Stagecoach Group plc

Annual Report 2005

STAGECOACH GROUP PLC Company No. SC100764

Business highlights

Financial highlights

. turnover from continuing operations »1,787.6m (2004: »1,641.1m)
. total operating profit(cid:1) »156.7m (2004: »147.5m)
. operating profit »132.8m (2004: »129.7m)
. profit before tax(cid:1) »136.8m (2004: »120.2m)
. profit before tax »108.3m (2004: »95.8m)
. earnings per share(cid:1) 9.0p, up 34.3% from 6.7p
. full year dividend up 13.8% to 3.3p (2004: 2.9p)

. free cash flow »173.6m (2004: »209.5m)

. »241.3m of capital returned to shareholders

(cid:1) excluding goodwill amortisation and exceptional items

. strong year of organic growth in bus and rail operations in UK and

overseas

. further growth in UK Bus division

^ turnover up 10.8%

^ kick start and telemarketing initiatives successfully introduced

^ investment in fleet, new product development and online sales
^ passenger volumes(cid:1) up 1.5% in non-London operations; turnover up

7.1%

^ turnover in London bus business up 21.0%

^ operating margin* maintained at 11.5%, despite significant increases

in fuel and other costs

. excellent performance by UK Rail division

^ turnover up 9.2%

^ South West Trains passenger volumes increased 4.8%

^ significant improvement in punctuality

^ first London operator to complete replacement of slam-door trains

. shortlisted for Greater Western, Thameslink/Great Northern and

Integrated Kent rail franchises

. strong growth in North American operations

^ US$ turnover growth of 12.7% from continuing operations

^ operating margin* up from 4.4% to 6.7%

^ 28.6% more tickets sold at New York Sightseeing

. market-leading positions maintained in New Zealand, despite

competition and cost pressures

. management team strengthened with appointment of Ian Dobbs as

Chief Executive of Rail division

*excluding restructuring costs, goodwill amortisation and exceptional items

(cid:1)excluding megabus.com

Contents

2 Chairman’s statement
3 Chief Executive’s review
4 Operating and financial review
5 UK Bus
6 North America
7 New Zealand
7 Rail

10 Current trading and outlook
11 Corporate social responsibility
15 Directors
16 Directors’ report
18 Corporate governance
21 Audit committee report
22 Nomination committee report

23 Remuneration committee report
30 Independent auditors’ report
31 Accounts
67 Shareholder information
68 Five year financial summary

Stagecoach Group plc page 1

Chairman’s statement

I am pleased to report that Stagecoach Group has had a strong year,
delivering on our strategy for organic growth in our bus and rail
operations in the UK and overseas. The Group has achieved excellent
financial and operational performance, despite the substantial fuel and
other cost pressures.

Stagecoach is continuing to lead the way in developing new ideas,
innovative products and highly effective marketing to attract new
passengers to public transport. By following this approach, combined with
strong operational management and cost-control, we have driven up both
passenger volumes and revenues across our business.

Our business is underpinned by a commitment to excellent customer
service and a strong focus on the safety and security of our passengers
and our people. We continue to have a proactive culture across the Group
that puts safety at the top of our agenda.

The successes we have achieved are flowing through strongly to our
shareholders, who benefited from the »241.3m return of capital
programme during the year and also from increased dividends.

Total turnover for the year ended 30 April 2005 was »1,794.7m (2004:
»1,792.3m). Operating profit before goodwill amortisation and exceptional
items was »156.7m (2004: »147.5m). Earnings per share before goodwill
amortisation and exceptional items were up 34.3% at 9.0p (2004: 6.7p).

Net debt increased by »147.0m from »67.6m at 30 April 2004 to »214.6m
at 30 April 2005. Excluding the »265.0m of cash outflows relating to
dividends and capital paid to shareholders, net debt fell by »118.0m as the
Group continues to generate significant cash from its operations.

Given the Directors’ confidence in the future prospects of the Group, as
well as its financial strength, we are proposing a final dividend of 2.3p per
share (2004: 2.0p), giving a total dividend for the year of 3.3p (2004:
2.9p). This is an increase of 13.8% and (based on continued strong cash
flows and profits) we will look to continue with a policy of growing the
dividends progressively. The proposed final dividend is payable to
shareholders on the register at 2 September 2005 and will be paid on
5 October 2005.

We have strengthened our senior management team with the
appointment of Ian Dobbs as Chief Executive of the Group’s Rail Division.
Ian has 28 years’ experience in the rail industry in the UK and overseas. A
former Divisional Director of British Rail, he was more recently Chief
Executive Officer of the Victoria Public Transport Corporation in Australia,
where he was responsible for the rail, tram and bus services. He will join
the Group in July 2005.

Ian has a strong track record and we are confident he will drive forward
Stagecoach’s reputation as a first-class rail operator delivering high-quality
services to passengers, value-for-money to taxpayers and an appropriate
return to shareholders. He will have operational responsibility for all of
the Group’s rail interests, and will initially report to Graham Eccles,
Stagecoach Group Executive Director ^ Rail, who has indicated that he
intends to retire and step down from the Board in April 2006.

We have made a promising start to the new financial year and despite
some industrial action in New Zealand in the early part of May, overall
trading is in line with our expectations.

I am pleased that the hard work of our employees has been rewarded
with another year of achievement across the Group. We believe there are
significant opportunities for organic growth and the expansion of our rail
portfolio, both of which can deliver increased value to our shareholders.

Robert Speirs
Chairman

page 2 Stagecoach Group plc

Chief Executive’s review

Organic growth across our business has driven Stagecoach’s strong
performance during the year.
We have built on our excellent track record in achieving growth in our
UK bus operations as a result of our innovation, targeted marketing and
consistent service delivery. Despite pressure on fuel costs, we have
achieved further impressive results in the year, increasing operating profits*
by 10.3% in our UK Bus division from »74.8m to »82.5m.
Our new telemarketing unit has been attracting thousands of new bus
users and we expect our two-year campaign focusing on a new location
every six-weeks to generate further organic growth in our provincial bus
operations. megabus.com, the Group’s low-cost inter-city bus service, has
now expanded to cover over 30 towns and cities in the UK and we expect
further growth in megabus.com’s revenue during the year to 30 April
2006. We have also expanded our use of online sales to increase our
share in other express coach markets, such as our premier London-Oxford
service.
We continue to develop positive partnerships with local authorities where
pro-bus policies coupled with our operational and marketing expertise are
producing strong revenue and passenger volume growth in our non-
London companies. Several of our initial Government-funded Kick Start
schemes are already generating significant passenger volume growth after
just six months and we have again significantly increased turnover at our
regulated bus operations in London.
Our UK Rail division has performed ahead of our original expectations and
we are extremely pleased with the strong growth in turnover and
passenger volumes at South West Trains. UK Rail operating profit is up
10.2% and the outlook for the remainder of the SWT franchise remains
positive.
Customers have experienced a significantly improved service following the
introduction of the new timetable at South West Trains in December
2004, with more frequent departures from the busiest stations. Train
punctuality has progressively increased, with over 90% of trains now
arriving on time (measured on the basis of the Strategic Rail Authority’s
Public Performance Measure), and we are confident that this new
improved timetable and its inherent reliability will stimulate further
passenger volume growth.

We have almost completed the UK’s biggest introduction of new rolling
stock at South West Trains with the minimum of delays for passengers.
South West Trains has replaced its old slam-door rolling stock earlier than
any other London operator, as part of the project to introduce 155 state-
of-the art Desiro units with a total value of around »1 billion.

Passengers have responded extremely positively to the new trains and
improved service. The most recent National Rail Trends data published by
the Strategic Rail Authority indicated that the number of passengers who
rated their overall journey with South West Trains as satisfactory or good
was 5% higher than the equivalent period in the previous year. This
improvement was one of the highest for an operator in the London and
South East area.

Stagecoach Group has a significant share of the UK passenger rail market
and a key strategic priority is to maximise the current significant
opportunities to grow our franchise portfolio. We have been shortlisted for
the Greater Western and Thameslink/Great Northern franchises. We are
also working hard with our partners, Danish State Railways, to win the
new Integrated Kent franchise.

The South West Trains franchise runs until February 2007 and we have
already started preparing for a possible tender in 2006. Under our
management since 1996, South West Trains passengers have benefited from
record investment in new trains, significant operational improvements and
new initiatives to boost security and customer service. Our strong financial
management has delivered value for money to passengers and taxpayers, as
well as an excellent return to our shareholders, and we believe we will be in
a strong position to retain the franchise.

We are pleased to have been involved in helping to shape the future
direction of the railways during the Government’s recent review. A number
of Stagecoach proposals, including better integration on the network, have
been put in place and the results are helping to reduce delays and
improve network management.

At the two Virgin Rail Group (‘‘VRG’’) franchises, West Coast and
CrossCountry, we are particularly pleased at the improving reliability for
passengers and the step-change in the travelling environment that has
been delivered with the introduction of new trains.

The re-negotiation of the West Coast franchise is a key strategic priority for
the Group. We look forward to continuing our discussions with Government
in late 2005, following the agreement to gather more revenue, passenger
and operational data to assist the re-negotiation of the franchise for the
period through to 2012. Passenger volumes on the West Coast mainline
have risen approximately 20% in the period since 18 September 2004 in
response to the introduction of new faster Pendolino trains. Journey times
on the key London-Manchester route have been reduced by more than half
an hour, while the frequency of services between the two cities has been
doubled, attracting many airline passengers to rail travel.

These results are extremely encouraging and many more people can be
attracted back to the railways if this uplift in quality of service is matched
by further and sustained progress in infrastructure provision by Network
Rail. With these excellent long-term prospects, we believe we can re-
negotiate a franchise agreement which is sustainable and in the long-term
interests of passengers, taxpayers and shareholders.

Like the West Coast franchise, Virgin CrossCountry continues to operate
on the basis of annual budgets set by the Strategic Rail Authority (‘‘SRA’’).
We are awaiting the SRA’s decision on the future of the franchise. If the
SRA decides to put the franchise out to open competition, we are
confident that VRG, as the incumbent operator with an excellent track
record, will be in a strong position to win the franchise.

Overseas, we have a strong set of bus businesses in the North American
and New Zealand markets. In North America, we are pleased to report
strong US$ turnover growth of 26.4% in the sightseeing and tour parts of
our continuing businesses. While we have significantly reduced our
ongoing exposure to these markets through our restructuring programme,
the leisure-related businesses we have retained are now benefiting from a
more stable US economy and from the recovery in charter and sightseeing
markets. To stimulate further growth we have recently launched a new
website for our North American operations, which incorporates online
sales as part of our revenue development strategy.

The non-leisure parts of our continuing North American businesses have
also seen good growth, with US$ turnover from scheduled services and
commuter services up 7.8% on the prior year. In addition, we have
continued to win and retain school bus and other contracts resulting in
US$ turnover growth of 6.2% over the prior year.

In New Zealand, while there has been increased competition from the railways
in Auckland, operating margins remain satisfactory at 14.7% (2004: 18.4%)
and we are satisfied with the performance of the division although ongoing
industrial action in Auckland is likely to impact financial performance in the
short term.

None of this could have been achieved without the tremendous
commitment from our people, who have ensured the Group has delivered
on its strategy. We have an excellent team of senior managers across the
Group and I believe we are well placed to deliver further growth in the
coming year.

*References to the operating profit or operating margin of a particular business throughout the Chief
Executive’s Review and Operating and Financial Review mean operating profit (or operating margin)
before goodwill amortisation, exceptional items and restructuring costs.

Brian Souter
Chief Executive

Stagecoach Group plc page 3

Operating and Financial Review

Description of the business
Stagecoach Group is a leading international public transportation group,
with extensive operations in the UK, United States, Canada and New
Zealand. The company, which employs around 30,000 people, operates
bus, coach, rail, tram and ferry services. The Group has four main
divisions : UK Bus, UK Rail, North America and New Zealand.

Our UK Bus division connects communities in around 100 towns and
cities across the country on a network stretching from the Highlands of
Scotland to south-west England, including major city operations in
Newcastle, Manchester and London. We are one of the biggest bus
operators in the UK, operating a fleet of around 7,000 buses across our
16 regional companies. Most of Stagecoach’s UK Bus services are operated
on a commercial basis in a deregulated market. However, we also operate
contracts on behalf of local authorities and provide bus services on behalf
of Transport for London in the regulated London market.

Stagecoach Group has major rail operations and has an involvement in
operating around a quarter of the UK passenger rail network. The Group’s
wholly-owned rail businesses include South West Trains, the UK’s biggest
commuter franchise by passenger revenue, which runs around 1,600 train
services a day in south-west England out of London Waterloo. The
Group’s other franchise is Island Line on the Isle of Wight. We also
operate Supertram, a 28km light rail network incorporating three routes in
the city of Sheffield.

Separately, the Group has a 49% shareholding in Virgin Rail Group, which
operates the West Coast and CrossCountry franchises.

Stagecoach is a major provider of transport services in North America,
where the market is highly fragmented with several thousand operators.
Our businesses are focused on commuter services, tour, charter,
sightseeing and school bus operations. The final part of our major
restructuring programme was completed during the year with the disposal
of our remaining taxi businesses. We now operate approximately 2,800
vehicles in North America where our operations are centred on three
areas: the North East region (covering the states of New York, New Jersey
and Pennsylvania), the North Central region (covering seven states in the
northern Midwest of the United States) and Canada (focused on the
provinces of Quebec and Ontario).

In New Zealand, our bus operations cover the metropolitan areas of
Auckland and Wellington, where we are the biggest provider of scheduled
services. Stagecoach also runs Fullers Ferries, which operates services on
the Waitemata Harbour and Hauraki Gulf off Auckland.

Group strategy
Stagecoach Group’s strategy is to focus on organic growth in local
transport operations with critical mass and good future potential in our
core UK, North American and New Zealand markets. We also continue to
look for complementary bolt-on acquisition opportunities in these
geographic locations, which offer the prospect of additional profitable
growth.

Through a combination of operational expertise and applying our
entrepreneurial skills in our core geographic markets, we believe we can
maximise shareholder value.

We have a very strong position in UK Bus and are confident we can
achieve further organic growth by continuing to demonstrate
entrepreneurial vision and innovation, supported by targeted and effective
marketing and a commitment to partnerships with transport authorities.

In UK Rail, where we already have a significant share of the passenger rail
market, we are targeting a number of opportunities that fit with our
strategy of long-distance inter-city and high-volume commuter franchises.
We are currently shortlisted for the Greater Western and Thameslink/Great
Northern Rail franchises and we have a 29.9% stake in the Danish State
Railways bid for the Integrated Kent franchise.

A key element of our rail strategy is agreeing new long-term commercial
arrangements for Virgin Rail Group’s West Coast franchise. VRG would also
look to bid for the CrossCountry franchise if it is put to the market and,
as the incumbent operator, VRG is in a strong position to win the
franchise.

In North America, our strategy is to organically grow our mix of
scheduled, charter, sightseeing and school bus operations, as well as
assessing potential bolt-on acquisitions in the non-leisure related parts of
the business. We are targeting further growth in our New Zealand bus
operations by adopting a number of marketing strategies successfully used
elsewhere in the group.

Overview of Financial Results
Total turnover for the year was »1,794.7m compared to »1,792.3m in the
prior year. Turnover from continuing operations at constant exchange
rates increased 9.9%, reflecting excellent underlying growth. Turnover by
division is summarised below :

GROUP TURNOVER

2005

2004

2005

2004

Continuing operations

UK Bus
North America
New Zealand
Rail
Virgin Rail Group (49% share)

Discontinued operations

North America
Citybus (Hong Kong)
Trainline

»m

Currency

Local Currency
(m)

Growth
%

720.3
213.7
59.0
479.4
315.2

650.2
205.3
58.3
438.9
288.4

1,787.6

1,641.1

7.1
Nil
Nil

7.1

131.5
17.8
1.9

151.2

»
US$
NZ$
»
»

US$
HK$
»

720.3
396.0
160.6
479.4
315.2

650.2
351.3
160.9
438.9
288.4

10.8
12.7
(0.2)
9.2
9.3

13.1
Nil
Nil

225.1
227.8
1.9

(94.2)
(100.0)
(100.0)

Total turnover

1,794.7

1,792.3

page 4 Stagecoach Group plc

Operating profit from continuing businesses increased from »141.9m to »156.7m. Operating profit is summarised below:

OPERATING PROFIT

2005

2004

2005

2004

Continuing operations

UK Bus
North America
New Zealand
Rail
Virgin Rail Group (49% share)
Others
Group overheads
Restructuring costs

Discontinued operations
Citybus (Hong Kong)
Trainline
Road King

Goodwill amortisation
Exceptional items

Total operating profit

% of
turnover

Currency

Local Currency
(m)

11.5%
4.4%
18.4%
10.0%
4.7%
^
^
^

»
US$
NZ$
»
»
»
»
»

82.5
27.4
23.7
48.6
12.7
(0.4)
(8.8)
(1.4)

74.8
25.4
29.5
44.1
13.5
(0.4)
(8.4)
(7.2)

5.6%

HK$

Nil

12.8

% of
turnover

11.5%
6.7%
14.7%
10.1%
4.0%
^
^
^

^

»m

82.5
14.8
8.7
48.6
12.7
(0.4)
(8.8)
(1.4)

156.7

Nil
Nil
Nil

156.7
(22.5)
(1.4)

132.8

»m

74.8
14.8
10.7
44.1
13.5
(0.4)
(8.4)
(7.2)

141.9

1.0
(2.4)
7.0

147.5
(17.8)
Nil

129.7

UK Bus
Overview
UK Bus has had an excellent year and this is reflected in the strong
financial performance. Turnover in our UK Bus division has increased by
10.8% to »720.3m (2004: »650.2m). Operating profit was up 10.3% to
»82.5m, compared to »74.8m in the previous year. We are particularly
pleased to report a continued strong operating margin, maintained at
11.5%, despite higher fuel costs, an increased use of operating leases to
finance new vehicles and costs associated with the development of new
products, such as megabus.com. Excluding the impact of additional
operating leases and losses relating to the development of
megabus.com, UK Bus operating margin was 12.6% versus 12.2%
in 2004.

Investment, innovation and growth
Stagecoach’s commitment to investment and innovation has delivered
further growth in passenger volumes at our UK Bus division during the
year. We are experiencing growth both in our deregulated provincial bus
operations and in the regulated London environment. We have continued
to modernise our fleet and introduce new buses, helping to change
passengers’ perceptions of bus travel. Supported by effective partnerships
with local transport authorities, targeted strategic marketing and further
development of innovative products, we have again grown our passenger
volumes. Total passenger volumes, excluding London and megabus.com,
were up 1.5%.

Our pioneering megabus.com product, which offers low cost intercity bus
travel via the Internet, has grown sharply during the year and we now
have a network of services covering over 30 towns and cities in the UK.
We have recently added a telephone booking facility to complement
online sales and we are confident this will further help to stimulate
demand. A new fleet of luxury double-decker coaches was introduced
during the year at a cost of »6.6m, driving up the quality of travel for
passengers on longer distance routes. Around 1.3m passengers have
travelled with megabus.com during the year and we have improved both
the average load factor and the average fare.

Stagecoach has signed an agreement with Siemens Transportation
Systems to develop a new optical guidance bus product for the UK.
We have agreed to investigate adapting the Siemens optical guidance
system for use on conventional buses and will work together to scope
the technical, operational and statutory issues around the potential

introduction of the technology on a city-wide basis. Optical guidance, as
part of a comprehensive package of pro-public transport measures, has
huge potential to help tackle the increasing road congestion that is
affecting many parts of the UK and generate further passenger volume
growth.

Provincial and city networks
We are continuing to drive passenger volume growth in our provincial and
city networks through our focus on customer profiling research and
targeted marketing. A new telemarketing unit has been established at our
headquarters in Perth and has launched a series of campaigns in the UK
to encourage non-users to switch to bus travel. The campaigns, which
include the offer of a week’s free travel and focus in particular on parents
and car users, have resulted in up to one in five of those contacted
switching to the bus. Stagecoach is concentrating on a new town or city
every six weeks and intends to target up to 20% of its UK bus networks
over the next two years.

Significant year-on-year passenger volume growth has been achieved in a
number of our provincial networks, including Bedford, Basingstoke, Corby
and Peterborough. We have also attracted significant growth in areas such
as Exeter, rural Devon, Gloucester, Swindon, Cheltenham, Aldershot and
Northampton.

The Cambridge ‘‘citi’’ network continues to expand more than three years
after Stagecoach invested over »4m in improved services. Boosted by a
strong partnership with Cambridgeshire County Council, the city has seen
one of the biggest rises in public transport use in the UK with bus use
increasing by around 45% in three years.

In Oxford, we have attracted more passengers on our Oxford Tube high-
frequency express coach service to and from London. This follows the
introduction of a new 25-vehicle fleet of luxury, disability accessible,
double-decker coaches. We have also developed our use of online sales to
increase market share.

Stagecoach has continued to work successfully with Nexus Passenger
Transport Executive to develop core corridors in Newcastle, Sunderland
and South Shields as part of the Tyne and Wear Superoute network. We
are also working with Greater Manchester Passenger Transport Executive
on a number of new technology programmes including real time
information, the delivery of bus times to mobile phones and smart cards
to make travel easier for passengers.

Stagecoach Group plc page 5

Operating and Financial Review

Severe flooding affected our Carlisle operations in January 2005, with
85 vehicles in the fleet written off due to water damage. However, the
company was able to maintain services to passengers and a »4m fleet of
39 low-floor vehicles was delivered in June this year, making all inner city
services in Carlisle easy access for the elderly, people with disabilities and
parents with young children. The financial impact of the flooding was
largely mitigated by insurance, although an exceptional loss of »0.8m was
reported for the year to 30 April 2005, representing the ‘‘excess’’ on the
insurance policy and other additional costs.

London
Our London bus business has achieved further significant growth this year.
Turnover increased by 21.0% during the year as a result of winning and
retaining contracts operated on behalf of Transport for London (‘‘TfL’’).
During the year, we began operating an »11m contract for an articulated
bus service out of our new »2.3m depot in Stratford. We have also
invested a further »1m in improved operational and engineering facilities
at our existing depots. Our excellent operational performance, which has
followed a close focus on the recruitment and retention of drivers, has
resulted in quality incentive payments from TfL and increased operating
profits. Nearly 90 new double-decker vehicles were introduced in our
operations in the capital during the year and our London fleet is now
100% low floor.

Partnership
Stagecoach continues to work closely with a range of stakeholders at local
and national level to improve the quality of bus provision for our
customers. We agree with the Government that strong partnerships are
the key to improving services and delivering value for money to taxpayers.
In Scotland and Wales, we continue to work with the devolved
administrations to successfully deliver the concessionary fares schemes. We
have been working with the Scottish Executive to help shape the new
Scotland-wide concessionary fares scheme and we welcome the recent
commitment by the Government to introduce free travel for the elderly in
England. Stagecoach is working with a number of local authorities on
smartcard, multi-operator ticketing schemes and real time information, in
places such as Manchester, Cambridge and south-west England, to make
travel easier for passengers. We are also working with businesses and
educational establishments to encourage travel by public transport. Our
work in Devon has been identified as an example of best practice by the
Energy Saving Trust, a non-profit making organisation set up by the
Government to help tackle climate change and improve air quality. In
Oxford, we have also established a new network in partnership with
Brookes University. These partnerships are delivering results, attracting
more people to bus travel and helping to address congestion in our towns
and cities.

Park and ride
We believe there is significant potential to develop park and ride around
the UK as a solution to the problem of increasing congestion in and
around our main towns and cities. Stagecoach is a partner with local
authorities in a number of major and growing park and ride sites. Ferrytoll
in Fife, Scotland, doubled in size this summer to offer 1,000 car parking
spaces and we are now running 12 buses an hour across the Forth Road
Bridge into Edinburgh as car users are attracted to the benefits of public
transport. There has been significant growth in car users using the five
award-winning park and ride services in and around Cambridge, where
every one of the 20 buses used by Stagecoach has low-floor access for
people with disabilities and parents with young children. During the year,
we won a contract for a park and ride facility in east Hull to give a public
transport alternative for motorists. Stagecoach is now investigating the
potential of ‘‘commercial’’ park and ride operations around the UK, where
the operator would also buy and manage the facility. This approach has
been successfully delivered in the United States and we believe there is
potential to introduce the concept in the UK.

Kick Start
Stagecoach was successful in the first round of funding allocations
following the decision by the Department for Transport, the Scottish
Executive and the devolved administration in Wales to take forward our
Kick Start proposal for targeted funding to support the introduction of
new bus services. We have already achieved high levels of passenger
volume growth after only six months of starting partnership projects in

Thanet, Chesterfield and Caerphilly. We have achieved similar success with
projects of our own, including in Swindon, following the success of our
initial pilot project in Perth, Scotland, where passenger volumes are still
growing nearly five years after the initial investment.

North America
Overview
North American trading has been very encouraging. Excluding discontinued
operations, turnover increased 12.7% from US$351.3m to US$396.0m.
Including discontinued operations, turnover at our North American
operations was US$409.1m compared to US$576.4m in the previous year.
Operating profit was US$27.4m (2004: US$25.4m), representing an
improvement in operating margin from 4.4% to 6.7%. Converted to
sterling, turnover was »220.8m (2004: »336.8m) and operating profit was
»14.8m (2004: »14.8m).

North East
In the North East region, we have achieved further significant passenger
and revenue growth in our highly successful New York Sightseeing
operation. 28.6% more tickets were sold in the year following the addition
of new tours to our product offering. A fleet of 20 new open-top double-
decker sightseeing coaches entered service in spring 2005, bringing the
fleet to 74 open-top vehicles for the 2005-06 season. A further six new
trolley buses have also entered service on a new tour in partnership with
the History Channel.

Express and commuter coach services have also performed well. Services
between New York City and New York State/Eastern Pennsylvania, for
example, have generated turnover growth of 6.8% while a marketing
campaign targeted at Newark Airport has produced further growth in our
Newark Airport Express service.

During the year, we have won a number of new contracts with private
and public sector organisations, including business operated on behalf of
New Jersey Transit and Newark Airport.

North Central
Scheduled services in the North Central region have seen significant
growth, partly as a result of increased air travel in the United States and
following a bolt-on acquisition of a small business in Rockford, Illinois.

Charter sales have grown steadily over the period following increased
marketing, operational improvements and targeted pricing initiatives.

North Central’s Sightseeing and tour operations have seen overall turnover
growth of 11.7%. Our Chicago Sightseeing and tour operation, which
offers a mix of double decker and trolley tours, has achieved significant
turnover growth. Plans are in place to develop new and improved tours in
the coming year.

We have won a number of college shuttle contracts in the Pittsburgh
market and our growing Wisconsin school bus business, which accounts
for around 27.3% of the North Central region’s turnover, has successfully
retained a number of contracts that were re-tendered during the year.

Canada
Coach Canada’s charter C$ turnover is up 34.7% on the previous year.
Charter business, which was impacted by the SARS outbreak in Toronto
two years ago, has recovered strongly.

During the year, we purchased a small sightseeing operation in Montreal
and have introduced four heritage double-decker buses from the UK as
part of the expansion of the operation.

A major three-year contract to run services on behalf of the town of
Whitby was renewed in November 2004, with annual revenues worth
C$3.7m.

We are pleased that our retained North American operations have
delivered our plan to out-perform the operating margins being achieved
by the division prior to restructuring. This has been achieved despite a
background of rising fuel and insurance costs and an unpredictable claims
environment.

page 6 Stagecoach Group plc

New Zealand
Turnover and operating profit from our New Zealand businesses were in
line with our expectations. Turnover was similar to last year at
NZ$160.6m (2004: NZ$160.9m). Operating profit was NZ$23.7m (2004:
NZ$29.5m). The operating margin of 14.7% (2004: 18.4%) remains
satisfactory but does reflect ongoing cost pressures and increased
competition from railways in the Auckland market. Converted to sterling,
turnover was »59.0m (2004: »58.3m) and operating profit was »8.7m
(2004: »10.7m).

Trading in the Auckland region continued to be challenging due to a
combination of fewer foreign language students, competition from the
upgraded local rail system and a tougher tendering environment for
service contracts. However, contracts for services in the North Shore sector
of the Auckland region were re-tendered during the year and we
successfully retained a similar volume of work to that covered by previous
contracts. We have launched a trial of a Unirider pass at Auckland
University to encourage the 30,000 students and staff to purchase
discounted travel for a year or a semester in advance.

In Wellington, turnover was 9.0% more than the previous year and there
has been particularly good passenger volume growth in the Hutt Valley
sector. A number of contracts for services in the region were also retained
at re-tender. The companies are also adopting the telemarketing
programmes that were successful in the UK, and the New Zealand roll-out
of the initiative has started successfully in the Lyall Bay area of Wellington.

The New Zealand businesses operate with three-year labour agreements
with the trade unions. The labour contracts for Auckland and Wellington
are both due to be re-negotiated in the year to 30 April 2006 and in
Auckland the process is already underway. The parties have not yet
reached agreement and the Auckland business was disrupted by a six-day
strike in May 2005. We are continuing negotiations to try and reach
agreement but further industrial action cannot be ruled out. This action is
likely to impact overall financial performance in New Zealand in the year
to 30 April 2006.

Rail
Overview
Our UK Rail division has had an excellent year. We are extremely pleased
with the strong growth in turnover and passenger volumes at South West
Trains, which has been stimulated by improvements for customers centred
on punctuality and the quality of the travelling environment.

Turnover for our wholly-owned rail subsidiaries in the year was »479.4m
(2004: »438.9m), with passenger volumes at South West Trains up 4.8%
on the prior year. Operating profit was up 10.2% to »48.6m (2004:
»44.1m), representing an operating margin of 10.1% (2004: 10.0%). This
includes liquidated damages of »2.6m in relation to late delivery of new
Desiro trains and reliability of class 458 trains.

Our strong performance at South West Trains has also benefited the
taxpayer, with »46.0m (2004: »27.9m) in revenue and profit sharing
payments being payable to the SRA in respect of the financial year ended
30 April 2005.

Stagecoach Group has taken a leading role in helping to shape the future
direction of the railways during the Government’s recent review. A number
of Stagecoach proposals on better integration on the network have been
put in place and the results are assisting our own measures to improve
services for passengers.

We are also working with the SRA, Transport for London, rolling stock
leasing company Porterbrook, and the train manufacturer, Bombardier, on
a »67m project to refurbish our 91 unit Class 455 fleet. Launched in
November 2004, the project will deliver improved reliability and a better
train layout for passengers on suburban routes.

A major initiative to update ticketing systems and infrastructure
technology is to be implemented at South West Trains in the summer
and autumn of 2005. Passengers will benefit from new touch screen ticket
machines, faster ticket printing, more ticket machines and acceptance of
credit cards at most self service outlets.

Punctuality and customer improvements
South West Trains has achieved a major improvement in train punctuality
during the year. Since the introduction of the new timetable in December
2004, punctuality has progressively improved, with over 90% of trains
now arriving on time (measured using the SRA’s Public Performance
Measure). This is one of the best performances of any operator on the
London and South East network. We are confident the new improved
timetable and its inherent reliability will stimulate further passenger
volume growth.

This dramatic improvement for passengers has followed the most radical
timetable change for nearly 40 years. The new timetable provides
consistency for customers, additional peak time services and capacity into
London Waterloo and a series of measures to reduce the effect of
incidents and promote better timekeeping.

We are also pleased that the Wessex Integrated Control Centre at
London Waterloo, a concept pioneered by Stagecoach and operated in
conjunction with Network Rail, is continuing to improve our joint
response to incidents and ensure delays and disruption to passengers
are minimised.

South West Trains has placed excellent operational management and
customer service at the heart of its business during the year and has been
rewarded with a number of awards. Our customer service team at London
Waterloo was named the top Frontline Customer Service Team at the
National Customer Service Awards, which cover a wide range of sectors
including transport. South West Trains also achieved its highest customer
satisfaction score in the National Passenger Survey, out-ranking most
other commuter operators. E-motion, our innovative customer magazine
and website, also received a Best in Business award from the National
Association of Publishing Agencies.

At the National Rail Awards, South West Trains won Maintenance Team
of the Year, London Operational Team of the Year, Major Station of the
Year for London Waterloo, and Project of the Year for the introduction of
the new Desiro trains with Siemens, while a number of our frontline
employees were shortlisted for their own personal contribution.

Further measures have been undertaken to improve passenger and
employee safety and security at South West Trains, which already has one
of the best records in the UK rail industry. The TravelSafe Officers
initiative, our ground-breaking security and anti-crime partnership with
British Transport Police, has played a major part in cutting crime on the
network by 20% in the last six months of 2004, compared with the same
period in 2003. We are also pleased to report that seven more South
West Trains stations have received the Secure Station award. This brings
the total number of stations on our network with this status to 43 ^ the
highest of any of the UK’s train operating companies.

South West Trains
The new three-year franchise at South West Trains, which commenced in
February 2004, is running extremely well and management has achieved
significant improvements in train service delivery and passenger
satisfaction. Therefore, we are well placed to continue to operate services
beyond the end of the existing South West Trains franchise in February
2007.

Commercial activity
Marketing activity at South West Trains has been focused on two key
areas: developing leisure off-peak travel to increase revenue and a wider
campaign to improve customer perception of our services. We have
achieved further success with our Apex and SuperAdvance ticket
promotions, and our leisure and reduced fare income is increasing at a
faster rate than other train operators in London and the South East.

New trains and technology improvements
Our programme to introduce 155 new Desiro trains is almost complete.
This has been achieved with very few delays affecting passengers. We are
the first London operator to have phased out the last of the old Mark I
slam door trains and have completed the fleet replacement programme
more quickly than any other train company.

Around 400,000 passengers use South West Trains’ services every day
and a major newspaper, TV and cinema advertising campaign was
undertaken in autumn 2004 to promote our improvements for
customers. New Mori research suggests that the campaign to reinforce
the benefits of the new Desiro trains, refurbishments to other rolling
stock and personal security initiatives has delivered a marked
improvement in passenger attitudes.

Stagecoach Group plc page 7

Operating and Financial Review

Island Line
Island Line, the Isle of Wight’s rail franchise, is operating on a three-year
franchise that runs concurrently with the South West Trains contract until
2007. Island Line remains Britain’s best performing railway in terms of
punctuality and reliability. Within the SRA’s community rail framework, we
are working with local stakeholders to find a suitable solution for the
long-term future of public transport on the Island.

Sheffield Supertram
Sheffield Supertram, Britain’s first state-of-the-art tramway, has achieved
further passenger volume growth during the year. The network has carried
a record 12.8m passengers during the year and has delivered further
growth in profits. Passenger volume growth has been achieved, boosted
by the regeneration of residential areas along the tram routes as well as
improved leisure and retail facilities in Sheffield. A number of passenger
improvements are being introduced across the network, including the
roll-out of CCTV technology and the launch of an automated passenger
announcement system.

Rail business development
The Group is in an excellent position to expand its rail portfolio and
currently has an involvement in three shortlisted franchise bids that are an
excellent fit with our strategy of concentrating on long-distance inter-city
and high-volume commuter franchises.

Stagecoach is shortlisted for the Greater Western and Thameslink/Great
Northern Rail franchises. Covering the West Country to London, the
Greater Western franchise includes long-distance, regional and local
services in the Thames Valley, Cotswolds, Bristol and the surrounding area
and the West of England, with some cross-border services into South
Wales. The seven-year franchise will run from 1 April 2006 with a
potential three-year automatic extension if agreed performance targets are
met. The enlarged Thameslink/Great Northern franchise, serving large
numbers of commuters, will cover services between Bedford and Brighton,
as well as between Peterborough, King’s Lynn, Cambridge and London.
The four-year franchise is expected to begin operations on 1 April 2006,
with two extra years if agreed performance targets are met. There is also a
possible further extension for up to three years to facilitate work on the
Thameslink 2000 project.

While we were disappointed that our joint bid with Virgin for the Inter
City East Coast franchise was unsuccessful earlier this year, we believe we
can develop strong bids for these new franchises that deliver first-class
passenger service, excellent value for taxpayers and a good return to
shareholders.

We also have a 29.9% stake in the Danish State Railways (‘‘DSB’’) bid for
the Integrated Kent franchise. The franchise includes routes on the
national rail network currently operated by South Eastern Trains
throughout Kent, parts of Sussex and South East London. It will also
incorporate new domestic services on the Channel Tunnel Rail Link
(‘‘CTRL’’). DSB operates the majority of passenger rail services in Denmark,
as well as franchise operations in other Scandinavian countries, and is one
of the best performing operators in Europe. We believe our UK experience
of both commuter and inter-city services will help deliver a powerful bid
for the franchise.

Virgin Rail Group
Stagecoach has a 49% share in Virgin Rail Group (‘‘VRG’’), which operates
the West Coast and CrossCountry inter-city rail franchises that link more
than 130 stations across the UK. Both franchises continue to operate on
the basis of annual budgets set by the SRA.

Our share of Virgin Rail Group’s turnover for the year amounted to
»315.2m (2004: »288.4m) and our share of operating profit was
»12.7m (2004: »13.5m).

Both VRG’s franchises operate on the basis of a Letter Agreement
signed with the SRA in July 2002. Negotiations will re-commence on
the West Coast franchise in September 2005 with a view to agreeing
revised commercial terms for the franchise through to 2012. The SRA
has terminated negotiations on the CrossCountry franchise and has the
right to re-tender this franchise, although it is required to give at least
12 months’ notice to VRG if it intends to terminate the existing
franchise.

Under the Letter Agreement, the SRA sets an annual budget, including
the level of financial support, for each franchise. The SRA has set
challenging budgets for VRG’s financial year to 4 March 2006. In particular,
discussions are continuing with the SRA regarding CrossCountry’s
requirement for additional cash funding from July 2005.

West Coast
A »1.2 billion fleet of Pendolino tilting trains, operating at up to
125mph, has successfully entered passenger service on what is one of
the main arteries of the UK rail network. Journey times for passengers
on some routes are being cut by more than 20%, On the key London-
Manchester route, journey times have been reduced by more than half
an hour, while the frequency of services between the two cities has been
doubled.

As predicted, the twin challenges of infrastructure work and introducing
new trains impacted performance on the West Coast mainline during the
autumn and winter of 2004. However, now that teething issues around
the new trains have largely been resolved, West Coast’s performance has
markedly improved and there is a continuing focus on driving up
punctuality.

Increasing numbers of customers have been attracted to travel on the new
state-of-the-art trains. Passenger volumes on the West Coast mainline
have risen by approximately 20% in the period since the new Red
Revolution timetable and faster Pendolino trains were introduced in
September 2004.

The new trains and timetables have increased VRG’s share of the
Manchester-London travel market with an 39% increase in the number of
rail journeys from north-west England to London between September
2004 and January 2005. In the same period, the number of passengers
using the Manchester-London air route dropped by more than 7%.

VRG will recommence negotiations with the Government in the autumn
of this year with a view to agreeing a re-negotiated franchise through to
2012. Earlier this year, VRG and the SRA agreed that more time was
required to assess revenue, passenger and operational data. Both parties
agreed to allow a full year’s impact of the new West Coast timetable to
be assessed up to September 2005. In the meantime, VRG will continue
to operate the West Coast franchise under the terms of the Letter
Agreement signed in July 2002 and is committed to working with all
other stakeholders to further improve services to passengers. We believe
this sensible and constructive approach will help deliver a re-negotiated
franchise agreement that is sustainable and in the long-term interests of
passengers, taxpayers and shareholders.

CrossCountry
CrossCountry, which is serviced by a fleet of modern Voyager trains, has
achieved further improvement in performance during the year. Since the
start of 2005, more than 80% of trains are arriving on time (as measured
by the SRA’s Public Performance Measure) and, VRG is working hard to
improve this further.

The improvements have helped transform travellers’ perceptions, with
CrossCountry being named the top performer in the InterCity sector of the
SRA-commissioned National Passenger Survey last year.

Like the West Coast Mainline franchise, the Virgin CrossCountry franchise
continues to operate on the basis of annual budgets set by the SRA, while
we await its decision on the future of the franchise. If the SRA decides to
put the franchise out to open competition, we are confident that VRG, as
the incumbent operator with an excellent track record of sustained
improvement, will be in a strong position to win the franchise.

Joint ventures and associates
Our share of joint venture and associates’ operating profits (before
goodwill amortisation) was »12.3m compared to »17.7m in the prior
year. This includes »12.7m (2004: »13.5m) in respect of the Group’s
share of operating profits in Virgin Rail Group, as referred to earlier in
this report. »0.4m (2004: »0.4m) of losses arose from other smaller
joint ventures and associates. The prior year’s results included our share
of trainline’s operating losses which, up to the date of disposal, was
»2.4m, and our share of profits in Road King, up to the date of disposal,
of »7.0m.

page 8 Stagecoach Group plc

Depreciation and amortisation
Earnings before interest, taxation, depreciation, goodwill amortisation and
exceptional items (pre-exceptional EBITDA) amounted to »224.4m (2004:
»214.7m). Total depreciation for the year was »67.7m (2004: »67.2m).
The annual goodwill amortisation charge was »22.5m compared to
»17.8m in 2004. Total goodwill amortisation has increased by »4.7m, with
the principal movement being a »6.5m increase in the amortisation of
goodwill related to the Group’s investment in Virgin Rail Group. The
Directors reviewed the period over which the goodwill in respect of Virgin
Rail Group was being amortised, in light of the status of the negotiations
on Virgin Rail Group’s franchises and the possibility that the SRA could
terminate the CrossCountry franchise with 12 months’ notice. As a result,
the amortisation of goodwill in respect of Virgin Rail Group has been
accelerated, resulting in an increased charge.

Restructuring costs
Non-exceptional restructuring costs included within operating profit
amounted to »1.4m (2004: »7.2m). The prior year figure included »5.7m
relating to the restructuring at North America. The restructuring costs at
North America for the year ended 30 April 2005 were »0.1m as the
restructuring programme was largely completed in the prior year.

Exceptional Items
Net exceptional charges before tax of »6.0m (2004: »6.6m) were
recorded of which »1.4m (2004: »Nil) is included within operating profit:
»0.8m (2004: »Nil) relating to flooding at the UK Bus Division’s Carlisle
depot, »0.3m (2004: »Nil) relating to costs associated with the return of
capital and »0.3m (2004: »Nil) relating to the write-down of an
investment. Non-operating exceptional charges comprised a loss of »5.9m
(2004: »7.1m) on the disposals and closures of businesses and a net gain
of »1.3m (2004: »0.5m) on the sale of properties.

A tax credit of »1.6m (2004: charge of »0.2m) was recognised in respect
of exceptional items resulting in net exceptional charges after tax of
»4.4m (2004: »6.8m).

Finance charges
Net finance charges decreased from »27.3m to »19.9m as a result of a
lower average net debt during the year and favourable foreign exchange
rate movements. The ratio of pre-exceptional EBITDA to net finance
charges was 11.3 times compared to 7.9 times in 2004, reflecting the
reduced finance charges.

Taxation
Profit before tax for the year was »108.3m. The Group’s tax charge of
»29.5m represents an effective rate of 27.2% on this profit (2004: 33.6%
excluding impact of exceptional tax credit of »41.0m).

Earnings and dividends
Earnings per share before goodwill amortisation and exceptional items
were 9.0 pence, compared to 6.7 pence in 2004, reflecting the strong
performance at each of our core divisions. Basic earnings per share (taking
account of all exceptional items and goodwill amortisation) were
6.8 pence (2004: 7.9 pence): the prior year amount of 7.9 pence
included 3.1 pence in respect of the exceptional tax credit.

The total proposed dividend in respect of ordinary shares for the year is
3.3 pence (2004: 2.9 pence). This represents dividend cover (before
goodwill amortisation and exceptional items) of 2.9 times (2004:
2.3 times). »0.4m (2004: »Nil) of dividends on ‘B’ shares have been
recognised in the year.

Shares in issue
The weighted average number of ordinary shares during the year used to
calculate basic earnings per share was 1,154.5m (2004: 1,321.7m).
Following the return of capital in September 2004 and the related 19 for
24 consolidation of ordinary shares, the number of shares ranking for
dividend at 30 April 2005 was 1,063.0m, with a further 6.5m of ordinary
shares held by employee trusts and not ranking for dividend.

Net assets
Net assets at 30 April 2005 were »219.0m (2004: »390.0m) with the
decrease principally reflecting the return of capital and dividends during
the year, partly offset by the strong reported profits.

Net debt
During the year, we returned »241.3m of capital to shareholders by
issuing new redeemable ‘B’ shares. Of the »241.3m shares issued,
»227.4m have been redeemed for cash during the year and are included
in the increase in net debt which has increased from »67.6m to »214.6m.
»13.9m of the ‘B’ shares have yet to be redeemed and are therefore not
included in the net debt of »214.6m as at 30 April 2005.

Excluding the impact of the redeemed ‘B’ shares of »227.4m, net debt
reduced by »80.4m. This includes the benefit of ongoing cash generation
from our core operations, »30.2m received in respect of joint ventures
and »14.7m received from the disposal of businesses including a
negotiated early settlement of the deferred consideration from the prior
year disposal of Coach USA’s West and South Central Regions.

The strong cash generative nature of the Group is once again
highlighted by free cash flow of »173.6m (2004: »209.5m). Free cash
flow per share decreased from 15.9 pence to 15.0 pence. The prior year
free cash flows included one-off tax refunds of »25.6m and »23.6m of
one-off cash inflows arising from the close-out of fixed to floating
interest rate swaps.

The impact of capital expenditure for the year on net debt was »100.0m
(2004: »83.0m), partly offset by proceeds from the sale of tangible
fixed assets of »7.1m (2004: »4.2m). This primarily related to
expenditure on passenger service vehicles, and comprised cash
outflows of »73.8m (2004: »56.0m) and new hire purchase debt of
»26.2m (2004: »27.0m).

Capital Expenditure
Additions to tangible fixed assets for the year were:

UK Bus
North America
New Zealand
Citybus (Hong Kong)
UK Rail

2005

2004

»m

»m

51.4
33.8
10.8
Nil
7.8

103.8

50.5
23.1
7.0
3.0
3.2

86.8

The differences between the amounts shown above and the impact of
capital expenditure on net debt arose from movements in fixed asset
deposits and creditors.

Acquisitions and disposals
Cash of »4.8m was paid on new acquisitions in the year, and »1.1m was
paid in respect of deferred consideration on acquisitions completed in
previous years.

Cash of »14.7m was received during the year in respect of disposals,
which included the negotiated early settlement of deferred consideration
on disposals completed during last financial year.

Return of Capital
Following the passing of a special resolution at the 2004 AGM, we have
successfully completed the return of »241.3m of capital to shareholders,
with 77.2m ‘B’ shares (»13.9m) still to be redeemed.

The Group has authority to repurchase a further 134,073,290 ordinary
shares. This authority expires at the 2005 AGM and we will seek to renew
the general authority to repurchase up to 10% of the issued ordinary
share capital.

Having taken account of the cashflow generation of the Group and the
potential bonding requirements on current rail franchise bids, the Board is
now comfortable with the Group’s current capital structure. The Board will,
however, continue to keep the Group’s capital structure under review.

Stagecoach Group plc page 9

Operating and Financial Review

Fuel hedging
We currently use the equivalent of 1.8m to 1.9m barrels per annum of
diesel fuel in our bus operations. As a result, we are exposed to the
movement in the underlying price of crude oil, which is the major driver
of diesel prices. We manage the year on year volatility in our fuel costs by
maintaining an ongoing fuel hedging programme where we use
derivatives to effectively fix or cap the variable unit cost of a percentage
of our current and future diesel volumes. If we had no hedging in place a
US$10 a barrel movement in the underlying prices would affect our fuel
costs by US$18m-US$19m per annum.

For the financial year to 30 April 2006, we have fixed or capped
approximately 85% of our variable fuel costs at an equivalent crude oil
price of US$48 a barrel. If crude oil prices remain at around US$55 a
barrel, fuel costs for the year ending 30 April 2006 could increase by a
further »15m to »20m, when compared to 2004/5.

We continue to manage fuel costs as part of our overall cost base, and
our total costs of operation are taken into account when setting fares and
contract prices.

Liquidity and funding
Our policy is to finance the Group through a mixture of bank and hire
purchase debt, capital markets issues and retained earnings. As at 30 April
2005, the Group’s committed credit facilities were »688.8m (2004:
»430.1m), »327.4m (2004: »310.5m) of which were utilised, including
bank guarantees.

Treasury risk management
The main areas of financial risk associated with our businesses are
managed by our centralised Group Treasury function. The Board regularly
reviews these risks and approves the Group’s treasury policy, which covers
the management of these risks. Financial instruments are held to finance
Group operations, to manage the financial risk exposures and to achieve
greater certainty of future costs. The use of financial instruments is
restricted to financing and treasury management only.

Interest rate risk management
To provide some certainty as to the level of interest cost, it is our policy
to manage interest rate exposure through the use of fixed and floating
rate debt. Derivative instruments are also used where appropriate to
generate the desired interest rate profile. At 30 April 2005, 63% (30 April
2004: 49%) of the Group’s gross borrowings were fixed or capped.

Currency rate risk
The Group is exposed to limited transactional currency risk due to the
small number of foreign currency transactions entered into by
subsidiaries in currencies other than their functional currency. Where
necessary, forward buying of currencies is carried out by the Group
Treasury function.

The Group now has overseas investments in Canada, the USA and New
Zealand. To minimise balance sheet translation exposure, the Group aims
to hedge the sterling book value of overseas operations through
borrowings denominated in their functional currency or through the use
of derivative financial instruments which effectively convert sterling
borrowings into borrowings of the functional currency, and through
forward currency exchange contracts. It is Group policy to examine each
overseas investment individually and to adopt a strategy based on
current and forecast political and economic climates. The policy aims to
allow the Group to maintain a low cost of funds and to retain some
potential for currency appreciation whilst partially hedging against
currency depreciation.

Credit risk
It is our policy to invest cash assets safely and profitably. To control credit
risk, counterparty credit limits are set by reference to published credit
ratings and the counterparty’s geographical location. The Group considers
the risk of material loss in the event of non-performance by a financial
counterparty to be low.

Pensions
The Group continues to account for pensions on the basis of SSAP 24,
‘‘Accounting for pension costs’’. Under SSAP 24, total pension costs in
the year ended 30 April 2005 were »38.6m (2004: »32.9m). The
charge for the year includes additional costs relating to the funding of
past service deficits, and is similar to the cash contributions paid by
the Group in the year that amounted to »38.0m.

Under the transitional arrangements of FRS 17, ‘‘Retirement Benefits’’,
the Group continues to account for pensions in accordance with
SSAP 24 as explained above and also provides the additional
disclosures required by FRS 17. The Group contributes to a number of
defined benefit pension schemes for its bus and head office
employees, and also to the relevant sections of the Railway Pension
Scheme (‘‘RPS’’). Under both FRS 17 and International Financial
Reporting Standards, we would expect to recognise only that part of
the RPS deficit (or surplus) that the Group is expected to fund over
the life of the franchise, as calculated by independent actuaries. This
revised basis of estimate is considered by the Directors to best reflect
the Group’s obligations. The Group is continuing to discuss the
calculation and reporting of RPS arrangements with its advisors.
Excluding any adjustments required to reflect the revised basis of
estimate for RPS, the post-tax deficit on our defined benefit schemes,
measured in accordance with FRS 17, was »177.7m at 30 April 2005,
up from »130.0m at 30 April 2004. The deficit has increased primarily
because FRS 17 requires liabilities to be discounted using the yield on
AA-rated bonds of similar maturity. Bond yields are now close to
record lows and the reduction on bond yields results in an increase in
FRS 17 liabilities. Under FRS 17, the defined benefit pension schemes
in respect of the Group’s UK Bus and head office employees showed a
net liability at 30 April 2005 of »148.0m (2004: »115.8m) after
taking account of deferred tax. In addition, the defined benefit pension
schemes in respect of the Group’s Rail employees showed a net liability
of »29.7m (2004: »14.2m) after deferred tax.

International Financial Reporting Standards
The Group will be required to produce consolidated financial statements
and annual reports in line with International Financial Reporting
Standards (‘‘IFRS’’), also known as International Accounting Standards
(‘‘IAS’’). The Group’s first full set of IFRS accounts, including
comparatives, will be prepared for the year ending 30 April 2006.
Interim IFRS accounts, including comparatives, will be prepared for the
six months to 31 October 2005.

Our steering committee, set up to oversee the convergence to IFRS, has
identified the main differences between IFRS and the current Group UK
GAAP policies and has established the accounting policies or changes
required. The adjustments required to reconcile our UK GAAP numbers to
those that will be reported under IFRS as at 1 May 2004 and for the six
months to 31 October 2004 have been calculated.

The Group has chosen not to re-state its results for the year ended
30 April 2005 for financial instruments. The figures for the year ended
30 April 2005 will therefore not fully reflect the requirements of IAS 32,
‘‘Financial Instruments: Disclosure and Presentation’’ and IAS 39, ‘‘Financial
Instruments: Recognition and Measurement’’. The Group will apply IAS 32
and IAS 39 with effect from 1 May 2005.

The most significant areas of difference affecting net assets and EPS are
expected to be in respect of pensions, goodwill, share based payment,
dividends, and from 1 May 2005, ‘B’ shares and other financial
instruments.

We expect to publish our results for the year ended 30 April 2005,
re-stated to IFRS, prior to the next half year-end at 31 October 2005.

Current trading and outlook
While still early in the new financial year we have made a promising start
and, despite some industrial action in New Zealand in the early part of
May, overall trading is in line with our expectations.

There are a number of exciting new opportunities across the Group that
we are pursuing this year and this, combined with our focus on
innovation in our existing businesses and our strong cash generation,
means there is real potential to deliver further growth and shareholder
value.

page 10 Stagecoach Group plc

Corporate social responsibility
As well as providing a range of economic and environmental benefits, our
bus and rail services help cement social inclusion and bring people
together. We are committed to encouraging more people to use public
transport. It is central to our growth strategy, to the future success of our
Group, and also important to the future of the communities in which we
operate around the world. In short, we have the same long-term goal of
sustainable development as our numerous stakeholders and it is in our
collective interest to have an ongoing dialogue on how that can be
achieved.

It is easy to have a vision, but how that is delivered in practice is equally
important. For the past 25 years since it was founded, Stagecoach has
taken its wider corporate responsibilities seriously. The responsible way we
do business has always been firmly embedded in our Group’s culture, from
our approach to safety and the environment, to how we treat our people,
our customers and our local communities.

Like any business in any sector, we can get better. We are continually
striving to improve our processes and service delivery to make an
increasingly positive impact on society and the environment. Building trust
with our stakeholders in the wider community is vital and providing clear
information on our performance is part of that process.

Stakeholders
Stagecoach Group works in partnership with a range of bodies in each of
the markets where we provide public transport services. Our stakeholders
include:

Investors and the Financial Community - our shareholders are critical
to our business success. We have a regular programme of meetings with
investors and provide frequent updates to the markets and financial
community on our performance. We are a constituent of the FTSE4Good
UK Index, which is designed to measure the performance of companies
that meet globally recognised corporate responsibility standards.

Customers ^ millions of people use our services every day, including
commuters, schoolchildren, concessionary fares passengers and leisure
travellers. We conduct extensive customer research to monitor our
performance and determine how we can improve the delivery and
accessibility of our services.

Customer Interest Groups ^ our businesses have a regular and ongoing
dialogue with bus and rail user groups. This includes presentations from
senior managers on detailed aspects of our service as well as consultation
and information sharing on particular issues.

A people business
Stagecoach is a people business and it is the quality of our employees,
from drivers and engineers to customer service and support staff that
ensure we can deliver a first-class quality of service day in, day out. They
are crucial to our objective of attracting more people to public transport.
None of this happens by chance. We invest significant time and resources
to ensure we have the right people on board to deliver the best possible
service to customers.

We respect and value our staff, and we have a strong commitment to
equal opportunities and partnership working with trade unions.
Stagecoach also offers its UK employees the opportunity to join a
pension scheme as well as providing attractive pay and conditions
packages.

As a major employer, we also recognise the need for ongoing training and
development, not just so our people can do their job, but so they can
develop individually. In our UK Bus division, we have one of the best
vocational training programmes of any operator, designed to raise
standards among and recognise the key contribution of our people. To
date, some 50.7% of our current UK Bus drivers and 72.6% of our UK Bus
engineers have either achieved or are working towards the S/NVQ
qualification. During the year, we have focused closely on recruitment and
retention of drivers and have made significant progress as a result of a
number of measures, including improved pay, better training and
mentoring schemes. We have also established links overseas, as part of the
expansion of the EU, to recruit drivers to complement our employment
campaigns in the UK. We have worked with Aberdeen City Council as part
of an initiative focused on recruitment from Malta and have set up a
recruitment project in Poland, with the first of the drivers from these
schemes having started work in the UK.

At South West Trains, our centralised Recruitment Centre and the state of
the art Operations Training Centre are continuing to deliver benefits to
our employees and better service to our customers. We also have in place
vocational training, support for managers, employee recognition
programmes and round-the-clock open learning access for our staff. Our
people-centred approach has again been recognised externally with our
work at South West Trains shortlisted at both the Personnel Today and
Rail Innovation Awards.

In North America, we have set up a new centralised driver training school
in our North East division, which has improved the quality and consistency
of provision. Our Canada division has focused closely on harnessing the
power of the Internet to attract new employees and has been working in
partnership with Workopolis, Canada’s leading internet recruitment service.

Government ^ senior executives have an ongoing dialogue with national
and local government in all our countries of operation to ensure the
effective delivery of government transport policy and to assist in meeting
wider objectives. In the UK, we work closely with the Department for
Transport, the Strategic Rail Authority, the Scottish Executive, the Welsh
Assembly and Transport for London.

Stagecoach has been working with the Department of Labour in New
Zealand on a project to source employees outwith the country under
established quota arrangements. A recruitment team from Stagecoach and
the New Zealand Immigration Department visited Samoa to interview
prospective employees and nearly 30 drivers have taken up positions with
the company in Auckland.

Transport Authorities ^ we work closely with local authorities, including
Passenger Transport Executives, Regional Transport Committees and
Transit Authorities, in the delivery and planning of bus and rail services.

Government Advisory Bodies and Lobbying Groups ^ we have
constructive dialogue with organisations such as the Commission for
Integrated Transport, which provides advice to the UK Government, and
lobbying groups such as Transport 2000.

Transport and Industry Representation Groups ^ we are active
members of industry groups, such as the Confederation of Passenger
Transport UK (which covers buses and light rail) and the Association of
Train Operating Companies.

Our People ^ we have established strong working relationships with trade
unions and work in partnership with them on a range of issues, including
training and development, occupational health matters, pensions and other
employee benefits. We also communicate with our people face to face
and through a number of internal publications.

Suppliers ^ we rely on a range of suppliers to provide services linked to
our bus and rail operations. These include vehicle and rolling stock
manufacturers, fuel suppliers, IT companies and clothing manufacturers.

We are also looking to develop the managers of the future through our
graduate recruitment initiative. Our engineering apprenticeship programme
in the UK promotes careers through local schools and career development
agencies. We have also worked closely with government-funded enterprise
agencies to get the long-term unemployed back into work, because many
have vital skills that are being overlooked.

Stagecoach wants to support its people when they need it most. For
example, at South West Trains we have a partnership with Care First,
which offers an employee assistance programme that includes a 24-hour
confidential counselling service and legal helpline.

We are one of six employers across the UK involved in a pilot scheme that
aims to research and test various ways to improve financial capability in
the workplace. The multi-agency project ^ co-ordinated by the Financial
Services Authority (‘‘FSA’’), the independent financial watchdog ^ involves
offering our staff one to one surgeries and hard copy material. The
workplace is seen as an ideal way to get information and education on
finance to adults and active participation by employers is vital. The pilot is
part of a national strategy to improve access to information, advice and
personal finance education, so that consumers are better equipped to
make sound choices when looking after their money and their future
financial security.

Stagecoach Group plc page 11

Operating and Financial Review

Improving accessibility
Every customer we serve is unique, each with their own specific
individual needs. We recognise that accessibility is crucial in providing
attractive public transport services and, as far as possible within the
resources we have available, we are making it easier to use our bus and
rail services.

We have made further progress during the year on our programme that
will ultimately result in all our buses in the UK being fully low-floor. Each
year, hundreds of new, more easily accessible vehicles are added to our
fleet and already all buses operated in London are entirely low floor with
wheelchair access. We are also helping provide new demand responsive
transport services, which are meeting the needs of those with mobility
problems who require a service from their front door. In Hastings, for
example, we are working with East Sussex County Council to transport the
less mobile direct from their homes to main line bus services.

Significant investment is also taking place in our North American
business in partnership with federal agencies. This year, our New York
Sightseeing business introduced a fleet of 20 new open-top double-
decker vehicles with improved wheelchair access ramps for disabled
customers.

On the South West Trains network, we provide station-based ramps to
enable wheelchair users to board and alight our new accessible Desiro
trains with maximum convenience. To support the access of wheelchair
users to our network, we are now committed to providing wheelchair
users with accessible taxis to and from stations with step-free access at no
extra charge.

Access for all is also about staff training and we continue to maintain links
with disability groups to ensure both the needs of our passengers and
employees are considered. At Sheffield Supertram, for example, we are
currently refreshing the interiors of our vehicles, which will feature textured
grab rails and improved seating layouts to help passengers with visual
impairment. We are also currently undertaking trials of new higher visibility
destination blinds and investigating the potential for automated public
address announcements.

Stagecoach is also working with key stakeholders to improve accessibility
across the transport industry. In New Zealand, we have assisted the
Human Rights Commission inquiry into the provision of accessible
transport. We are introducing new LED screens on our new buses, which
provide improved visibility for people with visual impairment.

Many people now access transport information online and our recently
relaunched Stagecoach Group website, www.stagecoachgroup.com, has
been developed in line with accessibility guidelines drawn up by the Royal
National Institute for the Blind.

Health and safety
Stagecoach has a proactive culture across the Group that puts health and
safety at the very top of our agenda. Bus, coach and rail travel is
significantly safer than similar journeys by car, and the safety and security
of both our customers and our people are at the core of how we operate
our business.

Health and safety is monitored and reported on in every company across
Stagecoach Group and immediate action is taken to address issues in our
business processes. Safety is part of a well-defined risk management
process across our business. A main Board executive director, Graham
Eccles, has specific responsibility for safety issues across the Group and the
Board is updated on safety matters at each of its meetings. Safety matters
are also considered at the Board and management meetings of each of
our businesses.

Our Group Health, Safety and Environmental Committee, chaired by our
non-executive director Janet Morgan and also comprising Graham Eccles
and Iain Duffin, reports to the Board on these matters. They have access
to internal safety executives and external consultants.

In our UK Bus division, we are working in partnership with the
Government and other agencies to improve bus safety and security. While
crime and vandalism are relatively low, we are aware they can discourage
people from travelling on buses. We continue to invest in CCTV

technology, driver safety screens and other measures to protect our
passengers and our people. We have a number of joint programmes in
place with schools and the police to deter anti-social behaviour and
educate the next generation of public transport users. Stagecoach is also
working with a number of local authorities in areas such as Oxford,
Mansfield, Cheltenham and Gloucester to develop late night bus networks
to help reduce town centre crime. At an operational level, we have in
place a process of route risk assessments to identify potential safety issues.
As well as our own investment in on-going driver training, we are
supporting the work of the Road Operators’ Safety Council to drive up
standards in the industry. Stagecoach has also helped fund safety
campaigns focused on other road users, including cyclists and drivers of
agricultural vehicles.

Rail travellers on the South West Trains network are benefiting from a
safer environment on our new, state-of-the-art Desiro trains and on our
refurbished Class 455 trains, which are being fitted with CCTV technology.
All South West Trains rolling stock is fitted with the Train Protection
Warning System, which stops a train automatically at red signals. Our
award-winning TravelSafe Officers partnership with British Transport Police,
which helps ensure passenger safety, has been extended further in the
past year to cover more routes and stations on the South West Trains
network. Investment in both TravelSafe Officers and CCTV has helped cut
crime on the network by 8.6% in the first half of 2004 and 20% in the
second half of the year. Work is continuing with Network Rail and British
Transport Police to identify hot-spots and ensure effective measures are
taken on both trains and at stations to reduce incidents of assault,
trespass and vandalism.

In North America, we carry out regular safety audits of our facilities to
ensure high standards of health and safety are maintained. Along with
other major operators, we have assisted national bodies to put in place
processes to address the impact of potential terrorist attacks on public
transportation. In the United States, for example, we are working with
the Federal Government to take part in anti-terrorism workshops for our
employees and are beginning to put in place anti-theft and GPS
tracking, monitoring and communication systems. In Canada, we have a
dedicated Occupational Health and Safety Policy Committee whose
members are drawn equally from management and workforce
representatives.

Our business in New Zealand has a programme in place to reduce the
incidence of workplace injury and sickness and we conduct regular
workplace inspections. An annual review of health and safety issues is
carried out jointly by management and union representatives. We also
have a special project team in place to address the issue of driver
assaults.

Stagecoach Group itself has a good safety record, but there is no room
for complacency. We constantly keep our safety arrangements under
review and are committed to putting in place any improvements required
to our safety governance arrangements.

Part of the community
For nearly 25 years, Stagecoach has been a key part of communities.
As well as providing lifeline transport services and significant job
opportunities, we take an active role in the communities where we
operate.

We want local people to share in our success and that is why every year
we help fund the vital work of local, national and international charities.
During the year ended 30 April 2005, »0.3m (2004: »0.3m) was donated
by the Group to help many worthwhile causes, including many health
charities and local community projects in areas where Stagecoach provides
lifeline bus services.

Like many companies, Stagecoach and its employees were touched by the
Asian tsunami disaster and its impact on people living in the area. The
Group pledged »100,000 to help the relief effort and building work, and
also matched pound for pound the »40,000 raised by our employees in
the UK, North America and New Zealand. The »180,000 raised was
channelled through four charities ^ Save the Children, British Red Cross,
Tearfund and World Vision ^ which are part of the Disasters Emergency
Committee.

page 12 Stagecoach Group plc

Stagecoach’s support for the community is not just about money.
Hundreds of our employees devote their own time every day to local
projects that make a real difference in their area. Our businesses provide
much-needed in-kind support, while our people also give charities the
benefit of their expertise during secondments. Earlier this year, for
example, we provided transport for a group of children from Beslan in
Russia who were on a month-long stay in Scotland following the
terrorist siege at a school in their homeland. We have provided similar
assistance to groups of children affected by the Chernobyl disaster and
its aftermath.

Much of the backing we provide is focused on education and young
people. We work closely with schools and police on local crime prevention
initiatives and education of youngsters about the dangers and
consequences of anti-social behaviour. Our support also assists many local
initiatives that help provide opportunities for young people. Our bus
company in Warwickshire, for example, is a partner in an innovative
‘‘text2talk’’ anti-bullying initiative with the police and other agencies.
We are also a key partner in Kent People’s Trust, a police and business
initiative in the county targeted at reducing youth crime. In Strathclyde,
we have two information and training vehicles, which are used by the
police to work with youngsters in housing estates in Glasgow and
Ayrshire to cut crime and vandalism. At South West Trains, there is a
focus on projects designed to give young people alternatives to anti-
social behaviour, particularly highlighting the dangers of trespassing on
railway lines.

Stagecoach is also helping promote social inclusion with our communities
and help those who are the most vulnerable. We have a national
agreement with Guide Dogs for the Blind that allows the dog trainers free
travel on our buses.

We have continued to support the UK educational charity
businessdynamics, which provides courses designed to build the skills and
confidence of young people as they prepare to enter the worlds of work
and further education. We have also supported a number of arts initiatives
and this year marked the 10th anniversary of our sponsorship of the Mari
Markus Gomori children’s concerts, which have been attended by more
than 40,000 schoolchildren.

Overseas, our businesses support the work of chambers of commerce,
arts foundations, tourism associations, educational groups and other key
services. We have again provided transport facilities to assist the annual
Tartan Day celebrations in New York, while similar support has been
provided to a group of British police officers that make an annual visit
to the city to honour the Britons killed in the September 11 terrorist
attacks.

In New Zealand, Stagecoach is a long-standing supporter of the Starship
Foundation, which helps the country’s leading specialist paediatric hospital.
All fares collected on a specially-liveried Stagecoach bus in Auckland go to
the Starship Foundation and the money is used to provide a range of
additional equipment and staff training for the medical facility. Money
raised has purchased a ventilator for the paediatric intensive care unit, a
new incubator and has also helped fund the training of senior transport
nurses. In Wellington, Stagecoach has been a supporter of the New
Zealand Festival, converting a bus into a mobile performing stage and
providing transport for participants.

Supporting the community. Working with the community. Part of the
community. That is the cornerstone of our business philosophy and the
key to building positive relationships with our stakeholders.

Building a sustainable environment
Stagecoach has made good progress this year in improving the
environmental management and sustainability of its operations. Public
transport has a key role to play in reducing pollution levels, alleviating
road congestion and improving the quality of life in our towns and cities.
However, we are also working hard to ensure our own day-to-day
transport operations are carried out in a responsible manner.

Stagecoach worked with consultants, Arthur D. Little, to update and
improve our Group Environmental Policy two years ago. That policy sets
out our commitment to good environmental stewardship and we have
put in place stretching targets to reduce emissions, cut water and energy
consumption, minimise waste and identify opportunities for recycling.

The Group has put in place a number of internal measures to minimise
the impact of our operations on the environment. We have also improved

the processes designed to track environmental data, which has produced
more accurate information from which to analyse performance. Details of
our performance, compiled by Arthur D. Little, can be found on the
Stagecoach Website at http://www.stagecoachgroup.com

We have achieved a significant improvement in the direct emissions
per passenger journey from our bus and train fleets. There has been a
reduction across all measures, with some decreasing by more than
25%. This has been achieved through the introduction of newer
vehicles and rolling stock, which meet the latest stringent
environmental standards. We are also looking at new fuels and cleaner
technologies to improve our performance, as well as providing further
training for our drivers.

Following a 12-month trial, we are now rolling out the use of the Envirox
fuel additive across our UK Bus division. In tests on 1,000 vehicles, the
product has delivered a 5% fuel efficiency saving and associated reductions
in emissions. In Sunderland, we have fitted exhaust gas recirculation
systems to a number of our vehicles with Euro II engines to bring them
up to Euro IV standard as part of a Local Transport Plan/Energy Savings
Trust project. We have also launched a biodiesel trial in a number of our
buses in New Zealand.

Stagecoach has showcased a futuristic hybrid electric bus across the UK to
encourage local authorities to introduce the environmentally-friendly
vehicle in their areas. The state-of-the-art vehicle, which has been
successfully operated by Stagecoach in Auckland, New Zealand, has the
advantage of being able to run emission-free in densely populated areas
and the battery-powered technology means it is extremely quiet on the
road. Special regenerative braking technology means the batteries on the
bus are charged when the brakes are applied, while a diesel turbine can
also charge the batteries. Stagecoach has already won a local authority
contract to run the vehicles on a new route on the Quayside in Newcastle
and the service is now in operation.

Water consumption in our bus and train operations has reduced per
passenger journey by over 10%, assisted by the introduction of upgraded
wash facilities, better bus wash management and initiatives to identify and
repair water system leaks. In North America, for example, we have
introduced new water recycling units at two of our main facilities in
New York and New Jersey, which have the potential to reduce water
usage by 70%.

The Group has continued to make progress in controlling the production
of vehicle maintenance and other waste in its UK and overseas operations,
while there has been a significant increase in recycling of waste from our
bus operations in particular, rising from 20.4% in the 12 months to
30 April 2004 to 31.9% the following year.

While we have achieved a further improvement in some measures of
indirect emissions from our bus and train operations, we note that there
has been an increase in CO2 produced by our bus and train depots and
offices, as well as our train operations. The main reason for the increase
has been the step-change we have delivered in the working environment
for our people and the rail travelling environment for our customers.
While we have installed new energy efficient heating systems and low
energy lighting at several bus depots in the UK, many depot
refurbishments have included extra internal and external lighting for a
better and more secure working environment. There has also been an
increase in the use of electronic communication. Overseas, two additional
depots have been included in the collection of data in New Zealand.
Moving forward, a number of our UK Bus sites are to be fitted with a
smart energy metering system to help identify savings opportunities and
benchmark performance as part of a major Carbon Trust pilot project.

At South West Trains, the new Desiro trains have provided a major uplift
in travel comfort with improved air-conditioning, on-board information
systems and better safety features. These improvements are helping to
generate modal shift from car to public transport, which has a positive
impact on the environment. However, the rolling stock is heavier and,
combined with the improved acceleration, this means there is a greater
draw on the electricity supply. Controlled Emission Toilet-emptying
facilities and upgraded tanking facilities at a number of locations have
resulted in increased water and electricity usage. Station improvement
projects have involved additional air conditioning systems, better exterior
and platform lighting and new customer information systems. While these
have been designed using energy efficient systems and have significantly
improved passenger satisfaction, there has been an impact on electricity,
gas and water consumption.

Stagecoach Group plc page 13

Operating and Financial Review

In line with the targets set out in our Environmental Policy document, we
have taken further steps to improve our environmental management
across our global operations. We have improved the quality and accuracy
of the data, as well as the calculation methodology. Emissions in our
UK Bus division have been calculated based on the proportions of
different types of bus in service pre-Euro, Euro I, Euro II and Euro III
providing significantly more accurate calculations. In New Zealand, we have
developed and implemented a new method of monitoring water use,
which has identified bus washes for future water usage reduction
programmes. Waste monitoring has improved at our Supertram
operations, which is also now tracking general waste data. There has also
been improved waste calculations at South West Trains and Island Line as
a result of using more specific factors from the Department for the
Environment, Food and Rural Affairs (‘‘DEFRA’’) and SITA to estimate
weight to volume ratios of general waste.

We have continued to provide support and training for our employees to
ensure compliance with legislation, effective waste management, improved
energy consumption and better environmental performance. Our UK Bus
division, for example, has run a comprehensive environmental training
programme for around 200 managers over the past two years. The
division is also working with the road safety charity BRAKE and other
companies to benchmark and share good practice in safe driving and
driving methods which increase fuel efficiency. During 2005-06, following
the evaluation of measures undertaken in our Manchester depots, we are
running an electrical energy reduction campaign across the UK Bus

division. We have appointed specialist company Inenco to manage our gas
and electricity purchasing in the UK Bus division. Inenco will be making
recommendations on a utility purchasing policy, expected to include
alternative energy sources, and measures to reduce energy consumption.
South West Trains has undertaken a review of its environmental
management system to ensure it continues to comply with legislation. All
train services are no smoking, improving the travelling environment for our
passengers and the working environment for our people. South West Trains
is also working hard to accommodate cyclists and its Surbiton Station was
named best cycle facility at the London Cycling Campaign awards.

Major employers are working with us to develop travel plans that reduce
dependence on the car to get to work. Stagecoach’s work to promote bus
use among businesses in Exeter ^ including the Met Office and the Royal
Devon & Exeter Hospital ^ has been identified as an example of best
practice within the industry. TransportEnergy, a non-profit organisation
which encourages businesses to help reduce greenhouse gas emissions
and improve air quality in cities and towns, has highlighted Stagecoach’s
use of staff travel surveys with city businesses, the offer of discounts and
vouchers, and the provision of information about bus services.

Despite the improvements and investment we have made in the area of
environmental sustainability over the past year, we recognise more work
has still to be done. But we remain committed to building on the
progress we have made and exceeding the stretching targets we have set
our business.

page 14 Stagecoach Group plc

Directors

1 Robert Speirs, Non-Executive Chairman
A non-executive director of the Group since March 1995. In July 2002, he was
appointed by the Board as Non-Executive Chairman. He is currently a non-executive
director of Victoria Mortgage Funding Ltd and Chairman of the Miller Group Ltd. He
is a former Group Finance Director of The Royal Bank of Scotland plc. Robert Speirs
is a member of the Nomination Committee. Aged 68.

2 Brian Souter, Chief Executive
The co-founder of Stagecoach, Brian Souter is the architect of the company’s
strategy and philosophy. He has extensive knowledge of the ground transportation
industry around the world and is responsible for managing all of the Group’s
operations. He is also Chairman of ScotAirways Group Ltd. He was named
Businessman of the Year at the Insider Elite Awards 2004 and is a Chartered
Accountant. Brian Souter is a member of the Nomination Committee. Aged 51.

3 Martin Griffiths, Finance Director
Appointed Finance Director in April 2000, Martin Griffiths is responsible for the
Group’s overall financial policy, taxation and treasury management. He also has
responsibility for the overall management of the Group’s property portfolio and
supports the Group Chief Executive in all aspects of new business development
across the Group. He won the Young Scottish Finance Director of the Year Award in
2004 and is a Chartered Accountant. Aged 39.

4 Graham Eccles, Executive Director ^ Rail
Graham Eccles has over 35 years’ experience in the rail industry and has held a
number of senior management posts. He has been a member of the Board since
September 2000 and prior to that was managing director of South West Trains
from 1999. He is responsible for the management of all the Group’s rail operations
and business development opportunities in the rail market. In addition, he has main
board responsibility for Group safety matters and is a member of the Health, Safety
and Environmental Committee. Graham Eccles is co-chairman of Virgin Rail Group
Holdings. Aged 58.

5 Ewan Brown CBE, Non-Executive Director
Ewan Brown has been a non-executive director of the Group since 1988. He was
appointed Chairman of the Nomination Committee in June 2004 and is a member
of the Audit Committee. He is a former executive director and is currently a
non-executive director of Noble Grossart Ltd. His other non-executive directorships
include John Wood Group plc and Lloyds TSB Group plc. He is also Chairman of
Lloyds TSB Scotland plc and Tie Ltd. Aged 63.

Key to photograph

4

8

3

2

1

9

5

6

7

6 Iain Duffin, Non-Executive Director
Iain Duffin became a non-executive director of the Group in September 2001. He
was appointed Chairman of the Remuneration Committee on 1 May 2003 and is
also a member of the Audit Committee and Health, Safety and Environmental
Committee. He is a non-executive Chairman of Origo Services and Beattie Media
Group. He has previously held executive positions in the UK and the US with a
number of organisations including Macfarlane Group plc, LucasVarity plc,
ITT Corporation and Hughes Aircraft. Aged 58.

7 Ann Gloag OBE, Non-Executive Director
Ann Gloag co-founded Stagecoach in 1980 and served as an executive director until
May 2000. She became a member of the Health, Safety and Environmental
Committee in June 2005. She is a past winner of the Businesswoman of the Year
Award and European Women in Achievement Award. She is a trustee of the
Princess Royal Trust for Carers, an international Board member of Mercy Ships and a
non-executive director of OPTOS. In June 2004, she was awarded an OBE for
services to charity. Aged 62.

8 Dr Janet Morgan, Non-Executive Director
Dr Janet Morgan, Lady Balfour of Burleigh, became a non-executive director in April
2001. She is Chairman of the Health, Safety & Environmental Committee and is a
member of the Audit and Remuneration Committees. She is also Chairman of the
Nuclear Liabilities Fund and is a non-executive director of BPB plc and other
companies. She was a non-executive director of Cable & Wireless until 23 July 2004.
Dr Morgan is a Fellow of the Royal Society of Edinburgh, a Trustee of the
Carnegie Trust for the Universities of Scotland and a Trustee of the National Library
of Scotland. She was a member of the Central Policy Review Staff of the Cabinet
Office. Aged 59.

9 Russell Walls, Non-Executive Director
Appointed as a non-executive director in June 2000, Russell Walls is the Chairman
of the Audit Committee and is a member of the Remuneration Committee. He is
the senior independent non-executive director. He is a non-executive director of
Signet Group plc and Aviva plc. He was previously Group Finance Director of
BAA plc and Wellcome PLC. For many years he worked abroad with Coats Viyella plc
where he was Group Finance Director from January 1990. He is a fellow of the
Association of Chartered Certified Accountants. Aged 61.

Stagecoach Group plc page 15

Directors’ report

Principal activity and business review
The Group’s principal activity is the provision of public transport services in
the UK and overseas.

A review of the Group’s business performance, developments during the
year, its position at the year end and likely future prospects, is set out in
the Chairman’s statement on page 2, the Chief Executive’s review on
page 3 and the Operating and Financial Review on pages 4 to 14.

Group results and dividends
The results for the year are set out in the consolidated profit and loss
account on page 31.

An interim dividend of 1.0 pence per ordinary share (net) was paid on
9 March 2005. The Directors recommend a final dividend of 2.3 pence per
ordinary share making a total dividend of 3.3 pence per ordinary share for
the year. Subject to approval by shareholders, the final dividend will be
paid on 5 October 2005 to those ordinary shareholders on the register at
2 September 2005.

A dividend of 0.346828 pence per ‘‘B’’ share was paid on 31 March 2005.
The Company continues to accrue dividends on the ‘‘B’’ shares at the
agreed rate of 70% of 6 months LIBOR. The next dividend on the
‘‘B’’ shares is due to be paid on 30 September 2005.

Directors and their interests
The names, responsibilities and biographical details of the Directors appear
on page 15. Their participation in full Board meetings and meetings of
committees is given in the Corporate Governance report on page 19.

The Board reviews the development plans for the Board at least annually
as part of its performance evaluation. The assessment involves a
consideration of the balance of skills, knowledge and experience of the
Directors. The Board also considers whether the Directors have sufficient
time to properly discharge their duties, which includes a consideration of
any other appointments that each director has. The re-elections of
Brian Souter, Iain Duffin, Robert Speirs, Ewan Brown and Ann Gloag will
be proposed at the 2005 Annual General Meeting and are consistent with
the results of the Board’s assessment. The Board believes that the
performance of each of these Directors continues to be effective and that
they continue to demonstrate commitment to their respective roles. The
Board therefore considers it is appropriate that each of these Directors be
re-elected at the 2005 Annual General Meeting.

Brian Souter and Iain Duffin retire by rotation at the 2005 Annual General
Meeting in accordance with the Articles of Association and being eligible
offer themselves for re-election. As explained in the Corporate Governance
report on page 18, Ewan Brown is considered to be an independent
non-executive director by the Board. However, in recognition of the
factors suggested by the Combined Code for determining independence,
Ewan Brown offers himself for annual re-election. Robert Speirs, Chairman,
and Ann Gloag, who is a Non-Executive Director but is not independent,
also offer themselves for annual re-election.

Tables A, B and C, set out opposite, give the interests of the Directors
and their families in the share capital of the Company.

Company Secretary
Derek Scott, who has a long association with the Group, stood down as
Company Secretary at the 2004 Annual General Meeting. Ross Paterson,
the Group’s Financial Controller, was appointed as Company Secretary
from that time. He is also Secretary to all Board Committees.

Substantial shareholdings
On 21 June 2005 (being the latest practical date prior to the date of this
report), the only disclosable shareholdings in excess of 3% (other than
certain Directors’ shareholdings) were as follows:

Marathon Asset Management Ltd
Capital International Ltd
Standard Life Investments Ltd
Legal & General Investment Management Ltd
Morley Fund Management Ltd (UK)
Barclays Global Investors (UK) Ltd

4.90%
4.38%
4.23%
3.59%
3.13%
3.09%

Directors interests

TABLE A

Number of ordinary shares

Ordinary shares of 12/19thp each
(2004: 0.5p each)
Brian Souter

beneficial
non-beneficial

beneficial
non-beneficial

Graham Eccles
Martin Griffiths
Ewan Brown
Ann Gloag

Janet Morgan
Robert Speirs
Russell Walls
Iain Duffin

TABLE B

Redeemable B shares of 18p each
Brian Souter

beneficial
non-beneficial

beneficial
non-beneficial

Graham Eccles
Martin Griffiths
Ewan Brown
Ann Gloag

Janet Morgan
Robert Speirs
Russell Walls
Iain Duffin

TABLE C

Number of Ordinary shares of
12/19thp each held under option
(2004: 0.5p each)
Brian Souter
Graham Eccles
Martin Griffiths
Ewan Brown
Ann Gloag
Janet Morgan
Robert Speirs
Russell Walls
Iain Duffin

30 April and
22 June 2005

30 April and
23 June 2004

141,910,060
14,108,591
109,229
15,830
Nil
116,352,145
1,598,820
2,058
14,645
15,833
31,670

179,254,818
17,821,379
115,048
7,997
Nil
146,971,155
2,019,564
2,600
18,500
20,000
40,000

Number of ‘‘B’’ shares

30 April and
22 June 2005

30 April and
23 June 2004

1,388,888
Nil
257
257
Nil
1,388,888
Nil
Nil
Nil
Nil
Nil

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

Number of ordinary shares under option

30 April and
22 June 2005

30 April and
23 June 2004

4,585,671
2,172,157
1,958,066
Nil
Nil
Nil
Nil
Nil
Nil

3,804,038
2,297,373
2,298,573
Nil
Nil
Nil
Nil
Nil
Nil

In addition to their individual interests in shares, Brian Souter, Graham
Eccles and Martin Griffiths are potential beneficiaries of the Stagecoach
Group Employee Benefit Trust 2003, which held 4,690,333 (30 April
2004: 4,636,924) ordinary shares of 12/19th pence (2004: 0.5 pence)
each as at 30 April 2005. Graham Eccles and Martin Griffiths are also
potential beneficiaries of the Stagecoach Group Qualifying Employee Share
Trust (‘‘QUEST’’), which held 1,811,212 (30 April 2004: 4,887,606)
ordinary shares of 12/19th pence each as at 30 April 2005. Full details of
options held as at 30 April 2005 are contained in the Remuneration
Report on pages 23 to 29.

No director had a material interest in the loan stock or in the share capital
of any subsidiary company.

page 16 Stagecoach Group plc

Employment policies
The Group strives to meet its business objectives by motivating and
encouraging its employees to be responsive to the needs of its customers
and to maintain and, where possible, improve operational performance.
The Group is also committed to providing equality of opportunity to
current employees and potential employees. This applies to appropriate
training, career development and promotion opportunities for all
employees regardless of physical disability, gender, religion or belief and
racial or ethnic origin. The Group gives full consideration to applications
for employment from disabled persons where a disabled person can
adequately fulfil the requirements of the job. Where existing employees
become disabled, it is the Group’s policy wherever practicable to provide
continuing employment under normal terms and conditions and to
provide training and career development and promotion to disabled
employees wherever appropriate.

The Group is committed to employee participation and uses a variety of
methods to inform, consult and involve its employees. Employees
participate directly in the success of the business through the Group’s
bonus and other remuneration schemes and are encouraged to invest
through participation in share option schemes. Since 1996, there have
been four invitations to UK employees to subscribe to the Group’s
Sharesave (‘‘SAYE’’) schemes, all of which have met with encouraging levels
of response. 4,310 employees applied to participate in the most recent
SAYE invitation, and the savings contracts commenced on 1 April 2005.

The Group periodically arranges meetings that bring together
representatives from senior management and trade unions. Discussions
take place regularly with the trade unions representing the vast majority of
the Group’s employees on a wide range of issues. The Group also
produces a range of internal newsletters and information circulars that
keep employees abreast of developments. Employees are encouraged to
discuss matters of interest to them and subjects affecting day-to-day
operations of the Group with management.

The Group is committed to developing a culture of openness across all its
businesses and ensuring the highest standards of probity and accountability.
The Board actively encourages employees with serious concerns about the
interests of others or the Company to come forward. During the financial
year ended 30 April 2005, the Group issued an updated policy called
‘‘speaking up’’ to employees, which is designed to ensure processes exist
where employees can raise serious concerns constructively without fear of
victimisation, subsequent discrimination or disadvantage.

Directors’ responsibilities
Company law requires the Directors to prepare accounts for each financial
year that give a true and fair view of the state of affairs of the Company
and of the Group, and of the profit or loss of the Group for that period.
In preparing those accounts, the Directors are required to:

. select suitable accounting policies and then apply them consistently ;

. make judgements and estimates that are reasonable and prudent;

. state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
accounts; and

. prepare the accounts on a going concern basis unless it is inappropriate

to presume that the Group will continue in business.

The Directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and of the Group, and enable them to ensure that the accounts
comply with the Companies Act 1985. The Directors are also responsible
for safeguarding the assets of the Company and of the Group, and hence
for taking reasonable steps for the prevention and detection of fraud and
other irregularities.

Supplier payment policy and practice
It is the Group’s policy to agree appropriate terms of payment with
suppliers for each transaction or series of transactions, and to abide by
those terms based on the timely submission of satisfactory invoices. The
policies followed by each of the major UK operating subsidiaries are
disclosed in the accounts of those companies. As the Company is a
holding Company, trade creditor days is not a relevant figure. For the
Group as a whole, the trade creditors outstanding at the year-end
represented 31 days’ purchases (2004: 33 days).

Fixed assets
In the opinion of the Directors, the open market value of the Group’s
interest in land and buildings exceeds the net book value. As part of the
transition to International Financial Reporting Standards, the net book
value of certain land and buildings is expected to be revalued upwards by
approximately »53m as of 1 May 2004. The revaluation is not expected
to give rise to additional tax liabilities.

Close company status
The Directors are advised that at 30 April 2005 the Company was not a
close company within the meaning of the Income and Corporation Taxes
Act 1988.

Charitable and political contributions
Group companies made charitable donations of »0.3m (2004: »0.3m)
during the year.

It is the Group’s policy not to make political contributions and,
accordingly, there were no payments for political purposes during the year
(2004: »Nil).

Authority for company to purchase its own shares
At the 2004 Annual General Meeting, the Company was granted authority
by its shareholders under section 166 of the Companies Act 1985 to
repurchase up to 10% of its ordinary shares. During the year, no ordinary
shares were repurchased. Under the existing authority, the Company may
repurchase up to a further 134,073,290 shares. This authority will expire
on 26 February 2006 unless revoked, varied or renewed prior to this date.

A resolution will be placed at the next Annual General Meeting that the
Company be authorised to repurchase up to 10% of its ordinary shares of
12/19th pence each, which, if passed, will lapse on or before 31 December
2006. If the resolution is approved, the existing authority that was granted
at the 2004 Annual General Meeting will lapse.

Return of Capital
Following the passing of a special resolution at the 2004 Annual General
Meeting, we have successfully completed the return of »241.3m of
capital to shareholders by the issue of redeemable B shares, of which
77,189,641 ‘B’ shares (»13.9m) have still to be redeemed.

Having taken account of the cashflow generation of the Group and the
potential bonding requirements on current rail franchise bids, the Board is
now comfortable with the Group’s current capital structure. The Board will,
however, continue to keep the Group’s capital structure under review.

Going Concern
On the basis of current financial projections and the facilities available, the
Directors are satisfied that the Group has adequate resources to continue
for the foreseeable future and, accordingly, consider it appropriate to
adopt the going concern basis in preparing the accounts.

Auditors
A resolution to re-appoint PricewaterhouseCoopers LLP as auditors to the
Company, at remuneration to be fixed by the Directors, will be proposed
at the next Annual General Meeting.

By order of the Board

ROSS PATERSON
Company Secretary

22 June 2005

Stagecoach Group plc page 17

Corporate governance

Introduction
The Stagecoach Board is accountable to shareholders and others for the
Group’s activities and is responsible for the effectiveness of corporate
governance practices within the Group. In July 2003, a revised Combined
Code (‘‘the Combined Code’’) was issued for financial years commencing
on or after 1 November 2003.

This section of the report discusses Stagecoach Group’s corporate
governance arrangements and management structures. It also includes the
disclosures recommended by the Combined Code, and describes how the
principles of good corporate governance that are set out in the Combined
Code have been applied. In line with best practice, separate reports are
provided from each of the Audit Committee, Nomination Committee and
Remuneration Committee.

Compliance with the Combined Code
The Directors believe that the Group currently complies with all of the
recommendations contained in the Combined Code, other than that one
of the Non-Executive Directors regarded as independent by the Board
does not satisfy all of the criteria suggested by the Combined Code for
determining Directors’ independence.

Composition of the Board
The Combined Code suggests that independent Non-Executive Directors
should make up at least half of the Board (excluding the Chairman). The
Company’s Board comprises nine Directors. Excluding the Chairman, the
Board considers there to be four independent Non-Executive Directors.

Robert Speirs

Chairman

Ewan Brown

Non-Executive Director

Iain Duffin

Non-Executive Director

Janet Morgan

Non-Executive Director

Russell Walls

Senior Independent

Non-Executive Director

Ann Gloag

Non-Executive Director

Brian Souter

Chief Executive

Graham Eccles

Executive Director ^ Rail

Martin Griffiths

Finance Director

Independent
Non-Executive
Director

Other
Director

Chairman

H

H

H

H

H

H

H

H

H

Ewan Brown, one of the four independent Non-Executive Directors, has
served on the Board since 1988 and is a non-executive director of Noble
Grossart, which is an advisor to the Company. The Company recognises
and understands investor concerns over longer-serving Non-Executive
Directors but nevertheless continues to regard Ewan Brown as
independent. Ewan Brown’s long association with the Group enables him
to provide a robust and effective challenge to management because of
the sound and detailed knowledge of the Group’s business that he has
developed. The Board believes that Ewan Brown’s length of service
enhances his effectiveness as a non-executive director and that he remains
independent in character and judgement. In recognition of the factors
suggested by the Combined Code for determining independence,
Ewan Brown will stand for annual re-election as a director. In addition,
Ewan Brown does not serve on the Remuneration Committee and while
he does serve on the Audit Committee, the other three Independent
Non-Executive Directors also serve on that Committee. In assessing
independence, the Board takes into account the wider composition and
balance of the Board as a whole.

Operation of the Board
The Board is scheduled to meet six times each year. Additional meetings
of the Board are held to consider matters arising between scheduled
Board meetings, where a decision of the Board is required prior to the
next scheduled meeting.

The Chairman ensures that meetings of the Board and shareholders are
properly conducted and is responsible for setting and moving forward the
Board’s agenda. Leadership of the Board (by the Chairman) is not the
same as the leadership required (from the Group Chief Executive) to turn
the Board’s strategic and policy decisions into actions and to infuse the

whole enterprise. The Group Chief Executive has day-to-day responsibility
for all business of the Group and carries out the agreed strategy and
policies of the Board. The split of the Chairman’s and Chief Executive’s
responsibilities is in writing and has been approved by the Board.

The Directors’ biographies appear on page 15 of this Annual Report and
illustrate the Directors’ range of experience, which ensures an effective
Board to lead and control the Group. The Non-Executive Directors bring
an independent viewpoint and create an overall balance.

The Executive and Non-Executive Directors have a complementary range
of financial, operational and entrepreneurial experience that ensures no
one director or viewpoint is dominant in the decision-making process. The
Chairman and the Non-Executive Directors periodically meet without the
Executive Directors being present: these meetings generally follow each
meeting of the full Board. In addition, the Non-Executive Directors, led by
the Senior Independent Non-Executive Director, meet without the
Chairman at least annually.

All Directors meet regularly with other senior management and staff of
the Group, have access to confidential advice from the Company Secretary
and may take independent legal or other professional advice at the
Group’s expense where it is considered necessary for the proper discharge
of their duties as Directors. The Company Secretary, whose appointment
and removal is a matter for the Board as a whole, is responsible to the
Board for ensuring the Board procedures are complied with.

All Directors submit themselves for election by shareholders at the Annual
General Meeting following their appointment and all Directors are required
to stand for re-election by shareholders at least every three years.
Non-Executive Directors who are not considered by the Board to be
independent, or are considered independent but have served on the Board
for more than nine years submit themselves for annual re-election. Each
director receives induction training on appointment and subsequently such
training or briefings as are considered necessary to keep abreast of matters
affecting their roles as Directors. The Chairman endeavours to ensure that
all Directors (including any newly appointed Directors) attend the
Annual General Meeting, providing an opportunity for shareholders to
meet the Directors.

The number of full Board meetings during the year was six. The full Board
meets once a year at an operational location and regular verbal
communication is maintained by the Chairman between meetings to
ensure all Directors are well informed on strategic and operational issues.

The Board has a number of matters reserved for its consideration, with
principal responsibilities being to agree the overall strategy and
investment policy, to approve major capital expenditure, to monitor
performance and risk management procedures of senior management, to
ensure that there are proper internal controls in place and to consider
major acquisitions or disposals. The schedule of matters reserved for the
Board was reviewed and updated in April 2005. The Directors have full
and timely access to information with Board papers distributed in
advance of meetings.

The Board keeps the roles and contribution made by each director under
review and changes in responsibilities are made where necessary to
improve the Board’s effectiveness. To provide a more manageable process
and better control, certain of the Board’s powers have been delegated to
committees.

Minutes are taken of each meeting of the Board and its Committees.
Where any director has significant concerns that cannot be resolved about
the running of the Group or a proposed action, these concerns are
recorded in the minutes. It is also the Group’s policy that where a director
resigns, the director is asked to provide a written statement to the
Chairman of any concerns leading to his or her resignation.

Operational Management of the Group
The Board delegates the operational management of the Group to the
Group Chief Executive and Executive Directors. The Executive Directors
maintain day-to-day contact and meet regularly face-to-face or in
videoconferences with non-board senior management. There are four
principal operating divisions (UK Bus, North America, New Zealand and
Rail) which each comprise a varying number of autonomous business
units, each headed by a chairman or managing director who is responsible
for the day to day performance of the business unit.

page 18 Stagecoach Group plc

A managing director, who reports to the Group Chief Executive, heads the
UK Bus division. A small team of senior management and other specialists
support the UK Bus managing director. The division is divided into a
number of principal operating units, each headed by a regional managing
director who reports to the managing director of UK Bus. The managing
director of UK Bus and the other UK Bus Directors meet regularly.

North America now comprises three regions (North East, North Central
and Canada). Each region is headed by a chief operating officer, who
reports to the Group Chief Executive.

The New Zealand business is headed by a chairman, who reports to the
Group Chief Executive. A managing director is responsible for the overall
performance of the business unit.

A Rail Business Development Committee, comprising the three Group
Executive Directors and other senior management, oversees the
performance and development of the Group’s rail business, including
bidding on new rail franchises.

The Group’s principal train operating interests are its wholly owned
subsidiary, South West Trains, and its joint venture, Virgin Rail Group.
The Group Executive Director for Rail chairs the South West Trains Board,
and this role is separate from the managing director who is responsible for
the performance of the business unit. However, the former managing
director of South West Trains left the Group in March 2005 and the
Group Executive Director for Rail is presently undertaking this function
until a new managing director is appointed. The South West Trains Board
also includes the Group’s Company Secretary and three Non-Executive
Directors. A Chairman and Chief Executive head Virgin Rail Group. Virgin
Rail Group board meetings are attended by the Stagecoach Group
Executive Director for Rail and the Company Secretary. Stagecoach is
involved in all key decisions at Virgin Rail Group.

Directors and Officers’ liabilities
The Group maintains Directors and Officers’ insurance. In addition, the
Group proposes to provide indemnities to its Directors and Officers in light
of recent changes to UK law in this regard. A resolution will be presented
to the 2005 Annual General Meeting proposing to adopt new Articles of
Association which will, amongst other matters, permit the granting of
indemnities to the fullest extent permitted by law.

Performance evaluation
The Board assesses its own performance and the performance of each
individual Board member; this assessment is co-ordinated and directed by
the Chairman with the support of the Company Secretary. The Senior
Independent Non-Executive Director co-ordinates the Board’s assessment
of the performance of the Chairman. As part of the assessment process,
the Non-Executive Directors meet without the Executive Directors being
present. The Non-Executive Directors also meet without the Chairman
being present. The Chairman obtains feedback from each individual
director on the performance of the Board and other Board members ^
this involves the completion of a questionnaire and a follow-up discussion.
In the same way, the Senior Independent Non-Executive director obtains
feedback from each individual director on the performance of the
Chairman. A similar process is undertaken to assess the performance of
each of the Board’s Committees.

The Directors have reviewed the effectiveness of the Board as a whole and
its Committees. Each Director has assessed the effectiveness of the Board
and each Committee of which he or she is a member. In the case of the
Remuneration Committee, independent consultants have contributed to
the assessment of the Committee’s effectiveness.

The assessment of effectiveness included:

. Consideration of the effectiveness of the formal Board and Committee

meetings;

. The nature and extent of the Board’s interaction with the management

of the Group;

. The timeliness, relevance and accuracy of the information provided to

the Board and its Committees;

. The allocation of the Board’s time between differing priorities including
the time spent on strategic considerations relative to other matters;

Audit Committee
The Audit Committee comprises four Non-Executive Directors, all of who
are considered by the Board to be independent. It receives reports from all
of the Group’s major business functions including the Risk Assurance
Function. It also receives reports from the external auditors. It considers
the scope and results of the audit, the interim and annual accounts and
the accounting and internal control systems in place throughout the
Group. The Audit Committee reviews the cost effectiveness, independence
and objectivity of the internal and external auditors.

The Audit Committee Report is set out on pages 21 and 22.

Remuneration Committee
The Remuneration Committee makes recommendations to the Board for
ensuring that the Executive Directors’ remuneration is appropriate to
attract, motivate and retain Executive Directors of the quality needed to
run the Group’s business successfully. The constitution and operation of
the Remuneration Committee complies with the principles and provisions
of the Combined Code and this is detailed in the remuneration report laid
out on pages 23 to 29.

Nomination Committee
The Nomination Committee currently comprises two Non-Executive
Directors (one of whom is the Chairman of the Company) that the Board
considers to be independent, and one Executive Director. The Committee
is responsible for evaluating the balance of skills, knowledge and
experience of the Board, and where appropriate suggesting new
appointments.

The Nomination Committee Report is set out on page 22.

Health, Safety and Environmental Committee
The Health, Safety and Environmental Committee is chaired by an
independent Non-Executive Director, Janet Morgan, and during the
financial year comprised one other independent Non-Executive Director,
Iain Duffin who joined the Committee in May 2004 and one Executive
Director, Graham Eccles. Ann Gloag joined the Committee from June
2005. It was established to discuss health, safety and environmental issues
across the Group and to report regularly to the Board on these matters. It
has access to internal safety executives and also external consultants. The
Committee met twice during the year and again in June 2005.

The terms of reference of the Health, Safety and Environmental
Committee are available on the Group’s website at
http://www.stagecoachplc.com/sgc/investorinfo/corpgov

Individual director participation at meetings
The following is a table of participation in full Board meetings and
meetings of committees by director during the year ended 30 April 2005:

PARTICIPATION
IN MEETINGS

Full
Board
meetings

Audit
Committee

Remuneration
Committee

Health,
Safety and
Environmental
Committee

Nomination
Committee

No. of meetings

Robert Speirs
Brian Souter
Martin Griffiths
Graham Eccles
Ewan Brown
Iain Duffin
Ann Gloag
Janet Morgan
Russell Walls

6

6
6
6
6
6
6
6
6
6

3

n/a
n/a
n/a
n/a
3
3
n/a
3
3

4

n/a
n/a
n/a
n/a
n/a
4
n/a
4
4

2

n/a
n/a
n/a
2
n/a
2
n/a
2
n/a

1

1
1
n/a
n/a
1
n/a
n/a
n/a
n/a

. The composition of the Board and its Committees.
The Board has considered the results of these assessments and has
concluded that overall the Board and the Committees continue to operate
in an effective and constructive manner.

Relations with shareholders
The Board endeavours to present a balanced and understandable
assessment of the Company’s position and prospects in all of its
communications with shareholders.

Stagecoach Group plc page 19

Corporate governance

The Board considers communications with shareholders, whether large or
small, external or employee, to be extremely important. The Group holds
periodic meetings with representatives of major institutional shareholders,
other fund managers and representatives of the financial press.

The programme of investor relations includes presentations in London of
the full-year and interim results and meetings with institutional investors
in the UK and overseas. Investor and analyst feedback is sought after
presentations to ensure key strategies, market trends and actions being
taken are being effectively communicated and shareholder objectives are
known. During the year, written responses are given to letters or e-mails
received from shareholders and all shareholders receive interim and annual
reports or the summary annual report.

Each shareholder is given the opportunity to elect which document they
require and this allows our reporting to be more focused towards the
needs of individual shareholders. Information is also available on the
Group’s website (www.stagecoachgroup.com).

The Group holds periodic meetings with its principal shareholders. The
Board receives regular updates on the views of shareholders through
briefings from the Chairman and the Executive Directors, reports from the
Company’s brokers and reports from the Company’s Financial PR
consultants. The Senior Independent Non-Executive Director is available to
shareholders where contact through the normal channels is inappropriate,
or has failed to resolve concerns.

Private and institutional shareholders are welcome to attend and
participate at the Annual General Meeting and any Extraordinary General
Meetings. The Group aims to ensure that all Directors, including the
chairmen of the Audit, Remuneration, Nomination and Health, Safety and
Environmental Committees are available at the Annual General Meeting to
answer questions. The Annual General Meeting provides an opportunity
for shareholders to question the Chairman and other Directors on a variety
of topics and further information is provided at the Annual General
Meeting on all the Group’s principal business activities. Notice of the
Annual General Meeting and related papers are distributed to shareholders
at least 20 working days before the meeting. It is the Company’s policy to
propose a separate resolution at the Annual General Meeting for each
substantially separate issue. Resolutions are proposed annually in respect
of the Report and Accounts, and the Remuneration Report. At each
Annual General Meeting, the Chairman reports, after each show of hands,
details of all proxy votes lodged for and against each resolution, and the
number of abstentions. Details of the proxy votes are also published on
the Group’s website at http://www.stagecoachplc.com/sgc/investorinfo/
agminfo/. The Company and its Registrars have established procedures to
ensure that votes casts are properly received and recorded.

Risk management
The Group has an ongoing process for identifying, evaluating and
managing the significant risks that it faces. The Board regularly reviews the
process, and the Board considers that the process accords with the
Turnbull Guidance on internal control.

The Board considers acceptance of appropriate risks to be an integral part
of business and unacceptable levels of risk are avoided or reduced and, in
some cases, transferred to third parties. Internal controls are used to
identify and manage acceptable levels of risk. The Directors acknowledge
their responsibility for establishing and maintaining the Group’s system of
internal control, and reviewing its effectiveness. Although the system can
provide only reasonable and not absolute assurance of material
misstatement or loss, the Group’s system is designed to provide the
Directors with reasonable assurance that any risks or problems are
identified on a timely basis and dealt with appropriately. The Group has
established an ongoing process of risk review and certification by the
business heads of each operating unit.

Certain of the Group’s businesses are subject to significant risk. Each
identified business risk is assessed for its probability of occurrence and its
potential severity of occurrence. Where necessary, the Board considers
whether it is appropriate to accept certain risks that cannot be fully
controlled or mitigated by the Group.

The Group’s risk management process was embedded throughout the
businesses during the financial year ended 30 April 2005 and up to the
date of the approval of this report. The Board has carried out a review of
the effectiveness of the Group’s internal control environment and such
reviews are supported on an ongoing basis by the work of the Audit
Committee. The Board is satisfied that the processes are in place to
ensure that risks are mitigated to an acceptable level.

The Board has designated specific individuals to oversee the internal
control and risk management processes, while recognising that it retains
ultimate responsibility for these. The Board believes that it is important
that these processes remain rooted throughout the business and the
managing director of each operating unit is responsible for the internal
control framework within that unit. The Audit Committee meets with
representatives of operating units because this is one way for an
independent and objective appraisal of risk management to be obtained.

Self-assessment of risk conducted by the Directors and senior
management is ongoing and has been considered at several levels with
each division maintaining a separate risk profile.

The Group Risk Assurance function, which is outsourced to and managed
by Deloitte, reports to the Audit Committee and is utilised in monitoring
risk management processes to determine whether internal controls are
effectively designed and properly implemented. A risk-based approach is
applied to the implementation and monitoring of controls. The monitoring
process also forms the basis for maintaining the integrity and improving
where possible the Group’s full risk management process in the context of
the Group’s overall goals.

The Audit Committee reviews Group Risk Assurance plans, as well as
external audit plans and any business improvement opportunities that are
recommended by the external auditors.

Virgin Rail Group has its own audit committee and internal audit function.
The Group’s risk management process does not specifically cover Virgin
Rail Group, but the Group maintains an overview of the business risk
management through representation on the board and audit committee.
Stagecoach management representatives also meet regularly with
representatives of Virgin Rail Group to ensure that the joint venture
follows appropriate risk management procedures.

The Group’s Audit Committee reviews the financial statements of Virgin
Rail Group together with the minutes, external audit presentations,
management presentations and internal audit presentations from the audit
committee meetings.

Internal control
The wider process described above and the key procedures noted below,
enable the Directors to confirm that they have reviewed the effectiveness
of the system of internal control of the Group during the year. The key
procedures, which the Directors have established, are as follows :

. an annual budgeting process with regular re-forecasting of out-turn,
identifying key risks and opportunities. All budgets are presented to a
panel consisting of Executive Directors and senior group managers by
each business unit’s management team, before being approved by the
Board prior to the commencement of the financial year.

. reporting of financial information to the Board encompassing profit and
loss, cash flow, balance sheet and key performance indicators. Group
management monitor the results throughout each financial year.

. a Risk Assurance function which reviews key business processes and

business controls, reporting directly to the Audit Committee.

. third party reviews commissioned periodically by the Group of areas
where significant inherent risks have been identified, such as treasury
management, insurance provisioning, pensions strategy and competition
policy.

. a decentralised organisation structure with clearly defined limits of
responsibility and authority to promote effective and efficient
operations.

. control over the activities of joint ventures and associated undertakings

through Stagecoach representation on the boards of the entities
together with regular contact between Stagecoach management and
the management of the relevant entities.

. a performance management appraisal system covers the Group’s senior
management and is based on agreed financial and other performance
objectives, many of which incorporate managing risk.

. significant emphasis is placed on cash flow management. Bank balances
are reviewed on a daily basis, cash flows are compared to budget on a
four-weekly basis and any material variances between earnings and
expected cash flows are investigated.

page 20 Stagecoach Group plc

. regular Board reporting on specific matters including updated key risks,
taxation, pensions, insurance, treasury management, foreign exchange,
interest and commodity exposures. The Board regulates treasury
management policies and procedures.

. defined capital expenditure and other investment approval procedures,
including due diligence requirements where material businesses are
being acquired or divested.

. each operating unit maintains controls and procedures appropriate to
the business. A written certificate is provided at least annually by the
management of each business confirming that they have reviewed the
effectiveness of the system of internal control during the year. As might
be expected, a number of minor internal control weaknesses were
identified by this procedure, all of which have been, or are being,
addressed. None of the weaknesses have resulted in any material losses,
contingencies or uncertainties that would require disclosure in the
Group’s Annual Report. This process is considered to be an integral part
of the maintenance and improvement of our risk management
procedures.

. a commitment to best practice in external reporting.

. a competition compliance programme, which the Board has approved

and which is subject to regular monitoring.

Pension schemes
The assets of the Group’s pension schemes are held under trust, separate
from the assets of the Group and are invested with independent fund
managers. There are ten trustees for the principal UK scheme of whom
five are employee representatives nominated by the members on a
regional basis. The other trustees include senior Group and UK Bus
executives. The chairman of the trustees of the principal UK scheme is an
elected member of the National Association of Pension Funds’ investment
council. The auditors and actuaries of the principal UK pension schemes
are both independent of the Group. Similar arrangements are in place for
the South West Trains, Island Line, Sheffield Supertram and two Virgin Rail
Group sections of the Railways Pension Scheme. PricewaterhouseCoopers
LLP does not conduct the external audit of any significant pension
schemes in which the Group participates.

During the financial year ended 30 April 2005, a Pensions Oversight
Committee was established. This Committee is chaired by a Non-Executive
Director and also comprises one Executive Director and other members of
senior management. The Committee operates at a strategic level and its
remit covers all matters affecting the Group’s pension schemes from the
perspective of the Company, and it will consider, develop and propose
recommendations to the Board in respect of such issues as may arise. The
Committee reviews pension scheme funding issues and implications,
investment strategy, and the related administration for all of the employee
pension schemes of the Company and its wholly owned subsidiaries.

Audit Committee Report
In line with best practice, the Audit Committee has decided to present a
separate annual report. This report relates to the financial year ended
30 April 2005.

Composition of the Audit Committee
The Audit Committee comprises four Non-Executive Directors, all of who
are considered by the Board to be independent. At the present time, its
members are Russell Walls (Chairman), Janet Morgan, Ewan Brown and
Iain Duffin. Of the members of the Audit Committee, Russell Walls is a
former Finance Director of a FTSE 100 company and Ewan Brown is
currently the chairman of an audit committee of a FTSE 100 company.
The Committee has significant recent and relevant financial expertise and
is appropriately qualified to undertake its duties in an effective manner.

Operation of the Audit Committee
The Audit Committee met three times during the year and has met a
further time in June 2005. It receives reports from all of the Group’s
major business functions including the Risk Assurance Function (internal
audit), which is outsourced and managed by Deloitte. It also receives
reports from the external auditors. It considers the scope and results of
the audit, the interim and annual accounts and the accounting and
internal control systems in place throughout the Group. The Audit
Committee reviews the cost effectiveness, independence and objectivity of
the internal and external auditors.

The terms of reference of the Audit Committee are available on the
Group’s website at http://www.stagecoachplc.com/sgc/investorinfo/corpgov

Review of External Auditors
The Audit Committee has the delegated responsibility for making
recommendations on the appointment, reappointment, removal and
remuneration of the external auditors. There have been no instances of
disagreements between the Board and the Audit Committee relating to
the external auditors.

Subject to the annual appointment of auditors by the shareholders, the
Audit Committee conducts a continuous review of the relationship
between the Group and the auditors. This review includes :

. the consideration of audit fees that should be paid and advance

approval of any other fees in excess of »50,000 cumulative which are
payable to auditors or affiliated firms in respect of non-audit activities ;

. the consideration of the auditors’ independence and objectivity ;

. the nature and scope of the external audit and the arrangements which
have been made to ensure co-ordination where more than one audit
firm or offices of the same firm are involved ; and

. discussions on such issues as compliance with accounting standards.

The Committee formally assesses the effectiveness of the external audit
process on an annual basis.

The Audit Committee, having considered the external auditors’
performance during their period in office, recommends re-appointment.
The audit fees of »0.6m for PricewaterhouseCoopers LLP and non-audit
related fees of »0.4m were discussed by the Audit Committee and
considered appropriate given the current size of the Group and the level
of corporate activity undertaken during the year. The Committee believes
the level and scope of non-audit services does not impair the objectivity
of the auditors and that there is a clear benefit obtained from using
professional advisors who have a good understanding of the Group’s
operations. Other accounting or consulting firms have been used where
the Group recognises them as having particular areas of expertise or where
potential conflicts of interest for the auditors are identified.

Policy on the Auditors Providing Non-Audit Services
Procedures in respect of other services provided by the auditors are:

. Audit related services ^ These are services that the auditors must

undertake or are best placed to undertake by virtue of their role as
auditors. Such services include formalities relating to bank financing,
regulatory reports, and certain shareholder circulars. The auditors would
generally provide all such services, subject to approval by the Audit
Committee.

. Tax consulting ^ It is the Group’s policy to select the advisor for each

specific piece of tax consulting work who has the most appropriate skills
and experience for the work required. The Group uses a range of
advisors for tax consulting, including the auditors where they are best
suited to the work being undertaken, subject to approval by the Audit
Committee.

. General consulting ^ For other consulting work, the Group will select an
advisor after taking account of the skills and experience required and
the expected cost of the work. The Group uses a range of advisors for
general consulting, including the auditors where they are best suited to
the work being undertaken. The auditors are only permitted to provide
general consulting when the Group, the Audit Committee and the
auditors are satisfied that there are no circumstances that would lead to
a threat to the audit team’s independence or a conflict of interest.

Review of Risk Assurance Function
The Audit Committee has the delegated responsibility for making
recommendations on the appointment, reappointment, removal and
remuneration of the Group Risk Assurance Function (internal auditors).
There have been no instances of disagreements between the Board and
the Audit Committee relating to the Risk Assurance Function.

The Audit Committee conducts a continuous review of the relationship
between the Group and the Risk Assurance Function. This review includes
a consideration of independence and objectivity, the overall level of fees,
the quality of the risk assurance process, and the role of the function in
the context of the broader sources of risk assurance.

Stagecoach Group plc page 21

Corporate governance

The Committee formally assesses the effectiveness of the risk assurance
process on an annual basis.

‘‘Speaking Up’’ Policy
The Audit Committee reviews the Group’s ‘‘Speaking Up’’ policy, which
provides a mechanism for employees with serious concerns about the
interests of others or the Group to come forward. The Committee ensures
that appropriate arrangements are in place to receive and act
proportionately upon a complaint about malpractice. The Committee takes
a particular interest in any reports of possible improprieties in financial
reporting.

RUSSELL WALLS
Chairman of the Audit Committee

22 June 2005

Nomination Committee Report
In line with best practice, the Nomination Committee has decided to
present a separate annual report. This report relates to the financial year
ended 30 April 2005.

Composition of Nomination Committee
The Nomination Committee currently comprises two Non-Executive
Directors that the Board considers to be independent, Robert Speirs and
Ewan Brown (who acts as Chairman) and one Executive Director,
Brian Souter. The Committee may also include, by invitation, the other
Non-Executive Directors, as necessary.

Operation of the Nomination Committee
The Committee is responsible for evaluating the balance of skills,
knowledge and experience of the Board, and where appropriate suggest
new appointments. Based on its assessment, the Committee will prepare a
description of the role and the required attributes for each particular
appointment. The description will include a job specification, the estimate
of the time commitment expected, and the Group’s policy on Directors

having other significant commitments. Potential candidates will be asked
to disclose their other commitments and confirm that they will have
sufficient time to meet what is expected of them. The Directors are also
required to report any significant changes in their commitments as they
arise. The Committee will identify suitable candidates and make proposals
for each appointment, although final appointments are the responsibility
of the Board as a whole.

Non-Executive Directors receive a letter of appointment. For any new
appointments, the letter of appointment will set out the expected time
commitment.

No Director of the Company is a chairman of a FTSE 100 company.

The terms of reference of the Nomination Committee are available on the
Group’s website at http://www.stagecoachplc.com/sgc/investorinfo/corpgov.

Succession Planning Arrangements
The Board and the Nomination Committee recognise the importance of
succession planning to ensure that the Group continues to prosper in the
longer term. The Group operates a decentralised organisational structure
with clearly defined limits of responsibility and authority, and oversight
from head office. This structure provides the opportunity for managers to
develop in some of the Group’s smaller business units before progressing
to wider and more responsible roles. The Group has a history of
developing good managers who have progressed to take on senior
positions within the Group. The Group operates a graduate recruitment
programme, and some of the graduates recruited have went on to
become Managing Directors of individual business units.

The Nomination Committee is mindful of the need to ensure appropriate
succession arrangements are in place for the Directors. The Nomination
Committee and the Board seeks to identify new Directors and senior
managers to ensure succession of Directors is conducted in a managed
way, without significant disruption to the ongoing business of the Group.

EWAN BROWN
Chairman of the Nomination Committee

22 June 2005

page 22 Stagecoach Group plc

Remuneration Committee report

Remuneration Committee Report
The Board supports the principles of good corporate governance relating
to Directors’ remuneration and has applied them as described below.

In accordance with Schedule 7A ‘‘Directors’ Remuneration Report’’ of the
Companies Act 1985, those paragraphs that have been audited have been
highlighted as such.

Composition of the Remuneration Committee
During the year ended 30 April 2005, Iain Duffin chaired the
Remuneration Committee and the other members were Russell Walls and
Janet Morgan, all three of whom are independent Non-Executive Directors.
The Committee, which was established in December 1992, has delegated
responsibility for approving the remuneration and terms of employment
for the Executive Directors and the Chairman, including pensions rights
and any compensation payments. The Remuneration Committee also
monitors and makes appropriate recommendations with respect to the
remuneration of other senior management.

The Board of Directors as a whole, having given due regard to the
required time commitment and responsibilities, sets the fees and expenses
payable to the Non-Executive Directors. Non-Executive Directors do not
hold any share options, nor do they participate in any incentive plans or
pension schemes with the exception of Ann Gloag who receives a pension
accrued when she was an executive director. The members of the
Remuneration Committee have no personal interest in the matters to be
decided other than as shareholders, no potential conflicts of interest
arising from cross-directorships and no day-to-day involvement in running
the businesses of the Stagecoach Group.

Both the constitution and operation of the Remuneration Committee
comply with the principles incorporated in the Combined Code, with the
prior consent of shareholders where necessary. In preparing this
Remuneration Report, the Remuneration Committee has followed the
provisions of the Combined Code.

The terms of reference of the Remuneration Committee are available on
the Group’s website at http://www.stagecoachplc.com/sgc/investorinfo/
corpgov.

Performance graph
The graph below charts the performance of the Stagecoach Group Total
Shareholder Return (‘‘TSR’’) (share value movement plus reinvested
dividends) over the 5 years to 30 April 2005 compared with that of the
FTSE Transport All-Share Index, the FTSE Mid 250 Index and the
FTSE All-Share Index. We have included a further graph to highlight the
Company’s more recent performance, charting TSR for the 12 months up
to 30 April 2005.

In assessing the performance of the Company’s TSR the Board believes
the comparator groups it has chosen represent a fair benchmark both in
terms of the nature of the business activity and size of company.

Remuneration Policy
The Remuneration Policy is consistent with our prior year policy, which was
approved by the shareholders at the 2004 Annual General Meeting. However,
the Committee has, with the assistance of the Group’s advisers, KPMG LLP
(UK), been reviewing the structure of remuneration for Executive Directors
and senior management. Proposals will be submitted to shareholders at the
2005 Annual General Meeting to make changes to the various elements of
remuneration in the context of the overall objectives of the Remuneration
Policy. The Remuneration Committee follows Schedule A of the Combined
Code in designing performance-related remuneration schemes.

In determining appropriate levels of remuneration for the Executive
Directors, the Remuneration Committee aims to provide overall packages
of terms and conditions that are competitive in the UK and will attract,
retain and motivate high quality executives capable of achieving the
Stagecoach Group’s objectives and to ensure that they are fairly rewarded
for their individual responsibilities and contributions to the Group’s overall
performance. The Remuneration Committee believes that such packages
should contain significant performance-related elements and that these
performance-related elements should be designed to align the interests of
the Executive Directors and other senior managers with the interests of
shareholders. Performance targets are established to achieve consistency
with the interests of shareholders, with an appropriate balance between
short- and long-term targets. Performance targets include traditional
financial indicators and personal targets, successful investment, innovation,
staff development, customer satisfaction and achievement of regulatory
requirements, including health and safety and environmental targets.

Stagecoach TSR Comparative Performance since 30 April 2000

Stagecoach 1 Year TSR Comparative Performance to 30 April 2005

Stagecoach Group plc page 23

Remuneration Committee report

To this end, the Remuneration Committee reviews the existing
remuneration of the Executive Directors, in consultation with the
Chief Executive, making comparisons with peer companies of similar size
and complexity and with other companies in the public transport industry
in the UK and overseas. Proposals for the forthcoming year are then
discussed in the light of the prospects for the Group. The Remuneration
Committee is also kept informed of the salary levels of other senior
executives employed by the Stagecoach Group and of average earnings for
all employees. With regard to pensions, the Remuneration Committee has
access to reports from the trustees and scheme actuaries regarding the
cost of pension obligations.

The Committee has taken advice during the financial year from a firm of
independent executive remuneration consultants, Inbucon Consulting. Also,
KPMG LLP (UK) provided guidance on the implementation of the
proposed changes to the remuneration arrangements as described later in
this report. Inbucon has no other relationship with the Group. KPMG LLP
(UK) has from time to time provided other consultancy services to the
Group and is the auditor of the Stagecoach Group Pension Scheme
(‘‘SGPS’’).

Shareholders are invited to specifically approve all new long-term
remuneration plans (whether share-settled or cash-settled plans) and any
significant changes to existing plans, except where otherwise permitted by
the Listing Rules.

The Remuneration Committee believes that remuneration packages should
reward the efforts of all staff since a motivated workforce is a key element
of Group performance. The Committee recognises that Executive Directors
bear the greatest responsibility for delivering corporate strategy that
underpins long-term sustainable performance. While the Remuneration
Committee’s report focuses on incentive schemes for senior executives,

there are also a number of performance-related bonus schemes within
group companies, in addition to the UK-only SAYE scheme.

Remuneration of Executive Directors and Other Executives
(audited)
The remuneration of the Executive Directors and other executives may
comprise a number of elements from the following:

. Basic Salary;

. Performance-related annual cash bonuses;

. Benefits in kind and other allowances ;

. Pension arrangements ;

. Share options;

. Long Term Bonus Scheme (‘‘LTBS’’);

. Executive Participation Programme (‘‘EPP’’) ^ proposed;

. Long Term Incentive Plan (‘‘LTIP’’) ^ proposed.

The participation of the three Executive Directors in the above
arrangements is summarised in Table 1.

Each Executive Director’s remuneration package is tailored to the individual
to ensure an appropriate balance of reward for responsibilities, motivation,
retention and share participation, whilst ensuring the overall packages are
appropriate to recruit and retain high quality executives capable of
achieving the Group’s objectives.

Directors’ remuneration for the year ended 30 April 2005 is shown in
Table 2 and Directors’ pension benefits are shown in Table 3.

TABLE 1 ^ DIRECTORS’
PARTICIPATION

Brian Souter
Graham Eccles
Martin Griffiths

Basic
Salary/Annual
Bonus

YES
YES
YES

Benefits
in kind

YES
YES
YES

Pension

YES
YES
YES

Share
Options

YES*
YES*
YES*

LTBS

NO
YES(cid:1)
YES(cid:1)

EPP
(proposed)

LTIP
(proposed)

YES
NO`
YES

YES
NO`
YES

*The Executive Directors are not expected to receive further awards of executive share options, following and subject to the approval of the
proposed EPP and LTIP.

(cid:1)The existing LTBS will be unwound subject to the approval of the proposed EPP and LTIP.

`Graham Eccles will not participate in the EPP nor the LTIP because he intends to retire as a Director in April 2006.

TABLE 2 ^ DIRECTORS’ REMUNERATION
(amounts in »000)

Salary/fees

Performance
related bonus

Benefits in
kind

Non-pensionable
allowances*

Total

2005

2004

2005

2004

2005

2004

2005

2004

2005

2004

Executive Directors
Brian Souter
Graham Eccles
Martin Griffiths

Non-Executive Directors
Ewan Brown
Ann Gloag
Robert Speirs
Russell Walls
Janet Morgan
Iain Duffin

484
261
220

32
32
90
32
32
32

470
250
205

30
30
90
30
30
30

339
183
154

Nil
Nil
Nil
Nil
Nil
Nil

329
175
143

Nil
Nil
Nil
Nil
Nil
Nil

Total

1,215

1,165

676

647

17
24
20

Nil
Nil
Nil
Nil
Nil
Nil

61

18
21
20

Nil
Nil
Nil
Nil
Nil
Nil

59

n/a
46
33

n/a
n/a
n/a
n/a
n/a
n/a

79

n/a
44
29

n/a
n/a
n/a
n/a
n/a
n/a

840
514
427

32
32
90
32
32
32

817
490
397

30
30
90
30
30
30

73

2,031

1,944

*Non-pensionable allowances represent additional taxable remuneration paid to provide pension benefits.

page 24 Stagecoach Group plc

Remuneration of Executive Directors and Other Executives (audited) (continued)

TABLE 3 ^ DIRECTORS’ PENSION BENEFITS
(amounts in »000)

Executive Directors

Brian Souter
Graham Eccles
Martin Griffiths

Additional
accrued benefits
in the year

Excluding
inflation

Including
inflation

Accrued
pension

Accrued lump
sum

Transfer value
of increase
(excluding inflation)

Increase in
transfer value
less Directors’
contributions

2005

2004

2005

2004

2005

2004

47
10
11

66
14
13

244
21
26

226
18
23

439
64
78

391
53
68

146
33
12

127
29
10

116
33
12

Graham Eccles and Martin Griffiths were not members of the Group
pension schemes before the introduction of the pensionable salary cap in
June 1989. They are each paid a non-pensionable allowance, which is
equivalent to the cost of a money purchase contribution of 20% of their
salary in excess of the pensionable salary cap.
During the year ended 30 April 2002, the remaining proceeds of a small self-
administered money purchase scheme (‘‘SSAS’’) established for Brian Souter
and Ann Gloag in 1992 were transferred into the Stagecoach Group Pension
Scheme to secure additional final salary type benefits equivalent in actuarial
value to the proceeds transferred. The additional benefits are reflected in the
disclosure of Brian Souter’s accrued benefits above. In Ann Gloag’s case, her
share of the SSAS assets was used to secure additional money purchase
benefits equivalent in actuarial value to the proceeds transferred. This
provided her with an initial annual pension of »90,000, reduced to »81,000
from 1 March 2004. Employer contributions to the SSAS ceased in 2000 for
Ann Gloag and in 2001 for Brian Souter.
Directors who are members of the Stagecoach Group Pension Scheme
have the option to pay additional voluntary contributions (‘‘AVCs’’).
Neither the contributions nor the resulting benefits of any AVCs are
included in the table above.
Each of the elements of remuneration is discussed further below.

Basic salary
The salary of individual Executive Directors is reviewed at 1 May each year.
Account is taken of individual achievements, together with any changes in
responsibilities that may have occurred and, as stated above, the salaries
for similar roles in comparable companies.

Performance-related annual cash bonuses
An annual discretionary bonus scheme for the Executive Directors was first
introduced in 1993. Bonuses are non-pensionable.
At the start of each financial year, the Board agrees specific objectives for
each Executive Director. Following the end of each financial year, the
Remuneration Committee determines the performance-related annual cash
bonus for each Executive Director for the year just ended. This is based on
the Director’s performance in achieving the objectives agreed. These
comprise both financial and non-financial objectives. For Executive
Directors, the financial objectives for the year ending 30 April 2006 are to
better the Group’s financial targets for the financial year with respect to
measures of earnings before interest and taxation, earnings per share, and
net debt. The non-financial objectives are specific to each Executive
Director and cover matters such as safety targets, environmental targets,
successful investment, innovation, staff development, customer satisfaction,
successful business acquisitions/disposals and regulatory requirements.
In making its judgement of performance for the last financial year the
Remuneration Committee had particular regard to the results as recorded
elsewhere in the Annual Report, and relative total return to shareholders
over the year, as well as other strategic developments and operating
improvements. Bonuses awarded to Executive Directors in respect of the
year ended 30 April 2005 were:

Director

Brian Souter
Graham Eccles
Martin Griffiths

Actual bonus as a
percentage of
basic salary

Maximum potential
bonus as a
percentage of
basic salary

70%
70%
70%

70%
70%
70%

For the year ending 30 April 2006, Brian Souter and Martin Griffiths will
each have a maximum potential bonus of up to 100% of basic salary, 70%

for meeting financial objectives and 30% for meeting personal non-financial
objectives. The change in potential bonus is part of the wider proposals to
update remuneration arrangements, including the new proposed EPP and
LTIP. As Graham Eccles is expected to retire in April 2006 and is therefore
not participating in the new remuneration arrangements, his maximum
potential bonus for the year ending 30 April 2006 will be up to 70% of
basic salary, 40% for meeting financial objectives and 30% for meeting
personal non-financial objectives.

Benefits in kind and other allowances
Certain Executive Directors receive car, fuel, telephone and healthcare
taxable benefits. Other allowances may be provided as an additional cash
payment: for example, an Executive Director may receive a cash allowance
in lieu of a company car. The value of such benefits is included within
Table 2 on page 24 of this report.

Pension arrangements
Under the terms of their service agreements, Executive Directors are
entitled to become members of one of the Stagecoach Group’s defined
benefit pension schemes or, if preferred, to receive payment of a
proportion of salary for personal pension schemes. The Stagecoach Group
pension schemes are designed to provide a pension for Executives of up
to two-thirds of final pensionable salary completed up to normal
retirement age, subject to Inland Revenue limits.
Martin Griffiths and Graham Eccles are subject to the pensionable earnings
cap so the Company makes cash contributions to them for the part of
their salary that exceeds the cap. Only basic salary is pensionable. Life
assurance of four times basic annual salary is provided under the Group
pension scheme.
The Remuneration Committee is reviewing the implications of the new
pensions regime introduced by the Pensions Act 2004. No changes have
been made to date and where possible the Committee will look to work to
the general principle of not increasing the rate of accrual of pensions benefit
nor to increase the annual cost to the Group as a result of the new regime.

Share options (audited)
The Executive Directors are not expected to receive further awards of
executive share options, following and subject to the approval of the
proposed EPP and LTIP. However, the Executive Directors continue to hold
executive share options that were previously awarded.
Two Directors exercised Executive share options during the year. Details
are shown in Table 4 on page 26.
The interests of Directors who have options to subscribe for ordinary
shares of the Company, together with movements during the year, are
shown in Table 5 on page 26. All of the share options were granted for
nil consideration. The exercise price of the share options reflects the
mid-market price immediately preceding the time of the award: the
Group’s policy is not to offer executive share options at a discount to the
mid-market price. The mid-market price of the underlying ordinary shares
at 30 April 2005 was »1.03 per share (30 April 2004: »0.82 per share).
The Company’s ordinary shares traded in the range »0.76 to »1.23 (year
ended 30 April 2004: »0.44 to »0.93) during the year to that date.
Share options are subject to certain performance criteria as discussed on
page 27.
In addition to the share options shown in Table 5 on page 26, one
Director has been granted and two Directors have exercised options during
the year under the Group’s Save As You Earn scheme. Details are shown
in Table 7 on page 27.
Further information on these options is detailed in note 23 to the
accounts on page 58.

Stagecoach Group plc page 25

Remuneration Committee report

TABLE 4 ^ OPTIONS EXERCISED IN YEAR
Original date of grant

Date of exercise/sale

Number of
ordinary shares
under option

Exercise price
per share
»

Average selling
price per share/
market price at
exercise
»

Gain before
transaction costs
and taxes
»

Graham Eccles
Shares sold immediately on exercise of options
15 June 2000
20 June 2001

Shares retained on exercise of options
15 February 2002

Martin Griffiths
Shares sold immediately on exercise of options
15 June 2000
20 June 2001

Shares retained on exercise of options
15 February 2002

24 January 2005
24 January 2005

216,000
315,200

0.6250
0.7075

1.120000
1.120000

106,920
130,020

1 April 2005

15,833

0.6000

1.097500

7,877

A

A

547,033

244,817

A

A

9 December 2004
9 December 2004

380,800
315,200

0.6250
0.7075

1.107558
1.107558

183,758
126,098

1 April 2005

9,500

0.6000

1.097500

4,726

A

A

705,500

314,582

A

A

TABLE 5 ^ EXECUTIVE
SHARE OPTIONS
Grant Date

Brian Souter
23 July 2002
5 December 2002
26 June 2003
12 December 2003
25 June 2004
10 December 2004

Graham Eccles
19 October 1998
19 July 1999
15 June 2000
20 June 2001
23 July 2002
5 December 2002
26 June 2003
12 December 2003
25 June 2004
10 December 2004

Martin Griffiths
19 October 1998
19 July 1999
15 June 2000
20 June 2001
23 July 2002
5 December 2002
26 June 2003
12 December 2003
25 June 2004
10 December 2004

As at
1 May 2004

Granted in year

Exercised in year
(see Table 4)

As at
30 April 2005

Exercise price
»

Date from which
exercisable

Expiry date

1,226,667
1,703,704
582,645
291,022
Nil
Nil

Nil
Nil
Nil
Nil
564,548
217,085

Nil
Nil
Nil
Nil
Nil
Nil

1,226,667
1,703,704
582,645
291,022
564,548
217,085

A A A A

3,804,038

781,633

Nil

4,585,671

A A A A

40,396
61,524
216,000
315,200
480,000
703,704
309,917
154,799
Nil
Nil

Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
304,665
117,152

Nil
Nil
(216,000)
(315,200)
Nil
Nil
Nil
Nil
Nil
Nil

40,396
61,524
Nil
Nil
480,000
703,704
309,917
154,799
304,665
117,152

A A A A

2,281,540

421,817

(531,200)

2,172,157

A A A A

29,820
35,519
380,800
315,200
480,000
666,667
254,132
126,935
Nil
Nil

Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
256,997
98,822

Nil
Nil
(380,800)
(315,200)
Nil
Nil
Nil
Nil
Nil
Nil

29,820
35,519
Nil
Nil
480,000
666,667
254,132
126,935
256,997
98,822

A A A A

2,289,073

355,819

(696,000)

1,948,892

A A A A

0.3750
0.2700
0.6050
0.8075
0.8575
1.1150

2.2280
2.0310
0.6250
0.7075
0.3750
0.2700
0.6050
0.8075
0.8575
1.1150

2.2280
2.0310
0.6250
0.7075
0.3750
0.2700
0.6050
0.8075
0.8575
1.1150

23 Jul 2005
5 Dec 2005
26 Jun 2006
12 Dec 2006
25 Jun 2007
10 Dec 2007

23 Jul 2009
5 Dec 2009
26 Jun 2010
12 Dec 2010
25 Jun 2011
10 Dec 2011

19 Oct 2001
19 Jul 2002
15 Jun 2003
20 Jun 2004
23 Jul 2005
5 Dec 2005
26 Jun 2006
12 Dec 2006
25 Jun 2007
10 Dec 2007

19 Oct 2001
19 Jul 2002
15 Jun 2003
20 Jun 2004
23 Jul 2005
5 Dec 2005
26 Jun 2006
12 Dec 2006
25 Jun 2007
10 Dec 2007

19 Oct 2005
19 Jul 2006
15 Jun 2007
20 Jun 2008
23 Jul 2009
5 Dec 2009
26 Jun 2010
12 Dec 2010
25 Jun 2011
10 Dec 2011

19 Oct 2005
19 Jul 2006
15 Jun 2007
20 Jun 2008
23 Jul 2009
5 Dec 2009
26 Jun 2010
12 Dec 2010
25 Jun 2011
10 Dec 2011

page 26 Stagecoach Group plc

The executive share options shown in Table 5 that were awarded on or
before 20 June 2001 have vested and may be exercised at any time. The
executive shares options shown in Table 5 that were awarded on 23 July
2002 are expected to vest on 23 July 2005.

All of the outstanding executive share options shown in Table 5 were
issued under The Stagecoach Unapproved Executive Share Option Scheme
(‘‘the Scheme’’). The Scheme was established in September 1997, when it
was approved by shareholders at the Annual General Meeting. The scheme
was amended by shareholder approval at an Extraordinary General Meeting
in January 2002. This scheme is also used to reward senior executives
throughout the Group, at the Board’s discretion.

In December 2004, the Board and the Remuneration Committee agreed
to remove from the Scheme, the ability to award ‘‘Super Options’’.
Therefore, all executive share options awarded on or after 4 December
2004, are ‘‘Ordinary Options’’ which are exercisable between three and
seven years after the date of award. The maximum level of executive
share options that can now be issued to a given individual in any financial
year is two times that individual’s salary, calculated by comparing the
salary to the total number of shares covered by the options multiplied by
the exercise price. The Board and the Remuneration Committee also
agreed to remove from the Scheme, the facility for the performance
condition to be re-tested. Re-testing is now prohibited for all executive
share options awarded on or after 4 December 2004. Accordingly, the
exercise of executive share options awarded on or after 4 December 2004
is subject to earnings per share outperforming inflation over
three consecutive financial years by 3% per annum cumulatively ^ the
base year is the latest financial year ended prior to the award of the
option and the performance condition may not be re-tested.

For ordinary options awarded up until June 2001, exercise of the options
is subject to earnings per share outperforming inflation over
three consecutive financial years by 2% per annum cumulatively. For
ordinary options awarded after June 2001 but prior to 4 December 2004,
exercise of the options is subject to earnings per share outperforming
inflation over three consecutive financial years by 3% per annum, or

earnings per share outperforming inflation over four consecutive
financial years by 4% per annum, or earnings per share outperforming
inflation over five consecutive financial years by 5% per annum.

Awards were made to three Directors under this scheme in the financial
year ended 30 April 2005, and are shown in Table 6.

Under the rules of the Company’s share option schemes, and consistent
with guidance issued by the Association of British Insurers (‘‘ABI’’), there
are limits on the number of share options that can be granted that are to
be satisfied with the issue of new shares. Following the consolidation of
ordinary shares related to the return of capital in September 2004, the
number of executive share options that had been granted in the previous
10 years exceeded 5% of the issued number of ordinary shares ^
therefore, it is not possible to satisfy any new grants of share options
under the executive share option schemes with newly issued shares since
to do so would exceed the limits under the share schemes. Accordingly,
the Board and the Remuneration Committee has determined that all
future grants of share options under the executive share option schemes
will be satisfied with existing shares until such time as there is sufficient
headroom available under the new issue share limits.

The Group’s Employee Share Ownership Trusts are used to acquire and
finance shares to meet contingent obligations under share-based incentive
schemes that are not expected to be satisfied through the issue of new
shares. At 30 April 2005, these trusts held 6,501,545 12/19th Ordinary
Shares in the Company, representing 0.6% of the total issued Ordinary
Shares. The Company follows the ABI guideline that the shares held by
Employee Share Ownership Trusts should not exceed 5% of the total
shares in issue. The Employee Share Ownership Trusts have waived the
right to receive dividends on the shares held by them.

In determining the amounts shown above, issues of new shares and the
re-issuing of shares from Treasury are both treated as being dilutive. The
Group do not, however, treat shares released from Employee Share
Ownership Trusts as being dilutive.

TABLE 6 ^ EXECUTIVE
SHARE OPTIONS
GRANTED IN YEAR
Grant Date

Brian Souter
25 June 2004
10 December 2004

Graham Eccles
25 June 2004
10 December 2004

Options granted
in year

Fair value at
grant date*
»

Intrinsic value
at grant date
»

Exercise price
»

Total cost
to exercise
»

Date from which
exercisable

Expiry date

564,548
217,085

304,665
117,152

0.20
0.26

0.20
0.26

Nil
Nil

Nil
Nil

0.8575
1.1150

484,100
242,050

25 Jun 2007
10 Dec 2007

25 June 2011
10 Dec 2011

0.8575
1.1150

261,250
130,624

25 Jun 2007
10 Dec 2007

25 June 2011
10 Dec 2011

Martin Griffiths
25 June 2004
10 December 2004
*estimated using the Black Scholes Model and assumptions set by the Board.

256,997
98,822

0.20
0.26

Nil
Nil

TABLE 7
SAYE OPTIONS

Martin Griffiths
Graham Eccles

0.8575
1.1150

220,375
110,187

25 Jun 2007
10 Dec 2007

25 June 2011
10 Dec 2011

At 1 May 2004
No of ordinary
shares

Granted
No of ordinary
shares

Exercised
No of ordinary
shares (see Table 4)

At 30 April 2005
No of ordinary
shares

9,500
15,833

9,174
Nil

(9,500)
(15,833)

9,174
Nil

Stagecoach Group plc page 27

Remuneration Committee report

Long Term Bonus Scheme
The Long Term Bonus Scheme is intended to motivate and retain certain
key executives at the Board’s discretion.

Graham Eccles and Martin Griffiths are presently the only participants in
The Stagecoach Executive Directors’ Long Term Bonus Scheme. Under this
Scheme, Graham Eccles may be awarded an additional annual bonus of
»100,000 per financial year for each of the three years commencing
1 May 2003 and Martin Griffiths may be awarded an additional annual
bonus of »50,000 for each of the five years commencing 1 May 2003.
The performance condition of the Scheme is such that the bonuses are
payable if the growth in earnings per share each financial year outperforms
inflation by at least 5%. The performance conditions in respect of the
years ended 30 April 2004 and 30 April 2005 were satisfied and therefore
subject to the relevant individual remaining a full-time employee of the
Group, the bonus in respect of those years will be paid at the end of the
three or five year period.

In conjunction with the proposals set out below to introduce new long-
term remuneration schemes, it is proposed that Martin Griffiths waives his
entitlement to any current or future amounts under the existing Long
Term Bonus Scheme and, subject to shareholder approval for the new
schemes being obtained, the Remuneration Committee proposes to make
a cash payment to buy out any amounts of the earned bonus accrued up
until 30 April 2005. As Graham Eccles is expected to retire in April 2006
his existing arrangement under the Long Term Bonus Scheme will remain
in place.

Executive Participation Programme
A new Executive Participation Programme (‘‘EPP’’) is proposed and
shareholder approval will be sought at the 2005 Annual General Meeting.
Subject to shareholder approval, the first awards under the EPP will be for
the financial year ending 30 April 2006, with deferred shares expected to
be allocated in June 2006.

The intention of the EPP is to further align the interests of senior
executives with shareholders by giving senior executives a greater direct
interest in the performance of the Company’s shares. The EPP is such that
the executives can benefit from both capital growth (i.e. increases in share
price) and dividend yield. This avoids one of the issues with the executive
share option scheme that could be seen as discouraging management
from increasing dividends at the expense of capital growth. The EPP is
also designed to provide an incentive for senior executives to remain with
the Group and would form a core part of the Group’s succession and
management development plans.

Awards under the EPP can be to Executive Directors and other senior
executives. Participants would be required to sacrifice 50% of their actual
annual bonus award and would be awarded deferred shares with an initial
market value approximately equal to the amount of the actual cash bonus
foregone.

Absolute and full entitlement to the shares would be deferred for
three years.

There would be no specific performance conditions attaching to the
release of deferred shares because the annual bonus is already subject to
performance conditions and there will be no awards of matching shares in
respect of annual bonuses ^ the EPP is to encourage executives to invest
an element of their annual bonus in the Company’s shares. The EPP
would be an effective retention programme in that a participant would
lose his or her entitlement to the deferred shares if he/she left of his/her
own volition during the three-year deferral period.

Further details are provided in the circular sent to shareholders.

It is intended that where an individual receives an award under the EPP,
he or she would not also receive an award of executive share options in
the same financial year.

Long Term Incentive Plan
For a small number of senior executives, including Executive Directors, a
new long-term incentive plan (‘‘LTIP’’) is proposed. The LTIP would
introduce stringent performance criteria related to total shareholder return
(‘‘TSR’’). TSR is calculated as the movement in share value after taking
account of re-invested dividends. TSR would be measured against a
comparator group, which would be the list of FTSE 250 companies.
Subject to shareholder approval, the first awards under the LTIP will be in
August 2005.

Under the proposed LTIP, executives would be awarded notional units with
a value equal to one of the Company’s ordinary shares, at the discretion of
the Remuneration Committee. The maximum award in any year to an
individual would be limited to 150% of the individual’s basic salary.

The individual would need to remain with the Company for three years in
order to receive full entitlement to the deferred shares. The number of
shares that would be released after the three years would be calculated as
follows:

. If TSR is negative, irrespective of the TSR of the comparator group, no

shares would be released ;

. If TSR is positive but is less than the median TSR of the comparator

group, no shares would be released ;

. If TSR exceeds the median of the comparator group, 33% of the shares

would be released;

. If TSR is in the top quartile of the comparator group, 100% of the

shares would be released ;

. If TSR is higher than the median but less than the top quartile, the

proportion of shares to be released would be between 33% and 100%
depending on the exact ranking against the comparator group.

Accordingly, the awards are closely tied to the rewards to shareholders as
a whole. The participants will only benefit if TSR is positive and TSR is
above the median of FTSE 250 companies.

An independent third party will calculate the TSR measures for the
purposes of determining the extent to which the performance condition is
satisfied.

There would be no re-testing of performance conditions.

Further details are provided in the circular sent to shareholders.

Directors’ service agreements
The details of the Executive Directors’ service contracts are summarised in
the table below :

Name of director

Brian Souter

Graham Eccles
Martin Griffiths

Date of contract

Notice period

2 April 1993
(amended
26 January 1996)
27 October 2000
8 August 2000

12 months

12 months
12 months

It is the Company’s policy that Executive Directors should have 12-month
rolling service contracts providing for a maximum of one year’s notice.
Due to the nature of the Group’s businesses, the service contracts contain
restrictive covenants that will be rigorously applied.

Non-Executive Directors are appointed by a letter, which makes no specific
provision for notice periods. Non-Executive Directors are subject to
election and re-election by shareholders as described on page 18.

Early termination
If the Company terminates an Executive Director’s contract, the costs for
which the Company is liable will vary depending on length of service and
are subject to mitigation. The costs will include a termination payment of
up to one times annual salary only and certain benefits and retirement
benefits funded under the Company’s pension schemes.

Change of control
The following apply where there is a change in control of the Company :

. Executive Directors are entitled to normal termination benefits as

outlined above, except where the director is offered and has refused
employment on terms and conditions that were no less favourable to
those in place prior to the change of control;

. With respect to Executive Share Options, options can be exercised

within six months of the change of control. For options granted prior
to 14 January 2002, the performance condition will not apply. For
options granted on or after 14 January 2002, the extent to which the
performance condition is applied shall be determined by the
Remuneration Committee;

page 28 Stagecoach Group plc

. Under the proposed EPP, shares deferred would automatically vest on a

change of control.

. Under the proposed LTIP, LTIP units would vest on a pro-rata basis

taking account of the proportion of the vesting period that had expired
and the TSR performance condition.

Outside appointments
Under the terms of their service agreements, Executive Directors require
Board approval before accepting any external appointment. Details of
remuneration earned where an Executive Director serves as a
Non-Executive Director elsewhere are disclosed in note 27 to the accounts
on page 66. Such earnings are paid to the Group and not to individual
Directors.

Transition to International Financial Reporting Standards
The Finance Director’s Review summarises the status of the Group’s
transition from UK Generally Accepted Accounting Principles (‘‘UK GAAP’’)
to International Financial Reporting Standards (‘‘IFRS’’).

The Remuneration Committee has introduced measures to ensure a
consistent measurement of financial performance during the transition to
IFRS. The Group will report IFRS financial information for the year ending
30 April 2006, with comparative information for the year ending 30 April
2005. Where financial performance is being assessed with reference to a
base year ending on or after 30 April 2005, the Remuneration Committee
will assess performance based on IFRS financial information. Where
financial performance is being assessed with reference to an earlier
financial year, the Remuneration Committee will assess performance based
on UK GAAP financial information. To enable this, the Group will continue
to produce key UK GAAP financial measures for the Remuneration
Committee as required. Similarly, adjustments will be made for any other
changes in accounting policies to ensure financial performance is measured
consistently.

Transactions in which Directors have had a material
interest (audited)
(a) Noble Grossart Limited
Ewan Brown (a Non-Executive Director of Stagecoach) is a former
executive director and current non-executive director of Noble Grossart
Limited that provided advisory services to the Group during the year. Total
fees payable to Noble Grossart Limited in respect of the year amounted to
»145,950 (2004: »20,000), including »125,500 (2004: »Nil) in respect of
Noble Grossart’s role as financial advisor in connection with the return of
capital in September 2004. Noble Grossart Investments Limited, a
subsidiary of Noble Grossart Limited, held at 30 April 2005 6,354,443
(2004: 8,026,665) ordinary shares in the Company, representing 0.6%
(2004: 0.6%) of the ordinary shares in issue and 8,026,665 B shares in
the Company, representing 10.4% of the B shares in issue.

(b) Alexander Dennis Limited
With effect from 21 May 2004, Brian Souter (Chief Executive of
Stagecoach) and Ann Gloag (a Non-Executive Director of Stagecoach)
together control 40.0% of the shares and voting rights in
Alexander Dennis Limited. Noble Grossart Investments Limited
(see (a) above) controls a further 30.0% of the shares and voting rights of
Alexander Dennis Limited. None of Brian Souter, Ann Gloag or
Ewan Brown is a director of Alexander Dennis Limited nor do they have
any involvement in the management of Alexander Dennis Limited.
Furthermore, they do not participate in deciding on and negotiating the
terms and conditions of transactions between the Group and Alexander
Dennis Limited.

In the period from 21 May 2004 to 30 April 2005, the Group purchased
»25.5m of vehicles from Alexander Dennis Limited and »2.4m of spare
parts and other services. Of the »25.5m worth of vehicles, »20.4m was
ordered from Transbus prior to its administration and Alexander Dennis
Limited inherited the orders from Transbus. Transbus was not a related
party of the Group.

For new orders placed with Alexander Dennis Limited for vehicles, the
Group has consulted with the UK Listing Authority and taken the
appropriate measures to ensure that the transactions with Alexander
Dennis Limited comply with the Listing Rules. In the period from 21 May
2004 to 30 April 2005, the Group has placed orders totalling »49.3m
with Alexander Dennis for the purchase of new vehicles. Of this »49.3m,
vehicles accounting for »5.1m were delivered prior to 30 April 2005 and
are included in the total purchases of »25.5m referred to above.

(c) ScotAirways Group Ltd
Brian Souter is Chairman of ScotAirways Group Ltd. During the year the
Group purchased flights from ScotAirways Group Ltd totalling »74,905
(2004: »99,123).

Remuneration policy approval
An ordinary resolution to receive and approve this Remuneration Report
will be proposed at the 2005 Annual General Meeting.

On behalf of the Board

IAIN DUFFIN
Chairman of the Remuneration Committee

22 June 2005

Stagecoach Group plc page 29

Basis of audit opinion
We conducted our audit in accordance with auditing standards issued by
the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements and the auditable part of the directors’ remuneration report. It
also includes an assessment of the significant estimates and judgements
made by the directors in the preparation of the financial statements, and
of whether the accounting policies are appropriate to the company’s
circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information
and explanations which we considered necessary in order to provide us
with sufficient evidence to give reasonable assurance that the financial
statements and the auditable part of the directors’ remuneration report
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.

Opinion
In our opinion:

. the financial statements give a true and fair view of the state of affairs
of the company and the group at 30 April 2005 and of the profit and
cash flows of the group for the year then ended ;

. the financial statements have been properly prepared in accordance with

the Companies Act 1985; and

. those parts of the directors’ remuneration report required by Part 3 of
Schedule 7A to the Companies Act 1985 have been properly prepared
in accordance with the Companies Act 1985.

PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
Glasgow

22 June 2005

Independent auditors’ report

Independent auditors’ report to the members of
Stagecoach Group plc

We have audited the financial statements which comprise the consolidated
profit and loss account, the consolidated balance sheet, the Company
balance sheet, the consolidated cash flow statement, the reconciliation of
movements in consolidated shareholders’ funds, the consolidated
statement of total recognised gains and losses and the related notes to
the accounts. We have also audited the disclosures required by Part 3 of
Schedule 7A to the Companies Act 1985 contained in the directors’
remuneration report (‘‘the auditable part’’).

Respective responsibilities of directors and auditors
The directors’ responsibilities for preparing the annual report and the
financial statements in accordance with applicable United Kingdom law and
accounting standards are set out in the statement of directors’
responsibilities. The directors are also responsible for preparing the
directors’ remuneration report.

Our responsibility is to audit the financial statements and the auditable
part of the directors’ remuneration report in accordance with relevant legal
and regulatory requirements and United Kingdom Auditing Standards
issued by the Auditing Practices Board. This report, including the opinion,
has been prepared for and only for the company’s members as a body in
accordance with Section 235 of the Companies Act 1985 and for no other
purpose. We do not, in giving this opinion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed by
our prior consent in writing.

We report to you our opinion as to whether the financial statements give
a true and fair view and whether the financial statements and the
auditable part of the directors’ remuneration report have been properly
prepared in accordance with the Companies Act 1985. We also report to
you if, in our opinion, the directors’ report is not consistent with the
financial statements, if the company has not kept proper accounting
records, if we have not received all the information and explanations we
require for our audit, or if information specified by law regarding directors’
remuneration and transactions is not disclosed.

We read the other information contained in the annual report and
consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the financial
statements. The other information comprises only the Chairman’s
Statement, the Chief Executive’s review, the Operating and Financial
Review, the Corporate Governance statement, the Audit Committee report,
the Nomination Committee report, the Directors’ report and the unaudited
part of the Remuneration report.

We review whether the corporate governance statement reflects the
company’s compliance with the nine provisions of the 2003 FRC
Combined Code specified for our review by the Listing Rules of the
Financial Services Authority, and we report if it does not. We are not
required to consider whether the board’s statements on internal control
cover all risks and controls, or to form an opinion on the effectiveness of
the company’s or group’s corporate governance procedures or its risk and
control procedures.

page 30 Stagecoach Group plc

Consolidated profit and loss account

Year ended 30 April 2005

Turnover: Group and share of joint ventures
Less: Share of joint ventures’ turnover

Notes

2

Group turnover

Represented by:
Continuing Group operations
Discontinued operations

Operating costs
Other operating income

Operating profit of Group companies
Share of operating (loss)/profit of joint ventures
Share of operating (loss)/profit from interest in associates

2

144.4
12.7
(0.4)

2005

2004

Performance pre
goodwill and
exceptionals
»m

Goodwill and
exceptional
items
»m

Results for
the year
»m

Performance pre
goodwill and
exceptionals
»m

Goodwill and
exceptional
items
»m

1,794.7
(315.2)

1,479.5

1,472.4
7.1

1,479.5
(1,509.0)
173.9

3

Nil
Nil

Nil

Nil
Nil

Nil
(8.1)
(0.6)

(8.7)
(14.9)
(0.3)

1,794.7
(315.2)

1,792.3
(290.3)

1,479.5

1,502.0

1,472.4
7.1

1,352.7
149.3

1,479.5
(1,517.1)
173.3

1,502.0
(1,501.3)
129.1

135.7
(2.2)
(0.7)

129.8
10.7
7.0

Nil
Nil

Nil

Nil
Nil

Nil
(8.8)
Nil

(8.8)
(8.7)
(0.3)

Results for
the year
»m

1,792.3
(290.3)

1,502.0

1,352.7
149.3

1,502.0
(1,510.1)
129.1

121.0
2.0
6.7

Total operating profit:
Group and share of joint ventures and associates

Represented by:
Continuing Group operations
Continuing joint ventures and associates

Discontinued Group operations
Discontinued joint ventures and associates

2

2

2

2
2

Total operating profit:
Group and share of joint ventures and associates
Profit on sale of properties
Loss on disposal of operations

13

Profit on ordinary activities before interest
and taxation
Finance charges (net)

Profit on ordinary activities before taxation
Taxation on profit on ordinary activities

Profit on ordinary activities after taxation
Equity dividends
Non-equity dividends

Retained profit for the year

Earnings per share ^ Adjusted/Basic

^ Diluted

4

5
7

8

8

9

9

156.7

(23.9)

132.8

147.5

(17.8)

129.7

144.4
12.3

156.7
Nil
Nil

156.7
Nil
Nil

156.7
(19.9)

136.8
(32.2)

104.6
(35.1)
(0.4)

(8.7)
(15.2)

(23.9)
Nil
Nil

(23.9)
1.3
(5.9)

(28.5)
Nil

(28.5)
2.7

(25.8)
Nil
Nil

135.7
(2.9)

132.8
Nil
Nil

132.8
1.3
(5.9)

128.2
(19.9)

108.3
(29.5)

78.8
(35.1)
(0.4)

128.8
13.1

141.9
1.0
4.6

147.5
Nil
Nil

147.5
(27.3)

120.2
(32.3)

87.9
(38.4)
Nil

(7.8)
(9.0)

(16.8)
(1.0)
Nil

(17.8)
0.5
(7.1)

(24.4)
Nil

(24.4)
41.1

16.7
Nil
Nil

121.0
4.1

125.1
Nil
4.6

129.7
0.5
(7.1)

123.1
(27.3)

95.8
8.8

104.6
(38.4)
Nil

69.1

(25.8)

43.3

49.5

16.7

66.2

9.0p

8.8p

6.8p

6.6p

6.7p

6.5p

7.9p

7.8p

A statement of movements on the profit and loss account reserve is given in note 10.

The accompanying notes form an integral part of this consolidated profit and loss account.

Stagecoach Group plc page 31

Consolidated balance sheet

As at 30 April 2005

Fixed assets
Intangible assets
Tangible assets
Investments
^ Investment in joint ventures

Goodwill
Share of gross assets
Share of gross liabilities
Shareholder loan notes

Total investment in joint ventures

^ Investment in associates
^ Other investments

Current assets
Stocks
Debtors and prepaid charges ^ due within one year

^ due after more than one year

Cash at bank and in hand

Creditors: Amounts falling due within one year

Net current (liabilities)/assets

Total assets less current liabilities
Creditors: Amounts falling due after more than one year
Provisions for liabilities and charges
^ Joint ventures
Goodwill
Share of gross liabilities
Shareholder loan notes

^ Other provisions

Net assets

Capital and reserves
Equity share capital
Redeemable ‘B’ preference shares
Share premium account
Profit and loss account
Capital redemption reserve
Own shares

Shareholders’ funds

Analysis of shareholders’ funds
Equity
Non-equity

Signed on behalf of the Board on 22 June 2005

2005

Notes

»m

11

12

13

13

13

13

15
16

16

17

17

21

21

2

22
22

24

24
24

24

89.5
640.2

42.8
131.3
(106.2)
3.3

71.2

0.7
1.7

803.3

12.5
174.1
48.7
140.0

375.3
(541.8)

(166.5)

636.8
(236.2)

Nil
Nil
Nil
(181.6)

219.0

6.8
13.9
163.4
(187.4)
229.1
(6.8)

219.0

205.1
13.9

219.0

2004

»m

103.5
618.0

57.5
98.8
(59.8)
10.0

106.5

1.4
2.3

831.7

13.4
169.2
58.0
476.5

717.1
(674.6)

42.5

874.2
(292.2)

0.3
(1.7)
0.4
(191.0)

390.0

6.7
Nil
392.4
(6.9)
1.7
(3.9)

390.0

390.0
Nil

390.0

BRIAN SOUTER
Chief Executive

The accompanying notes form an integral part of this consolidated balance sheet.

MARTIN A GRIFFITHS
Finance Director

page 32 Stagecoach Group plc

Company balance sheet

As at 30 April 2005

Fixed assets
Tangible assets
Investments

Current assets
Debtors and prepaid charges ^ due within one year

^ due after more than one year

Cash at bank and in hand

Creditors: Amounts falling due within one year

Net current liabilities

Total assets less current liabilities
Creditors: Amounts falling due after more than one year
Provisions for liabilities and charges

Net assets

Capital and reserves
Equity share capital
Redeemable ‘B’ preference shares
Share premium account
Profit and loss account
Capital redemption reserve
Own shares

2005

Notes

»m

0.1
923.0

923.1

21.6
168.1
Nil

2004

»m

4.1
923.8

927.9

18.5
131.9
153.1

189.7
(376.0)

303.5
(320.9)

(186.3)

(17.4)

736.8
(38.3)
(3.7)

910.5
(44.1)
(5.3)

694.8

861.1

6.8
13.9
163.4
288.4
229.1
(6.8)

6.7
Nil
392.4
464.2
1.7
(3.9)

12

13

16
16

17

17

21

22
22

24
24

24
24

Shareholders’ funds

694.8

861.1

Analysis of shareholders’ funds
Equity
Non-equity

Signed on behalf of the Board on 22 June 2005

680.9
13.9

694.8

861.1
Nil

861.1

BRIAN SOUTER
Chief Executive

MARTIN A GRIFFITHS
Finance Director

The accompanying notes form an integral part of this balance sheet.

Stagecoach Group plc page 33

Consolidated cash flow statement

Year ended 30 April 2005

Net cash inflow from operating activities
Dividends from joint ventures and associates

Returns on investments and servicing of finance
Interest paid
Interest element of hire purchase and lease finance
Interest received
Non-equity dividends paid

Net cash (outflow)/inflow from returns on investments and servicing of finance

Taxation

Capital expenditure and financial investment
Purchase of tangible fixed assets
Sale of tangible fixed assets

Net cash outflow from capital expenditure and financial investment

Acquisitions and disposals
Acquisition of subsidiaries
Purchase of other investments
Movement in loans to joint ventures
Cash of disposed subsidiaries
Disposal of subsidiaries and other businesses
Disposal of investments in joint ventures and associates
Disposal of other investments

Net cash inflow from acquisitions and disposals

Equity dividends paid

Net cash inflow before financing

Financing
Sale of tokens
Redemption of tokens
Issue of ordinary share capital for cash
Redemption of ‘B’ shares
Expenses on issue of ‘B’ shares
Redemption of ‘B’ shares by employee share ownership trusts
Investment in own ordinary shares by employee share ownership trusts
Sale of own ordinary shares by employee share ownership trusts
Decrease in collateral balances
Decrease in borrowings
Repayments of hire purchase and lease finance
Cash inflows from lease finance

Net cash outflow from financing

(Decrease)/increase in cash during the year

Free cash flow

Free cash flow per share

2005

Notes

»m

25

198.5
23.5

25

13

13

(26.2)
(8.3)
13.6
(0.4)

(21.3)

(27.1)

(73.8)
7.1

(66.7)

(5.9)
(0.2)
6.7
Nil
14.7
Nil
0.6

15.9

(37.2)

85.6

10.2
(10.9)
5.3
(227.4)
(0.4)
1.7
(1.9)
4.8
3.0
(110.1)
(92.5)
Nil

(418.2)

25

(332.6)

173.6

2004

»m

214.3
4.1

(37.9)
(5.8)
44.2
Nil

0.5

(9.4)

(56.0)
4.2

(51.8)

(7.4)
Nil
Nil
(4.3)
263.7
64.9
Nil

316.9

(35.6)

439.0

13.5
(11.9)
6.4
Nil
Nil
Nil
(3.9)
Nil
37.3
(158.4)
(60.3)
85.7

(91.6)

347.4

209.5

15.0p

15.9p

Free cash flow comprises net cash inflow from operating activities, dividends from joint ventures and associates, net cash (outflow)/inflow from
returns on investments and servicing of finance, and taxation.

The accompanying notes form an integral part of this consolidated cash flow statement.

page 34 Stagecoach Group plc

Consolidated statement of total recognised gains and losses

Year ended 30 April 2005

Profit for the financial year
Translation differences on foreign currency net investments, net of hedging
Tax effect of translation differences on foreign currency net investments
Share of other recognised gains and losses of associates

Total recognised gains and losses relating to the year

2005

2004

»m

78.8
3.6
Nil
Nil

82.4

»m

104.6
(0.4)
4.8
(0.2)

108.8

There are no recognised gains and losses of joint ventures other than the Group’s share of their profits or losses for each financial year.

Reconciliation of movements in consolidated shareholders’ funds

Year ended 30 April 2005

2005

2004

Profit for the financial year
Equity dividends
Non-equity dividends

Other recognised gains and losses relating to the year
^ translation differences on foreign currency net investments, net of hedging
^ UK tax effect of translation differences on foreign currency net investments
^ share of other recognised gains and losses of associates
Equity ordinary share capital issued less costs
Movements in shares held by employee share ownership trusts
Redemption of ‘B’ shares
Expenses on issue of ‘B’ shares set against share premium

Net (reduction)/increase in shareholders’ funds
Opening shareholders’ funds

Closing shareholders’ funds

»m

78.8
(35.1)
(0.4)

43.3

3.6
Nil
Nil
12.8
(2.9)
(227.4)
(0.4)

(171.0)
390.0

219.0

»m

104.6
(38.4)
Nil

66.2

(0.4)
4.8
(0.2)
6.4
(3.9)
Nil
Nil

72.9
317.1

390.0

The accompanying notes form an integral part of these statements.

Stagecoach Group plc page 35

Notes to the accounts

Note 1 Statement of accounting policies

A summary of the principal accounting policies is set out below. All principal accounting policies have been applied consistently throughout the
year and the preceding year.

(a) Basis of accounting
The accounts have been prepared under the historical cost convention and in accordance with applicable accounting standards in the
United Kingdom.

(b) Presentation of profit and loss account
Where applicable, profit and loss account information has been presented in a columnar format, which separately highlights goodwill amortisation
and exceptional items. This is intended to enable the users of the accounts to determine more readily the impact of goodwill and exceptional
items on the results of the Group.

(c) Basis of consolidation
The consolidated accounts include the accounts of the Company, its subsidiary undertakings, joint ventures and associates made up to 30 April
in each year except as noted below:

Associates ^ The Group’s share of the profit of Road King Infrastructure Limited pre-disposal is based on the results of that company for the
year to 31 December. The Group’s share of the profit/loss of other associates is based on the results for the period covered by the Group’s
financial year.

The consolidated profit and loss account includes the results of businesses purchased from the effective date of acquisition and excludes the
results of discontinued operations and businesses sold from the effective date of disposal. No profit and loss account is presented for the parent
company, Stagecoach Group plc, as permitted by Section 230 of the Companies Act 1985.

(d) Intangible assets
In accordance with FRS 10 ‘‘Goodwill and Intangible Assets’’, goodwill arising on acquisitions after 30 April 1998 is recorded as an asset on the
balance sheet at cost less amortisation. Each acquisition is reviewed and where the goodwill has a finite economic life, goodwill is amortised over
that life. In estimating the useful economic life of goodwill, account has been taken of the nature of the business acquired, stability of the
industry sector, extent of barriers to entry and expected future impact of competition. The useful life of goodwill arising on the acquisitions
made is estimated by the directors to be between 2 and 20 years. Provision is made for any impairment, with impairment reviews being
undertaken in accordance with FRS 11, ‘‘Impairment of fixed assets and goodwill’’. Goodwill arising on acquisitions in the year ended 30 April
1998 and earlier periods was written off directly to reserves in accordance with the accounting standard then in force.

As permitted by the current accounting standard, the goodwill previously written off to reserves has not been reinstated in the balance sheet. On
the disposal of a subsidiary undertaking, goodwill previously written off directly to reserves in respect of such an undertaking is transferred to the
profit and loss account and constitutes part of the gain or loss to the Group arising on disposal.

Fair value accounting adjustments have been made to take account of the revaluation of certain fixed assets on an existing use basis,
discounting of long term liabilities (but not deferred tax provisions) and other changes in accounting policies required to comply with Group
policies. Fair value adjustments based on provisional estimates are amended in the following year’s accounts where necessary,
with a corresponding adjustment to goodwill, in order to refine adjustments to reflect further evidence gained post-acquisition.

As explained in note 13 to the accounts, during the year ended 30 April 2005, the Directors revised the period over which goodwill in respect of
the Group’s interest in Virgin Rail Group is being amortised.

(e) Tangible fixed assets
Tangible fixed assets are shown at their original historic cost or fair value on acquisition net of depreciation and any provision for impairment as
set out in note 12.
Depreciation is provided at rates calculated to write off the cost or valuation less estimated residual value of each asset on a straight-line basis
over their estimated useful lives, as follows:

Heritable and freehold buildings and long leasehold properties
Short leasehold properties
Public service vehicles (‘‘PSVs’’) and transportation equipment
Information Technology and other equipment, furniture and fittings
Motor cars and other vehicles

Heritable and freehold land is not depreciated.

50 years
Over period of lease
7 to 16 years, depending on type
3 to 10 years
3 to 5 years

The need for any fixed asset impairment write-down is assessed by comparison of the carrying value of the asset against the higher of net
realisable value and value in use.

As part of the restructuring of the Group’s North American business, the Directors reviewed the estimated residual values and estimated useful
lives of public service vehicles operated in North America. The estimates were revised. The effect of this change in estimate is to reduce profit
before tax for the year ended 30 April 2005 by »2.7m.

(f) Pre-contract costs
In accordance with UITF Abstract 34, ‘‘Pre-contract costs’’, the costs associated with securing new rail franchises are expensed as incurred, except
where it is virtually certain that a contract will be awarded in which case they are recognised as an asset and are charged to the profit and loss
account over the life of the franchise.

page 36 Stagecoach Group plc

Note 1 Statement of accounting policies (continued)

(g) Investments
Fixed asset investments are shown at cost less provision for impairment. In the Company’s accounts, investments in subsidiary undertakings are
stated at cost, less provision for impairment.

(h) Associates and joint ventures
In the Group accounts, the investments in associates are accounted for using the equity method and investments in joint ventures are accounted
for using the gross equity method. The consolidated profit and loss account includes the Group’s share of associates’ and joint ventures’ profits
less losses, while the Group’s share of associates’ and joint ventures’ net assets is shown in the consolidated balance sheet. Where the Group has
an interest in a joint venture’s net liabilities, the Group’s share of net liabilities is classified within provisions for liabilities and charges. Goodwill
arising on the acquisition is accounted for in accordance with the policy set out above. Any unamortised goodwill is included in the carrying
value of the Group’s investments. The Group applies its own accounting policies when accounting for its share of associates and joint ventures,
making appropriate adjustments where necessary, having given due regard to all relevant factors.

(i) Stocks

Stocks of parts and consumables are stated at the lower of cost and net realisable value after making due allowance for obsolete or slow
moving items.
Taxicabs which are held for sale or leased to independent contractors are included within stocks.

(j) Hire purchase and lease obligations
Assets acquired under hire purchase and finance leases are recorded in the balance sheet as assets at the equivalent of the purchase price and as
obligations to pay hire purchase capital instalments or future lease rentals. Obligations arising from hire purchase contracts and finance leases
represent the total of the capital payments outstanding at the date of the balance sheet. Future finance charges are not included. Future finance
charges are calculated in relation to the reducing balance of capital outstanding throughout the contract and charged to the profit and loss
account on the same basis.

Assets capitalised under finance leases and other similar contracts are depreciated over the shorter of the lease terms and their estimated
useful lives.

Assets capitalised under hire purchase contracts are depreciated over their estimated useful lives.

Rentals under operating leases are charged on a straight-line basis over the lease term.

The principal restriction on property held under finance or hire purchase agreements is a restriction on the right to dispose of the property
during the period of the agreement.

(k) Taxation
Corporation tax is provided on taxable profits at the current rate applicable. Tax charges and credits are accounted for through the same primary
statement (either the profit and loss account or the statement of total recognised gains and losses) as the related pre-tax item.

In accordance with FRS 19, ‘‘Deferred Taxation’’, full provision is made for deferred tax on a non-discounted basis in respect of all timing
differences except those arising from the revaluation of fixed assets where there is no binding sale agreement and undistributed profits of
overseas subsidiaries and associates.

Deferred tax is calculated at rates at which it is estimated the tax will arise. Deferred tax assets are recognised to the extent they are more likely
than not to be recovered.

(l) Turnover
Turnover represents gross revenue earned from public transport services and operating lease rentals receivable, and excludes future payments
received on account. Amounts receivable for tendered services and concessionary fare schemes are included as part of turnover. Where
appropriate, amounts are shown net of rebates and VAT. Revenues incidental to the Group’s principal activity (including advertising income and
maintenance income) are reported as miscellaneous revenue.

Bus and rail revenue is recognised at the time of travel. Bus revenue from local authority and similar contracts is recognised on a
straight-line basis over the period of the contract.

Miscellaneous revenue comprises income from advertising and other activities and is recognised as the income is earned.

Net compensation receivable by UK Rail companies in respect of service disruption under the performance regime provisions of the track access
agreements with Network Rail is recognised over the expected period of disruption and is shown as other operating income.

(m) Tokens
Tokens issued by National Transport Tokens Limited, a subsidiary of the Group, are credited to a token redemption provision. Redemptions are
offset against this and associated handling commission paid to third parties is included in operating costs. Funds from the sale of tokens required
for token redemption are included as a financing activity in the consolidated cash flow statement.

The estimation of the balance sheet provision for token redemption is based on the value of tokens issued by the Group but not yet redeemed
at the balance sheet date. Allowance is made for the estimated proportion of tokens in issue that will never be redeemed. This allowance is
estimated with reference to historic redemption rates.

Stagecoach Group plc page 37

Notes to the accounts

Note 1 Statement of accounting policies (continued)

(n) Pension costs
The Group provides for and funds pension liabilities on the advice of external actuaries and makes payments to segregated funds managed by
specialist financial institutions.

Independent actuarial valuations on a going concern basis are carried out at least every three years. The employer costs of providing retirement
benefits to employees are charged to the profit and loss account on a systematic basis so as to produce a substantially level percentage of the
current and future pensionable payroll. Variations from regular cost arising from any excess or deficiency of the actuarial value of the pension
funds’ assets over the actuarial valuation of the pension funds’ liabilities are allocated to the profit and loss account over the employees’ average
remaining service lives. Any timing difference between amounts charged in the profit and loss account and paid to the pension funds is shown
in the balance sheet as an asset or a liability.

The Group’s contributions to defined contribution schemes are charged to the profit and loss account in the period to which the contributions
relate.

Details of the principal Group pension schemes are given in note 26e.

The transitional disclosures required under FRS 17, ‘‘Retirement Benefits’’, are also included in note 26e.

(o) Foreign currencies
The accounts of overseas subsidiaries and associate undertakings are maintained in the local currencies in which the subsidiaries transact business.
The trading results of overseas subsidiary and associate undertakings are translated into sterling using average rates of exchange. Exchange
differences arising on the translation of the opening net assets and results of overseas operations, together with exchange differences arising on
net foreign currency borrowings and foreign currency derivatives, to the extent they hedge the Group’s investment in overseas operations, are
dealt with in the statement of total recognised gains and losses.

Foreign currency assets and liabilities are translated into sterling at the rates of exchange ruling at the year end except in those instances where
the exchange rate risk of an asset or liability is hedged by a derivative, in which case the contract rate is used. Foreign currency transactions
arising during the year are translated into sterling at the rate of exchange ruling on the date of the transaction. Any exchange differences so
arising are dealt with through the profit and loss account.

PRINCIPAL RATES OF EXCHANGE

2005

2004

New Zealand Dollar
Year end rate
Average rate
Hong Kong Dollar
Year end rate
Average rate
Average rate ^ Citybus*
US Dollar
Year end rate
Average rate
Canadian Dollar
Year end rate
Average rate
*up to date of disposal

2.6088
2.7240

^
^
^

1.9099
1.8530

2.3969
2.3621

2.8350
2.7600

13.8317
13.3188
12.7803

1.7734
1.7115

2.4388
2.2985

(p) Accounting for finance costs and debt
Finance costs of debt are recognised in the profit and loss account over the term of such instruments at a constant rate on the carrying amount.

Debt is initially stated at the amount of the net proceeds after deduction of issue costs. The carrying amount is increased by the finance costs
that are recognised in the profit and loss account in respect of each accounting period. The carrying amount is reduced by amounts paid in
respect of finance costs and/or repayments of principal.

(q) Government grants
Government grants relating to tangible fixed assets are treated as deferred income and released to the profit and loss account over the expected
useful lives of the assets concerned. Other grants are credited to the profit and loss account as the related expenditure is expensed.

Revenue grants receivable in respect of the operation of rail franchises in the UK are charged or credited to the profit and loss account in the
year in which the related expenditure is recognised in the profit and loss account or where they do not relate to any specific expenditure, in the
year in which the grant is receivable. These rail franchise grants are classified within Other Operating Income.

page 38 Stagecoach Group plc

Note 1 Statement of accounting policies (continued)

(r) Derivatives and financial investments
Financial assets (other than derivatives) are recognised in the balance sheet at the lower of cost and net realisable value.
The Group uses derivative financial instruments to reduce exposure to foreign exchange risk, commodity price risk and interest rate movements.
The Group does not generally hold or issue derivative financial instruments for speculative purposes.
Forward foreign exchange contracts are used to manage exposure to fluctuations in currency rates and to hedge overseas net investments.
For a forward foreign exchange contract to be treated as a hedge, the instrument must be related to actual foreign currency assets or liabilities
or to a probable commitment. It must involve the same currency or similar currencies as the hedged item and must also reduce the risk of
foreign currency exchange movements on the Group. Gains and losses arising on these contracts are either held off balance sheet or deferred on
balance sheet and recognised either in the profit and loss account or as adjustments to the carrying amount of fixed assets, only when the
hedged transaction has itself been reflected in the Group’s financial statements. Gains and losses arising on derivatives hedging overseas net
investments are recognised in the Statement of Total Recognised Gains and Losses.
For interest rate and commodity swaps to be treated as a hedge, the instrument must be related to actual assets or liabilities or a probable
commitment and must change the nature of the interest rate or fuel cost by converting a fixed rate to a variable rate or vice versa. Cash flows
under these swaps are recognised by adjusting net interest payable and fuel costs over the periods of the contracts. Gains and losses arising from
the termination of these contracts are deferred on balance sheet and amortised to the profit and loss account over the remaining period of the
related hedged item or recognised immediately in the profit and loss account where the hedged item no longer exists.
If an instrument ceases to be accounted for as a hedge, for example because the underlying hedged position no longer exists or the hedge is no
longer effective, provision is made for any fair value loss on the instrument at that time.

(s) Marketing costs
Marketing costs incurred during the start up phase of a new activity are charged to the profit and loss account as incurred.

(t) Insurance
The Group receives claims in respect of traffic incidents and employee claims. The Group protects against the cost of such claims through third
party insurance policies. An element of the claims are not insured as a result of the ‘‘excess’’ on insurance policies.
Provision is made on a discounted basis for the estimated cost to the Group to settle claims for incidents occurring prior to the balance sheet
date. The estimation of the balance sheet insurance provisions is based on an assessment of the expected settlement on known claims together
with an estimate of settlements that will be made in respect of incidents occurring prior to the balance sheet date but that have not yet been
reported to the Group. The provision is set after taking account of advice from third party actuaries.

(u) Investment in own shares
In accordance with UITF Abstract 38 ‘‘Accounting for ESOP Trusts’’, own shares held by the Group’s Employee Benefit Scheme and Qualifying
Employee Share Trust have been classified as deductions from shareholders’ funds.

Note 2 Segmental analysis

(a) Turnover

Continuing operations
UK Bus
North America
New Zealand

Total bus continuing operations
UK Rail

Total continuing operations

Discontinued operations
North America
Citybus

Total discontinued operations

Group turnover
Share of joint ventures’ turnover
Continuing
^ Virgin Rail Group
Discontinued
^ thetrainline
Elimination of inter-segment turnover

2005

»m

720.3
213.7
59.0

993.0
479.4

2004

»m

650.2
205.3
58.3

913.8
438.9

1,472.4

1,352.7

7.1
Nil

7.1

131.5
17.8

149.3

1,479.5

1,502.0

315.2

Nil
Nil

288.4

8.1
(6.2)

Group turnover and share of joint ventures’ turnover

1,794.7

1,792.3

Due to the nature of the Group’s business, the origin and destination of turnover is the same in all cases.

Stagecoach Group plc page 39

Notes to the accounts

Note 2 Segmental analysis (continued)

(b) Operating profit

2005

2004

Performance pre
goodwill and
exceptionals
»m

Goodwill and
exceptional
items
»m

Results for
the year
»m

Performance pre
goodwill and
exceptionals
»m

Goodwill and
exceptional
items
»m

Results for
the year
»m

82.5
14.8
8.7

106.0
48.6

154.6
(8.8)
Nil
(1.4)

(0.8)
Nil
Nil

(0.8)
Nil

(0.8)
(0.6)
(7.3)
Nil

81.7
14.8
8.7

105.2
48.6

153.8
(9.4)
(7.3)
(1.4)

74.8
14.8
10.7

100.3
44.1

144.4
(8.4)
Nil
(7.2)

Nil
Nil
Nil

Nil
Nil

Nil
Nil
(7.8)
Nil

74.8
14.8
10.7

100.3
44.1

144.4
(8.4)
(7.8)
(7.2)

144.4

(8.7)

135.7

128.8

(7.8)

121.0

Nil
Nil

Nil

Nil
Nil

Nil

Nil
Nil

Nil

1.0
Nil

1.0

144.4

(8.7)

135.7

129.8

12.7
Nil

Nil

Nil

(0.4)

Nil
Nil

Nil
Nil

Nil

12.7
Nil

Nil

(14.9)

(14.9)

Nil

Nil
(0.3)

(0.4)

Nil
(0.3)

13.5
(0.4)

(2.4)

Nil

Nil

7.0
Nil

Nil
(1.0)

(1.0)

(8.8)

Nil
Nil

Nil

(8.7)

Nil

Nil
(0.3)

1.0
(1.0)

Nil

121.0

13.5
(0.4)

(2.4)

(8.7)

Nil

7.0
(0.3)

156.7

(23.9)

132.8

147.5

(17.8)

129.7

Continuing operations
UK Bus
North America
New Zealand

Total bus continuing operations
UK Rail

Total continuing operations
Group overheads
Goodwill amortisation
Redundancy/restructuring costs

Total operating profit of continuing
Group operations

Discontinued operations
^ Citybus
^ Goodwill amortisation

Total operating profit of discontinued
Group operations

Total operating profit of Group companies
Share of operating profit/(loss) of joint ventures
Continuing
^ Virgin Rail Group
^ other
Discontinued
^ thetrainline
Goodwill amortised on investment in continuing
joint ventures
Share of operating (loss)/profit of associates
Continuing
^ other
Discontinued
^ Road King
Goodwill amortised on investment in continuing associates

Total operating profit: Group and share
of joint ventures and associates

The operating profit from discontinued Group operations includes Citybus. The operating profit from the discontinued element of North America
is not separately shown because it is not clearly distinguishable due to certain ‘‘shared’’ costs that relate to North America as a whole. However,
the discontinued element of North America’s operating profit is not believed to be material in the context of the Group’s annual operating profit
as a whole, for neither the year ended 30 April 2005 nor the year ended 30 April 2004.

Goodwill amortisation on continuing operations of »7.3m (2004: »7.8m) is analysed as UK Bus »0.7m (2004 : »0.6m), New Zealand »1.2m
(2004: »1.2m) and North America »5.4m (2004: »6.0m).

Redundancy/restructuring costs of »1.4m (2004: »7.2m) are analysed as UK Bus »0.4m (2004: »0.6m), North America »0.1m (2004: »5.7m),
UK Rail »0.8m (2004: »0.9m) and costs incurred centrally »0.1m (2004: »Nil)

page 40 Stagecoach Group plc

Note 2 Segmental analysis (continued)

(c) Net assets

UK Bus
North America
Overseas Bus
UK Rail
Central assets/liabilities

Net assets of Group companies before debt
Joint ventures
Associates

Total net assets before debt: Group, joint ventures and associates
Net debt

Net assets

2005

»m

295.2
170.0
67.2
(92.1)
(78.6)

361.7
71.2
0.7

433.6
(214.6)

219.0

2004

»m

306.6
177.4
50.2
(99.3)
(84.2)

350.7
105.5
1.4

457.6
(67.6)

390.0

Central assets/liabilities include the proposed dividend, token provisions, interest payable and receivable on Group debt and other net assets of
the holding company.

Note 3 Other operating income

Miscellaneous revenue
Loss on disposal of tangible fixed assets, other than properties
Rail franchise support, excluding incentive payments
Rail incentive payments
Rail liquidated damages

2005

»m

48.3
(3.0)
90.2
35.2
2.6

173.3

2004

»m

46.8
(3.6)
107.7
(21.8)
Nil

129.1

Miscellaneous revenue comprises revenue incidental to the Group’s principal activity. It includes advertising income, maintenance income and
property income.

The loss on disposal of tangible fixed assets of »3.0m (2004 : »3.6m) includes an exceptional loss of »0.6m (2004: »Nil) in relation to the
difference between the net book value and the amounts recovered through insurance on vehicles that were scrapped as a result of flooding at
the UK Bus division’s Carlisle depot.

Rail franchise support is the gross amount of financial support receivable from the Strategic Rail Authority (‘‘SRA’’). Partly offsetting this,
South West Trains recognised amounts payable to the SRA under revenue and profit share agreements totalling »46.0m (2004: »27.9m) which
are included within operating costs.

Rail incentive payments comprise receipts from/payments to the SRA in respect of the operational performance of our rail companies measured
against benchmarks set by the SRA. Payments are made to the SRA when performance is worse than the target benchmarks and conversely
payments are received from the SRA when performance is better than that set by the benchmarks. The year on year movement in these
payments is primarily due to new benchmarks being set by the Regulator for Network Rail and is largely offset by payments to/from Network
Rail, which are included within operating costs. Network Rail makes payments to our rail companies when punctuality deteriorates due to the
actions of Network Rail and our rail companies make payments to Network Rail where the rail companies’ actions cause punctuality to deteriorate.

Rail liquidated damages of »2.6m (2004: »Nil) relate to amounts received by South West Trains for the late delivery and reliability of trains.

Note 4 Finance charges (net)

Bank loans and overdrafts
Hire purchase and finance leases
Other loans
Unwinding of discount on provisions
Interest receivable

2005

»m

4.0
8.3
19.7
3.2
(15.3)

19.9

2004

»m

19.2
5.8
13.1
2.8
(13.6)

27.3

Interest receivable includes »1.7m (2004: »1.3m) in relation to share of joint venture net interest receivable and »0.7m (2004: »1.0m) in
relation to interest receivable on joint venture shareholder loan notes. Interest payable on other loans includes »Nil (2004 : »0.8m) in relation to
share of associates’ net interest payable.

Stagecoach Group plc page 41

Notes to the accounts

Note 5 Profit on ordinary activities before taxation

Profit on ordinary activities before taxation is stated after charging/(crediting) :

Materials and consumables
Depreciation and amounts written off
^ Tangible fixed assets (owned)
^ Tangible fixed assets (on hire purchase or finance lease)
Amortisation of goodwill
^ Subsidiaries
^ Joint venture and associates
Gains on property disposals
Losses on other tangible fixed asset disposals
Network Rail charges
Operating lease rentals
^ PSVs and rolling stock
^ Land and buildings

Audit services
^ statutory audit
^ audit-related regulatory reporting
Other assurance services
Tax services
^ compliance services
^ advisory services
Advice re disposal of businesses
Provision of training and related materials
Advice re return of capital and related matters
Other services

Auditors’ remuneration ^ audit (Company)

The following items have been treated as exceptional:

Loss on disposal of operations (note 13)
Return of capital costs
Impairment of minority investment
Loss re flooding at Carlisle depot
Gain on sale of properties

Tax effect of exceptional items

2005

2004

»m

158.3

47.2
20.5

7.3
15.2
(1.3)
3.0
128.2

116.7
6.1

»’000

635.0
72.0
76.4

6.4
67.0
Nil
0.5
140.0
Nil

997.3

20.0

»m

162.2

49.6
17.6

8.8
9.0
(0.5)
3.6
117.3

98.0
8.0

»’000

655.0
12.5
38.8

27.5
117.5
17.6
6.5
Nil
26.8

902.2

20.0

2005

2004

»m

(5.9)
(0.3)
(0.3)
(0.8)
1.3

(6.0)
1.6

(4.4)

»m

(7.1)
Nil
Nil
Nil
0.5

(6.6)
(0.2)

(6.8)

The loss on disposal of operations of »5.9m comprises pre-tax losses arising on the disposals and closures of parts of our North American
businesses.

Net exceptional charges before tax of »7.1m for the year ended 30 April 2004 relate to the total pre-tax losses arising on the disposals of
various parts of our North American businesses and our investment in former associated companies operating in the Chinese city of Chongqing
partly offset by the pre-tax gains arising on the disposals of Citybus, our associated undertaking, Road King Infrastructure Limited, and our joint
venture, trainline.

The Directors also undertook an impairment review as at 30 April 2005 of the carrying value of the Group’s 49% joint venture interest in Virgin
Rail Group (‘‘VRG’’) and concluded that there had been no impairment loss (see note 13).

page 42 Stagecoach Group plc

Note 6 Staff costs and employees

Staff costs
Wages and salaries
Social security costs
Other pension costs (note 26e)

Summary directors’ remuneration
Aggregate emoluments
Sums paid to third parties for directors’ services

2005

»m

652.9
53.8
38.6

745.3

2004

»m

665.7
55.0
32.9

753.6

2005

2004

»m

2.0
^

2.0

»m

1.7
0.2

1.9

Further information on directors’ remuneration, share options, incentive schemes and pensions is contained in the Remuneration Committee
report on pages 23 to 29.

The average monthly number of persons employed by the Group during the year (including executive directors) was as follows:

UK operations
UK administration and supervisory
Overseas

Note 7 Taxation on profit on ordinary activities

(a) Analysis of charge in the year

Current tax:
UK corporation tax at 30% (2004 : 30%)
Prior year under/(over) provision for corporation tax
Share of joint ventures’ tax
Foreign tax (current year)
Foreign tax (adjustments in respect of prior years)

Total current tax

Deferred tax:
Origination and reversal of timing differences
Adjustments in respect of prior years

Total deferred tax

Tax on profit on ordinary activities

2005

2004

number

21,105
2,266
6,286

29,657

number

20,917
1,955
6,291

29,163

2005

2004

Performance pre
goodwill and
exceptionals
»m

Goodwill and
exceptional
items
»m

Results for
the year
»m

Performance pre
goodwill and
exceptionals
»m

Goodwill and
exceptional
items
»m

Results for
the year
»m

25.3
0.3
4.8
1.7
(0.1)

32.0

2.1
(1.9)

0.2

32.2

(0.3)
Nil
Nil
Nil
Nil

(0.3)

(2.4)
Nil

(2.4)

(2.7)

25.0
0.3
4.8
1.7
(0.1)

31.7

(0.3)
(1.9)

(2.2)

29.5

21.2
Nil
3.2
2.7
(0.1)

27.0

8.5
(3.2)

5.3

32.3

Nil
(24.7)
Nil
Nil
Nil

(24.7)

(0.1)
(16.3)

21.2
(24.7)
3.2
2.7
(0.1)

2.3

8.4
(19.5)

(16.4)

(11.1)

(41.1)

(8.8)

Stagecoach Group plc page 43

Notes to the accounts

Note 7 Taxation on profit on ordinary activities (continued)

(b) Factors affecting tax charge for the year

Profit on ordinary activities before tax

Profit on ordinary activities multiplied by standard rate of corporation tax in the UK of 30% (2004: 30%)
Effects of:
Goodwill amortisation
Goodwill allowances/deductions
Non-deductible expenditure
Utilisation of losses not recognised
Capital allowances (more)/less than depreciation
Creation or utilisation of losses
Movement in general provisions and other short term timing differences
Foreign taxes differences
Adjustments to tax charge in respect of prior years

Current tax charge for the year (note 7a)

2005

2004

»m

108.3

32.5

5.8
(2.2)
5.3
(11.3)
(4.5)
Nil
6.9
(1.0)
0.2

31.7

»m

95.8

28.7

5.0
Nil
8.1
(4.2)
3.0
(5.9)
(5.5)
0.4
(27.3)

2.3

(c) Factors that may affect future tax charges
No provision has been made for deferred tax on rolled over gains. The total amount unprovided for is »3.3m (2004 : »3.3m).
No deferred tax is recognised on the unremitted earnings of overseas subsidiaries unless a binding agreement exists at the balance sheet date to
remit such earnings in the future.
Deferred tax assets in respect of tax losses carried forward are provided against where the recoverability is not sufficiently certain.

Note 8 Dividends

Equity dividends
Ordinary shares ^ interim paid (1.0 pence (2004: 0.9 pence) per share)

^ final proposed (2.3 pence (2004 : 2.0 pence) per share)

Non-equity dividends
Redeemable ‘B’ preference shares ^ paid: 116,502,944 shares of 18.0 pence @ 3.534125% for 199 days

(»404,065)

^ accrued: 77,189,641 shares of 18.0 pence @ 3.526691% for 30 days

(»40,274)

2005

»m

10.7
24.4

35.1

0.4

^

0.4

2004

»m

11.9
26.5

38.4

Nil

Nil

Nil

During the year, a share alternative was offered in respect of the interim dividend of 1.0 pence per share. The cash cost to the Company is
unaffected but the cash is used by the Company’s registrars to acquire shares to be provided to shareholders as an alternative to the cash
dividend. A similar arrangement applied to last year’s final dividend of 2.0 pence per share.

The redeemable ‘B’ preference shares attract a non-cumulative preferential dividend set at 70% of 6 months’ LIBOR. The dividend is payable on
the nominal amount of 18 pence per ‘B’ share and is paid twice yearly in arrears on 31 March and 30 September.

page 44 Stagecoach Group plc

Note 9 Earnings per share

Earnings per share has been calculated in accordance with Financial Reporting Standard 14 ‘‘Earnings per Share’’ by calculating Group profit on
ordinary activities after tax and non-equity dividends, divided by the weighted average number of shares in issue during the year based on the
following:

2005

Weighted
average no.
of shares
million

Earnings/(loss)
»m

2004

Earnings/(loss)
per share
pence

Earnings
»m

Weighted
average no.
of shares
million

Earnings/
(loss)
per share
pence

Basic

78.4

1,154.5

6.8

104.6

1,321.7

Adjusted (pre goodwill and exceptional items)
Dilutive shares ^ Executive Share Option Scheme

^ Employee SAYE Scheme

Diluted excluding goodwill and exceptional items
Include goodwill and exceptional items

104.2
^
^

104.2
(25.8)

1,154.5
21.9
3.6

1,180.0
^

9.0
(0.2)
^

8.8
(2.2)

87.9
^
^

87.9
16.7

1,321.7
20.2
2.2

1,344.1
^

Diluted

78.4

1,180.0

6.6

104.6

1,344.1

7.9

6.7
(0.2)
^

6.5
1.3

7.8

Earnings per share before goodwill and exceptional items is calculated after adding back goodwill amortisation and exceptional items after taking
account of taxation, as shown on the consolidated profit and loss account on page 31. This has been presented to allow shareholders to gain a
clearer understanding of the underlying performance.

On 10 September 2004, the Company issued 1,340,732,902 18 pence redeemable ‘B’ shares at the rate of 1 redeemable ‘B’ share for every
1 ordinary share held.

The issue of redeemable ‘B’ shares was followed by a share consolidation whereby shareholders received 19 consolidated ordinary shares for every
24 ordinary shares held. In determining the consolidated earnings per share, no adjustment has been made to the number of ordinary shares
outstanding before the event where the issue of redeemable ‘B’ shares was combined with the share consolidation. The weighted average
number of ordinary shares outstanding for the year ended 30 April 2005 has been adjusted for the reduction in the number of ordinary shares
from the date on which the issue of redeemable ‘B’ shares and share consolidation took place. This treatment is consistent with paragraph 26 of
Financial Reporting Standard 14, ‘‘Earnings per Share’’.

Note 10 Profit and loss account

The movement on profit and loss account reserve is:

Retained (loss)/profit brought forward
Retained profit for the year
Translation adjustment
UK tax effect of translation adjustment
Share of other recognised gains and losses of associates
Redemption of ‘B’ shares

Retained (loss)/profit carried forward

Group

Company

2005
»m

(6.9)
43.3
3.6
Nil
Nil
(227.4)

(187.4)

2004
»m

(77.3)
66.2
(0.4)
4.8
(0.2)
Nil

(6.9)

2005
»m

464.2
51.6
Nil
Nil
Nil
(227.4)

288.4

2004
»m

57.5
406.7
Nil
Nil
Nil
Nil

464.2

Stagecoach Group plc page 45

Notes to the accounts

Note 11 Intangible assets ^ goodwill

All of the intangible assets that have been recognised by the Group are amortised over periods not exceeding 20 years.

The Group movement in the year is:

Cost
Beginning of year
Additions
Disposals
Translation adjustment

End of year

Amortisation
Beginning of year
Charge for the year
Disposals
Translation adjustment

End of the year

Net book value beginning of year

Net book value end of year

Joint ventures
(included in
provisions)
»m

Joint ventures
(included in
investments)
»m

Associates
»m

Subsidiaries
»m

Total
»m

1.9
Nil
(1.9)
Nil

Nil

(1.6)
(0.2)
1.8
Nil

Nil

0.3

Nil

97.9
Nil
Nil
Nil

97.9

(40.4)
(14.7)
Nil
Nil

(55.1)

57.5

42.8

2.8
Nil
Nil
Nil

2.8

(1.2)
(0.3)
Nil
Nil

(1.5)

1.6

1.3

598.0
2.4
(44.6)
(37.2)

518.6

(494.5)
(7.3)
39.9
32.8

(429.1)

103.5

89.5

700.6
2.4
(46.5)
(37.2)

619.3

(537.7)
(22.5)
41.7
32.8

(485.7)

162.9

133.6

Goodwill arising during the year and the amortisation periods are as follows:

Amortisation period
Years

Goodwill additions
»m

Subsidiaries ^ UK Bus
^ UK Bus

2
3

There were no adjustments to goodwill arising on prior year acquisitions (2004: »Nil).

Note 12 Tangible fixed assets

The following are included in the net book value of tangible fixed assets:

Land and buildings
Passenger Service Vehicles (‘‘PSVs’’) and other assets

Group

Company

2005
»m

142.8
497.4

640.2

2004
»m

134.5
483.5

618.0

2005
»m

Nil
0.1

0.1

2.2
0.2

2.4

2004
»m

3.3
0.8

4.1

page 46 Stagecoach Group plc

Note 12 Tangible fixed assets (continued)

The Group movement in the year is:

Cost
Beginning of year
Additions
New subsidiary undertakings
Disposals
Sale/closure of subsidiary undertakings
Translation adjustment

End of year

Depreciation
Beginning of year
Charge
Disposals
Sale/closure of subsidiary undertakings
Translation adjustment

End of year

Net book value, beginning of year

Net book value, end of year

Included in the above net book value at end of year are :
Assets on hire purchase
Leased PSV assets
Short leasehold land and buildings
Long leasehold land and buildings

Land and
buildings
»m

PSVs and
other assets
»m

Total
»m

1,109.3
103.8
1.3
(50.2)
(5.1)
(6.9)

970.8
88.9
1.3
(46.6)
(3.1)
(5.6)

1,005.7

1,152.2

(487.3)
(63.3)
35.3
3.0
4.0

(508.3)

483.5

497.4

124.3
2.6
Nil
Nil

(491.3)
(67.7)
38.1
4.5
4.4

(512.0)

618.0

640.2

124.3
2.6
1.0
20.2

138.5
14.9
Nil
(3.6)
(2.0)
(1.3)

146.5

(4.0)
(4.4)
2.8
1.5
0.4

(3.7)

134.5

142.8

Nil
Nil
1.0
20.2

Heritable and freehold land amounting to »35.9m (2004: »33.0m) has not been depreciated.

Depreciation of »20.5m (2004: »17.6m) has been charged in the year in respect of assets held under hire purchase or finance lease agreements.

The Company movement during the year was as follows:

Cost
Beginning of year
Additions
Intra-group transfer

End of year

Depreciation
Beginning of year
Charge
Intra-group transfer

End of year

Net book value, beginning of year

Net book value, end of year

Land and
buildings
»m

PSVs and
other assets*
»m

Total
»m

3.6
Nil
(3.6)

Nil

(0.3)
Nil
0.3

Nil

3.3

Nil

1.5
1.1
(1.7)

0.9

(0.7)
(0.1)
Nil

(0.8)

0.8

0.1

5.1
1.1
(5.3)

0.9

(1.0)
(0.1)
0.3

(0.8)

4.1

0.1

* PSVs and other assets include »Nil (2004: »0.6m) of assets in progress not yet allocated to Group operating companies.

Stagecoach Group plc page 47

Notes to the accounts

Note 13 Fixed asset investments

The Group movement during the year was as follows:

Cost
Beginning of year
Additions
Disposals
Share of recognised profits/(losses)
Translation adjustment
Dividends received
Loan repayment

End of year

Amounts written off
Beginning of year
Goodwill amortised during year
Impairment of minority investment
Other amounts written-off
Disposals

End of year

Net book value, beginning of year

Net book value, end of year

Joint ventures
»m

Associates
»m

Other investments
»m

Total
»m

146.9
Nil
Nil
9.6
Nil
(23.5)
(6.7)

126.3

(40.4)
(14.7)
Nil
Nil
Nil

(55.1)

106.5

71.2

2.6
Nil
Nil
(0.4)
Nil
Nil
Nil

2.2

(1.2)
(0.3)
Nil
Nil
Nil

(1.5)

1.4

0.7

3.4
0.3
(2.0)
Nil
0.1
Nil
Nil

1.8

(1.1)
Nil
(0.3)
(0.1)
1.4

(0.1)

2.3

1.7

152.9
0.3
(2.0)
9.2
0.1
(23.5)
(6.7)

130.3

(42.7)
(15.0)
(0.3)
(0.1)
1.4

(56.7)

110.2

73.6

The Group’s share of the net assets of Virgin Rail Group Holdings Limited included above is analysed below.

Fixed assets
Current assets
Creditors: Amounts falling due within one year
Creditors: Amounts falling due after more than one year

Share of net assets
Goodwill (note 11)
Shareholder loan notes

The principal joint venture is:

2005

2004

»m

4.9
126.4
(102.9)
(3.3)

25.1
42.8
3.3

71.2

»m

7.6
91.2
(53.7)
(6.1)

39.0
57.5
10.0

106.5

Country of
incorporation/
operation

Number of shares
in issue at
30 April 2005

Nominal value of
share capital in issue
at 30 April 2005

% held at
30 April
2005

Virgin Rail Group Holdings Limited

United Kingdom

34,780

»3,478

49

Virgin Rail Group Holdings Limited is the holding company of Virgin Rail Group Limited, which in turn is the holding company of CrossCountry
Trains Limited and West Coast Trains Limited.

The Virgin Rail Group Holdings shareholder agreement provides for joint decision making on key matters and equal representation on the Board.
As a consequence the investment has been accounted for as a joint venture. As part of the original acquisition, the Group acquired a »20m
shareholder loan to Virgin Rail Group Limited, now a subsidiary of Virgin Rail Group Holdings Limited. The shareholder loan bears interest at a
fixed rate of 10% per annum. »10m of the original »20m loan was repaid on 28 April 2000, »3.3m was repaid on 23 September 2004, and a
further »3.4m was repaid on 27 September 2004.

Unless otherwise agreed by its shareholders, Virgin Rail Group Holdings Limited is restricted from paying dividends until any loans payable to its
shareholders have been repaid. With the agreement of its shareholders, Virgin Rail Group Holdings Limited has declared a dividend of »18m in
respect of its financial year ended 5 March 2005. This dividend was paid prior to 30 April 2005.

page 48 Stagecoach Group plc

Note 13 Fixed asset investments (continued)

The Directors undertook an impairment review as at 30 April 2004 of the carrying value of the Group’s 49% joint venture interest in Virgin Rail
Group (‘‘VRG’’) and concluded that there had been no impairment loss. For five years following the impairment review, the Group is required to
review its initial projections in light of the actual cash flows. The Group has therefore reviewed the projections made in connection with the
30 April 2004 impairment review. This indicated that the actual net cash flows earned by the Group from its investment in VRG during the year
ended 30 April 2005 exceeded those projected, therefore under this ‘look-back’ test no impairment has arisen.

Both VRG’s franchises operate on the basis of a Letter Agreement signed with the Strategic Rail Authority (‘‘SRA’’) in July 2002. Negotiations will
re-commence on the West Coast franchise in September 2005 with a view to agreeing revised commercial terms for the franchise through to
2012. The SRA has terminated negotiations on the CrossCountry franchise and has the right to re-tender this franchise, although it is required to
give at least 12 months’ notice to VRG if it intends to terminate the existing franchise.

Under the Letter Agreement, the SRA sets an annual budget, including the level of financial support,
challenging budgets for VRG’s financial year to 4 March 2006. In particular, discussions are continuing with the SRA regarding CrossCountry’s
requirement for additional cash funding from July 2005.

for each franchise. The SRA has set

The Directors have re-assessed the carrying value of the Group’s investment in VRG as at 30 April 2005. In accordance with FRS 11, the
Directors have compared the carrying value of our net investment in VRG, with its estimated recoverable amount, being the higher of net
realisable value and value in use. The value in use of VRG was determined using an average pre-tax discount rate of 10.7%. The Directors of
Stagecoach Group have concluded there is no impairment loss at 30 April 2005 and they continue to monitor the situation regularly and to
assess any implications for the Group’s investment in VRG.

The Directors reviewed the period over which the goodwill in respect of VRG was being amortised, in light of the status of negotiations on VRG’s
franchises and the possibility that the SRA could terminate the CrossCountry franchise with 12 months’ notice. As a result, the amortisation of
goodwill in respect of VRG has been accelerated, resulting in an increased charge of »14.7m (2004: »8.2m). The remaining goodwill relating to
the original acquisition of VRG is being amortised over its remaining useful life of 6.8 years from 30 April 2005.

Investments ^ Company

The Company movement during the year was as follows:

Cost
Beginning of year
Disposals

End of year

Amounts written off
Beginning of year
Disposals

End of year

Net book value, beginning of year

Net book value, end of year

Subsidiary
undertakings
»m

Joint ventures
»m

Other investments
»m

Total
»m

923.0
Nil

923.0

Nil
Nil

Nil

923.0

923.0

1.8
(1.8)

Nil

(1.8)
1.8

Nil

Nil

Nil

0.8
(0.8)

Nil

Nil
Nil

Nil

0.8

Nil

925.6
(2.6)

923.0

(1.8)
1.8

Nil

923.8

923.0

Acquisitions
During the year a further 8 acquisitions have been concluded in the UK and North America for a total consideration of »4.8m in cash. The fair
value of the net assets acquired was »2.4m giving rise to goodwill of »2.4m which has been capitalised and is being amortised over 2 to
3 years.

These acquisitions are not considered to be individually or collectively material for the purposes of FRS 7, ‘‘Fair Values in Acquisition Accounting’’.

The aggregate fair value of the net assets acquired is as follows:

Fair value to Group
Tangible fixed assets
Other current assets

Total assets

Consideration

Goodwill

»m

1.3
1.1

2.4

4.8

2.4

Stagecoach Group plc page 49

Notes to the accounts

Note 13 Fixed asset investments (continued)

Disposals

During the year, the Group disposed of and closed parts of its North American businesses as set out below.

The Group has not retained any ownership interest in any of the businesses that were disposed of in the year.

The operating profit attributable to disposed operations is disclosed in the segmental analysis in note 2b.

In respect of the subsidiary undertakings that were disposed of during the year, the net assets disposed of were as follows:

Fixed assets
Intangible assets ^ goodwill
Tangible assets

Other current assets

Total assets

Other creditors

Total liabilities

Net assets disposed

Provisions and accruals for future costs associated with the disposals
Release of provision against receivable on prior year disposals
Loss on disposal

Proceeds, net of directly attributable costs

Satisfied by:
Cash
Deferred consideration outstanding (net of provision for
doubtful debts) as at 30 April 2005

Net cash inflows in respect of disposals comprised:
Cash consideration
Deferred consideration in respect of businesses disposed in prior years

North America
»m

4.7
0.6

5.3
3.5

8.8

(0.3)

(0.3)

8.5

7.9
(1.7)
(5.9)

8.8

7.1

1.7

8.8

7.1
7.6

14.7

page 50 Stagecoach Group plc

Note 14 Principal business units

The principal subsidiary undertakings (ordinary shares 100% owned except where shown) are:

Company

Stagecoach Transport Holdings plc
SCOTO Limited
Stagecoach (South) Ltd
Stagecoach (North West) Ltd
East Midland Motor Services Ltd
Stagecoach Scotland Ltd

National Transport Tokens Ltd (99.9%)
East Kent Road Car Company Ltd
Stagecoach West Ltd
PSV Claims Bureau Ltd
Busways Travel Services Ltd

South East London and Kent Bus Co Ltd
East London Bus and Coach Co Ltd
Cleveland Transit Ltd
Cambus Ltd
Stagecoach Devon Ltd

Greater Manchester Buses South Ltd
South West Trains Ltd
Island Line Ltd
South Yorkshire Supertram Ltd

Wellington City Transport Ltd
Transportation Auckland Corporation Limited
Fullers Group Limited (96%)
Coach USA Inc.

Country of registration
or incorporation

Scotland
England
England
England
England
Scotland

England
England
England
England
England

England
England
England
England
England

England
England
England
England

New Zealand
New Zealand
New Zealand
United States

Principal activity

Holding company
Holding company
Bus and coach operator
Bus and coach operator
Bus and coach operator
Bus and coach operator

Transport tokens
Bus and coach operator
Bus and coach operator
Claims handling
Bus and coach operator

Bus and coach operator
Bus and coach operator
Bus and coach operator
Bus and coach operator
Bus and coach operator

Bus and coach operator
Train operating company
Train operating company
Tram operator

Bus and coach operator
Bus and coach operator
Ferry operator
Bus and coach operator

All companies operate in the countries shown above and, except for Stagecoach Transport Holdings plc, are indirectly held. The companies listed
above include all those which principally affect the results and assets of the Group.

Note 15 Stocks

Parts and consumables
Taxicabs held for resale

Group

Company

2005
»m

12.5
Nil

12.5

2004
»m

11.9
1.5

13.4

2005
»m

Nil
Nil

Nil

There is no material difference between the carrying value of stocks held at 30 April 2005 and their estimated replacement cost.

Note 16 Debtors and prepaid charges

Amounts falling due within one year are:

Trade debtors
Other debtors
Other prepayments and accrued income
VAT and other government debtors
Foreign tax receivable
UK corporation tax debtor

Group

Company

2005
»m

74.2
25.4
63.7
9.8
1.0
Nil

2004
»m

74.6
28.4
53.8
11.1
1.3
Nil

174.1

169.2

2005
»m

0.2
Nil
11.2
9.8
Nil
0.4

21.6

2004
»m

Nil
Nil

Nil

2004
»m

0.2
Nil
8.1
10.2
Nil
Nil

18.5

Stagecoach Group plc page 51

Notes to the accounts

Note 16 Debtors and prepaid charges (continued)

Amounts falling due after more than one year are :

Pension scheme prepayment (note 26e)
Amounts owed by group companies
Other debtors
Deferred tax asset (note 21)

Note 17 Creditors

(a) Creditors : Amounts falling due within one year

Bank overdrafts
Bank loans and loan notes
Euro 6% notes (note 17d)
Trade creditors
Accruals and deferred income
Dividends payable
Other creditors
^ UK corporation tax payable
^ PAYE and NIC payable
Current portion of hire purchase and lease obligations
Amounts due to group companies

(b) Creditors : Amounts falling due after more than one year

Bank loans and loan notes
US Dollar 8.625% Notes (note 17c)
Non-current portion of hire purchase and lease obligations
Accruals and deferred income
Amounts due to group companies

Group

Company

2004
»m

36.9
Nil
21.1
Nil

58.0

2005
»m

Nil
166.6
Nil
1.5

168.1

Group

Company

2004
»m

Nil
38.9
182.2
96.6
244.0
26.5

33.9
15.7
36.8
Nil

2005
»m

197.0
104.8
Nil
1.7
15.9
24.4

Nil
0.2
Nil
32.0

2004
»m

Nil
130.8
Nil
1.1

131.9

2004
»m

Nil
38.6
200.2
1.7
21.2
26.5

4.5
0.2
Nil
28.0

2005
»m

36.1
Nil
8.5
4.1

48.7

2005
»m

1.5
104.9
Nil
98.9
241.9
24.4

33.3
16.8
20.1
Nil

541.8

674.6

376.0

320.9

Group

Company

2005
»m

7.2
174.9
46.0
8.1
Nil

236.2

2004
»m

2.7
187.9
95.6
6.0
Nil

292.2

2005
»m

Nil
Nil
Nil
0.8
37.5

38.3

2004
»m

Nil
Nil
Nil
Nil
44.1

44.1

(c) US Dollar 8.625% Notes
On 9 November 1999, the Group issued US$500m of 8.625% Notes due in 2009. Interest on the Notes is payable six monthly in arrears. Unless
previously redeemed or purchased and cancelled, the Notes will be redeemed at their principal amount on 15 November 2009.

The cumulative par value of Notes repurchased was US$165.9m as at 30 April 2005 (2004 : US$165.9m).

The Notes were issued at 99.852% of their principal amount. The consolidated carrying value of the Notes at 30 April 2005 was »174.9m
(2004: »187.9m), after taking account of the notes purchased by the Group, the discount on issue, and issue costs.

(d) Euro 6% Notes
On 24 November 1999, the Group issued e400m of 6% Notes due in 2004. The Notes were issued at 99.937% of their principal amount. The
cumulative par value of Notes repurchased and cancelled at 30 April 2004 was e104.2m. The remaining Notes were redeemed at their principal
amount on 24 November 2004.

page 52 Stagecoach Group plc

Note 17 Creditors (continued)

(e) Borrowings are repayable as follows

On demand or within 1 year
Bank overdraft
Bank loans and loan notes
Euro 6% Notes
Hire purchase and lease obligations
Within 1-2 years
Bank loans and loan notes
Hire purchase and lease obligations
Within 2-5 years
Bank loans and loan notes
US Dollar 8.625% Notes
Hire purchase and lease obligations
Over 5 years
US Dollar 8.625% Notes
Hire purchase and lease obligations

Total borrowings
Less current maturities

Long term portion of borrowings

Group

Company

2005
»m

1.5
104.9
Nil
20.1

0.7
12.1

6.5
174.9
22.3

Nil
11.6

354.6
(126.5)

228.1

2004
»m

Nil
38.9
182.2
36.8

Nil
33.1

2.7
Nil
53.6

187.9
8.9

544.1
(257.9)

286.2

2005
»m

197.0
104.8
Nil
Nil

Nil
Nil

Nil
Nil
Nil

Nil
Nil

301.8
(301.8)

Nil

2004
»m

Nil
38.6
200.2
Nil

Nil
Nil

Nil
Nil
Nil

Nil
Nil

238.8
(238.8)

Nil

Interest terms on UK borrowings (except loan notes) are at annual rates between 0.35% and 0.65% over Bank of Scotland base rate or
equivalent LIBOR rates. Interest terms on overseas borrowings are at annual rates of 0.5% above applicable local market borrowing rates. Interest
on loan notes are at three months LIBOR or fixed interest. Loan notes amounting to »38.3m (2004: »38.6m) are backed by guarantees
provided under group banking facilities.

The loan notes have been classified by reference to the earliest date on which the loan note holders can request redemptions.

UK Bank loans, overdrafts and US$ Notes are unsecured.

Note 18 Derivatives and other financial instruments

Treasury policy and the use of financial instruments are both discussed in the Operating and Financial Review on page 10.

Short term debtors and creditors (defined as amounts due within one year of the balance sheet date) have been excluded from the disclosures
below except for note 18(c) on currency exposures.

(a) Interest rate and currency profile of financial liabilities
The interest rate profile of the financial liabilities of the Group on which interest is paid at 30 April 2005 was as follows:

Currency

Sterling
US Dollar
Canadian Dollar

Gross borrowings

Floating rate
»m

Fixed rate
»m

170.9
1.5
7.3

179.7

31.4
143.5
Nil

174.9

Total
»m

202.3
145.0
7.3

354.6

Weighted average
fixed interest rate
%

Weighted average
period for which
rate is fixed
Years

6.8
6.8
n/a

6.8

4.5
4.5
n/a

4.5

The figures shown in the above table take into account various interest rate and currency swaps used to manage the interest rate and currency
profile of borrowings.

As at 30 April 2005 floating rate Sterling borrowings of »50.0m (2004: »50.0m) were hedged with a collar with a cap rate of 8.5% and a floor
of 4.5%. The cap was not exercised during the year to 30 April 2005, the floor was exercised on »50m at a rate of 4.5% until July 2004, at
which point floating rates were above the floor level.
The floating rate financial liabilities bear interest at rates fixed in advance for periods ranging from one to three months based on market rates
outlined in note 17.
The Directors have reviewed how they define and identify financial liabilities as part of the transition to IFRS and have concluded that there are
no (2004 restated: »Nil) financial liabilities on which interest is paid. The prior year comparatives have been restated.

The Group’s policies on managing interest rate risk and currency risk are explained in the Operating and Financial Review on page 10.

Stagecoach Group plc page 53

Notes to the accounts

Note 18 Derivatives and other financial instruments (continued)

The interest rate profile of the financial liabilities of the Group on which interest is paid at 30 April 2004 was as follows:

Currency

Sterling
US Dollar
Canadian Dollar

Gross Borrowings

Floating rate
»m

Fixed rate
»m

262.2
64.5
2.7

329.4

26.6
188.1
Nil

214.7

Total
»m

288.8
252.6
2.7

544.1

The maturity profile of the Group’s financial liabilities at 30 April 2005 was as follows:

Expiring within one year
Expiring in more than one year but less than two years
Expiring in more than two years but less than five years
Expiring beyond five years

Gross borrowings

Weighted average
fixed interest rate
%

Weighted average
period for which
rate is fixed
Years

9.4
6.8
n/a

7.1

2005

»m

126.5
12.8
203.7
11.6

354.6

2.0
5.5
n/a

5.1

2004
Restated

»m

257.9
33.1
56.3
196.8

544.1

(b) Interest rate and currency profile of financial assets
The Group’s financial assets on which floating interest is receivable comprise cash deposits and cash in hand of »140.0m (2004: »476.5m). The
cash deposits comprise deposits placed on money market at call, seven day, monthly rates and cash deposited with counterparty banks at
commercially negotiated interest rates. The currency analysis is as follows:

Currency

Sterling
US Dollar
New Zealand Dollar
Canadian Dollar

Cash at bank and in hand

Floating rate

2005
»m

124.5
10.3
4.7
0.5

140.0

2004
»m

413.7
59.1
3.2
0.5

476.5

Financial assets on which no interest is receivable total »1.7m (2004: »2.3m) and comprise other investments of »1.7m (2004: »2.3m). These
assets are denominated in Sterling »0.4m (2004: »0.5m), US dollars »0.1m (2004: »Nil) and others »1.2m (2004: »1.8m). Net financial assets
on which fixed interest is receivable total »5.4m (2004: »16.4m) and comprise US$ denominated loan notes receivable. The net amount of
»5.4m (2004: »16.4m) includes a provision for doubtful debts of »2.4m (2004: »9.9m). The net financial assets have a weighted average
interest rate of 7.8% (2004 : 8.4%) and an average maturity of 3.5 years (2004: 4.5 years).

(c) Currency exposures
As explained in the Operating and Financial Review on page 10, the Group’s objective in managing currency borrowings and net exposures
arising from its investments in net assets of overseas subsidiaries is to maintain a low cost of borrowing and to retain some potential for
currency related appreciation whilst partially hedging against currency depreciation. All foreign currency borrowings are taken out to provide for
or to hedge against foreign net investments. Gains and losses arising from these currency borrowings and net exposures are recognised in the
statement of total recognised gains and losses.

The Group generally hedges actual and forecast foreign exchange transactional exposures up to one year forward. At 30 April 2005 and 30 April
2004 there were no material net transactional foreign currency exposures.

page 54 Stagecoach Group plc

Note 18 Derivatives and other financial instruments (continued)

(d) Borrowing facilities
At 30 April 2005, the Group had the following undrawn committed banking and hire purchase facilities :

Expiring within one year
Expiring in more than one year but no more than two years
Expiring beyond two years

2005

»m

43.8
Nil
317.6

361.4

2004

»m

68.5
Nil
51.1

119.6

Note 19 Fair values
Set out below is a comparison of fair and book values of all the Group’s financial instruments by category. Where available, market values have
been used to determine fair values. Where market values are not available, fair values have been calculated by discounting future cash flows at
prevailing interest and exchange rates.

2005

2004
Restated

Book value
»m

Fair value
»m

Book value
»m

Primary financial instruments to finance the Group’s operation
Cash deposits and bank overdrafts
US Dollar 8.625% Notes
Euro 6% Notes
Foreign currency swaps hedging currency debt
Short term borrowings and current portion of long term debt
Other long term borrowings

Net debt (note 25c)
Derivative financial instruments held to manage the interest
rate, currency and commodity risk profiles
Interest rate swaps and similar instruments
Forward foreign currency contracts and swaps hedging
overseas investments
Fuel price swaps, caps and options
Other financial assets

140.0
(174.9)
Nil
Nil
(126.5)
(53.2)

(214.6)

Nil

Nil
2.1
7.1

140.0
(199.5)
Nil
(0.1)
(126.5)
(53.2)

(239.3)

(0.3)

(0.5)
8.7
7.1

476.5
(187.9)
(199.9)
17.7
(75.7)
(98.3)

(67.6)

Nil

Nil
Nil
18.7

(205.4)

(224.3)

(48.9)

Fair value
»m

476.5
(216.8)
(203.9)
23.9
(75.7)
(98.3)

(94.3)

(3.5)

(0.1)
6.5
18.7

(72.7)

Note 20 Hedge accounting

Unrecognised gains or losses on hedges at start of year
Gains or losses arising in previous years that were
recognised in the year

Gains or losses arising in previous years that were
not recognised in the year
Gains or losses arising in the year that were
not recognised in the year

Unrecognised gains or losses on hedges at end of year

Of which:
Gains or losses expected to be recognised within
one year
Gains or losses expected to be recognised after
one year

2005

Losses
»m

(3.6)

Gains
»m

12.7

Total
»m

9.1

Gains
»m

59.0

2004

Losses
»m

(33.5)

Total
»m

25.5

(11.4)

3.2

(8.2)

(46.6)

30.0

(16.6)

1.3

5.3

6.6

6.6

Nil

6.6

(0.4)

(0.5)

(0.9)

(0.8)

(0.1)

(0.9)

0.9

4.8

5.7

5.8

(0.1)

5.7

12.4

0.3

12.7

12.2

0.5

12.7

(3.5)

(0.1)

(3.6)

(3.2)

(0.4)

(3.6)

8.9

0.2

9.1

9.0

0.1

9.1

The table above shows the unrecognised gains or losses on derivatives that were in place during the year ended 30 April 2005. In addition at
30 April 2005 there was »19.6m (2004 : »22.6m) of unrecognised net gains arising from the close out, during the year ended 30 April 2004, of
interest rate derivatives. These will be recognised as follows: »3.5m within one year (2004: »3.0m) and »16.1m after one year (2004: »19.6m).
During the year »3.0m (2004: »4.1m) of net gains were recognised.
As explained in the Operating and Financial Review on page 10, the Group’s policy is to hedge against interest rate risk, currency risk and
commodity price risk.
Gains and losses on instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised.

Stagecoach Group plc page 55

Notes to the accounts

Note 21 Provisions for liabilities and charges

Group

Company

Deferred taxation
Token redemption provision
Insurance provisions
Environmental provisions
Pension provision (note 26d)
Restructuring provision

Joint ventures
^ goodwill
^ share of gross liabilities
^ shareholder loan

2005
»m

78.7
25.5
63.5
3.9
10.0
Nil

2004
»m

76.2
27.3
71.9
3.5
10.2
1.9

181.6

191.0

Nil
Nil
Nil

Nil

(0.3)
1.7
(0.4)

1.0

Total provisions

181.6

192.0

2005
»m

Nil
Nil
Nil
Nil
3.7
Nil

3.7

Nil
Nil
Nil

Nil

3.7

2004
»m

Nil
Nil
Nil
1.8
3.5
Nil

5.3

Nil
Nil
Nil

Nil

5.3

The token redemption provision relates to tokens issued to third parties to be redeemed as payment for transportation services.

The insurance provisions relate to insurance reserves on incurred accidents up to 30 April in each year where claims have not been settled. These
are based on actuarial reviews and prior claims history.
The environmental provisions relate to legal or constructive obligations to undertake environmental work, such as an obligation to rectify land
which has been contaminated by fuel tanks or to eliminate the presence of asbestos. The provision is based on the estimated cost of
undertaking the work required.

The pension provision relates to unfunded liabilities established by actuarial review and SSAP 24 pension liabilities.
The restructuring provision as at 30 April 2004 related to the estimated costs of completing the sale or closure of operations in North America,
where an obligation existed at the balance sheet date.

Share of joint venture net liabilities as at 30 April 2004 was in relation to the Group’s interest in the consolidated net liabilities of various small
joint ventures. The joint ventures were unwound during the year ended 30 April 2005.

The Group movement during the year was as follows:

Beginning of year
^ (credited)/provided during year
Unwinding of discount
Utilised in the year
Arising on sale of tokens during year
Redemption of tokens
Translation differences
Disposed of with joint ventures

End of year

Deferred
taxation
»m

76.2
(2.2)
Nil
Nil
Nil
Nil
0.6
Nil

74.6

Token
redemption
provision
»m

27.3
Nil
Nil
Nil
10.5
(12.3)
Nil
Nil

71.9
37.9
3.2
(47.0)
Nil
Nil
(2.5)
Nil

25.5

63.5

Insurance
provisions
»m

Environmental
provisions
»m

Pension
provisions
»m

Restructuring
provision
»m

Share of
joint ventures’
net liabilities
»m

3.5
1.3
Nil
(0.9)
Nil
Nil
Nil
Nil

3.9

10.2
13.0
Nil
(13.2)
Nil
Nil
Nil
Nil

10.0

1.9
Nil
Nil
(1.8)
Nil
Nil
(0.1)
Nil

Nil

1.0
Nil
Nil
Nil
Nil
Nil
Nil
(1.0)

Nil

The net deferred tax liability of »74.6m (2004: »76.2m) is made up of deferred tax liabilities of »78.7m (2004: »76.2m) disclosed within
provisions for liabilities and charges and a deferred tax asset of »4.1m (2004: »Nil) disclosed within debtors and prepaid charges (note 16).

The Company movement during the year was as follows:

Beginning of year
Provided during year
Utilised in year
Payments in year

End of year

Deferred
taxation
»m

Environmental
provisions
»m

Pension
provisions
»m

(1.1)
(0.4)
Nil
Nil

(1.5)

1.8
Nil
(1.8)
Nil

Nil

3.5
0.3
Nil
(0.1)

3.7

The deferred tax asset of »1.5m (2004: »1.1m) is disclosed within debtors and prepaid charges (note 16).

page 56 Stagecoach Group plc

Note 21 Provisions for liabilities and charges (continued)

Deferred taxation is calculated as follows:

Accelerated capital allowances
Pension timing differences
Short-term timing differences

Note 22 Called up share capital

Group

Company

2005
»m

89.8
7.8
(23.0)

74.6

2004
»m

86.4
8.0
(18.2)

76.2

2005
»m

Nil
(0.9)
(0.6)

(1.5)

2004
»m

0.5
(0.9)
(0.7)

(1.1)

Authorised
1,456,666,666 (2004: 1,840,000,000) ordinary shares of 12/19 pence (2004: 0.5 pence) each
1,388,888,889 redeemable ‘B’ preference shares of 18 pence each

Total

Allotted, called-up and fully-paid
1,069,545,227 (2004: 1,335,358,600) ordinary shares of 12/19 pence (2004: 0.5 pence) each
77,189,641 redeemable ‘B’ preference shares of 18 pence each

Total

Group and Company

2005

»m

9.2
250.0

259.2

6.8
13.9

20.7

2004

»m

9.2
Nil

9.2

6.7
Nil

6.7

The redeemable ‘B’ preference shares attract a non-cumulative preferential dividend set at 70% of 6 months’ LIBOR. The dividend is payable on
the nominal amount of 18 pence per ‘B’ share and is paid twice yearly in arrears on 31 March and 30 September. The redeemable ‘B’ shares are
redeemable at their nominal value of 18 pence per share at the option of holders on 31 March and 30 September each year. As a result of the
number of ‘B’ shares already redeemed, the Company is able to compulsorily redeem all the outstanding ‘B’ shares at any time on or after
30 September 2005. The ‘B’ shares are not listed on a recognised Stock Exchange.

In accordance with UITF 38, all shares held by employee trusts are deducted from shareholders’ funds and are not classified as assets.

The Group operates two Employee Share Ownership Trusts: the Stagecoach Group Qualifying Employee Share Ownership Trust (‘‘QUEST’’) and
the Stagecoach Group Employee Benefit Trust 2003 (‘‘EBT’’). Shares held by these trusts are treated as a deduction from the shareholders’ funds
in the Group’s accounts. Other assets and liabilities of the trusts are consolidated in the Group’s accounts as if they were assets and liabilities of
the Group. As at 30 April 2005, the QUEST held 1,811,212 (2004: 4,887,606) ordinary shares in the Company and the EBT held 4,690,333
(2004: 4,636,924) ordinary shares in the Company.

Stagecoach Group plc page 57

Notes to the accounts

Note 23 Share option schemes

(a) Savings related share option schemes

The Company had an Inland Revenue approved savings related share option scheme in operation during the year. The scheme is based on
eligible employees being granted options and them agreeing to open a sharesave account with the relevant bank or building society and to save
weekly or monthly for a fixed period. The right to exercise the option is at the employee’s discretion within six months following the end of the
fixed period. Two issues from the scheme were in operation during the year as follows:

Issue

C
D

Option grant date

15 February 2002
11 February 2005

Savings contract
start date

1 April 2002
1 April 2005

Exercise price

60.0p
103.275p

Date from which
exercisable

1 April 2005
1 April 2008

Expiry date

30 September 2005
30 September 2008

The changes in the number of participating employees and options over ordinary shares were as follows:

Beginning of year
Options issued
Options exercised
Options lapsed

End of year

(b) Executive share options

Issue C

Issue D

Ordinary
shares

Number of
employees

Ordinary
shares

Number of
employees

3,038
Nil
(2,129)
(264)

10,745,846
Nil
(8,098,880)
(840,777)

645

1,806,189

Nil
4,310
Nil
(19)

4,291

Nil
12,272,931
Nil
(74,482)

12,198,449

Award date

9 September 1994

13 October 1995
11 October 1996

8 September 1997

8 September 1997
19 October 1998

19 July 1999
15 June 2000

20 June 2001
23 July 2002

5 December 2002
26 June 2003

12 December 2003
25 June 2004

10 December 2004

At 1 May
2004

53,296

32,899
606,522

558,569

41,472
302,722

581,010
4,992,155

3,861,025
13,648,506

13,409,896
5,219,862

3,445,752
Nil

Nil

Granted

Exercised

Lapsed

At 30 April
2005

Exercise
price »

Date from
which
exercisable

Expiry date

Nil

Nil
Nil

Nil

Nil
Nil

Nil
Nil

Nil
Nil

Nil
Nil

Nil
5,424,281

1,601,538

(53,296)

(32,899)
Nil

Nil

Nil
Nil

Nil
(4,148,635)

(3,076,525)
(1,067,219)

Nil
Nil

(62,987)
Nil

Nil

Nil

Nil
Nil

(558,569)

Nil
(29,174)

(61,852)
(459,600)

(80,000)
(356,328)

(247,200)
(85,222)

(36,814)
(37,159)

(9,525)

Nil

Nil
606,522

Nil

41,472
273,548

519,158
383,920

704,500
12,224,959

13,162,696
5,134,640

3,345,951
5,387,122

1,592,013

0.3030

0.4820
1.0900

1.2810

1.2810
2.2280

2.0310
0.6250

0.7075
0.3750

0.2700
0.6050

0.8075
0.8575

1.1150

9 September 1997 9 September 2004

13 October 1998
11 October 1999

13 October 2005
11 October 2006

8 September 2000 8 September 2004

8 September 2000 8 September 2007
19 October 2005
19 October 2001

19 July 2002
15 June 2003

20 June 2004
23 July 2005

19 July 2006
15 June 2007

20 June 2008
23 July 2009

5 December 2005
26 June 2006

5 December 2009
26 June 2010

12 December 2006 12 December 2010
25 June 2011

25 June 2007

10 December 2007 10 December 2011

Totals

46,753,686

7,025,819

(8,441,561)

(1,961,443)

43,376,501

All options were granted for nil consideration. The mid-market price for the ordinary shares at 30 April 2005 was »1.03 (2004: »0.82).
The Company’s ordinary shares traded in the range »0.76 to »1.23 (2004: »0.44 to »0.93) during the year to that date.

page 58 Stagecoach Group plc

Note 24 Reserves

Share premium account
Profit and loss account (note 10)
Capital redemption reserve
Own shares

Group

Company

2005
»m

163.4
(187.4)
229.1
(6.8)

2004
»m

392.4
(6.9)
1.7
(3.9)

2005
»m

163.4
288.4
229.1
(6.8)

2004
»m

392.4
464.2
1.7
(3.9)

Of the Company’s profit and loss account balance »281.6m (2004: »378.5m) is distributable and »Nil (2004: »85.7m) is non-distributable.
None of the other above reserves as at 30 April 2005 are regarded as distributable.

Details of own shares held are given in note 22.

The consolidated profit on ordinary activities after taxation for the financial year includes »87.1m (2004: »445.1m) in respect of the Company.

The movement in the profit and loss account is given in note 10. The movement on other reserves is as follows:

Group and Company:
share premium

Group and Company:
capital redemption reserve

Group and Company:
own shares

Beginning of year
‘B’ shares issued from share premium
Expenses on issue of ‘B’ shares
‘B’ shares redeemed
Arising on new ordinary share issues
Own shares purchased
Own shares sold

End of year

»m

392.4
(241.3)
(0.4)
^
12.7
^
^

163.4

»m

1.7
^
^
227.4
^
^
^

229.1

»m

(3.9)
^
^
^
^
(5.4)
2.5

(6.8)

Cumulative goodwill of »113.8m (2004: »113.8m) has been written off against reserves in periods prior to the adoption of FRS 10 ‘‘Goodwill
and Intangible Assets’’.

Note 25 Consolidated cash flows

(a) Reconciliation of operating profit to net cash flow from operating activities

2005

2004

Operating profit of Group companies
Depreciation
Loss on disposal of tangible fixed assets, other than properties
Goodwill amortisation
Impairment and amounts written off of investments
(Increase)/decrease in stocks
Increase in debtors
Increase in creditors
Decrease in provisions

Net cash inflow from operating activities

(b) Reconciliation of net cash flow to movement in net debt

(Decrease)/increase in cash
Bond repayments
Cash flow from decrease in debt and lease financing

Loans of disposed subsidiaries
Other movements
Movement in cash collateral

(Increase)/decrease in net debt
Opening net debt

Closing net debt

»m

135.7
67.7
3.0
7.3
0.4
(0.4)
(9.8)
8.9
(14.3)

198.5

(332.6)
181.0
21.6

(130.0)
Nil
(14.0)
(3.0)

(147.0)
(67.6)

(214.6)

»m

121.0
67.2
3.6
8.8
Nil
7.3
(11.7)
24.3
(6.2)

214.3

347.4
10.4
122.6

480.4
47.3
2.0
(37.3)

492.4
(560.0)

(67.6)

Stagecoach Group plc page 59

Notes to the accounts

Note 25 Consolidated cash flows (continued)

(c) Analysis of net debt

Cash
Cash collateral
Hire purchase and lease obligations
Bank loans and loan stock
Bonds

Opening
»m

Cash flows
»m

Cash collateral
»m

New hire purchase
»m

Foreign exchange
movements
»m

439.2
37.3
(132.4)
(41.6)
(370.1)

(332.6)
(2.7)
92.5
(71.2)
181.0

(67.6)

(133.0)

Nil
(0.3)
Nil
0.3
Nil

Nil

Nil
Nil
(26.2)
Nil
Nil

(26.2)

(2.4)
Nil
Nil
0.4
14.2

12.2

Closing
»m

104.2
34.3
(66.1)
(112.1)
(174.9)

(214.6)

The net total of cash and cash collateral of »138.5m (2004: »476.5m) is classified in the balance sheet as »140.0m (2004: »476.5m) in cash at
bank and in hand and »1.5m (2004: »Nil) as bank overdrafts.

(d) Restricted cash

The cash collateral balance as at 30 April 2005 of »34.3m (2004: »37.3m) comprises balances held in trust in respect of loan notes of »33.5m
(2004: »33.7m) and North America restricted cash balances of »0.8m (2004: »3.6m). In addition, cash includes train operating company cash
of »61.3m (2004: »71.6m). Under the terms of the franchise agreements, train operating companies can only distribute cash out of
retained profits.

(e) Purchase of subsidiary undertakings

Net assets acquired at fair value (see note 13)
Goodwill

Consideration
Cash and acquisition expenses paid in year

The cash paid during the year in respect of the purchase of subsidiary undertakings was as follows:

Cash paid in respect of acquisitions in year (see above)
Deferred consideration in respect of businesses acquired in prior years

»m

2.4
2.4

4.8

4.8

»m

4.8
1.1

5.9

Companies acquired in the year did not have a material impact on cash flows.

(f) Disposal of subsidiaries and other businesses
Details of net assets disposed of and the related sales proceeds are set out in note 13.

The cash flows from the discontinued element of North America are not shown because they are not clearly distinguishable due to certain
‘‘shared’’ costs that relate to North America as a whole. However, the discontinued element of North America’s cash flows is not believed to be
material to the Group.

Note 26 Guarantees and other financial commitments

(a) Guarantees
The Company is a party to bank guarantees in respect of guarantees, loans, overdrafts and other facilities provided to certain Group undertakings
of which »81.4m was outstanding at 30 April 2005 (2004: »80.9m) and provides cross-guarantees to certain subsidiary undertakings under
VAT group provisions.

(b) Capital commitments
Capital commitments are as follows:

Group

Company

2005
»m

2004
»m

2005
»m

2004
»m

Contracted for but not provided
For delivery in one year

57.8

81.7

53.4

60.2

At 30 April 2005, »2.0m of the total capital commitments relates to overseas operations (30 April 2004: »16.8m).

page 60 Stagecoach Group plc

Note 26 Guarantees and other financial commitments (continued)

(c) Operating lease commitments

South West Trains has contracts which commit it to lease rolling stock from Angel Trains Contracts Ltd, HSBC Rail (UK) Ltd and Porterbrook
Leasing Limited.
Commitments for payments in the next year under rolling stock operating leases are as follows:

2005

2004

Under one year
Between one year and five years
Five years and over

Commitments for payments in the next year under other operating leases are as follows:

»m

0.1
122.3
Nil

Under one year
Between one year and five years
Five years and over

2005

2004

Land and
buildings
»m

0.6
7.8
3.4

Other
»m

5.0
10.0
1.6

Land and
buildings
»m

Nil
1.5
5.8

The following are the contractual lease payments due under unexpired operating leases as at 30 April 2005:

Lease payments due in respect of:
Year ending 30 April 2006
Year ending 30 April 2007
Year ending 30 April 2008
Year ending 30 April 2009
Year ending 30 April 2010
1 May 2010 and thereafter

Land &
Buildings
»m

11.8
10.0
5.5
4.0
3.7
13.8

48.8

Buses &
other road
transportation
equipment
»m

Trains &
rolling stock
»m

Plant &
machinery
»m

13.8
11.7
7.7
9.4
0.6
Nil

43.2

122.4
87.3
Nil
Nil
Nil
Nil

209.7

2.8
2.0
0.4
0.2
0.1
Nil

5.5

»m

19.8
76.6
Nil

Other
»m

0.5
9.0
6.4

Total
»m

150.8
111.0
13.6
13.6
4.4
13.8

307.2

All operating lease commitments associated with South West Trains are assumed to terminate in February 2007, in line with the franchise end.

(d) Network Rail charges

South West Trains has contracts with Network Rail for access to the railway infrastructure (track, stations and depots) until February 2007.
Commitments for payments under these contracts are as follows:

Under one year
Between one year and five years
Five years and over

2005

2004

»m

Nil
101.3
Nil

»m

Nil
141.5
Nil

Stagecoach Group plc page 61

Notes to the accounts

Note 26 Guarantees and other financial commitments (continued)

(e) Pension commitments

(i) Summary of schemes operated
The Group contributes to a number of pension schemes. The principal defined benefit occupational benefit schemes are as follows:

. The South West Trains section of the Railways Pension Scheme (‘‘RPS’’);
. The Island Line section of the Railways Pension Scheme (‘‘RPS’’);
. The Stagecoach Group Pension Scheme (‘‘SGPS’’) ;
. A number of UK Local Government Pension Schemes (‘‘LGPS’’).

These defined benefit schemes cover the majority of the Group’s UK employees. These schemes are devised in accordance with local employment
terms and conditions. Each scheme is administered independently of the employers and the scheme assets are held in trusts that are managed
by investment managers appointed by the schemes’ trustees.

In addition, the Group contributes to a number of defined contribution schemes covering non-UK employees.

(ii) Accounting for pensions under SSAP 24
The Group has applied SSAP 24, ‘‘Accounting for pension costs’’ in preparing its accounts. The total pension cost reported in the profit and loss
account and the cash outflow to the Group in the year ended 30 April 2005 can be analysed as follows:

UK Bus/Group overheads
^ SGPS
^ LGPS
^ Other
Rail
^ RPS
North America

Pension cost

Cash outflow

2005
»m

19.1
7.0
0.3

11.6
0.6

38.6

2004
»m

16.9
3.4
0.4

11.3
0.9

32.9

2005
»m

21.0
3.1
0.1

13.2
0.6

38.0

2004
»m

18.6
3.6
0.1

13.0
0.9

36.2

The balance sheet position of each scheme as at 30 April 2005 is analysed below. It should be noted that the balance sheet position under
SSAP 24 that is shown below is not equivalent to an actuarial estimate of the scheme’s funding position at the balance sheet date. The net
balance sheet asset of »26.1m (2004: »26.7m) shown below is the sum of the cumulative differences between contributions paid by the
employers into the schemes and the charge to the profit and loss account.

UK Bus/Group overheads
^ SGPS
^ LGPS
^ Other
Rail
^ RPS

Prepayment

Provision

Net

2005
»m

23.9
12.2
Nil

Nil

36.1

2004
»m

22.0
14.9
Nil

Nil

36.9

2005
»m

Nil
(1.2)
(3.8)

(5.0)

2004
»m

Nil
Nil
(3.6)

(6.6)

(10.0)

(10.2)

2005
»m

23.9
11.0
(3.8)

(5.0)

26.1

2004
»m

22.0
14.9
(3.6)

(6.6)

26.7

page 62 Stagecoach Group plc

Note 26 Guarantees and other financial commitments (continued)

(e) Pension commitments (continued)

(ii) Accounting for pensions under SSAP 24 (continued)
The accounting for each of the defined benefit schemes is based on the most recent formal valuation of the relevant scheme, updated where
appropriate to the financial year-end immediately following the date of the valuation. The key details for each scheme are as follows:

UK Bus/Group overheads
^ SGPS
^ LGPS
Rail
^ RPS

Most recent full
actuarial valuation
of scheme

Latest actuarial
review for
SSAP 24 accounting
purposes

5 April 2002
31 March 2004

30 April 2002
30 April 2004

31 December 2001

31 December 2001

Funding
Level
%

105
90

105

Market
value of
assets
»m

325.9
179.4

225.5

The above defined benefit schemes are funded at contribution rates determined by independent actuaries on the basis of triennial valuations
using the projected unit method. The assumptions that have the most significant effect on the results of valuations are those relating to the
rate of return on investments and the rates of increases in earnings and pensions. The valuations referred to above for SSAP 24 accounting
purposes assume that investment returns, net of management expenses, will exceed earnings growth by an average of at least 3.5% per annum.
Present and future pensions are assumed to increase at an average of 2.6% per annum for SGPS and 2.8% per annum for the other defined
benefit schemes.

(iii) Accounting for pensions under FRS 17
Under the transitional arrangements for the implementation of Financial Reporting Standard (‘‘FRS’’) 17, ‘‘Retirement Benefits’’, the Group
continues to account for pensions in accordance with SSAP 24 as set out above. The additional disclosures required by FRS 17 are
provided below.

The calculations of FRS 17 disclosures have been based on the most recent actuarial valuations, which have been updated to 30 April 2005 by
an independent professionally qualified actuary to take account of the requirements of FRS 17.

The main financial assumptions used by the actuary were as follows:

Rate of increase in salaries
Rate of increase of pensions in payment
^ SGPS
^ Other defined benefit schemes
Discount rate
Inflation
Expected long-term rate of return as at 30 April were:
Equities*
Bonds
Cash
Property
*includes private equity

2005

2004

2003

%

4.3

2.6
2.8
5.4
2.8

8.5
5.3
4.7
7.5

%

4.3

2.6
2.8
5.8
2.8

8.5
5.8
4.0
7.5

%

4.0

2.3
2.5
5.5
2.5

8.5
5.3
3.8
8.0

In applying FRS 17, the directors believe that the RPS schemes need to be considered separately. The directors understand that the Group has no
rights or obligations in respect of the RPS schemes following the expiry of the South West Trains and Island Line franchises. Furthermore, the
franchise payments of the South West Trains franchise to February 2007 take account of the cash cost of pension scheme funding during the
franchise term. Accordingly, the Directors believe that to best meet the requirements of IFRS and FRS 17, only that element of any deficit (or
surplus) for each franchise that is expected to be funded (or recovered) during the period of the current franchise should be recognised as a
liability (or asset). However, the FRS 17 disclosures have not yet been represented on that basis, and the Group is continuing to discuss how
best to address this matter.

The amounts relating to the RPS schemes are separately highlighted on page 64.

Stagecoach Group plc page 63

Notes to the accounts

Note 26 Guarantees and other financial commitments (continued)

(e) Pension commitments (continued)
(iii) Accounting for pensions under FRS 17 (continued)
The following amounts at 30 April 2005 were measured in accordance with the requirements of FRS 17:

Equities
Bonds
Cash
Property

Total market value of assets
Present value of scheme liabilities

Pension liability before tax
Related deferred tax asset

Net pension liability

SGPS/Other

2005
»m

411.4
Nil
20.7
Nil

432.1
(595.4)

(163.3)
49.0

(114.3)

RPS

2005
»m

235.6
16.9
14.5
2.9

269.9
(312.4)

(42.5)
12.8

(29.7)

LGPS

2005
»m

127.5
36.6
17.6
7.2

188.9
(237.1)

(48.2)
14.5

Total

2005
»m

774.5
53.5
52.8
10.1

890.9
(1,144.9)

(254.0)
76.3

Total

2004
»m

695.8
57.6
31.5
9.0

793.9
(979.7)

(185.8)
55.8

Total

2003
»m

519.9
46.8
41.4
13.0

621.1
(879.0)

(257.9)
77.4

(33.7)

(177.7)

(130.0)

(180.5)

If FRS 17 had been adopted, the amounts charged/(credited) to the profit and loss account would have been as follows:

Charge to operating profits
^ Current service cost
^ Past service cost

Finance (income)/cost
^ Expected return on assets
^ Interest cost

2005

»m

39.4
Nil

39.4

(65.6)
56.9

(8.7)

2004

»m

37.9
Nil

37.9

(50.4)
48.3

(2.1)

The following amounts would have been included within the Group statement of total recognised gains and losses (STRGL) under FRS 17:

Actual return less expected return on pension scheme assets
Experience gains and losses arising on the scheme liabilities
Changes in assumptions underlying the present value of the scheme liabilities

Actuarial (loss)/gain reported in STRGL

2005

»m

2.3
14.2
(92.0)

(75.5)

Actuarial (loss)/gain as a percentage of scheme assets and liabilities at 30 April 2005 were as follows:

Actual return less expected return on pension scheme assets as a percentage of
scheme assets
Experience gains and losses arising on the scheme liabilities as a percentage of
the present value of scheme liabilities
Total actuarial (loss)/gain recognised in STRGL as a percentage of the present
value of scheme liabilities

2005

%

0.3

1.2

(6.6)

2004

»m

91.8
(22.1)
2.0

71.7

2004

%

11.6

2.3

7.3

2003

»m

(185.6)
38.8
(85.6)

(232.4)

2003

%

(29.9)

4.4

(26.4)

page 64 Stagecoach Group plc

Note 26 Guarantees and other financial commitments (continued)

(e) Pension commitments (continued)

(iii) Accounting for pensions under FRS 17 (continued)
The movement in deficit during the year under FRS 17 would have been:

Deficit in schemes at the beginning of the year
Movement in the year:
Current service cost
Contributions
Other finance income
Actuarial (loss)/gain

Deficit in schemes at the end of the year

2005

2004

»m

(185.8)

(39.4)
38.0
8.7
(75.5)

»m

(257.9)

(37.9)
36.2
2.1
71.7

(254.0)

(185.8)

If FRS 17 had been adopted in these accounts, the Group’s consolidated net assets and profit and loss reserve at 30 April 2005 would have
been as follows:

2005

2004

Profit and
loss reserve
»m

(187.4)
(177.7)

(26.1)
7.8
(14.0)

Net
assets
»m

219.0
(177.7)

(26.1)
7.8
(14.0)

Profit and
loss reserve
»m

(6.9)
(130.0)

(26.7)
8.0
(18.4)

(397.4)

9.0

(174.0)

Net
assets
»m

390.0
(130.0)

(26.7)
8.0
(18.4)

222.9

As currently stated
Net pension liability on FRS 17 basis
SSAP 24 net pension asset that will reverse
on implementation of FRS 17
Deferred tax related to SSAP 24 items
Adjustment to net interest in joint ventures

Net assets on FRS 17 basis

(f) Contingent liabilities

(i) A performance bond backed by a bank facility for »44.3m (2004: »44.3m), a season ticket bond backed by an insurance arrangement for
»32.5m (2004: »30.4) and a holding company guarantee of »15.7m (2004 : »15.7m) have been provided to the UK’s Strategic Rail
Authority in support of the Group’s franchise obligations at South West Trains Limited at 30 April 2005. These contingent liabilities are not
expected to crystallise.

(ii) The Group and its joint venture have, in the normal course of business, entered into a number of long term supply contracts. The most
significant of these relate to track, station and depot access facilities, together with new train lease and maintenance arrangements.

(iii) Under UK Rail franchise agreements, the Group and its joint venture have agreed with the UK’s Strategic Rail Authority annual amounts

receivable or payable in respect of the operation of rail franchises for future periods.

Under these agreements, there is a requirement to comply with a number of obligations. Failure to comply with these obligations would be
a breach of the relevant franchise.

(iv) The Group and the Company are from time to time party to legal actions arising in the ordinary course of business. Liabilities have been
recognised in the accounts for the best estimate of the expenditure required to settle obligations arising under such legal actions. As at
30 April 2005, the accruals in the consolidated accounts for such claims total »4.6m.

Stagecoach Group plc page 65

Notes to the accounts

Note 26 Guarantees and other financial commitments (continued)

(g) Joint venture
Our share of commitments and contingent liabilities in joint ventures shown below are based on the latest statutory accounts of the relevant
companies:

Annual commitments under non-cancellable operating leases
Capital commitments
Franchise performance bonds
Season ticket bond

Note 27 Related party transactions

2005

2004

»m

71.4
Nil
14.7
1.2

»m

73.0
0.5
14.7
1.1

Transactions between Group companies that are fully eliminated on consolidation are not disclosed as permitted by FRS 8, ‘‘Related
Party Disclosures’’.

Transactions in which Directors have had a material interest are disclosed in the Remuneration Committee report on pages 23 to 29.

At 30 April 2005, the Company had loan notes receivable of »3.3m (2004 : »10.0m) from Virgin Rail Group Limited. The Company earned
interest of »0.7m (2004 : »1.0m) on the loan notes during the year.

During the year, Graham Eccles and another member of the Group’s management were non-executive directors of Virgin Rail Group Holdings
Limited. Fees of »25,000 (2004: »25,000) were payable to the Group by Virgin Rail Group Holdings Limited in this regard.

During the previous year, Brian Souter and another member of the Group’s management were non-executive directors of Road King
Infrastructure Limited. Fees of »Nil (2004: »12,788) were payable to the Group by Road King Infrastructure Limited in this regard.

Brian Souter is Chairman of ScotAirways Group Ltd. During the year the Group purchased flights from ScotAirways Group Ltd totalling »74,905
(2004: »99,123).

With effect from 21 May 2004, Brian Souter (Chief Executive of Stagecoach) and Ann Gloag (a Non-Executive Director of Stagecoach) together
control 40.0% of the shares and voting rights in Alexander Dennis Limited. Noble Grossart Investments Limited controls a further 30.0% of the
shares and voting rights of Alexander Dennis Limited. None of Brian Souter, Ann Gloag or Ewan Brown is a director of Alexander Dennis Limited
nor do they have any involvement in the management of Alexander Dennis Limited. Furthermore, they do not participate in deciding on and
negotiating the terms and conditions of transactions between the Group and Alexander Dennis Limited.

In the period from 21 May 2004 to 30 April 2005, the Group purchased »25.5m of vehicles from Alexander Dennis Limited and »2.4m of spare
parts and other services. Of the »25.5m worth of vehicles, »20.4m was ordered from Transbus prior to its administration and Alexander Dennis
Limited inherited the orders from Transbus. Transbus was not a related party of the Group.

For new orders placed with Alexander Dennis Limited for vehicles, the Group has consulted with the UK Listing Authority and taken the
appropriate measures to ensure that the transactions with Alexander Dennis Limited comply with the Listing Rules. In the period from 21 May
2004 to 30 April 2005, the Group has placed orders totalling »49.3m with Alexander Dennis for the purchase of new vehicles. Of this »49.3m,
vehicles accounting for »5.1m were delivered prior to 30 April 2005 and are included in the total purchases of »25.5m referred to above.

page 66 Stagecoach Group plc

Shareholder information

Analysis of shareholders as at 30 April 2005

Range of holdings

25,000
1 ^
250,000
25,001 ^
250,001 ^
500,000
500,001 ^ 3,750,000
Over 3,750,000

Classification of shareholders

Individuals
Other corporate bodies
Banks and Nominees
Insurance and assurance companies
Limited companies
Pension funds

No. of holders

%

60,984
586
74
152
48

98.61
0.95
0.12
0.24
0.08

Ordinary
shares held

82,082,721
42,625,619
26,844,224
213,096,926
704,895,737

%

7.67
3.99
2.51
19.92
65.91

61,844

100.00

1,069,545,227

100.00

No. of holders

%

59,865
62
1,723
2
185
7

96.80
0.10
2.79
0.00
0.30
0.01

Ordinary
shares held

322,679,328
3,005,241
678,097,604
3,014,757
62,705,690
42,607

%

30.17
0.28
63.40
0.28
5.86
0.01

61,844

100.00

1,069,545,227

100.00

Registrar
All administrative enquiries relating to shareholdings should, in the first instance, be directed to the Company’s registrar and clearly state the
shareholder’s name and address. Please write to: Lloyds TSB Registrars Scotland, PO Box 28448, Finance House, Orchard Brae, Edinburgh
EH4 1WQ. Telephone 0870 601 5366. Registrar forms can be obtained on-line at http://www.stagecoachgroup.com/sgc/investorinfo/forms/

Stagecoach individual savings accounts
The Company has appointed Halifax Share Dealing Limited as an ISA provider and shareholders who would like further information should
contact their help desk on 08457 22 55 25.

The Company has also made arrangements with Stocktrade for Maxi and Mini ISAs. Full details and an application form are available from
Stocktrade (a division of Brewin Dolphin), 81 George Street, Edinburgh EH2 3ES. Telephone 0131 240 0448.

Low cost share dealing facility
The Group has set up a low cost execution only share dealing facility with a division of Brewin Dolphin, Stocktrade, exclusive to Stagecoach
shareholders. The commission is 0.5% up to »10,000 with 0.2% being charged on the excess thereafter, subject to a »15 minimum.
Shareholders who would like further information should write to Stocktrade, 81 George Street, Edinburgh EH2 3ES.
Telephone 0845 601 0995, quoting dealing reference Low Co020. Postal dealing packs are available on request.

Payment of dividends by BACS
Many shareholders have already arranged for dividends to be paid by mandate directly to their bank or building society account. The mandates
enable the Company to pay dividends through the BACS (Bankers’ Automated Clearing Services) system. The benefit to shareholders of the
BACS system is that the registrar posts the tax vouchers directly to them, whilst the dividend is credited on the payment date to the shareholder
bank or building society account. Shareholders who wish to benefit from this service should request the Company’s registrar (address above) to
send them a dividend/interest mandate form or alternatively complete the mandate form attached to the next dividend tax voucher they receive.

Dividend Re-Investment Plan
The Company operates a Dividend Re-Investment Plan which allows a shareholder’s cash dividend to be used to buy Stagecoach shares at
favourable commission rates. Shareholders who would like further information should telephone Lloyds TSB Registrars Scotland on
0870 241 3018.

Stagecoach Group plc page 67

Five year financial summary

Results
Total turnover
Operating profit/(loss)
Finance charges (net)
Profit/(loss) before tax
Tax (charge)/credit
Profit/(loss) attributable to ordinary shareholders

Net assets
Fixed assets
Net current (liabilities)/assets
Long term creditors
Provisions

Tangible fixed assets
Additions
Depreciation

Cash and debt
Cash at bank and in hand
Gross debt
Net debt

Cash flow
Free cash flow

Ratios
Earnings per ordinary share`
Dividends per ordinary share

Free cash flow per ordinary share

Shares in issue at year end

2005

2004

2003

2002

2001*

»m

»m

»m

»m

»m

1,794.7
132.8
(19.9)
108.3
(29.5)
78.4

803.3
(166.5)
(236.2)
(181.6)

1,792.3
129.7
(27.3)
95.8
8.8
104.6

831.7
42.5
(292.2)
(192.0)

2,076.6
(466.2)
(33.5)
(500.2)
(25.0)
(525.2)

1,259.8
(49.2)
(640.7)
(252.8)

2,114.4
96.5
(59.8)
42.0
(15.0)
27.0

1,981.0
(40.4)
(808.1)
(223.4)

2,083.5
(268.8)
(76.0)
(335.2)
(19.1)
(354.3)

2,047.3
(109.1)
(816.8)
(201.1)

103.8
(67.7)

86.8
(67.2)

71.1
(105.3)

103.3
(112.7)

141.8
(111.2)

140.0
354.6
(214.6)

476.5
544.1
(67.6)

164.7
(724.7)
(560.0)

150.0
(924.6)
(774.6)

160.4
(946.1)
(785.7)

173.6

209.5

217.8

184.3

228.1

9.0p
3.3p

6.7p
2.9p

6.4p
2.6p

6.3p
2.6p

7.5p
3.8p

15.0p

15.9p

16.6p

14.1p

17.0p

1,069.5m 1,335.4m

1,320.9m

1,320.9m

1,318.6m

Average number of employees

29,657

29,163

38,876

38,783

40,002

*2001 has been restated following adoption of FRS 19, ‘‘Deferred Tax’’
`before goodwill amortisation and exceptional items

page 68 Stagecoach Group plc

Registered office, advisers and financial calendar

Company Secretary
Ross Paterson

Registered Office
10 Dunkeld Road

Perth PH1 5TW

Telephone +44 (0) 1738 442 111

Facsimile +44 (0) 1738 643 648

Email

info@stagecoachgroup.com

Company number
SC 100764

Registrars
Lloyds TSB Registrars Scotland

PO Box 28448

Finance House

Orchard Brae

Edinburgh EH4 1WQ

Telephone +44 (0) 870 601 5366

Merchant Bankers
Noble Grossart Limited

48 Queen Street

Edinburgh EH2 3NH

Auditors
PricewaterhouseCoopers LLP

Kintyre House

209 West George Street

Glasgow G2 2LW

Stockbrokers
Credit Suisse

1 Cabot Square

London E14 4QJ

Principal Bankers
Bank of Scotland

New Uberior House

11 Earl Grey Street

Edinburgh EH3 9BN

Solicitors
Shepherd & Wedderburn, WS

Saltire Court

20 Castle Terrace

Edinburgh EH1 2ET

Herbert Smith

Exchange House

Primrose Street

London EC2A 2HS

Financial Calendar

Annual General Meeting

26 August 2005

Payment Date ^ Ordinary Shares

Final Dividend

5 October 2005

Interim Report

December 2005

Interim Dividend

March 2006

Group Headquarters  10 Dunkeld Road  Perth  PH1 5TW  Scotland
T +44 (0) 1738 442 111

F +44 (0) 1738 643 648 www.stagecoachgroup.com