transforming travel in 2003/04

transforming travel in 2003/04 annual report 2004

01 Financial and operational highlights Business overview 06 Chairman s statement 07 Chief Executive s review 15 Financial review 19 Board of Directors 20 Corporate governance 25 Directors remuneration report 31 Directors report 34 Directors responsibilities As the UK s largest surface transport company, with 62,000 employees across the UK and North America, our vision is to transform travel providing public transport services that are safe, reliable, high quality, personal and accessible. This report details how we are delivering our promises to our customers, employees, communities and shareholders. 35 Independent auditors report 36 Consolidated profit and loss account 37 Balance sheets 38 Consolidated cash flow statement 38 Reconciliation of net cash flows to movements in net debt 39 Consolidated statement of total recognised gains and losses 39 Reconciliation of movements in shareholders funds 40 Notes to the financial statements 62 Group financial summary 63 Shareholder information UK Bus We are the UK s largest bus operator, running more than one in five of all local bus services and carrying over 2.8 million passengers every day. 80% of our operations are in urban areas where the bus is the most effective means of tackling traffic congestion. We are working in partnership with local authorities and other stakeholders to provide cost effective, urban transport solutions that bring improvements to the travelling public. UK Rail We operate passenger and freight services in the UK. Our passenger operations include intercity (First Great Western, TransPennine Express and Hull Trains), London commuter (First Great Western Link) and regional (First North Western). We commenced operation of the new TransPennine Express franchise on 1 February 2004 and First Great Western Link, the suburban services into London Paddington, on 1 April 2004. We operate freight services through GB Railfreight. North America Headquartered in Cincinnati, Ohio, our operations are spread across the US and Canada. First Student We are the second largest provider of student transportation in North America with a fleet of some 17,400 yellow school buses, carrying over 1 million students every day across the US and Canada. First Transit Our transit contracting and management operation is the largest private sector provider in the US. We manage public transport systems on behalf of cities such as Houston, Los Angeles and Denver. We also manage call centres, paratransit operations and other related light transit activities. First Services Our services operation is the largest private sector provider of vehicle maintenance and ancillary services in the US. As well as maintaining vehicle fleets and equipment for public sector customers such as cities, counties, fire and police departments, we also operate a specialist business which provides a full turnkey operation, fitting communications equipment to emergency service vehicles.

01 Financial and operational highlights Turnover up 8% to 2,479m Adjusted earnings per share 1 up 2% to 27.3p Dividend per share up 6% to 11.65p Group return on capital employed 12% North America US Dollar operating profit 1 up 15% strong growth continues UK Bus revenue up 5.4% further growth in London and urban areas UK Rail First Great Western passenger income up 8% 2004 2003 Group turnover ( m) 2,479.0 2,291.0 Group operating profit 1 ( m) 204.1 216.1 Profit before tax 1 ( m) 161.3 159.8 Profit on ordinary activities after tax ( m) 92.2 97.6 Adjusted basic earnings per share 1 (pence) 27.3 26.8 Basic earnings per share (pence) 22.3 23.4 Dividend per share (pence) 11.65 11.0 EBITDA 2 ( m) 307.1 315.3 Interest cover 3 7.2x 5.6x 1 Before goodwill amortisation, exceptional items and profit on disposal of fixed assets, as shown in the consolidated profit and loss account on page 36 2 Group operating profit before goodwill amortisation and exceptional items, plus depreciation 3 Calculated as EBITDA 2 divided by net interest payable and similar charges before exceptional items Operating profit ( m) Turnover ( m) UK Bus 111.2m UK Rail 49.8m North America 63.5m UK Bus 906.2m UK Rail 945.0m North America 620.7m Operating profit in UK Rail is stated after charging the finance cost of assets, which is implicit in the operating lease rentals, whereas UK and US Bus operating profits are stated before finance charges. Interest costs, as disclosed in note 6 to the accounts, were 42.8m.

transforming travel in 2003/4 People have a choice in how they travel and we want them to choose First. Our vision is to Transform Travel providing public transport services that are safe, reliable, high quality, personal and accessible. Here we outline some of the initiatives, including new technology, that we have introduced to transform travel for our customers and continuously improve the services we operate. open up to read more >> Getting the green light for buses New bus priority lanes and guided busways enable buses to get through congestion meaning shorter, more reliable journeys for our passengers. In major cities such as Aberdeen, Bradford, Bristol, Glasgow, Leeds, Manchester and York we have worked in partnership with local authorities to introduce traffic priority measures, giving our buses the green light to cut through the traffic, speeding our passengers on their way.

Get the message No more waiting around at bus stops. Customers regularly tell us that reliability is one of the most important factors in their journey. So we are working hard to remove the uncertainty from public transport. For example, passengers in the Leicester area can now use their mobile phones to find out when the bus is coming. By keying in a code, which is displayed at the bus stop, passengers receive a text message within 30 seconds indicating when the next bus is due. This is just one of the ways we are using new technology to make bus travel easier and more predictable. First PD Blue Today s police patrol car is a mobile state of the art crimefighting machine. First Services, through its acquisition of L&E Mobile, adds value in more ways than one. By installing high tech equipment such as on-board computers, radar, cameras and Access all areas All our new trains and buses offer easy access and facilities for disabled travellers, passengers with buggies, children and heavy shopping. Our new buses are low floor and some even kneel to give curb level access. On our new trains we have spacious toilet facilities providing easy access for wheelchair bound passengers, as well as secure baby changing facilities for parents. Our investment to improve accessibility to our services means that we really are opening up public transport for everyone. strobe lighting we provide a one stop shop for Police Departments in places such as Washington and Massachusetts. We keep their vehicles on the road, so they can keep crime off the streets. Supermarket on rails Keeping prices low is part of ASDA s culture and we are delighted to be able to help Britain s best value retailer with a contract to move over 2,000 containers a year. The deal to move freight from Felixstowe to the Midlands is the first ASDA has struck directly with a rail freight company and was won by GB Railfreight because of its innovative approach to moving traffic off the road and onto the rails. So, it s right for ASDA and right for the environment.

Fresh air bus Our hydrogen-powered buses, currently being trialled in London, produce just fresh air and water, so we can all breathe more easily. We are operating three zero emission fuel cell buses in London as part of a trial funded by the EU, the largest project of its type anywhere in the world. This is an important step in the ongoing development of clean urban transport combining energy efficiency with cost effectiveness. We ve parked 3 million cars... Our park and ride sites are a huge success. Over 3 million cars use our park and ride facilities in cities such as Leeds, York, Aberdeen, Bristol, Norwich, Stoke and Bath. The four sites we serve in York are used by over one million cars per year and in the city, we have seen passenger growth of up to 40% on individual routes. Initiatives such as these are tackling the problem of traffic congestion and of course help provide a better environment and safeguard our historic city centres. Ultimate safety weapon The stop sign on our yellow school bus means just that. Car drivers know they must respect it in the name of safety; and safety is our business across all of our operations in the UK and North America. It is the first item on the agenda at our Board meetings and we have a continuous programme to inbed a culture of safe working practices across our Company. It is an on-going task and we are always working to improve our record. So stop isn t a word we use when we talk about improving safety.

Keeping our cool Seeing the whole picture Our new integrated control centre at Swindon not only lets our managers view the status of all the trains in the Great Western Zone, but also improves the liaison with Network Rail and other rail contractors. By working together, we are able to ensure a seamless operation that The new cooler units we fitted on our First Great Western fleet of High Speed Trains (HSTs) ensured that both our engines and our passengers remained cool, despite soaring temperatures last summer. This, together with improvements in our maintenance systems, ensured that we achieved record levels of service reliability, giving a new lease of life to the HST units, which continue to be the most successful diesel trains ever produced, and form the backbone of our First Great Western fleet. helps to keep trains running on time. Improved co-ordination means problems can be solved more quickly and passengers are kept informed with up-to-the minute information. This model can be rolled out to deliver improved integration across other parts of the railway network. The future is yellow Yellow school buses are part of the fabric of society in North America. A tried and tested product which parents know they can rely on to get their children safely to and from school. We are the second largest operator of school buses in North America and now we are bringing them to the UK a proven concept which can help reduce traffic congestion from the school run and increase the safety and security of our children.

06 Chairman s statement The safety and security of passengers and staff is of paramount importance to the Group. Buses and trains remain among the safest methods of surface transport, and we will strive to ensure that we use every opportunity to improve our performance wherever possible. I am pleased to report another year of excellent progress across all divisions. All of our new businesses have performed ahead of our expectations confirming our ability to make earnings enhancing acquisitions and integrate and manage new businesses effectively. Group turnover and profit before tax, exceptional items and goodwill amortisation, have again increased with strong underlying cash generation that has enabled us to invest a net 197m in the business through capital expenditure and acquisitions whilst continuing with our progressive dividend policy and share buy back programme. Turnover has increased to 2,479m (2003: 2,291m) and profit before tax, goodwill amortisation and exceptional items increased to 161.3m (2003: 159.8m). This result is impressive, as we have absorbed some 32m of additional costs and subsidy reductions in our UK operations. Adjusted basic earnings per share has increased to 27.3p (2003: 26.8p) and the Board has proposed a final dividend, subject to approval by shareholders, of 7.9p making a full year payment of 11.65p, an increase of 6%. The dividend is covered 1.9 times and will be paid on 27 August 2004 to shareholders on the register on 23 July 2004. The Group s strong financial position is underpinned by an investment grade BBB stable credit rating from Standard & Poor s. In December we successfully issued a 250m 15-year bond, which was substantially oversubscribed, to improve our debt maturity profile and reduce bank debt. The Group now has, on average, 250m of unutilised bank borrowing headroom. A number of strategic acquisitions and franchise wins took place during the year which strengthened the Group s core businesses. In July we acquired a North American transit business which complements and extends our existing operations in this sector. In August we acquired GB Railways Group Plc, which gives us an entry into the growing rail freight market through GB Railfreight, and into passenger operations on the East Coast Main Line through Hull Trains. On 1 February 2004, we commenced operation of the TransPennine Express passenger rail franchise for eight years with an option to extend for a further five years. On 1 April 2004, we took over the franchise to run suburban services from London Paddington, as First Great Western Link. In March, we announced a number of changes to simplify reporting lines and strengthen the Board by the appointment of Dean Finch as Commercial Director and David Leeder as Director, UK Bus. Dr Mike Mitchell, previously Chief Operating Officer UK, becomes Business Change Director and will step down from the Board later in the year prior to his retirement in 2005. Iain Lanaghan, currently Finance Director, will step down from the Board at the end of May and will leave the Group later in the year. He will be succeeded by Dean Finch. I would like to thank Mike and Iain for their contribution to the Group and wish them every success for the future. We have a strong and dedicated workforce and once again I would like to thank them for their hard work and commitment delivering another set of good results for the Group. We will continue to increase shareholder value by expanding our businesses in North America and the UK through a combination of organic growth and acquisitions. We are extremely pleased with the performance of our North American operations and confident about the prospects for growth in this very large and fragmented market. Our UK bus business continues to generate significant cash flow and we anticipate further growth in London and other cities where we are able to work with local authorities to manage traffic congestion. In UK Rail, we will continue to bid for new franchises in order to create a strong portfolio of railway operations and we are encouraged by the opportunities for further expansion in the rail freight market. Martin Gilbert Chairman Operating profit referred to in this statement and in the Chief Executive s review and Financial review refers to operating profit before goodwill amortisation and exceptional items.

07 Chief Executive s review Overview Safety Safety is our number one priority and every employee has a responsibility for safety. The right attitude towards safety and putting in place the right policies, procedures, equipment, training and support will help us embed a safety culture. I am pleased to report that across the Group lost time incidents have been reduced and we have seen positive trends in other key safety indicators. The separate Corporate Responsibility Report details the progress we have made to further improve our safety record, as well as to advance environmental management and stakeholder consultation in the communities in which we operate. Results I am extremely pleased to report another successful year with expansion in our core markets in the US and UK. Group turnover increased by 8% to 2,479m (2003: 2,291m). Operating profit was 204.1m (2003: 216.1m). Underlying growth in earnings, together with management actions to control costs, was offset by 17m reduction in rail subsidy and increased franchise payments, as well as increased National Insurance and Pension contributions of 15m. Strong EBITDA (operating profit plus depreciation) of 307.1m (2003: 315.3m) has enabled the Group to continue to invest in the business, with net capital expenditure and business acquisitions totalling 197m, as well as increasing the dividend by 6% and returning 29m to shareholders through the further repurchase of equity during the year. Over the last five years the Group s revenue profile has changed substantially. Approximately 80% of the revenue in our North American operations is secured under medium-term contracts. Currently the Group has contracts with government agencies and other large organisations for periods averaging 3-5 years in both North America and the UK, representing a secure revenue stream worth 2.8 billion. As we expand in North America and grow our UK rail operations we expect that more than half of the Group s annual revenues will be covered by such contracts. North America In North America the Group is the second largest operator of student transportation with some 17,400 school buses across the US and Canada. We operate the largest transit contracting and management business in North America and we have an expanding management and maintenance services division. Results I am delighted with our performance in North America where we have delivered a fifth year of strong growth. Turnover from our three North American operations increased to 620.7m or $1,051.6m (2003: 582.4m or $901.0m), an increase in US dollars of 16.7%. Operating profit increased to 63.5m or $109.2m (2003: 61.3m or $95.1m), an increase in US dollars of 14.8%. Margins in each of the divisions have been maintained or increased. The business is generating excellent returns with EBITDA of 107.1m or $183.7m (2003: 103.3m or $159.5m) making the business self financing for maintenance capital expenditure, contract growth and in-fill acquisitions. Since acquisition in 1999, turnover has grown by 73% and profit has grown by 65%, generating a cash return on invested capital of 12% which comfortably exceeds our cost of capital. First Student The division has had a very successful year. US Dollar turnover and operating profit increased by 10% with margins maintained at 13.8%. We now operate approximately 17,400 buses, an increase of approximately 1,900 buses during the year. We retained 90% of our existing school bus

08 Chief Executive s review continued contracts that came up for renewal and we won contracts to operate some 1,300 additional buses. We were particularly pleased to be awarded the management contract to run all of the 683 school buses on behalf of the City of Boston. The start up of this large contract and other new business in the autumn of 2003 went extremely well. We have also obtained significant additional business in Pennsylvania, Washington and California as well as continuing to gain new business in Illinois, Minnesota, Massachusetts, Missouri and Louisiana. We have continued to make strategic in-fill acquisitions of smaller privately owned school bus companies at attractive multiples and during the year acquired approximately 560 new buses. We purchased two New York state based companies operating 285 buses that fit well with our current business mix in that region. In addition, we made our first acquisition of 35 buses in the large and growing Miami market. At the end of March 2004, we purchased a 244 bus company operating in New Hampshire and Vermont, which will contribute to the trading result for 2004/05. Bidding is under way for new contracts to commence in autumn 2004 and we are confident that we will be able to continue to win and acquire new business at our target margins. First Transit US Dollar turnover increased by 25% and operating profit by 32%. These results include nine months contribution from the transit business we acquired in July 2003 for $22.5m. This business, which has proved to be an excellent fit with our existing operations, is performing ahead of our acquisition model and has an annualised turnover of $95m, with contracts to operate some 1,200 buses on behalf of transit authorities in states such as California, Florida and New York. The strategy of First Transit is to gradually increase margins on urban transit contracting business and to develop the fast expanding and higher value call centre, paratransit and transit management markets. In line with this strategy we entered the corporate shuttle market with the strategic purchase of a small company operating university and corporate shuttles in the three states of Michigan, Ohio and Kentucky. During the year, bidding remained competitive for new and rebid contracts and we withdrew from, or did not renew, some of our lower margin contracts. However, we renewed important contracts with the cities of Miami and Los Angeles and most recently we were delighted to be re-awarded the contract to run the largest paratransit call centre in New York. We also gained new outsourced management contracts from the public sector in Arkansas, North Carolina, Illinois and Virginia. First Services The division, which provides a range of management and maintenance services, has had a very successful year with US dollar turnover increasing by 35% and operating profit by 38%, reflecting significant growth in First Vehicle and a full year contribution from L&E Mobile which has proved to be an excellent acquisition. This specialist business, which fits communications equipment into police cars and emergency vehicles, was acquired in February 2003. During the year, 100% of all rebids were retained without margin dilution. First Services has also seen significant contract growth with the addition of 11 new contracts including Atlantic City, Arlington, Roswell and Exxon Mobil Inc. In addition, L&E Mobile has won contracts with the Massachusetts State Police and American Water Inc., servicing 500 and 800 vehicles respectively. Over the next Yellow School Buses in North America North American Divisional Turnover ($m) Student 616.7m Transit 330.4m Services 104.5m Total $1,051.6m

09 12 months the business plans to increase its range of services and look for additional opportunities in the Federal sector. The outlook for further growth remains strong. Investment and margins The North American operations are now able to fund their own maintenance capital expenditure, contract growth and in-fill acquisitions from internally generated resources. We have achieved excellent returns from acquisitions demonstrating our rigorous investment criteria. All new investment, including contract bids, must meet our internal return targets to ensure that margins in each of the divisions are maintained. Outlook North America Our North American operations are delivering excellent returns for shareholders, and we are confident that we can continue to expand the business and maintain margins through our proven combination of organic growth and well researched acquisitions. UK Bus The Group is the largest bus operator in the UK with a fleet of 9,300 buses, and a market share of approximately 23%. We carry some 2.8 million passengers every day. Results Turnover increased to 906.2m (2003: 859.4m) and operating profit before lease financing costs was 111.2m (2003: 111.7m). This is a particularly pleasing performance as the division has absorbed 12m of additional costs comprising 4m in National Insurance charges and 8m of additional pension contributions. The absorption of these additional costs, combined with a small increase in volume (1%) and maintaining bus fares at around the level of inflation, has resulted in a fall in operating margin to 12.3% (2003: 13.0%). London The introduction by Transport for London (TfL) of the congestion charge in February 2003 has created worldwide interest because of the dramatic and sustained reduction in traffic delays. We have invested heavily to increase the size and quality of our London bus fleet and properties to support this policy. Contract mileage operated on behalf of TfL has increased by 13% and average bus speeds in the capital have improved by around 15%. We now operate approximately 1,370 buses in London (2003: 1,235). We have opened two new depots at Willesden and Rainham and are developing a new site in Dagenham. We are now well placed to benefit from further growth in the London bus market because of our strong position in the Thames Gateway corridor, which is expected to be the focus of substantial growth in population and employment over the next few years. Urban areas In urban operations outside London, which represent approximately 55% of our business, passenger growth continues to be driven by a mixture of our own marketing initiatives and partnership working with local authorities to develop bus lanes, park & ride sites and other projects to improve the competitive position of public transport. Our policy is to concentrate our capital and operating investment in those areas where local councils are committed to supporting the use of public transport. In York, where passenger volumes have grown by up to 40% on individual routes, we will introduce a fifth park & ride site in partnership with the City Council in 2004. In other areas, we have seen increases on individual Quality Partnership routes of up to 28% in Essex, 20% in Manchester and 13% in Glasgow. We continue to work closely with South and West Yorkshire Passenger Transport Park and Ride Service in York

10 Chief Executive s review continued Executives and the district councils to develop the Yorkshire Bus Initiative. We have already provided 86 new buses to upgrade services in Sheffield and Leeds, and we hope to introduce the first pilot projects for our new concept vehicle during 2004/05. In Sheffield we have signed a draft Statutory Quality Partnership agreement for bus services in the north of the city, under which the local authority will improve the public transport infrastructure and we will introduce new vehicles and improved levels of service and reliability. It is through programmes like these that we will be able to develop cost effective urban transport solutions that bring real improvements to the travelling public. During the year, we have focused on building loyalty with various customer groups such as students and commuters through targeted campaigns. Improved point of sale marketing material also helped to increase sales of daily, weekly and monthly season tickets which encourage customer loyalty and speed up boarding time on the bus. Rural operations Rural operations represent less than 20% of our business. We welcome the Government s new Kickstart initiative which will enable us to develop more marginal services where car ownership and congestion is increasing and passenger volumes continue to fall. In Devon and Cornwall we have carried out a complete review of our route structure with the objective of improving frequencies on the higher-demand corridors. In many rural areas we operate local authority contracts to provide socially necessary services. In Wales, where the Welsh Assembly Government has introduced free travel for senior citizens, we have provided new buses as a response to the increase in patronage. In April 2003 we established a new base in North Staffordshire, with 20 new buses, to provide a bespoke bus replacement service to support the West Coast Main Line rail upgrade works. We plan to develop further contracted bus services in 2004/05. Yellow School Bus We continue to develop our school bus pilot projects and now have seven programmes across the UK. We were encouraged by the Transport Select Committee s Report on school transport which proposed a large-scale yellow bus trial to assess its potential impact on modal shift. We have ordered a further 26 new buses for further projects in 2004. Investment Capital expenditure has been focused on areas of high passenger growth in major urban centres such as Sheffield and Leeds. During the year 65m was spent on new, low-floor, easy access vehicles and 25m has been spent on new depots, principally in London, Glasgow and Bolton. In December 2003 we completed the acquisition of a 90% stakeholding in Aircoach, the leading operator of express coaches between Dublin city centre and the airport and contracted services for airport car parks. We believe this puts us in a good position to benefit from the forthcoming liberalisation of the Irish transport market. Operational performance As part of our continued drive to control costs and reduce overheads we have reorganised our divisional management structure and are undertaking a thorough review of business processes. We have already made good progress in improving our recruitment methods which resulted in a reduction in driver shortages at the year end. Aircoach Express Coaches in Dublin Bendy bus in London

11 We continue to achieve useful cost savings across a range of goods and services through centralised purchasing procedures. Accounting functions have also been rationalised and overhead costs reduced through the opening, earlier in the year, of the Shared Service Accounting Centre in Aberdeen. Throughout the year we have worked closely and productively with staff, trade unions and local management to reform pension provision within our UK bus companies. The varied plans inherited from previous owners are being combined to reduce administration and funding costs, introduce risk sharing and produce substantial savings, as well as improving investment performance. A wider range of savings plans is also now offered to employees. Outlook UK Bus The results of congestion charging in terms of modal shift, reduced congestion and improved environment have been unprecedented. We believe that the London experience demonstrates what can be achieved to improve traffic flow in our major towns and cities, and the role that buses can play in providing an alternative to private motoring. We look forward to developing further bus priority and route enhancement projects with environmentally minded local authorities. We will continue to focus on growing passenger volumes, as well as further developing our contracted bus business, whilst targeting continued cost control and process improvements. UK Rail The rail division operates passenger and freight services in the UK. Passenger rail franchises operated during the year consisted of First Great Western, First Great Eastern, First North Western, Anglia and TransPennine Express. Hull Trains is a non-franchised, open access intercity passenger train operator and we provide rail freight services through GB Railfreight. Results Turnover in the Group s rail division was 945.0m (2003: 842.3m) and operating profit was 49.8m (2003: 61.3m). This is a strong result as it reflects the combined impact of the reduction in subsidy on First Great Western and the increase in franchise payments on First Great Eastern totalling 17m, as well as increased National Insurance and pension costs of 3m. Franchise changes During the year we were successful in winning two out of the three franchises for which we submitted bids. The Group is now shortlisted for all four franchises in the current round Northern, ScotRail, Integrated Kent and InterCity East Coast, demonstrating that we have a long-term role to play in the UK rail industry. The division continues to work closely with the Strategic Rail Authority (SRA) and Network Rail. In addition we were pleased that the provisional findings of the Competition Commission would allow us to proceed with our bid for ScotRail, subject to mutual agreement of behavioural undertakings principally concerning a small number of individual bus routes in Scotland. On 1 February 2004 we commenced operation of the new TransPennine Express franchise with our partner Keolis. The franchise, which consists of intercity services between the North West and North East of England, runs for a period of eight years with an option to extend for a further five years. Operations have started well and we are very encouraged by passenger volumes, which are running ahead of expectations in the first two months. We have already ordered a 260m fleet of new trains and contracted for two First Great Western Adelante train at Paddington GB Railfreight Class 56 locomotive

12 Chief Executive s review continued new maintenance depots that will greatly improve the service offered to passengers in the region. On 1 April 2004 we commenced operation of suburban services from London Paddington in a new franchise branded as First Great Western Link. This new franchise will run for two years and allow us to offer significant benefits to passengers through the integration of services into Paddington ahead of the creation of the Greater Western franchise in 2006. From December 2004, a new integrated timetable will offer an 18% increase in capacity on suburban trains. In addition, services to Oxford and the Cotswolds will benefit from new InterCity quality 125 mph trains and there will be improved journey times to Devon and Cornwall. During the year we continued to operate First North Western on behalf of the SRA. This franchise will become part of the new Northern franchise later in 2004. Operational performance Passenger income on First Great Western continues to show encouraging growth of 8%. Operational performance has been at its highest level since 2000 with delay minutes attributable to us reduced by 24% in the period. Passenger complaints during the year are also significantly down. Improvements in our maintenance systems on High Speed Trains have resulted in the best availability for these units that we have ever experienced. The reliability of the new Adelante units has also improved. A new platform has been opened at Swindon on the Great Western main line, funded jointly by the SRA, Network Rail and First Great Western, which has simplified train operations through the station and improved operating reliability. Network Rail is making further improvements to the infrastructure in the Thames Valley area and Cornwall, which will improve train running. We have opened a joint control room with Network Rail at Swindon which has enabled us to co-ordinate and simplify train operations in the Great Western zone. This model can be rolled out to deliver improved integration across other parts of the railway network. Acquisitions Through our acquisition of GB Railways we acquired GB Railfreight (GBRf) and Hull Trains. Hull Trains Hull Trains is a non-franchised, open access InterCity train company operating between London Kings Cross and Hull. It now carries 330,000 passengers per year with four direct services from London to Hull each weekday. The company has upgraded its fleet of class 170 multiple units and has placed an order for four new four-car class 222/1 Bombardier 125 mph trains, which will reduce the journey time by approximately 15 minutes, when they enter service in 2005 and is expected to further increase patronage on this corridor. GB Railfreight The UK rail freight market is estimated to be worth some 725m per annum and we have been encouraged by the continued expansion of GBRf. The company was created in 2000 and has grown rapidly by offering a high level of service developed through a flexible business model. GBRf now provides freight services for customers such as Network Rail, British Gypsum and Medite Shipping Company Limited. During the year the company has won new contracts from Network Rail for haulage, as well as a contract for the operation and management of the infrastructure owner s Whitemoor depot in Cambridgeshire. In addition it has started new intermodal services from Felixstowe, which are used by, amongst others, ASDA for the transport of their goods to the Midlands. GBRf has ordered 93 container flat wagons with New Class 185 trains ordered for TransPennine Express Franchise

13 a capital value of over 4m to support these new contracts. We believe that the rail freight market offers further growth opportunities for the Group. Outlook UK Rail We have an active programme of new franchise bids under way which offer excellent prospects for the future growth of the division and, in addition, we are expanding our rail freight activities. We welcome the opportunity to be involved in the Government s Rail Review and remain very optimistic about the role we can play in the future of the UK s railways. Staff I would like to thank all our staff for their continued commitment to the Group. We place high importance on the views and concerns of our workforce. Our fourth employee satisfaction survey showed improvements in performance in all ten areas covered by the survey and an overall increase in satisfaction since the last survey. We are actively addressing areas of concern which were highlighted by the survey and continue to feed back actions and progress to staff. Retention and recruitment of high quality staff is a key issue within our industry. The Group has become a Recruitment Partner of Choice nationally with JobCentre Plus which will provide wider geographic coverage of job opportunities in the Group. The Group has also become an Age Positive Champion in particular reflecting our newly launched Flexible Decade of Retirement programme which provides our people with the opportunity to work beyond normal retirement age, but with flexible pension and working hour arrangements. We continue to encourage our staff to further their development and progress their careers within the Group. Our National Vocational Qualification programme continues to grow with 13% of the workforce now qualified and a further 3,000 drivers currently in training. The number of Workplace Learning Schemes has increased to 29 which means that over 10% of staff have access to workplace learning. This will increase to 15% with the opening of new centres in 2004/05. Environment and Community Our environmental management framework is now well established and all our companies and depots are audited against the requirements of the Group environmental management system. We have extended our supplier audit programme to include more companies, as well as social audits. An increasing number of our companies and divisions are now developing management systems in line with ISO14001. We are very encouraged by the continued reduction in energy usage in our depots. For example, water usage fell by 8% and energy consumption by 10.5% within the bus division alone, as a result of local depot initiatives and incentives for staff. In terms of waste, the bus operating companies reduced the overall general waste arising by 7% and increased recycling by 16%. In the UK, we were pleased to support Future Forests a carbon neutral tree planting initiative to offset CO2 emissions. Our US operations are reducing emissions through investment in new engines and emission control technology. In recognition of our commitment to the environment we were delighted to receive the following awards during the year: the Green Apple Award, for the third year running, the Bus Industry Award for Environmental Achievement and the Network Rail Environmental Award, for Zero-emission hydrogen-powered bus in London Future Forests tree-planting initiative

14 Chief Executive s review continued the second time in three years. In addition we were very pleased to be included in the top 100 Business in the Community Corporate Responsibility Index. During the year the Group and its staff in the UK and North America have continued to support a number of local and national charities. Further details of all these activities can be found in our Corporate Responsibility Report which is published separately and is available on our website www.firstgroup.com. Group outlook I look forward to continued growth in North America where we have delivered five years of consistent profit growth. The business has highly dependable revenue streams of which approximately 80% are covered by medium-term contracts. In UK Rail we are well positioned to benefit from rail re-franchising, having been shortlisted for all four franchises in the current round. In UK Bus we are seeing further growth in our London business and other urban areas and continue to focus on cost control and process improvements. The Group s strong free cash flows will continue to be used to invest in the business, increase dividends and buy back shares while maintaining a strong balance sheet. With on average 250m of borrowing headroom, the Group is in a strong financial position to maximise opportunities for growth. I am extremely confident about our future prospects. Trading in the new financial year has started well and is in line with our expectations. First Great Western Driver Simulator Training Facility First-sponsored ARCHIE Bus in Aberdeen. Aberdeen Royal Children s Hospital is one of the charitable causes which the Company supported during the year Moir Lockhead Chief Executive

15 Financial review Year to 31 March 2004 Year to 31 March 2003 Operating Operating Operating Operating Divisional results Turnover profit 1 margin 1 Turnover profit 1 margin 1 m m % m m % UK Bus 906.2 111.2 12.3 859.4 111.7 13.0 UK Rail 945.0 49.8 5.3 842.3 61.3 7.3 North America 620.7 63.5 10.2 582.4 61.3 10.5 Financing element of leases 2 (8.3) (6.7) Other 3 7.1 (12.1) 6.9 (11.5) Total Group 2,479.0 204.1 8.2 2,291.0 216.1 9.4 1 Before goodwill amortisation, exceptional items and profit on disposal of fixed assets. 2 Financing element of UK PCV operating lease costs. 3 Tram operations, central management, Group information technology and other items. Throughout the financial review, operating profit and operating margin are defined as being before goodwill amortisation and exceptional items. Overview The Group has a portfolio of businesses in the UK and North America which generate strong and predictable revenue streams with 40% of turnover arising from contracts with government and statutory bodies in the UK and US. The Group s cash flows are used to increase shareholder value by investing for growth, increasing dividends and, where appropriate, for share repurchases. The Group s pre-tax return on capital employed now stands at 12% and dividends have been increased by 6%, significantly ahead of inflation, giving an excellent yield. This year our cash tax rate is 17% and we expect this rate to remain low over the medium term. We have generated 312.3m of operational cash flow and invested a net 197.0m in the business through 147.3m of capital expenditure and 49.7m on business acquisitions. It is our policy to maintain a strong balance sheet and we have strengthened our financial position through the issue of an additional 250m 15-year bond. The weighted average duration of our debt is now equivalent to 9.7 years. Interest, before exceptional items, was covered 7.2 times by earnings before interest, tax, depreciation and amortisation (EBITDA). Results Turnover was 2,479.0m (2003: 2,291.0m), an increase of 8.2%. Operating profit was 204.1m (2003: 216.1m). This result was achieved despite increases in National Insurance and pension contributions of 15m and reduction in subsidies and increase in franchise payments in UK Rail of approximately 17m. North American turnover was 620.7m (2003: 582.4m). At constant exchange rates, this represents an increase of 16.7%. Operating profit for the division was 63.5m (2003: 61.3m), an increase of 14.8% at constant exchange rates. We continued our strong growth in First Student adding approximately 1,900 new buses. At constant exchange rates, turnover and EBIT increased by 10.4%, giving a margin of 13.8%. First Transit acquired a transit business during the year for $22.5m which was less than three times EBITDA. At constant exchange rates, turnover increased by 24.5% and operating profit by 32.3% giving a margin of 5.0%. First Services results incorporate a full year contribution from L&E Mobile, which was acquired in February 2003. At constant exchange rates, turnover increased by 35.4% and operating profit by 38.2% giving a margin of 7.3%. The margins in First Transit and First Services reflect the low capital investment requirements in these businesses. UK Bus turnover was 906.2m (2003: 859.4m), an increase of 5.4%, reflecting increased tender wins in London and growth in urban areas where we are able to work in partnership with local authorities. UK Bus operating profit was 111.2m (2003: 111.7m). This was a strong performance reflecting management actions to contain costs and improve operational efficiency which substantially offset the significant cost pressures from pensions and National Insurance contributions ( 12m). Operating margins were 12.3%.

16 Financial review continued UK Rail turnover was 945.0m (2003: 842.3m), an increase of 12.2%. Passenger income increased by 7.7% at First Great Western and increased by 4.5% at First Great Eastern. The acquisition of GB Railways Group Plc added 64.3m to turnover. UK Rail operating profit was 49.8m (2003: 61.3m) with the reduction principally due to subsidy reduction in First Great Western of 10.1m and an increase in the franchise payment in First Great Eastern of 6.5m. Since First Great Eastern was acquired in 1997, whilst consistently delivering profitability, a pre-privatisation subsidy of 40m has been converted into a 11.4m premium payable to the SRA. GB Railways contributed 2.8m of operating profit in the period since acquisition. The TransPennine Express franchise, which commenced in February 2004, is performing ahead of our expectations and contributed 2.6m to operating profit in the two months of ownership. Property The Group has a substantial portfolio of properties many of which are in prime sites in urban areas. We have a programme aimed at realising value from these sites which enables us to re-invest in more modern and efficient facilities and to generate cash which can be used for further investment within the Group. Property disposal gains in the year were 19.6m (2003: 10.0m). We expect to continue with this programme for a number of years. Goodwill The goodwill amortisation charge was 25.9m (2003: 25.8m) representing additional goodwill on acquisitions partly mitigated by favourable foreign exchange movements. Exceptional items The charge for the year includes 18.7m arising on the cancellation of certain US Dollar and Sterling interest rate swaps in April 2003. Subsequently, new US Dollar swaps were implemented with a significantly lower average interest rate of 2.85% and a longer term. Other exceptional items principally comprise 6.7m of bid costs, predominantly on UK Rail and 6.8m of restructuring costs mainly in UK Bus. This is the last year in which we expect to incur exceptional restructuring costs of this nature as we move towards completion of the restructuring of the UK Bus business. Interest charge before exceptional item The net interest charge was 42.8m (2003: 56.3m) with the reduction principally due to lower Sterling and US Dollar interest rates resulting from the cancellation of interest rate swaps. The interest charge was covered 7.2 times (2003: 5.6 times) by EBITDA. Taxation The taxation charge on profit before goodwill amortisation and exceptional items was 48.4m (2003: 47.9m) representing an effective rate of 30% (2003: 30%). Tax relief on US goodwill amortisation and exceptional items reduces the tax charge to 30.6m (2003: 35.8m). No tax has been provided on property gains as it is not envisaged that tax will become payable on these gains. The actual cash cost of taxation to the Group is 21.3m (2003: 27.2m) which is 17% of profit before tax (2003: 20%). The Group pays a minimal amount of tax on its profits in the US due to the ability to offset goodwill of some $650m spread over fifteen years from the acquisition of Ryder Public Transportation Services in 1999, and the level of tax allowances on the purchase of new buses. At 31 March 2004, in excess of $200m of accumulated tax losses were carried forward to be used against future profits in the US. We therefore believe that the level of cash tax charge in the US will remain at minimal rates for the medium term. A full reconciliation of the cash tax rate to the UK standard rate of corporation tax is set out in note 8 to the financial statements. Dividends The final proposed dividend per share of 7.9 pence (2003: 7.45 pence) takes the full year dividend per share to 11.65 pence (2003: 11.0 pence), an increase of 5.9%, significantly ahead of the rate of inflation and in line with the Group s progressive dividend policy. The final dividend will be paid on 27 August 2004 to shareholders on the register at 23 July 2004. Earnings per share (EPS) The adjusted basic EPS, before goodwill amortisation, exceptional items and profit on disposal of fixed assets, was 27.3 pence (2003: 26.8 pence), an increase of 1.9%. Basic EPS was 22.3 pence (2003: 23.4 pence) with the reduction principally due to the level of exceptional charges, including interest, mitigated by higher property gains year on year.

17 Operating Year to 31 March 2004 Year to 31 March 2003 Operating EBITDA by division profit Depreciation EBITDA EBITDA profit Depreciation EBITDA EBITDA m m m % m m m % UK Bus 111.2 52.2 163.4 18.0 111.7 51.4 163.1 19.0 UK Rail 49.8 5.4 55.2 5.8 61.3 4.3 65.6 7.8 North America 63.5 43.6 107.1 17.3 61.3 42.0 103.3 17.7 Financing element of leases (8.3) (8.3) (6.7) (6.7) Other (12.1) 1.8 (10.3) (11.5) 1.5 (10.0) Total Group 204.1 103.0 307.1 12.4 216.1 99.2 315.3 13.8 Capital expenditure and acquisitions Capital expenditure, as set out in note 12, was 164.7m (2003: 106.4m) with the increase principally due to outright purchase of buses in the UK. The majority of capital expenditure was in our bus operations with 60.3m spent in North America and 64.9m in the UK. In addition 24.8m was reinvested in new bus depots in the UK. On 14 August 2003 our offer for GB Railways Group Plc was declared unconditional in all respects. Between this date and December 2003 100% of the shares were acquired for 25.1m generating provisional goodwill of 20.2m. In December 2003 we acquired 90% of Aircoach, a leading operator of coaches between Dublin city centre and the airport, for a total consideration of 8.5m generating provisional goodwill of 9.0m. In July 2003 we acquired a transit business for a total consideration of $22.5m. Provisional goodwill arising on this acquisition amounted to $5.4m. In addition there were five bolt on acquisitions in North America during the year, however only four of these acquisitions contributed to the trading results in North America during the year. The total consideration for these six businesses was 26.4m and the goodwill arising on these acquisitions amounted to 14.9m. Cash flow EBITDA and EBITDA as a percentage of turnover, by division was as above. The Group s businesses continue to generate strong operating profits which are converted into cash. Net cash inflow from operating activities was 312.3m (2003: 219.7m). All of our businesses are either cash or contract based. During the year there was a positive working capital movement of 17m, reversing an outflow in the previous year of 83m, primarily resulting from timing differences in rail receipts and payments and in particular the commencement of the TransPennine franchise. Funding and risk management At the year end, total bank borrowing facilities amounted to 598m of which 525m is committed, and approximately 400m of these committed facilities had more than two years to maturity. Of these 525m committed facilities, 134.6m were utilised at 31 March 2004. The maturity profile of committed banking facilities is regularly reviewed and well in advance of their expiry such facilities are extended or replaced. In October 2003, the Group s short term committed bilateral facilities totalling 140m were replaced with new short term committed facilities for 125m, with more flexible terms. In December 2003, the Group successfully issued a 15 year 250m bond, repayable in 2019. The bond proceeds were swapped to US Dollars, and used to refinance US Dollar drawings under committed bank facilities. The bond transaction, which was oversubscribed 2.2 times, has further improved the Group s debt maturity profile which at the year end was 9.7 years (2003: 6.4 years). As the Group is a net borrower, it minimises cash and bank deposits, which arise principally in the Rail companies. The Group can only withdraw cash and bank deposits from the Rail companies to the extent of retained profits. The Group limits deposits to short terms, and with any one bank to the maximum of 30m, depending upon the individual bank s credit rating, which must not be less than A rated. The Group does not enter into speculative financial transactions and uses financial instruments for certain risk management purposes only. With regard to net interest rate risk, the Group reduces exposure by using a combination of fixed rate debt and interest rate derivatives to achieve an overall hedged position of between 75% to 100%. Fuel price risk from crude oil price volatility is 100% hedged in both UK Bus and Rail, this hedge expiring in March 2005. We have recently commenced effecting successor hedges and plan to be significantly hedged well ahead of April 2005. In North America the Group has hedged price risk at crude oil level of approximately 80% of our at risk fuel requirements up to June 2007. The Group hedges part of its exposure to the impact of exchange rate movements on translation of foreign currency net assets by holding currency swaps and net borrowings in foreign currencies. At 31 March 2004 foreign currency net assets were hedged 34% (31 March 2003: 35%).

18 Financial review continued Analysis of net debt Fixed Variable Total m m m Cash 26.2 26.2 Rail ring-fenced cash and deposits 99.0 99.0 Sterling bond (2013 6.875%) (295.5) (295.5) Bond (2019 6.125%)* (239.6) (239.6) Sterling bank loans and overdrafts (137.1) (137.1) US Dollar bank loans and overdrafts (9.5) (9.5) Canadian Dollar bank loans and overdrafts (8.0) (8.0) Euro bank loans and overdrafts (8.0) (8.0) HP and finance leases (20.9) (16.0) (36.9) Loan notes (8.7) (12.6) (21.3) Interest rate swaps, net 16.8 (16.8) Total (547.9) (82.8) (630.7) *The 2019 bond was swapped to floating rate US Dollars, and is shown net of arrangement costs and foreign exchange gains on retranslation to Sterling at year end. Net debt The Group s net debt at 31 March 2004 was 630.7m and is comprised as above. Shares in issue During the year 10.4m shares were repurchased and cancelled at a total cost of 29.2m. Accordingly the total number of shares in issue decreased by 2.5% from 413.4m to 403.0m. For the purpose of the EPS calculation (excluding 0.2m own shares held in trust for employees), the weighted average number of shares in issue for the year was 410.0m (2003: 416.7m). Foreign exchange The profits from North America have been translated at an average rate of 1:$1.69 (2003: 1:$1.55). The year end rate was 1:$1.81, compared with 1:$1.57 last year. Pensions During the year the Group was successful in achieving the merger of six existing occupational bus pension schemes and employee and employer contributions have increased with effect from April 2004. This will result in significant savings through reductions in annual administration costs and increased employee contributions, whilst still allowing us to offer a choice of salary related benefits to existing members, and career average or money purchase benefits to new employees. The introduction of this scheme, founded on cost sharing principles, should secure good pension provision, at an affordable cost and risk to both the Group and its employees, for the long-term. Pension and post retirement costs have been accounted for on a SSAP 24 basis. The total charge to the profit and loss account was 34.2m (2003: 26.1m). We have continued to apply the transitional rules and disclosures under FRS 17. At 31 March 2004, after taking account of deferred taxation, the FRS 17 net deficit in the Group pension funds, excluding Rail franchises, was approximately 162m (2003: 194m). In addition it should be noted that a post-tax deficit of 28m (2003: 20m) relates to Rail franchises where we believe that no liability will be borne beyond the end of the franchise. Equity markets have improved during the year, following the dip in 2003 around the time of the commencement of war in Iraq. This has helped to boost asset values, although the change in bond rates has led to a corresponding increase in the value of liabilities. The Group has continued to make tax-deductible payments into the schemes of 9m over and above the SSAP 24 charge, and intends that these payments will continue in the coming years. International Financial Reporting Standards The Council of the European Union announced in 2002 that all listed companies would adopt International Financial Reporting Standards (IFRS), formerly known as International Accounting Standards (IAS), from 1 January 2005. The adoption of IFRS will be first reflected in the Group s financial statements for the half year ending 30 September 2005 and the year ending 31 March 2006. The Group has established a project team to manage the convergence to IFRS. Throughout this process we have worked closely with our auditors, Deloitte & Touche LLP. At the date of this report, the Group has made good progress on converting to IFRS. The Group has undertaken an exercise to understand the differences between IFRS and the Group s current policies, and a conversion project is ongoing. The International Accounting Standards Board is expected to continue to issue further new standards during 2004, 2005 and beyond, for which the Group will consider early adoption on a case by case basis. In addition, the International Financial Reporting Interpretations Committee are expected to continue to issue interpretations which will apply to the standards that are mandatory for 2005. Accounting policies The financial statements for the year to 31 March 2004 have been prepared using the same accounting policies, as set out in note 1 to the financial statements, as were applied last year. Iain M Lanaghan Finance Director

19 Board of Directors 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. Martin Gilbert LLD MA LLB CA Chairman Chairman of the Nomination Committee 1,3 A Chartered Accountant and a qualified lawyer he is one of the founding directors and Chief Executive of Aberdeen Asset Management PLC. He was appointed to the Board of FirstGroup plc in 1995. He is Chairman of Chaucer Holdings PLC and a director of a number of investment trusts. He is a non-executive director of Lombard International Assurance SA and Primary Health Properties PLC. Age 48. 2. Moir Lockhead OBE Deputy Chairman and Chief Executive Chairman of the Safety Committee 3,4,5 Chief Executive and Deputy Chairman since the Group s formation in 1995. Originally a mechanical engineer he joined Grampian Regional Transport in 1985 as General Manager and went on to lead the successful employee buy-out of GRT Bus Group PLC. In 1996 he was awarded the OBE for services to the bus industry and he is a past President of the Confederation of Passenger Transport. Age 59. 3. Iain M Lanaghan MA CA Finance Director 4,5 Appointed to the Board in 2000 as Finance Director. He joined from Atlantic Power Group in Aberdeen where he was Finance Director. Previously he was Finance Director of PowerGen International. He is a Chartered Accountant, having qualified with KPMG in London and Europe. Age 48. 4. Dean Finch BSc MBA ACA Commercial Director 4,5 Appointed to the Board as Commercial Director in February 2004 and will take on responsibility for finance from the end of May 2004. He joined the Group in 1999 as Commercial Director Rail Division and was subsequently appointed Managing Director of the Rail Division in August 2001. He qualified as a Chartered Accountant with KPMG where he worked for 12 years specialising in Corporate Transaction Support Services including working for the Office of Passenger Rail Franchising on the privatisation of train operating companies. Age 37. 5. David Leeder BSc FILT Director UK Bus 4,5 Appointed to the Board on 1 May 2004. He joined the Group in 2001 as Managing Director UK Bus. He has held various senior posts in the transport industry including senior management roles at West Midlands Travel and subsequently Chief Executive of National Express bus division. He is a Fellow of the Institute of Logistics and Transport and a past President of the Confederation of Passenger Transport. Age 38. 6. Mike Mitchell MA MBA PhD MCIT MILT Business Change Director 4,5 Business Change Director with UK responsibilities for Change Management, Property and Environment. He began his career as a graduate trainee with British Rail in 1970, subsequently holding management roles in both bus and rail operations. He was formerly Chief Operating Officer with responsibility for all UK Bus and Rail operations, having joined the Board as Director of UK Rail in November 1999. Age 56. 7. David Dunn CA Senior Independent Non-Executive Director Chairman of the Audit Committee 1,2,3 Appointed to the Board as a Non-Executive Director in December 1999. He is a Chartered Accountant and is Non-Executive Chairman of Brammer plc. He is also a Non-Executive Director of Croda International plc and SMG plc. Age 59. 8. James Forbes CBE MSc BSc CEng MIEE Non-Executive Director Chairman of the Remuneration Committee 1,2,3 Appointed to the Board in April 2000, he is the former Chief Executive of Scottish and Southern Energy plc. His career began with the South of Scotland Electricity Board and he has since held various senior posts in the electricity industry. Age 57. 9. John Sievwright MA CA Non-Executive Director 1,2,3 Appointed to the Board in May 2002. He is Managing Director and Chief Operating Officer of Global Markets and Investment Banking for Merrill Lynch & Co. A Chartered Accountant, he has held various senior management positions in banking in London, New York, Dublin and Japan. He is a member of the North American Board of the Michael Smurfit Business School, Dublin. Age 49. 10. Martyn Williams Non-Executive Employee Director Appointed to the board as Employee Director in January 2003. He is employed as a customer services supervisor in Swansea and has worked for the Group for 26 years. Age 49. B Louise Ruppel LLB Company Secretary 1 Member of the Audit Committee 2 Member of the Remuneration Committee 3 Member of the Nomination Committee 4 Member of the Safety Committee 5 Member of the Executive Committee

20 Corporate governance In July 2003, the UK Financial Reporting Council issued the revised Combined Code on Corporate Governance (the new Code), which replaced the Combined Code published in June 1998 and annexed to the Listing Rules. The new Code applies for reporting periods beginning on or after 1 November 2003. Although the Company is not strictly required to report against the new Code until its report for 2005, during the year the Board undertook a review of the new Code and revised the Company s corporate governance framework accordingly. This revised framework was formally adopted in March 2004 and the following report has been prepared with reference to the new Code and its related guidance (the Turnbull guidance on Internal Control, the Smith guidance on Audit Committees and various items of good practice guidance from the Higgs report). The Company applies all of the main and supporting principles of good governance set out in section 1 of the new Code. The way in which the Company applies these principles is described below. The Company also complies with all of the provisions of section 1 of the new Code, except as may be explained below. Directors The Board, Chairman, Chief Executive and Senior Independent Director The Board currently comprises the Chairman, five Executive Directors and four Non-Executive Directors. The names of the Directors and their biographical details are set out on page 19. The roles of Chairman and Chief Executive are separate and each has a written statement of responsibilities. Martin Gilbert, the Chairman, is responsible for the effective conduct of Board and shareholder meetings and for ensuring that all Directors are properly briefed to enable them to take a full part in Board discussions. The Chairman s other significant business commitments are set out in his biography on page 19. Moir Lockhead, the Chief Executive and Deputy Chairman, is responsible for developing and implementing business strategy and processes and for the day-to-day management of the Group. David Dunn, who chairs the Audit Committee, is the Senior Independent Non-Executive Director. The Board critically examines the Group s budget and business plan annually and meets at least eight times a year to review the financial performance of the Group, current trading and key business issues and initiatives. It also meets regularly to discuss strategy and on an ad hoc basis as required. It has a schedule of matters reserved to it for decision, including items such as the approval of the annual and interim financial statements, financing arrangements, material capital commitments, business acquisitions and disposals, relationships with regulatory authorities and operating and accounting policies. Each of the Directors who were in office for the full year attended the eight Board meetings held during the year. Dean Finch attended the one Board meeting held after his appointment as a Director in February 2004, although by invitation of the Board, he attended a number of meetings during the year in his former role of Managing Director, Railways. The Board has established Audit, Remuneration and Nomination Committees, further details of which are given in separate sections below. The Board has also delegated certain matters to committees of the Board and the principal such committees are: Executive Safety Committee The Executive Safety Committee (ESC) is chaired by Moir Lockhead and comprises the Executive Directors, other senior managers and safety officers. The ESC meets monthly to review the Group s safety performance and practices, develop safety policies and procedures and follow up on outstanding issues. During the year, a number of the meetings were attended by representatives from DuPont Safety Resources. Senior representatives of relevant industry bodies, such as Her Majesty s Railway Inspectorate, also attend meetings of the ESC on a regular basis. Executive Management Board The Executive Management Board (EMB), under the chairmanship of Moir Lockhead, acts as a general operating management committee and comprises all the Executive Directors and certain senior business managers. The EMB meets monthly with senior corporate staff and business unit managing directors to review outstanding issues and to consider the Group s financial and operational performance. Executive Committee The Executive Committee, which comprises the Executive Directors, under the chairmanship of Moir Lockhead, meets on an ad hoc basis to consider and approve matters which arise in the ordinary course of the Group s operations. The Board has delegated specific powers to this committee within certain prescribed limits to deal with matters relating to the ordinary day-to-day running of the Group s operations and which need to be considered before the next scheduled Board meeting. Board balance and independence The independence of the Non-Executive Directors has been reviewed against the definition of independence set out in the new Code. David Dunn, Jim Forbes and John Sievwright are considered to be independent of management and have no business or other

21 relationships which could materially influence the exercise of their independent judgment. Martyn Williams, as an employee of one of the Group s subsidiary companies, cannot be considered to be independent. With the appointments of Dean Finch and David Leeder as Executive Directors in February and May 2004 respectively, the Company does not comply with the new Code provision that at least half the Board, excluding the Chairman, should be independent. However, Iain Lanaghan and Dr Mike Mitchell, Executive Directors, have both announced their intention to step down from the Board during 2004/05. The Board considers that there is no need for additional Non-Executive Directors to be appointed to the Board during this transitional period and is confident that the effectiveness of the Board and its Committees will be maintained. The composition and balance of the Board will be kept under review going forward in light of the provision in the new Code. The Board believes that together, the Directors possess the breadth of business, financial and international experience necessary to manage effectively an organisation of the size and complexity of the Group. Appointments to the Board The Nomination Committee (the Committee) is chaired by Martin Gilbert and includes David Dunn, Jim Forbes, John Sievwright and Moir Lockhead. Martyn Williams was a member until March 2004, when it was agreed that he would step down, although he retains the right to attend meetings at the request of the Chairman and may address any such meetings. The Board reviewed the remit of the Committee during the year in light of the new Code and adopted revised written terms of reference in March 2004, which are available on request and are published on the Company s website. The revised terms of reference did not introduce any significant changes but clarified and set out more fully the existing responsibilities of the Committee. The Committee meets as required to discuss appointments to the Board of both Executive and Non-Executive Directors, with recommendations being put to the full Board for its consideration. External search consultants are used to assist the process where appropriate. The Employee Director is elected by the Employee Directors Forum, which comprises the Employee Directors from the Group s subsidiaries, and generally serves a three-year term. During the year, the Committee met twice, primarily to consider executive appointments to the Board in the context of the skills and experience the Board requires for the future commercial and strategic development of the Group and to consider succession planning issues in general. All members of the Committee attended each meeting. During the year, the Committee recommended to the Board the appointment of Dean Finch as Commercial Director and, following the decisions by both Iain Lanaghan and Dr Mike Mitchell to leave the Board, the appointments of Dean Finch and David Leeder as Finance Director and Director, UK Bus respectively. External consultants were not used during this process as the Committee had, as part of its consideration of the Company s succession plans, identified candidates with the necessary skills and experience for those roles from amongst the Company s senior management team. The Board accepted the recommendations of the Committee unanimously. Executive Directors are permitted to accept a limited number of outside non-executive directorships, recognising that this is an effective way to broaden their knowledge and expertise. No such appointment can be taken up without prior Board approval. The Company s policy regarding the fees received for such directorships is set out in the Directors remuneration report on page 25. Information and professional development The Board receives detailed papers on the business to be conducted at each meeting well in advance and individual Board members have direct access to senior executives should they wish to receive additional information on any items for discussion. The head of each operating Division attends a number of Board meetings each year and, during the year, each presented to the Board on current issues facing their respective Divisions. A number of Board meetings each year are held on site at operating locations in the UK and USA, allowing the Directors to visit the Group s operations and to discuss key issues with local operational management and stakeholders. All Directors have access to the advice and services of the Company Secretary and can seek independent professional advice, at the Company s expense, in the furtherance of their duties, if necessary. The Company Secretary advises the Board on corporate governance matters and undertook on behalf of the Board the review of the new Code. Directors receive induction on appointment to the Board as appropriate, including information on their responsibilities and obligations as directors under legislation, regulation and best practice guidelines. The induction process is supported during the year by the programme of business presentations and operational visits, as described above. The training and induction process for new directors is being reviewed and will be developed further to take into account the provisions of the new Code. During the year, the Chairman held a separate meeting with the Non-Executive Directors. Performance evaluation Processes for evaluating the performance of the Board and its Committees are evolving in light of the requirements of the new Code. Such reviews have so far been informal in nature but it is the Board s intention to establish a structured process for evaluating and monitoring the performance of the Board and its Committees and the individual Directors, to conduct an annual formal review and to report on that review.

22 Corporate governance continued Re-election As required by the Company s articles of association, Directors offer themselves for re-election at least once every three years. Any Director appointed during the year is required to seek re-appointment by shareholders at the next Annual General Meeting (AGM). The biographical details of all the Directors, including those Directors seeking election or re-election at the 2004 AGM may be found on page 19. The Company s articles of association do not contain any age limits for directors. Non-Executive Directors are appointed for an initial term of three years, subject to re-appointment by shareholders. Non-Executive Directors have letters of appointment, which are available for inspection. None of the Non-Executive Directors has yet to serve a term of six years. Insurance The Company maintained directors and officers liability insurance cover throughout the year. The cover was renewed on 1 April 2004. Remuneration Remuneration Committee The Remuneration Committee, under the chairmanship of Jim Forbes, met six times during the year. Following the publication of the new Code, revised terms of reference for the Remuneration Committee were adopted. These are available on the Company s website. Details of the membership of the Remuneration Committee are set out in the Directors remuneration report on pages 25 to 30, together with a statement of the Group s remuneration strategy and policy. Full details of Directors remuneration appear on page 28. Accountability and Audit Financial reporting The Directors have a commitment to best practice in the Group s external financial reporting in order to present a balanced and comprehensible assessment of the Group s financial position and prospects to its shareholders, employees, customers, suppliers and other third parties. This commitment encompasses all published information including, but not limited to, the year-end and interim financial statements, Stock Exchange announcements and other public information. A statement of the Directors responsibility for preparing the financial statements may be found on page 34. Going concern After making enquiries, the Directors have formed a judgment, at the time of approving the financial statements, that there is a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. Internal Controls Introduction The Board has established procedures to meet the requirements of the new Code and its related guidance. These procedures, which are subject to a regular review, provide an ongoing process for identifying, evaluating and managing any significant risks faced by the Group. Responsibility The Board has overall responsibility for the system of internal control and assessing risk. The responsibility for establishing detailed control and risk management procedures within each subsidiary unit lies with the Executive Directors and the subsidiary unit managing directors. A sound system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. Control environment The Board is committed to business integrity, high ethical and moral values and professionalism in all its activities, principles with which managers and employees are required to comply. During the year, the Board considered and adopted a formal Code of Ethics, which is published on the Company s website. There is a defined divisional organisational structure with lines of responsibility and delegated authority which allows the Board to plan, execute, control and monitor the business in a manner consistent with the achievement of the Group s objectives. The day-to-day business management is delegated to the Executive Directors and subsidiary unit managing directors under the direction of the Chief Executive. As noted above, the Board retains certain key decisions to itself, enabling it to maintain control over the key business decisionmaking processes and significant transactions in terms of size, type or risk. A number of the Group s key functions, including treasury, taxation, insurance, corporate finance, legal, corporate communications and procurement are dealt with centrally. Each of these functions has detailed procedures and is monitored by an Executive Director.

23 Monitoring The Group adopts a professional approach to financial reporting and information in compliance with generally accepted accounting practice. The Group Finance Manual, circulated by the Group Finance function to all subsidiaries, details the Group accounting policies and procedures with which subsidiaries must comply. Budgets are prepared by subsidiary company management and are subject to review by both Group management and the Executive Directors. Monthly forecasts are completed during the year and compared against budget. When setting budgets and forecasts, management identifies, evaluates and reports on the potential significant business risks and actions required. Each subsidiary unit prepares a monthly report of operating performance, with a commentary on variances against budget, forecasts and prior year. Similar reports are prepared at a Group level. Key performance indicators, both financial and operational, are monitored on a weekly basis. In addition, business units participate in strategic reviews which include consideration of long-term financial projections and the evaluation of business alternatives. A process of annual self-assessment and hierarchical reporting provides for a documented and auditable trail of accountability from the subsidiary units to senior management to the Executive Directors. This process includes an internal control questionnaire and risk assessment and is signed off by the subsidiary directors. This process and the supporting documentation are reviewed by both the internal and external auditors. Detailed action plans are developed from these questionnaires to resolve any control weaknesses or significant risks identified. Risk assessment The Board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. As an integral part of planning and review, management from each business area and major projects identify their risks, the probability of the risks occurring, the impact on the business should the risks occur and the actions taken to manage the risks. The risks are assessed on a regular basis and could be associated with a variety of internal and external sources including political instability, regulatory requirements, disruption to information systems, control breakdowns and social, ethical and environmental issues. Regular performance reviews have been introduced in each of the divisions to further embed the concept of risk management. The divisional directors review the detailed risk management reports prepared by their subsidiary units which include updates of agreed action plans arising from previous performance reviews. Effectiveness The Directors confirm that they have reviewed the effectiveness of the system of internal control for the year under review and to the date of approval of the Annual Report and Financial Statements through the monitoring process described above. In addition, the Directors confirm that they have conducted a specific annual review of the effectiveness of the Group s system of internal control and risk management in operation during the period up to the date of this Annual Report and Financial Statements. Audit Committee and Auditors The Audit Committee (the Committee), which is chaired by David Dunn, includes Martin Gilbert, Jim Forbes and John Sievwright, and normally meets at least twice a year. It met twice during the year but it is expected that it will meet more frequently in the future. All the members of the Committee attended each meeting. Martyn Williams stepped down from the Committee in March 2004. The Board considers that each of the members of the Committee has sufficient and recent financial experience to enable the Committee to discharge its functions effectively. The Board reviewed the remit of the Committee during the year in light of the new Code and adopted revised written terms of reference in March 2004, which are available on request and are published on the Company s website. The revised terms of reference did not introduce significant changes but clarified and set out more fully the existing responsibilities of the Committee. The Committee keeps under review the effectiveness of the Company s financial reporting and internal control policies and procedures for the identification, assessment and reporting of risk. It also keeps under review the nature, scope and results of the audits conducted by the internal audit department and the external auditors. It keeps under review the consistency of accounting policies and financial reporting across the Group and reviews the half-year and full-year financial statements before they are presented to the Board. The Committee considers the Group s compliance with the new Code and its related guidance and oversees the objectivity and effectiveness of internal audit. The work of the internal audit department is focused on areas of priority as identified by risk analysis and in accordance with an annual audit plan approved by the Committee and the Board. Reports are sent to senior executives of the Group and subsidiary units and there is a follow-up process to ensure that actions to resolve identified control weaknesses are implemented. The Group Director of Audit has the right of direct access to the Chairman of the Committee. The Committee is responsible for making recommendations to the Board in respect of the appointment or re-appointment of the Group s external auditors and, subject to the approval of shareholders, recommends to the Board the audit fee to be paid to the external auditors. The Committee is also charged with monitoring the independence of the external auditors and the objectivity and effectiveness of the external audit process. The objectivity and independence of the external auditors is considered on a regular basis, with particular

24 Corporate governance continued regard to the level of non-audit fees. The majority of non-audit work is put out to tender, with the exception of due diligence work on acquisitions or potential acquisitions in both the UK and overseas, where the current auditors knowledge of the Company s business processes and controls means that they are best placed to undertake this work cost-effectively on the Company s behalf. The majority of the non-audit work undertaken by the auditors during the year was associated with acquisition-related due diligence and reviews of the financial models for the Company s rail franchise bids. It is the Committee s intention during the coming year to review its policy on nonaudit services in the light of the provisions in the new Code. Details of the audit and non-audit fees, including a breakdown of the nonaudit fee, are set out in Note 7 to the financial statements. The external auditors have direct access to the Committee to raise any matters that may concern them. The Committee reviews with management a detailed analysis of the Group s financial information prior to completion and announcement of the half-year and full-year results and receives a report from the external auditors on the audit process. The external auditors also meet with the full Board and, if necessary, separately, with the Chairman, the Chief Executive and Finance Director. The Annual Report and Financial Statements and interim results go through a detailed verification and due diligence process involving external advisers. The Committee may request the Executive Directors and any other officers of the Group to attend its meetings but none have the right of attendance. Committee meetings may be requested by the external or internal auditors if they consider it necessary. The external auditors and the Group Director of Audit attended each meeting held during the year. Executive Directors and other senior managers attended where requested and as appropriate. The business considered and discussed by the Committee included the reports of the external auditors on the half-year and full-year results, the 2004/05 Group Internal Audit Plan and budget, papers summarising any regular and special internal audits and an executive summary of each internal audit report, risk analysis assessments from Group companies and a review of the implications of proposed accounting standards. The Committee also received a report on the arrangements for the Group s confidential employee hotline, which was introduced during the year. Relations with shareholders Dialogue with Institutions The Group recognises the importance of regular communication with all of its shareholders. The full Annual Report and Financial Statements are made available to all shareholders and an Interim Report is published and sent to all shareholders at the half-year. These reports are intended to provide shareholders and other interested parties with a clear and balanced understanding of the Group s operational performance and prospects and its financial results and position. All investors are kept informed of key business activities, decisions, appointments etc. via regulatory news and press releases and the Group s website. There is also regular dialogue with institutional shareholders throughout the year and general presentations are made by the Chief Executive and Finance Director following the announcement of the full and half-year results. Other Directors, including Non-Executive Directors, attend meetings with major shareholders if requested. Regular reports on investor relations activity are submitted to the Board and senior management. A programme is being developed for the Chairman and Senior Independent Director to attend a number of meetings with major shareholders following the announcement of the Group s full and half-year results. The Non-Executive Directors have also had informal contact with major shareholders regarding the Group during the year and they expect that informal dialogue to continue. Annual General Meeting All shareholders have the opportunity to put questions to the Directors at the Company s AGM, at which a report is made on the highlights of the key business developments during the financial year under review. The Chairmen of each of the Remuneration and Audit Committees attend the AGM to answer specific questions from shareholders. All Directors were present at the 2003 AGM. Notice of the AGM is circulated to all shareholders at least 20 working days prior to the meeting. Separate resolutions are proposed at the AGM on each substantially separate issue. Proxy votes are counted on all resolutions and, where votes are taken by a show of hands, the proxy results are subsequently announced to the meeting.

25 Directors remuneration report This report has been prepared in accordance with the Directors Remuneration Report Regulations 2002 (the Regulations). It also meets the requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the main and supporting principles of the revised Combined Code on Corporate Governance (the new Code) relating to Directors remuneration. The Company complies with all of the provisions of section 1 of the new Code, except as may be explained below. A resolution to approve this report will be proposed at the Company s Annual General Meeting to be held on 8 July 2004. The Regulations require the auditors to report to the Company s members on the auditable part of the Directors remuneration report and to state whether in their opinion that part of the report has been properly prepared in accordance with the Companies Act 1985 (as amended by the Regulations). This report has therefore been divided into separate sections for audited and unaudited information. Unaudited information Remuneration Committee The Remuneration Committee (the Committee) is chaired by Jim Forbes. The other current members of the Committee are David Dunn and John Sievwright. The Board considers each of the members of the Committee to be independent in accordance with the definition in the new Code. None of the members of the Committee has any personal financial interest (other than as a shareholder) in the matters to be decided, conflict of interest arising from cross-directorships or any involvement in the day-to-day running of the business. They do not hold any share options nor do they participate in any Group share or pension schemes. Martyn Williams, the Non-Executive Employee Director, was a member of the Committee until 3 July 2003, when he stepped down. He retains the right to attend meetings of the Committee, at the request of the Committee Chairman, and may address Committee meetings. The Committee considers it especially important that employees views are taken into consideration, in particular when the remuneration of the Executive Directors is determined. The Board reviewed the remit of the Committee during the year in light of the new Code and adopted revised written terms of reference in March 2004, which are available on request and are published on the Company s website. The revised terms of reference did not introduce significant changes but clarified and set out more fully the existing responsibilities of the Committee. The Committee generally meets at least once a year and also as required to consider matters related to the remuneration of Executive Directors and senior management below Board level. In the year under review, it met six times and all its members attended each meeting. In determining the Executive Directors remuneration for the year, the Committee considered publicly available information, including the remuneration packages of those holding equivalent posts at the Company s peers within the transport industry and the FTSE 250 generally. In addition, the Committee has also received advice in relation to certain specific remuneration and pension-related matters from Watson Wyatt, a firm of independent remuneration consultants. Watson Wyatt also provided advice to the Company during the year on remuneration and pension-related matters in respect of staff below main Board level. Remuneration policy Executive remuneration packages are designed to attract, motivate and retain individuals of the high calibre needed to maintain the Group s position as a leader in the public transportation sector. There are four main elements of the remuneration package for Executive Directors and senior management, namely basic salary, annual cash and deferred share bonus, share option incentives and pension arrangements. The remuneration package for each Executive Director is viewed as a whole and the individual elements making up the package are balanced to ensure that overall, the remuneration received by an executive is not excessive, is competitive with the remuneration received by the individual s equivalents in other similar quoted companies, contains an appropriate balance of fixed and variable (performance-related) compensation and provides longer-term share incentives designed to align his interests with those of shareholders. A high proportion of the total remuneration package is performance-related. The Committee intends to review the total remuneration packages for Executive Directors in the 2004/05 financial year with a view to applying any new arrangements with effect from the beginning of the 2005/06 financial year. Major shareholders will be consulted in advance of any material change in remuneration policy which results from this review. Basic salary and other benefits in kind The basic salary and benefits in kind for each Executive Director are determined by the Committee prior to the beginning of each financial year and when an individual changes position or responsibility. In deciding appropriate levels, the Committee considers the Group as a whole and also the packages received by similar individuals at the Company s peers in the public transport sector and the FTSE 250. Details of the salaries and benefits in kind paid to each of the Executive Directors in the year are shown on page 28.

26 Directors remuneration report continued FirstGroup plc Executive Annual Bonus Plan Payment of bonuses under this plan is linked to achievement of budgeted Group operating profit targets and personal objectives (including certain safety-linked targets). Where an Executive Director also has responsibility for one or more operating division, payment of a proportion of the bonus is also linked to the profitability of those divisions. The Committee considers and agrees the Group and divisional objectives that must be met for each financial year for a bonus to become payable. The personal objectives for the Executive Directors are agreed with the Chief Executive. Bonus payments comprise a mixture of cash and deferred share awards. Share awards are deferred for three years and will lapse if the Director leaves the Group during that period for reasons other than redundancy, retirement or ill-health. The Committee considers that it is appropriate for part of the annual bonus to be paid in the form of deferred shares as this more closely aligns Directors interests with those of shareholders and provides an incentive for the relevant executive to remain with the Group. As the award of any bonus is already dependent upon the achievement of performance targets in a particular year, the Committee does not consider it appropriate to impose any further performance criteria on vesting of the deferred share element of any bonus award other than that the relevant Executive Director remains employed by the Group and has not tendered his resignation at the end of that three-year period. The Board sets yearly budget targets for the Group as a whole and for each business unit within the Group. These targets are, of necessity, extremely challenging. The Committee has determined that bonuses would be payable for Group performance against budget between 90% and 110%. The level of bonus payable is heavily skewed towards performance in excess of 100% of budget. However, even if the budgetary targets are met, a proportion of the bonus which would otherwise be payable is dependent on personal performance. The maximum level of bonus payable to an Executive Director is 80% of basic salary, although awards for the year ended 31 March 2004 were calculated at a lower percentage for each Executive Director, between 61.0% and 67.9%. The Committee has determined that awards for the 2004/05 financial year should be calculated on the same basis. As mentioned above, during the 2004/05 financial year, the Committee intends to undertake a complete review of executive remuneration packages, including the existing bonus scheme. Going forward, the Committee will review on a yearly basis what bonus arrangements, including performance criteria, are appropriate for future years. Share Option Schemes Executive Share Option Scheme The Company operates an Executive Share Option Scheme for Executive Directors and other senior management. Under this scheme, options to acquire ordinary shares in the Company may be awarded at the discretion of the Committee at levels of up to 200% of basic salary. The exercise price of the options granted under the scheme is based on the average of the middle market quotations for shares in the Company for the three dealing days prior to the date of grant. For grants made in 2001/02, 2002/03 and 2003/04, options will be exercisable if the growth in the Company s annualised earnings per share (EPS) for the three-year period following the financial year ending before the date of grant exceeds the growth in the UK Retail Prices Index (RPI) over the same period by an average of at least 3% per annum. If at the end of the three-year period the performance target has not been met, EPS growth will be measured over an additional year and must show an average growth of 3% in excess of RPI over the full four year period. Grants for the 2003/04 financial year were set at 1.33 times basic salary for Moir Lockhead and 1 times salary for other Executive Directors. The Committee has agreed that the following performance targets should apply for option grants made in the 2004/05 financial year. Both targets must be met for options to vest and be exercisable. Options will be exercisable if the growth in the Company s annualised EPS for the three-year period following the financial year ending before the date of grant exceeds the growth in the RPI over the same period by an average of at least 2% per annum. In addition, for the maximum number of options granted to vest, the Company s total shareholder return (TSR) over the three-year performance period must be such to place the performance relative to the returns earned by the companies in the top 25% of companies in a group of the Company s listed transport peers. Performance between the 25th and 50th percentile of that group will result in a proportion of the options vesting in accordance with a sliding scale. Options will lapse if the Company s TSR performance would place the Company below the 50th percentile of that group. Grants for the 2004/05 financial year will be set at 1.33 times basic salary for Moir Lockhead and 1 times salary for other Executive Directors. If the performance targets are met, an option may be exercised at any time during the rest of its ten-year life, without any further condition. If the holder leaves the Group before the end of the performance period by reason of injury, ill-health, disability, redundancy or retirement, an option may be exercised within 12 months if the performance target has been satisfied at the date of such cessation. Early exercise of options may also be permitted within specific periods in the event of a change of control of the Company resulting from a takeover, reconstruction, amalgamation or voluntary winding-up of the Company but only to the extent that any performance targets have then been achieved on a pro rata basis. The executive remuneration review to be carried out by the Committee in the 2004/05 financial year will include a review of the current share option scheme, in particular as to whether it continues to support the Company s aim of attracting and retaining key individuals in

27 the face of competition for talented and effective staff, whilst continuing to align the interests of the individuals concerned with the longerterm interests of shareholders. In future, the Committee will continue to focus on this objective when determining what share-related remuneration should be offered within the overall remuneration package. The Company no longer operates any long-term incentive schemes other than the share option schemes described in this report. Save As You Earn (SAYE) Scheme The Company also operates a SAYE Scheme for eligible employees under which options may be granted on an annual basis at a discount of up to 20% of market value. The Executive Directors are eligible to participate in the SAYE Scheme. Buy As You Earn (BAYE) Scheme The Company operates a Share Incentive Plan under the title Buy as You Earn. This scheme, which is open to all UK employees of the Group (including the Executive Directors), enables employees to purchase partnership shares from their gross income (before income tax and National Insurance deductions). The Company initially provided one matching share for every two partnership shares bought by employees, subject to a maximum Company contribution of shares to the value of 15 a month. With effect from February 2004, the matching share ratio was increased to two matching shares for every three partnership shares, subject to a maximum Company contribution of shares to the value of 20 a month. The shares are held in trust for up to five years, in which case no income tax and National Insurance will be payable. The matching shares will be forfeited if the corresponding partnership shares are removed from trust within three years of award. Retirement benefits Executive Directors are members of a number of defined benefit Group pension schemes. Their dependants are eligible for dependants pensions and the payment of a lump sum in the event of death in service. Further details are set out on page 30. Service contracts It is the Company s policy to restrict notice periods for Executive Directors to a maximum of 12 months. In line with this policy, all of the Executive Directors have service contracts with an undefined term but which provide for a notice period of 12 months. The contracts contain a provision, exercisable at the discretion of the Company, to pay an amount in lieu of notice on early termination of the contract. Such payments are limited to one year s basic salary. There are no contractual provisions governing payment of compensation on early termination of the contracts. If it becomes necessary to consider early termination of a service contract, the Company will have regard to all the circumstances of the case, including mitigation, when determining any compensation to be paid. Details of the Executive Directors contracts are set out below: Date of Service Contract Moir Lockhead 5 March 2001 Dean Finch 24 January 2002 Iain Lanaghan 29 November 2002 Mike Mitchell 2 July 1997 Where Board approval is given for an Executive Director to accept an outside non-executive directorship, unless the appointment is in connection with Group business, the individual Director is entitled to retain any fees received. Non-Executive Directors All Non-Executive Directors have a letter of appointment and their fees are determined by the Board based on surveys of fees paid to Non-Executive directors of comparable companies. These letters of appointment are available for inspection at the Company s registered office during normal business hours and will be made available at the Annual General Meeting. Non-Executive Directors cannot participate in any of the Company s share option schemes and are not eligible to join the Company s pension scheme. Each of the Non-Executive Directors, other than Martyn Williams, has elected to receive 40% of his fees in the form of shares in order to ensure that their interests are more closely aligned to those of the Company s shareholders. The shares are purchased on a monthly basis in the market. The appointment of each of the Non-Executive Directors is subject to early termination (without compensation) if he is not reappointed at a meeting of shareholders when he is up for re-election.

28 Directors remuneration report continued Total shareholder return The following graph shows, for the last five financial years of the Company, the total shareholder return on a holding of shares in the Company as against that of a hypothetical holding of shares made up of shares of the same kinds and number as those by reference to which the FTSE 250 Index and the FTSE All-Share Transport Index are calculated. Total shareholder return index 140 120 100 80 60 40 20 Source: Datastream Mar 99 FirstGroup plc Total Shareholder Return Index This graph is included to meet a legislative requirement and is not directly relevant to the performance criteria used for the Company s executive share option schemes. Nonetheless, these indices were selected for this purpose as the Company believes that they are the most appropriate and representative indices against which to measure the Company s performance for this purpose. Audited information Directors remuneration Details of the Directors remuneration for the year ended 31 March 2004 are set out on the following pages. Directors emoluments and compensation The total salaries, fees and benefits paid to, or receivable by, each person who served as a Director of the Company at any time during the year for the period of such directorship appear below. These include any and all payments for services as a Director of the Company, its subsidiaries or otherwise in connection with the management of the Group. Cash Benefits Salary bonus in kind 1 Fees Total Total 2004 2004 2004 2004 2004 2003 000 000 000 000 000 000 Executive Directors Moir Lockhead 390 156 29 575 510 Robbie Duncan 2 349 Dean Finch 3 24 6 2 32 Iain Lanaghan 215 86 1 302 292 Dr Mike Mitchell 243 97 21 361 348 Non-Executive Directors Martin Gilbert 103 103 100 David Dunn 34 34 33 Jim Forbes 34 34 33 George Law 4 10 John Sievwright 34 34 29 Martyn Williams 5 14 14 3 872 345 53 219 1,489 1,707 1 In relation to the value of non-cash benefits received, the values indicated relate to the following benefits received by each Director: Moir Lockhead: 23,000 company car, 5,000 private fuel and 1,000 medical insurance for himself and spouse; Dean Finch: 1,100 company car, 500 private fuel and 100 medical insurance for himself and his family; Iain Lanaghan: 1,000 medical insurance for himself and his family; Mike Mitchell: 15,000 company car, 5,000 private fuel and 1,000 medical insurance for himself and his family 2 Retired as a Director on 31 March 2003 3 Appointed as a Director on 26 February 2004 4 Retired as a Director on 31 December 2002 5 Appointed as a Director on 1 January 2003 Mar 00 Mar 01 Mar 02 Mar 03 Mar 04 FTSE All-Share Transport Total Shareholder Return Index FTSE 250 Total Shareholder Return Index

29 The outstanding share options under the Executive Share Option Scheme (ESOS), deferred share bonus, long-term incentive plan (LTIP) and SAYE Scheme granted to each of the serving Directors are set out in the table below. No price was paid for the award of any option. There have been no changes to the terms and conditions of any option awarded to Directors. At beginning Lapsed/ of year or Granted Exercised waived At end of date of during during during year or date appointment the year the year the year of cessation Exercise Date (number (number (number (number (number price from which Expiry Scheme of shares) of shares) of shares) of shares) of shares) (pence) exercisable date Moir Lockhead LTIP 2000 110,168 110,168 nil 31.3.03 31.3.10 ESOS: 2001 130,985 130,985 346.5 15.8.04 15.8.11 2002 173,784 173,784 269 21.6.05 21.6.12 2003 166,958 166,958 287 18.11.06 18.11.13 Deferred share bonus 1 : 2001 31,633 31,633 nil 1.4.04 1.4.05 2002 25,080 25,080 nil 1.4.05 1.4.06 2003 28,559 28,559 nil 1.4.06 1.4.07 Dean Finch ESOS: 2001 18,470 18,470 346.5 15.8.04 15.8.11 2002 24,535 24,535 269 21.6.05 21.6.12 2003 58,930 58,930 287 18.11.06 18.11.13 Deferred share bonus 1 : 2001 4,800 4,800 nil 1.4.04 1.4.05 2002 11,660 11,660 nil 1.4.05 1.4.06 2003 13,720 13,720 nil 1.4.06 1.4.07 Iain Lanaghan LTIP 2000 55,932 55,932 nil 31.3.03 31.3.10 ESOS: 2001 50,000 50,000 346.5 15.8.04 15.8.11 2002 78,067 78,067 269 21.6.05 21.6.12 2003 75,000 75,000 287 18.11.06 18.11.13 Deferred share bonus 1 : 2001 10,707 10,707 nil 1.4.04 1.4.05 2002 12,733 12,733 nil 1.4.05 1.4.06 2003 17,063 17,063 nil 1.4.06 1.4.07 SAYE 2002/03 4,921 4,921 192 1.2.06 31.8.06 Dr Mike Mitchell LTIP 2000 2 67,796 67,796 nil ESOS: 2001 60,606 60,606 346.5 15.8.04 15.8.11 2002 88,067 88,067 269 21.6.05 21.6.12 2003 84,607 84,607 287 18.11.06 18.11.13 Deferred share bonus 1 : 2001 22,667 22,667 nil 1.4.04 1.4.05 2002 16,903 16,903 nil 1.4.05 1.4.06 2003 19,249 19,249 nil 1.4.06 1.4.07 SAYE 2002/03 4,921 4,921 192 1.2.06 31.8.06 Martyn Williams SAYE: 2002/03 787 787 192 1.2.06 31.8.06 2003/04 636 636 232 1.2.07 31.8.07 1 The figures shown represent the number of nil-cost options which were granted under the deferred share element of the Executive Annual Bonus Plan in respect of the 2000/01, 2001/02 and 2002/03 financial years. The cash values of the 2003/04 award are Moir Lockhead: 92,820; Dean Finch: 73,654; Iain Lanaghan: 51,230 and Mike Mitchell: 50,993. These awards will take the form of nil-cost options over shares which will, subject to satisfying the requirements of the Plan, vest on 1 April 2007. The number of shares under option will depend on the market price of shares at the close of business on 12 May 2004. 2 Exercised on 17 November 2003. The closing market price on the date of exercise was 290.00 pence. The notional pre-tax gain on exercise was 196,608. Market price of FirstGroup plc shares The market price of FirstGroup plc shares at 31 March 2004 was 268.25p and the range during the year was 218.50p to 306.00p.

30 Directors remuneration report continued Retirement benefits Moir Dean Iain Mike Lockhead Finch Lanaghan Mitchell Scheme 1 2 2 2 Normal retirement age 65 60 60 65 Directors contributions in the year ( ) 24,812 11,385 13,365 50,992 Increase in accrued pension during the year (net of inflation) ( pa) 17,079 2,295 3,218 8,750 Increase in accrued pension during the year ( pa) 21,424 2,498 3,460 10,080 Accrued pension at 31 March 2004 ( pa) 176,604 9,720 12,100 57,625 Transfer value of increase in accrued pension (net of inflation) during the year ( ) 334,359 13,298 28,498 104,465 Transfer value of accrued pension at 31 March 2003 ( ) 2,848,743 32,598 59,568 424,767 Transfer value of accrued pension at 31 March 2004 ( ) 3,457,401 56,319 107,154 640,534 Increase in transfer value over the year, net of Director s contributions ( pa) 583,846 12,336 34,221 164,775 ˆCompany contribution to FURBS during the year ( ) 27,984 1 Aberdeen City Council No.2 Pension Fund 2 FirstGroup Flexible Benefits Scheme The Group does not have one pension scheme but instead operates a number of different schemes. All of the schemes in which the Executive Directors participate are defined benefit schemes, and are not limited in membership to Executive Directors. In addition to his pension entitlement, Moir Lockhead is entitled at retirement age to a lump sum from his pension scheme of 529,812 (2003: 465,539). Iain Lanaghan is accruing benefits which are subject to the Inland Revenue earnings cap and Dean Finch is accruing benefits which are subject to the three year average of the Inland Revenue earnings cap. This report was approved by the Board of Directors, on the recommendation of the Remuneration Committee, on 11 May 2004 and signed on its behalf by: B Louise Ruppel Company Secretary 11 May 2004

31 Directors report The Directors have pleasure in submitting their Annual Report and Financial Statements for the year ended 31 March 2004. Principal activities The principal activity of the Group is the provision of passenger transport services. Review of the business Reviews of the business and likely future developments are given in the Chairman s Statement, Chief Executive s review and in the Financial review. Financial matters The results for the year are given in the consolidated profit and loss account on page 36. The Directors recommend payment of a final dividend of 31.8m (7.9p per share), which, with the interim dividend of 15.5m (3.75p per share) paid on 11 February 2004, gives a total dividend of 47.3m (11.65p per share) for the year. The proposed final dividend, if approved, will be payable on 27 August 2004 to shareholders on the register at the close of business on 23 July 2004. Share capital Details of changes in share capital, including purchases by the Company of its own shares, are set out in Note 22 to the accounts. Authority for the Company to make market purchases of up to 61,500,000 of its own shares was renewed at the 2003 Annual General Meeting. This authority remains in place until the 2004 Annual General Meeting, when it is intended to seek a further renewal. Directors The Directors of the Company since 1 April 2003 were David Dunn, Dean Finch (appointed 26 February 2004), Jim Forbes, Martin Gilbert, Iain Lanaghan, Moir Lockhead, Mike Mitchell, John Sievwright and Martyn Williams. David Leeder was appointed to the Board with effect from 1 May 2004. In accordance with the Company s Articles of Association, Dean Finch and David Leeder, who have been appointed as Directors by the Board since the date of the last Annual General Meeting (AGM), will be retiring and, being eligible, offer themselves for election. In addition, Moir Lockhead and John Sievwright will be retiring by rotation at the forthcoming AGM and, being eligible, offer themselves for re-election. Iain Lanaghan has announced that he will step down from the Board on 31 May 2004 and therefore is not offering himself for re-election. Biographical details of the Directors to be elected or re-elected at the AGM are given in the Chairman s Letter and Notice of Meeting, which accompany this Annual Report. Details of the service contracts of the Executive Directors and the terms of appointment of the Non-Executive Directors are given in the Directors remuneration report on pages 25 to 30. Directors interests The Directors who held office at the end of the year had the following interests in the ordinary shares of the Company: Ordinary 5p shares At beginning of year or subsequent appointment At end of year Beneficial Non-beneficial Beneficial Non-beneficial David Dunn 12,532 17,329 Dean Finch 1,500 Jim Forbes 4,532 9,329 Martin Gilbert 33,369 48,273 Iain Lanaghan 6,155 6,799 Moir Lockhead 1,440,723 470,690 1,440,723 470,690 Mike Mitchell 115,395 153,191 John Sievwright 12,032 16,829 Martyn Williams 965 965 Details of the Directors share options are given in the Directors remuneration report on pages 25 to 30. Moir Lockhead also holds nominal non-beneficial interests in a number of subsidiary undertakings.

32 Directors report continued Between 1 April and 12 May 2004, the following changes occurred to Directors interests: on 23 April 2004 Iain Lanaghan acquired 54 shares pursuant to the Company s Buy As You Earn Scheme. On 26 April 2004, Martin Gilbert acquired 1,232 shares, and David Dunn, Jim Forbes and John Sievwright each acquired 396 shares pursuant to the standing arrangements whereby they have each elected to receive 40% of their monthly fees in the form of shares in the Company. On appointment to the Board on 1 May 2004, David Leeder had an interest in 817 shares and options over 118,624 shares. No Director is materially interested in any significant contract or agreement with the Group, other than their service contracts. Significant interests At 11 May 2004 the Company had been advised of the following notifiable interests in its issued ordinary share capital: Ordinary 5p shares % Fidelity International Limited 1 16,618,922 4.1 Legal & General Group plc 15,393,250 3.8 1 Mr Edward C Johnson, 3rd, as a principal shareholder in, and FMR Corp, as a company related to, Fidelity International Limited, are also deemed to be interested in this holding. Employees The Group is committed to employee involvement and uses a variety of methods to inform, consult and involve its employees in the business, details of which are given in the Chief Executive s review. Employee newsletters are distributed regularly throughout the year. The Group extends employee involvement by the appointment of employee directors nominated by the workforce. There is one employee director on the Board of FirstGroup plc and one or two employee directors on the boards of the majority of the Group s UK subsidiary undertakings. The Group is committed to wide employee share ownership. During the year, employees continued to have the opportunity to participate in the Group s Buy As You Earn Scheme and also were invited to participate in the Group s Save As You Earn Scheme, details of which are given in Note 31 to the financial statements. The Group recognises its obligations to give disabled persons full and fair consideration for all vacancies where possible. Wherever reasonable and practicable, the Group will retain newly disabled employees and at the same time provide full and fair opportunities for the career development of disabled people. Corporate social responsibility The system of internal control described on pages 22 and 23 covers significant risks associated with social, environmental and health and safety matters. The Group publishes a separate Corporate Responsibility Report covering these matters, which will be available on our website. Charitable and political contributions The Group made various donations to UK charities totalling approximately 34,000 (2003: 69,000) during the year. There were no payments made for political purposes. Creditors It is the Group s policy to abide by the payment terms agreed with suppliers whenever it is satisfied that the supplier has provided the goods and services in accordance with agreed terms and conditions. A number of significant purchases, such as fuel and tyres and commitments under hire purchase contracts, finance leases and operating leases are paid by direct debit. At 31 March 2004, the Group had the equivalent of 39 days (2003: 30 days ) purchases outstanding. The Company does not have any trade creditors in its balance sheet. Other issues The introduction of the Euro has had minimal impact on the Group, as the Group does not trade in continental Europe. The Directors continue to monitor the situation with regard to the possible introduction of Euro notes and coins in the UK. Annual General Meeting The AGM will be held at the Aberdeen Exhibition and Conference Centre, Bridge of Don, Aberdeen, Scotland AB23 8BL on Thursday 8 July 2004 at 11.00 am. The Notice of Meeting is contained in a separate letter from the Chairman accompanying this Annual Report.

33 Auditors On 1 August 2003, Deloitte & Touche transferred their business to Deloitte & Touche LLP, a limited liability partnership incorporated under the Limited Liability Partnerships Act 2000. The Company s consent has been given to treating the appointment of Deloitte & Touche as extending to Deloitte & Touche LLP under the provisions of section 26(5) of the Companies Act 1989. Deloitte & Touche LLP have expressed their willingness to continue in office as auditors and resolutions concerning their reappointment and remuneration are to be proposed at the forthcoming AGM. By order of the Board B Louise Ruppel Company Secretary 11 May 2004 395 King Street Aberdeen AB24 5RP

34 Directors responsibilities United Kingdom company law requires that the Directors prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group at the end of the financial year and of the profit or loss of the Group for that period. In preparing those financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; and state whether applicable accounting standards have been followed. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for the system of internal control, for safeguarding the assets of the Company and Group and hence for taking reasonable steps to prevent and detect fraud and other irregularities.

35 Independent auditors report to the members of FirstGroup plc We have audited the financial statements of FirstGroup plc for the year ended 31 March 2004 which comprise the consolidated profit and loss account, the balance sheets, the consolidated cash flow statement, the reconciliation of net cash flows to movements in net debt, the consolidated statement of total recognised gains and losses, the reconciliation of movements in shareholders funds and the related notes 1 to 31. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the part of the Directors remuneration report that is described as having been audited. This report is made solely to the Company s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As described in the statement of Directors responsibilities, the Company s Directors are responsible for the preparation of the financial statements in accordance with applicable United Kingdom law and accounting standards. They are also responsible for the preparation of the other information contained in the annual report including the Directors remuneration report. Our responsibility is to audit the financial statements and the part of the Directors remuneration report described as having been audited in accordance with relevant United Kingdom legal and regulatory requirements and auditing standards. 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 part of the Directors remuneration report described as having been audited 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 with the Company and other members of the Group is not disclosed. We review whether the corporate governance statement reflects the Company's compliance with the seven provisions of the 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 form an opinion on the effectiveness of the Group s corporate governance procedures or its risk and control procedures. We read the Directors report and the other information contained in the annual report for the above year as described in the contents section including the unaudited part of the Directors remuneration report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with United Kingdom 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 part of the Directors remuneration report described as having been audited. 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 circumstances of the Company and the Group, 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 part of the Directors remuneration report described as having been audited 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 and the part of the Directors remuneration report described as having been audited. Opinion In our opinion: the financial statements give a true and fair view of the state of affairs of the Company and the Group as at 31 March 2004 and of the profit of the Group for the year then ended; and the financial statements and part of the Directors remuneration report described as having been audited have been properly prepared in accordance with the Companies Act 1985. Deloitte & Touche LLP Chartered Accountants and Registered Auditors London 11 May 2004

36 Consolidated profit and loss account For the year ended 31 March 2004 Before Before goodwill Goodwill goodwill Goodwill amortisation amortisation amortisation amortisation and and and and exceptional exceptional exceptional exceptional items items Total items items Total 2004 2004 2004 2003 2003 2003 Notes m m m m m m Turnover Continuing operations 2,369.4 2,369.4 2,291.0 2,291.0 Acquisitions 109.6 109.6 Group turnover 2 2,479.0 2,479.0 2,291.0 2,291.0 Operating profit Continuing operations 196.4 (37.0) 159.4 216.1 (36.4) 179.7 Acquisitions 7.7 (2.4) 5.3 Group operating profit 2 204.1 (39.4) 164.7 216.1 (36.4) 179.7 Group operating profit before goodwill amortisation and exceptional items 204.1 204.1 216.1 216.1 Goodwill amortisation 2 (25.9) (25.9) (25.8) (25.8) Exceptional items, net 4 (13.5) (13.5) (10.6) (10.6) Group operating profit 2 204.1 (39.4) 164.7 216.1 (36.4) 179.7 Profit on disposal of fixed assets 19.6 19.6 10.0 10.0 Profit on ordinary activities before interest 2 204.1 (19.8) 184.3 216.1 (26.4) 189.7 Net interest payable and similar charges 6 (42.8) (18.7) (61.5) (56.3) (56.3) Profit on ordinary activities before taxation 7 161.3 (38.5) 122.8 159.8 (26.4) 133.4 Tax on profit on ordinary activities 8 (48.4) 17.8 (30.6) (47.9) 12.1 (35.8) Profit on ordinary activities after taxation 112.9 (20.7) 92.2 111.9 (14.3) 97.6 Equity minority interests (0.9) (0.9) (0.1) (0.1) Profit for the financial year 112.0 (20.7) 91.3 111.8 (14.3) 97.5 Equity dividends paid and proposed 9 (47.3) (47.3) (45.5) (45.5) Retained profit for the financial year 23 64.7 (20.7) 44.0 66.3 (14.3) 52.0 Adjusted Actual Adjusted Actual Basic earnings per share 10 27.3p 22.3p 26.8p 23.4p Cash earnings per share 10 52.4p 50.6p Diluted earnings per share 22.2p 23.4p

37 Balance sheets At 31 March 2004 Group Company 2004 2003 2004 2003 Notes m m m m Assets employed: Fixed assets Goodwill 11 461.2 496.7 Tangible fixed assets 12 797.6 775.8 Investments 13 0.6 0.7 1,684.5 1,659.5 1,259.4 1,273.2 1,684.5 1,659.5 Current assets Stocks 14 35.1 28.9 Debtors 15 394.7 345.8 1,219.2 1,028.4 Investments 16 30.3 45.7 Cash at bank and in hand 17 94.9 35.6 7.2 555.0 456.0 1,219.2 1,035.6 Creditors: amounts falling due within one year 18 (647.9) (571.5) (1,066.2) (961.8) Net current (liabilities)/assets Amounts due within one year (143.0) (159.3) 153.0 73.8 Amounts due after more than one year 15 50.1 43.8 Net current (liabilities)/assets (92.9) (115.5) 153.0 73.8 Total assets less current liabilities 1,166.5 1,157.7 1,837.5 1,733.3 Creditors: amounts falling due after more than one year 18 (682.8) (630.9) (652.6) (589.1) Provisions for liabilities and charges 20 (128.1) (124.0) 355.6 402.8 1,184.9 1,144.2 Financed by: Capital and reserves Called up share capital 22 20.1 20.7 20.1 20.7 Share premium account 23 238.8 238.8 238.8 238.8 Revaluation reserve 23 3.4 3.5 Other reserves 23 4.4 3.8 261.9 261.3 Profit and loss account 23 86.8 134.9 664.1 623.4 Equity shareholders funds 353.5 401.7 1,184.9 1,144.2 Equity minority interests 2.1 1.1 These financial statements were approved by the Board of Directors on 11 May 2004 and were signed on its behalf by: Moir Lockhead Director Iain M Lanaghan Director 355.6 402.8 1,184.9 1,144.2

38 Consolidated cash flow statement For the year ended 31 March 2004 2004 2003 Notes m m Net cash inflow from operating activities 24(a) 312.3 219.7 Returns on investment and servicing of finance 24(b) (65.2) (31.0) Taxation Corporation tax paid (23.7) (23.6) Capital expenditure and financial investment 24(c) (147.3) (82.2) Acquisitions and disposals 24(d) (49.7) (23.8) Equity dividends paid (45.9) (44.0) Cash (outflow)/inflow before use of liquid resources and financing (19.5) 15.1 Management of liquid resources Decrease in liquid bank deposits 15.4 14.7 Financing 24(e) 46.2 (47.4) Increase/(decrease) in cash in year 42.1 (17.6) Reconciliation of net cash flows to movements in net debt For the year ended 31 March 2004 2004 2003 Notes m m Increase/(decrease) in cash in year 42.1 (17.6) Cash (inflow)/outflow from (increase)/decrease in debt and HP contract and finance lease financing (75.4) 32.7 Movement in current asset investments (15.4) (14.7) Fees on issue of Bond and loan facility 1.3 1.6 Amortisation of debt issuance fees (0.8) (0.5) Foreign exchange differences 41.9 26.6 Movement in net debt in year (6.3) 28.1 Net debt at beginning of year 25 (624.4) (652.5) Net debt at end of year 25 (630.7) (624.4)

39 Consolidated statement of total recognised gains and losses For the year ended 31 March 2004 Group Company 2004 2003 2004 2003 m m m m Profit for the financial year 91.3 97.5 115.9 92.2 Foreign exchange differences (63.0) (53.2) 1.3 (4.0) Tax on foreign exchange 1.2 Total recognised gains and losses for the year 28.3 44.3 117.2 89.4 Reconciliation of movements in shareholders funds For the year ended 31 March 2004 Group Company 2004 2003 2004 2003 m m m m Profit for the financial year 91.3 97.5 115.9 92.2 Dividends (47.3) (45.5) (47.3) (45.5) 44.0 52.0 68.6 46.7 Shares issued to QUEST 2.1 2.1 Own shares purchased and cancelled (29.2) (17.1) (29.2) (17.1) Write down of own shares held by QUEST (1.1) Foreign exchange differences (63.0) (53.2) 1.3 (4.0) Tax on foreign exchange 1.2 Net (reduction)/increase in shareholders funds (48.2) (17.3) 40.7 28.9 Shareholders funds at beginning of year 401.7 419.0 1,144.2 1,115.3 Shareholders funds at end of year 353.5 401.7 1,184.9 1,144.2 No note of historical cost profits and losses is given as there are no material differences between the results as set out in the consolidated profit and loss account, and their historical cost equivalents.

40 Notes to the financial statements 1 Principal accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group s financial statements. (a) Basis of preparation The financial statements have been prepared under the historical cost convention, modified to include the revaluation of certain fixed assets, and in accordance with applicable United Kingdom accounting standards. (b) Basis of consolidation The consolidated financial statements incorporate the accounts of the Company and all of its subsidiary undertakings; all accounts are made up to 31 March 2004. The results of subsidiary undertakings are included in the financial statements under the principles of FRS 6 from the date control passes. No profit and loss account is presented for the Company as permitted by section 230 of the Companies Act 1985. In the accounts of the Company, investments in subsidiary undertakings are stated at cost less provision for impairment. Dividends received and receivable are credited to the profit and loss account to the extent that they represent a realised profit for the Company. (c) Goodwill Goodwill arising on acquisitions made after 1 April 1998 is shown on the balance sheet as an intangible fixed asset. Where capitalised goodwill is regarded as having a limited useful economic life, it is amortised over that life. Where capitalised goodwill is regarded as having an indefinite useful economic life, it is not amortised. Where capitalised goodwill is amortised over a life of greater than 20 years, or is not amortised, annual impairment reviews are conducted to compare the book value with the recoverable amount. If the recoverable amount has fallen below the book value, the goodwill is written down to the recoverable amount immediately. The Companies Act 1985 requires goodwill that is treated as an asset to be amortised systematically over a finite period. In order to show a true and fair view of the Group s results, goodwill of 68.6m arising on the acquisitions of Mainline and Capital Citybus is not being amortised because of a number of factors which have led the Directors to conclude that the goodwill has an indefinite life. These include the stability of the bus industry, its lack of fundamental change and the Group s track record in maintaining and enhancing the values of its businesses. This treatment of goodwill as having an indefinite life is in accordance with FRS 10. It is not possible to quantify the effect on the Group s results if the Act were to be followed, as it would depend on the finite life that was used. Capitalised goodwill arising on other acquisitions is being amortised over a period of up to 20 years on a straight line basis. Capitalised goodwill arising on foreign acquisitions is denominated in the currency in which the acquired company s assets and liabilities are recorded. Fair value accounting adjustments are made in respect of acquisitions. In the year of acquisition, some adjustments are made using provisional estimates, based on information available at the time the financial statements are prepared, and amendments are sometimes necessary in the following accounting period, with a corresponding adjustment to goodwill, when the information necessary to determine these estimates is available. Prior to 1 April 1998, all goodwill arising on acquisitions was written off to reserves. This goodwill has not been reinstated on the balance sheet. On disposal of the businesses concerned this goodwill is included in determining the gain or loss on disposal in the profit and loss account. (d) Turnover Turnover represents the amounts receivable for services supplied to customers during the year and includes rail support grants and amounts receivable for tendered services and concessionary fare schemes. (e) Fixed assets and depreciation Depreciation is provided to write off the cost or valuation less residual value of tangible fixed assets over their estimated useful economic lives as follows: Freehold buildings 50 years straight line Long leasehold buildings 50 years straight line Short leasehold properties period of lease Passenger carrying vehicles 7 to 15 years straight line Other plant and equipment 3 to 25 years straight line No depreciation is provided on freehold land, the land element of long leasehold properties or on assets in the course of construction. Surpluses or deficits arising on the revaluation of tangible fixed assets are credited or debited to a revaluation reserve. On a subsequent disposal of a revalued asset, the revaluation surplus or deficit relating to this asset is transferred to the profit and loss account reserve. From 1 April 1999 the Group s policy has been not to revalue tangible fixed assets. Properties that had been revalued before that date retained their book value, in accordance with the transitional rules of FRS 15.

41 1 Principal accounting policies continued (f) Hire purchase contracts and leases Assets held under hire purchase contracts and under finance leases, which are those leases where substantially all the risks and rewards of ownership of the asset have passed to the Group are recorded in the balance sheet as tangible fixed assets. Depreciation is provided on these assets over their estimated useful lives or lease term, as appropriate. Future obligations under hire purchase contracts and finance leases are included in creditors, net of finance charges. Payments are apportioned between the finance element, which is charged to the profit and loss account as interest, and the capital element, which reduces the outstanding obligations. The finance charges are calculated in relation to the reducing amount of obligations outstanding and are charged to the profit and loss account on the same basis. All other leases are operating leases and the rental charges are taken to the profit and loss account on a straight line basis over the life of the lease. (g) Government grants and subsidies Rail support grants and amounts receivable for tendered services and concessionary fare schemes are included in turnover and are recognised in the profit and loss account as the related expenditure is incurred. (h) Stocks and work in progress Stocks are valued at the lower of cost and net realisable value. (i) Foreign currencies Assets and liabilities denominated in foreign currencies are translated into sterling at rates of exchange ruling at the year end and results of foreign enterprises are translated at the average rates of exchange during the year. Differences on exchange arising on the retranslation of net investments in foreign enterprises and from the translation of results at an average rate are taken to reserves. Where foreign currency borrowings or currency swaps are used to finance or hedge investments in foreign enterprises, the gain or loss on translation is also taken to reserves. All other exchange differences are dealt with through the profit and loss account. (j) Taxation The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes. Provision is made for deferred tax on all timing differences except those arising from the revaluation of fixed assets for which there is no binding agreement to sell or on the undistributed profits of overseas subsidiaries, associates and joint ventures. Deferred tax is calculated at the rates at which it is estimated the tax will arise. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. The deferred tax provision is not discounted to net present value. (k) Pension costs Retirement benefits are provided for most employees of the Group by means of defined benefit pension schemes. These are funded by contributions from the Group and employees. The Group s contributions are charged to the profit and loss account, based on recommendations by independent actuaries, in such a way as to provide for the liabilities evenly over the average remaining working lives of the employees. The difference between the charge to the profit and loss account and the contributions paid by the Group is shown as an asset or a liability in the balance sheet and the tax effect of this timing difference is included in deferred taxation. (l) Financial instruments Various derivative instruments are utilised by the Group principally to manage interest rate, fuel and forward exchange risks. The Group does not enter into speculative derivative contracts. All such instruments are used for hedging purposes to alter the risk profile of an existing underlying exposure of the Group, in line with the Group s risk management policies. Amounts payable or receivable in respect of interest rate swaps and fuel derivatives are recognised as adjustments to interest expense and fuel costs respectively over the period of the contracts. (m) Insurance The Group s policy is to self-insure high frequency, low value claims within the businesses. To provide protection above these types of losses, cover is obtained through third-party insurance policies. Provision is made for the estimated cost of settling insurance claims for incidents occurring prior to balance sheet date. (n) Debt Debt is initially stated at the amount of the net proceeds after the deduction of issue costs. The carrying amount is increased by the finance cost in respect of the accounting period and reduced by payments made in the period.

42 Notes to the financial statements continued Continuing Total Total 2 Profit and loss account analysis operations Acquisitions 2004 2003 and segmental information m m m m Group turnover 2,369.4 109.6 2,479.0 2,291.0 Group operating costs General (2,173.0) (101.9) (2,274.9) (2,074.9) Goodwill amortisation (24.3) (1.6) (25.9) (25.8) Exceptional items, net (note 4) (12.7) (0.8) (13.5) (10.6) Total Group operating costs (note 3) (2,210.0) (104.3) (2,314.3) (2,111.3) Group operating profit 159.4 5.3 164.7 179.7 Operating profit before goodwill and Turnover exceptional items Net assets/(liabilities) 2004 2003 2004 2003 2004 2003 Segmental information is as follows: m m m m m m UK Bus 906.2 859.4 111.2 111.7 228.3 267.2 UK Rail 945.0 842.3 49.8 61.3 (4.4) (37.9) North America 620.7 582.4 63.5 61.3 435.8 483.5 Financing element of UK Bus leases (8.3) (6.7) Group items 7.1 6.9 (12.1) (11.5) (304.1) (310.0) 2,479.0 2,291.0 204.1 216.1 355.6 402.8 Exceptional items (note 4) (13.5) (10.6) Goodwill amortisation (note 11) (25.9) (25.8) Group operating profit 164.7 179.7 Profit on disposal of fixed assets 19.6 10.0 Profit on ordinary activities before interest 184.3 189.7 All of the Group turnover and Group operating profit for the year was generated in the United Kingdom, except that shown above as being generated in North America. Continuing Total Total operations Acquisitions 2004 2003 3 Operating costs m m m m Materials and consumables 251.0 7.9 258.9 235.4 Staff costs (note 5) 1,055.0 44.9 1,099.9 1,009.9 External charges 778.7 47.9 826.6 741.0 Depreciation, amortisation and other amounts written off fixed assets 125.3 3.6 128.9 125.0 2,210.0 104.3 2,314.3 2,111.3 North Total Total UK Bus UK Rail America Other 2004 2003 4 Exceptional items, net m m m m m m Restructuring costs 5.9 0.9 6.8 6.0 Bid costs 5.9 0.8 6.7 3.4 Claims settlements 3.7 Gain on disposal of Tramtrack Croydon (2.5) The tax effect in 2004 was a credit of 4.1m (2003: credit of 3.1m). 5.9 5.9 0.9 0.8 13.5 10.6

43 5 Employees and Directors remuneration 2004 2003 The average number of persons employed by the Group (including Directors) during the year was as follows: No. No. Operational 56,483 52,257 Administration 5,414 4,862 61,897 57,119 2004 2003 The aggregate payroll costs of these persons were as follows: m m Wages and salaries 996.4 923.6 Social security costs 69.3 60.2 Other pension costs 34.2 26.1 1,099.9 1,009.9 Disclosures on Directors remuneration, share options, long-term incentive schemes and pension entitlements required by the Companies Act 1985 and those specified for audit by the Financial Services Authority are contained in the tables/notes within the Directors remuneration report on pages 25 to 30 and form part of these audited financial statements. 2004 2003 6 Net interest payable and similar charges m m Bond and bank facilities 37.5 47.6 Loan notes 1.5 1.9 Finance charges payable in respect of hire purchase contracts and finance leases 3.3 6.5 42.3 56.0 Income from short-term deposits and other investments (2.4) (2.6) Notional interest on provisions 2.9 2.9 Net interest payable and similar charges before exceptional items 42.8 56.3 Cancellation of interest rate swaps 18.7 61.5 56.3 7 Profit on ordinary activities before taxation 2004 2003 Profit on ordinary activities before taxation is stated after charging/(crediting) the following: m m Depreciation and amounts written off tangible fixed assets 103.0 99.2 Goodwill amortisation 25.9 25.8 Rentals payable under operating leases plant and machinery 19.4 17.2 track and station access 272.2 278.4 hire of rolling stock 78.4 71.8 other assets 11.4 11.4 Net rents receivable from property (0.1) (0.1) Deloitte & Touche LLP audit fee 0.5 0.4 Deloitte & Touche LLP and associates non-audit fees 1.1 0.4 The Company s audit fee amounted to 0.1m (2003: 0.1m). Non-audit fees comprised of due diligence on acquisitions of 474,000 (2003: 203,000), UK Rail franchise reviews of 280,000 (2003: 45,000), other assurance services including the review of the interim accounts of 122,000 (2003: 134,000), UK bond issue 50,000 (2003: nil), International Financial Reporting Standards work 50,000 (2003: nil), tax advisory services of 33,000 (2003: nil) and other non-audit services of 69,000 (2003: 42,000).

44 Notes to the financial statements continued 2004 2003 8 Tax on profit on ordinary activities m m m m Current taxation UK corporation tax charge for the year 20.3 26.4 Adjustment in respect of prior years 0.2 (0.4) 20.5 26.0 Overseas taxation charge Current year 0.8 1.2 Total current taxation 21.3 27.2 Deferred taxation Origination and reversal of timing differences 10.0 7.9 Adjustment in respect of prior years (0.7) 0.7 9.3 8.6 30.6 35.8 The standard rate of taxation for the year, based on the UK standard rate of corporation tax is 30%. The actual current tax charge for the current and previous year differed from the standard rate for the reasons set out in the following reconciliation: 2004 2003 % % Standard rate of taxation 30.0 30.0 Factors affecting charge Disallowable expenses 1.7 2.3 Property disposals (4.8) (2.2) Capital allowances in excess of depreciation (11.5) (13.8) Other timing differences (2.2) (4.4) Gain on disposal of Tramtrack Croydon Limited (0.6) Foreign tax charged at different rates 2.7 2.0 Utilisation of tax losses brought forward (0.3) Unrelieved tax losses carried forward 1.6 7.4 Prior years tax charge 0.2 (0.3) 17.4 20.4 No provision has been made for deferred tax on revalued property. The tax on the gains arising would only become payable if the property were sold without rollover relief being available. The tax which would be payable under such circumstances is estimated to be 0.2m (2003: 0.6m). These assets are expected to be used in the continuing operations of the business and, therefore, no tax is expected to be paid in the foreseeable future. No deferred tax has been recognised on property gains as it is anticipated that rollover relief will be available. To benefit from the relief the proceeds should be reinvested in new property within three years of disposal. The tax that would be payable assuming that reinvestment was not made within three years amounts to 2.5m (2003: nil). No deferred tax has been provided on the future remittance of overseas reserves as it is not expected that the reserves will be repatriated to the UK in the foreseeable future. 2004 2003 9 Equity dividends m m Ordinary shares of 5p each Interim paid 3.75p (2003: 3.55p) per share 15.5 14.8 Final proposed 7.9p (2003: 7.45p) per share 31.8 30.8 Adjustment to prior year dividend in respect of shares cancelled (0.1) 47.3 45.5

45 10 Earnings per share (EPS) Basic EPS is based on earnings of 91.3m (2003: 97.5m) and on the weighted average number of ordinary shares of 410.0m (2003: 416.7m) in issue. Diluted EPS is based on the same earnings and on the weighted average number of ordinary shares of 411.5m (2003: 417.4m). 2004 2003 Number Number A reconciliation of the number of shares used in the basic and diluted measures is set out below: (m) (m) Weighted average number of shares used in basic calculation 410.0 416.7 SAYE share options 1.5 0.6 Long-term incentive plan awards 0.1 411.5 417.4 The adjusted basic EPS and adjusted cash EPS measures are intended to demonstrate recurring elements of the results of the Group before goodwill amortisation and exceptional items. Both the adjusted basic and cash measures of EPS use the same weighted average number of ordinary shares as the basic EPS measure. A reconciliation of the earnings used in these measures is set out below: 2004 2003 Earnings Earnings per share per share m (p) m (p) Profit for basic EPS calculation 91.3 22.3 97.5 23.4 Goodwill amortisation 25.9 6.3 25.8 6.2 Taxation effect of this adjustment (8.1) (2.0) (9.0) (2.2) Exceptional items, net 13.5 3.3 10.6 2.5 Taxation effect of this adjustment (4.1) (1.0) (3.1) (0.7) Exceptional interest rate charge 18.7 4.6 Taxation effect of this adjustment (5.6) (1.4) Profit on disposal of fixed assets (19.6) (4.8) (10.0) (2.4) Profit for adjusted basic EPS calculation 112.0 27.3 111.8 26.8 Depreciation 103.0 25.1 99.2 23.8 Profit for adjusted cash EPS calculation 215.0 52.4 211.0 50.6 11 Goodwill m Cost At 1 April 2003 584.8 Additions 44.1 Exchange rate differences (66.3) At 31 March 2004 562.6 Amortisation At 1 April 2003 88.1 Charge for year 25.9 Exchange rate differences (12.6) At 31 March 2004 101.4 Net book value At 31 March 2004 461.2 At 31 March 2003 496.7 Goodwill additions comprise 29.2m on acquisition of subsidiary undertakings (note 13 and 9.0m of goodwill arising on the acquisition of Aircoach) and 14.9m on purchase of businesses (note 27).

46 Notes to the financial statements continued Passenger Land and carrying plant and 12 Tangible fixed assets buildings vehicle fleet equipment Total m m m m Cost or valuation At 1 April 2003 128.4 1,134.5 142.3 1,405.2 Subsidiary undertakings and businesses acquired 2.4 13.5 3.3 19.2 Additions 23.8 125.3 15.6 164.7 Disposals (10.0) (37.2) (2.4) (49.6) Exchange rate differences (3.1) (62.1) (4.2) (69.4) At 31 March 2004 141.5 1,174.0 154.6 1,470.1 Depreciation At 1 April 2003 19.9 520.5 89.0 629.4 Subsidiary undertakings and businesses acquired 0.2 1.7 1.9 Charge for year 3.2 84.1 15.7 103.0 Disposals (1.2) (32.7) (1.7) (35.6) Exchange rate differences (0.6) (23.4) (2.2) (26.2) At 31 March 2004 21.5 548.5 102.5 672.5 Net book value At 31 March 2004 120.0 625.5 52.1 797.6 At 31 March 2003 108.5 614.0 53.3 775.8 Other 2004 2003 The net book value of land and buildings comprises: m m Freehold 101.0 93.5 Long leasehold 15.6 11.2 Short leasehold 3.4 3.8 Depreciation is not provided on the land element of freehold and long leasehold property which amounts to 31.7m (2003: 32.4m). 120.0 108.5 2004 2003 The assets that have been revalued comprise the following land and buildings: m m At 1993 professional valuations 12.6 14.9 Aggregate depreciation thereon (1.3) (1.4) Net book value 11.3 13.5 Historical cost of revalued assets 10.9 13.1 Aggregate depreciation based on historical cost (3.0) (3.1) Historical net book value 7.9 10.0 The 1993 professional valuations were carried out by Chesterton International Limited, International Property Consultants, and Messrs Graham and Sibbald, Chartered Surveyors (RICS), on the basis of open market value for existing use. Included in the net book value above is 133.0m (2003: 189.8m) of tangible fixed assets held under hire purchase contracts and finance leases. The depreciation charge on these assets during the year was 18.1m (2003: 24.8m).

47 13 Fixed asset investments investments shares Total Group m m m Cost At 1 April 2003 7.5 1.2 8.7 Additions 1.3 1.3 Disposals (1.9) (1.9) At 31 March 2004 7.5 0.6 8.1 Provision At 1 April 2003 (7.5) (0.5) (8.0) Disposals 0.5 0.5 At 31 March 2004 (7.5) (7.5) Net book value At 31 March 2004 0.6 0.6 At 31 March 2003 0.7 0.7 Other Own Unlisted subsidiary Other Own Company undertakings investments shares Total m m m m Cost At 1 April 2003 1,664.2 8.1 1.2 1,673.5 Additions 25.1 1.3 26.4 Disposals (1.9) (1.9) At 31 March 2004 1,689.3 8.1 0.6 1,698.0 Provision At 1 April 2003 (5.4) (8.1) (0.5) (14.0) Disposals 0.5 0.5 At 31 March 2004 (5.4) (8.1) (13.5) Net book value At 31 March 2004 1,683.9 0.6 1,684.5 At 31 March 2003 1,658.8 0.7 1,659.5

48 Notes to the financial statements continued 13 Fixed asset investments continued Subsidiary undertakings The principal subsidiary undertakings of FirstGroup plc at the end of the year were: UK local bus and coach operators First Midland Red Buses Limited Transit contracting and fleet CentreWest London Buses Limited First PMT Limited maintenance First Aberdeen Limited+ First Somerset & Avon Limited First Transit, Inc First Beeline Buses Limited First South Yorkshire Limited First Bristol Limited First Wessex Limited Rail companies First Capital East Limited First West Yorkshire Limited Anglia Railways Train Services Limited First Capital North Limited First York Limited FirstInfo Limited First Cymru Buses Limited Leicester CityBus Limited (94%) First/Keolis TransPennine Limited (55%) First Devon & Cornwall Limited Northampton Transport Limited GB Railfreight Limited First Eastern Counties Limited Great Eastern Railway Limited First Edinburgh Limited+ North America school bus operators Great Western Trains Company Limited First Essex Buses Limited First Student, Inc Hull Trains Company Limited (80%) First Glasgow (No. 1) Limited+ FirstBus Canada Limited North Western Trains Company Limited First Glasgow (No. 2) Limited+ FirstGroup America, Inc First Hampshire and Dorset Limited FirstGroup USA, Inc First Manchester Limited All subsidiary undertakings are wholly owned at the end of the year except where percentage of ownership is shown above. All these companies above are incorporated in Great Britain and registered in England and Wales except those marked + which are registered in Scotland, those marked which are incorporated in the United States of America and that marked which is registered in Canada. All shares held in subsidiary undertakings are ordinary shares, with the exception of Leicester CityBus Limited where the Group owns 100% of its redeemable cumulative preference shares, as well as 94% of its ordinary shares. All of these subsidiary undertakings are owned via intermediate holding companies except Great Eastern Railway Limited, which is owned by FirstGroup plc. There are, in addition to those listed above, a number of subsidiary undertakings which are mostly intermediate holding companies or were dormant throughout the year. A full list of subsidiary undertakings is filed with the Annual Return to the Registrar of Companies. Acquisitions of subsidiary undertakings On 14 August 2003 the offer for GB Railways Group Plc was declared unconditional in all respects and in December 2003 as over 90% of the shares had been acquired, the full 100% acquisition was completed via compulsory purchase of the remaining shareholdings. The fair value of the net assets acquired was 4.9m. The resulting goodwill of 20.2m was capitalised. The following table sets out the book values of the identifiable assets and liabilities on acquisition: Tangible fixed assets 1.8 Other current assets 10.3 Cash at bank and in hand 10.4 Season ticket bond (6.2) Other creditors (11.4) 4.9 Goodwill 20.2 Satisfied by cash paid and payable 25.1 There were no material differences between the book values and the fair values of the assets and liabilities acquired. An amount of nil has been charged to the Group profit and loss account in respect of costs incurred in reorganising, restructuring and integrating the acquisition of GB Railways Group Plc in the period from 14 August 2003 to 31 March 2004. GB Railways Group Plc earned a profit after taxation and minority interests of 1.1m in the year ended 31 March 2004, of which a loss of 0.6m arose in the period from 1 April 2003 to 14 August 2003. The summarised profit and loss account for the period from 1 April 2003 to 31 August 2003, shown on the basis of the accounting policies of GB Railways Group Plc prior to the acquisition, is as follows: m 25.1

49 13 Fixed asset investments continued Turnover 37.7 Other operating expenses (37.5) Operating profit 0.2 Exceptional costs (0.8) Loss on ordinary activities before taxation (0.6) Tax on loss on ordinary activities Loss on ordinary activities after taxation and for the financial period (0.6) GB Railways Group plc contributed 2.8m to the Group s net operating cash flows, received 0.1m in respect of net returns on investments and servicing of finance, paid nil in respect of taxation, utilised 0.3m for capital expenditure and paid nil in respect of financing. Other investments The interest in other investments at the end of the year is a 6% interest in the ordinary share capital of Prepayment Cards Limited, which is incorporated in Great Britain and registered in England and Wales. Own shares Details of the number and market value of own shares held in the FirstGroup plc ESOP and other employee trusts are as follows: m 2004 2003 Number (m) m Number (m) m Own shares held by trustees 2.7 7.3 5.1 12.3 Own shares vested unconditionally (2.5) (6.6) (4.7) (11.4) 0.2 0.7 0.4 0.9 The number of own shares held by the Group at the end of the year was 246,431 (2003: 382,015) FirstGroup plc ordinary shares of 5p each. Of these, 206,422 (2003: 319,956) were held by the FirstGroup plc Employee Benefit Trust and 40,009 (2003: 62,059) by the FirstGroup plc Qualifying Employee Share Ownership Trust (QUEST). The shares held by the QUEST are being used to satisfy exercises of savings related share options. Both trusts have waived the rights to dividend income from the FirstGroup plc shares. The market value of the shares at 31 March 2004 was 0.7m (2003: 0.9m). 2004 2003 14 Stocks m m Spare parts and consumables 24.0 23.1 Property development work in progress 11.1 5.8 There is no material difference between the balance sheet value of stocks and their replacement cost. Group 35.1 28.9 Company 2004 2003 2004 2003 15 Debtors m m m m Amounts due within one year Trade debtors 233.9 190.5 Amounts due from subsidiary undertakings 1,203.0 1,021.7 Corporation tax recoverable 15.3 5.7 Deferred taxation 0.9 0.6 Other debtors 52.7 44.5 0.4 Pension funds prepayments 10.4 8.1 Other prepayments and accrued income 47.6 58.9 344.6 302.0 1,219.2 1,028.4 Amounts due after more than one year Pension funds prepayments 48.7 42.4 Other prepayments and accrued income 1.4 1.4 50.1 43.8 394.7 345.8 1,219.2 1,028.4

50 Notes to the financial statements continued Group Company 2004 2003 2004 2003 16 Current asset investments m m m m Bank deposits 30.3 45.7 Group Company 2004 2003 2004 2003 17 Cash at bank and in hand m m m m Ring-fenced cash 68.7 22.2 Other cash 26.2 13.4 7.2 94.9 35.6 7.2 Under the terms of the Rail franchise agreements, cash can only be distributed by the train operating companies up to the amount of retained profits. The ring-fenced cash represents that which is not available for distribution at the balance sheet date. Group Company 2004 2003 2004 2003 18 Creditors m m m m Amounts due within one year Bank loans and overdrafts 52.0 40.0 174.4 138.0 Obligations under hire purchase contracts and finance leases 20.8 34.2 Loan notes 0.3 0.6 0.3 0.4 Trade creditors 156.4 102.9 Amounts due to subsidiary undertakings 834.4 761.0 Corporation tax 25.1 27.2 Other tax and social security 21.2 18.5 Other creditors 15.9 33.0 Pension funds creditors 11.7 11.3 Accruals and deferred income 271.8 235.0 24.7 31.4 Season ticket deferred income 40.3 37.8 Proposed dividends 32.4 31.0 32.4 31.0 647.9 571.5 1,066.2 961.8 Group Company 2004 2003 2004 2003 m m m m Amounts falling due after more than one year Bank loans Due in more than two years but not more than five years 110.6 286.8 110.6 286.8 Obligations under hire purchase contracts and finance leases Due in more than one year but not more than two years 7.7 21.5 Due in more than two years but not more than five years 3.6 6.1 Due in more than five years 4.8 0.1 Loan notes Due in more than one year but not more than two years 21.0 21.3 6.9 7.2 300.0m Sterling bond 6.875% 2013 295.5 295.1 295.5 295.1 250.0m bond 6.125% 2019 239.6 239.6 682.8 630.9 652.6 589.1 Bank loans and overdrafts Whilst advances under bank facilities are generally repayable within a few months of the balance sheet date, they have been classified by reference to the maturity date of the longest refinancing permitted under these facilities in accordance with FRS 4. The bank loans and overdrafts are unsecured.

51 18 Creditors continued 2004 2003 The maturity profile of the undrawn committed borrowing facilities is as follows: m m Facilities maturing: Within one year 40.0 More than two years 390.4 205.6 390.4 245.6 Hire purchase contracts and finance leases Hire purchase contract and finance lease liabilities are secured on the assets to which they relate. The contracts vary in length between four and 12 years. Loan notes The loan notes have been classified by reference to the earliest date on which the loan note holders can request redemption. Loan notes of 20.5m (2003: 20.6m) are supported by bank guarantees from certain subsidiaries. Bonds The 300m bond is repayable in 2013 and is shown net of 4.5m (2003: 4.9m) of issue related costs which are being amortised over the term of the bond. The 250m bond is repayable in 2019 and was swapped to US Dollars on a floating six month LIBOR basis. The Sterling equivalent shown is net of a foreign exchange gain of 9.1m on retranslation at year end and is also net of 1.3m of issue related costs which are being amortised over the term of the bond. Certain subsidiaries have issued guarantees to the Company s bondholders. These guarantees rank pari passu with guarantees provided by those subsidiaries to the Group s bank lenders participating in the Group s 400m syndicated bank facility. 19 Financial assets and liabilities Foreign currencies At 31 March 2004, the Group s profit and loss account was not exposed to material exchange rate risk from monetary assets and liabilities denominated in foreign currencies as all such material balances are used to hedge the Group s overseas net assets. Interest rates After taking account of interest rate swaps entered into by the Group, details of the interest rate profile of the Group s financial liabilities, excluding cash, was as follows: Fixed rate liabilities Weighted Total average Weighted financial Floating Fixed interest average liabilities rate rate rate period m m m % Years At 31 March 2004 Sterling 490.3 108.7 381.6 6.97 8.0 US Dollars 249.6 83.3 166.3 2.89 2.5 Canadian Dollars 8.0 8.0 Euros 8.0 8.0 755.9 208.0 547.9 At 31 March 2003 Sterling 417.2 13.2 404.0 7.53 8.9 US Dollars 277.9 117.4 160.5 6.22 1.7 Canadian Dollars 10.6 10.6 705.7 141.2 564.5 The weighted average fixed interest rates of 6.97% and 2.89% on the respective Sterling and US Dollar liabilities include fixed rates under the Group s interest rate hedging programme, which accounts for 15% on Sterling fixed rate debt and 100% for US Dollar fixed rate debt. Sterling fixed rate debt includes an all-in cost of 7.1% relating to the 300m Sterling bond. Bank margins negotiated on floating rate debt range from 0.225% to 0.8% over Sterling LIBOR and US Dollar LIBOR where applicable, or the bank base rate for the currency concerned. Financial assets, which consist wholly of cash on deposit and in hand of 125.2m (2003: 81.3m), are all denominated in Sterling except 3.0m (2003: 3.1m) in US Dollars and 0.6m (2003: 1.5m) in Canadian Dollars. Deposited cash earns interest at commercial rates negotiated with counterparty banks.

52 Notes to the financial statements continued 19 Financial assets and liabilities continued 2004 2003 Fair values Book value Fair value Book value Fair value Details of the book values and fair values of the financial assets and liabilities are as follows: m m m m Bank deposits 30.3 30.3 45.7 45.7 Cash at bank and in hand 94.9 94.9 35.6 35.6 Bank loans and overdrafts (162.6) (162.6) (326.8) (326.8) Obligations under hire purchase contracts and finance leases (36.9) (38.4) (61.9) (62.7) Loan notes (21.3) (25.8) (21.9) (27.1) Interest rate swaps (6.5) (24.5) Fuel derivatives 9.5 8.8 300m bond (295.5) (316.3) (295.1) (323.8) 250m bond (swapped to US Dollars) (239.6) (243.8) (630.7) (658.7) (624.4) (674.8) In order to protect the Group s financial position and performance against net interest rate risk, the Group uses interest rate swaps and fixed rate debt. As a result of movements in interest rates, differences arise between book values and fair values, which are categorised as unrecognised gains and losses as required under FRS 13. The Group also protects its financial position and performance against fuel price risk using a range of fuel derivatives. Movements in fuel prices relative to the prices provided by the derivatives gives rise to differences between book and fair values which are categorised as unrecognised gains and losses as required under FRS 13. Fair values for derivatives and the bonds have been supplied externally by the respective counterparties and banks using market rates prevailing at year end. The book value of the 300m bond is stated at its par value less issue costs of 4.5m (2003: 4.9m). The book value of the 250m bond, which is swapped to US Dollars on a floating rate six month LIBOR basis, is stated at its par value less issue costs of 1.3m and net of an unrealised foreign exchange gain of 9.1m. Fair values for hire purchase debt and loan notes have been determined by discounting future cash flows that will arise under these liabilities. The movement in net unrecognised gains and losses on instruments used to hedge interest rate risk and fuel price risk are as follows: Net unrecognised gains/(losses) 2004 2003 m m At beginning of year (15.7) (5.0) Arising in previous year but recognised in the year 23.4 5.1 Arising before beginning of year and remaining at the end of the year 7.7 0.1 Arising in the year (4.7) (15.8) At end of year 3.0 (15.7) It is expected that 3.0m of the net unrecognised gains (2003: 15.7m unrecognised losses) will be recognised in the following year. Further information on financial instruments is given in the Financial review on pages 15 to 18. Deferred Insurance 20 Provisions for liabilities and charges tax claims Pensions Total Group m m m m At 1 April 2003 88.2 29.8 6.0 124.0 Provided in the year 9.3 23.3 32.6 Utilised in the year (27.3) (0.1) (27.4) Subsidiary undertakings acquired (0.4) (0.4) Notional interest 2.9 2.9 Exchange rate differences (0.7) (2.9) (3.6) At 31 March 2004 96.4 25.8 5.9 128.1 Most of the insurance claims are expected to be settled within four years. The pensions payments will be spread over several decades.

53 21 Deferred tax 2004 2003 Group m m Capital allowances in excess of depreciation 124.8 116.2 Other timing differences 12.7 16.0 Trading losses (41.1) (44.0) Deferred tax provision 96.4 88.2 22 Called up share capital 2004 2003 Group and Company m m Authorised Ordinary shares of 5p each 30.0 30.0 Allotted, called up and fully paid Ordinary shares of 5p each 20.1 20.7 Number The changes in the number and amount of issued share capital during the year are set out below: (m) m At beginning of year 413.4 20.7 Shares cancelled (10.4) (0.6) At end of year 403.0 20.1 Between 5 November 2003 and 17 February 2004, 10,445,000 shares were repurchased at a total cost of 29.2m and cancelled. Share premium Revaluation Profit and 23 Reserves account reserve loss account Group m m m At 1 April 2003 238.8 3.5 134.9 Cancellation of shares (29.2) Retained profit for the year 44.0 Foreign exchange differences (63.0) Transfer of realised revaluation reserve (0.1) 0.1 At 31 March 2004 238.8 3.4 86.8 Capital redemption Capital Total other reserve reserves reserves m m m At 1 April 2003 1.1 2.7 3.8 Cancellation of shares 0.6 0.6 At 31 March 2004 1.7 2.7 4.4 Share premium account Profit and loss account Company m m At 1 April 2003 238.8 623.4 Cancellation of shares (29.2) Retained profit for the year 68.6 Foreign exchange differences 1.3 At 31 March 2004 238.8 664.1 Capital Total redemption Capital Merger other reserve reserves reserve reserves m m m m At 1 April 2003 1.1 93.8 166.4 261.3 Cancellation of shares 0.6 0.6 At 31 March 2004 1.7 93.8 166.4 261.9

54 Notes to the financial statements continued 2004 2003 24 Notes to the consolidated cash flow statement m m (a) Reconciliation of operating profit to net cash inflow from operating activities Operating profit 164.7 179.7 Depreciation and other amounts written off tangible fixed assets 103.0 99.2 Amortisation charges 25.9 25.8 Loss on sale of non-property fixed assets 1.3 0.2 Profit on sale of investment in joint venture (2.5) Increase in stocks (1.3) Increase in debtors (49.4) (77.3) Increase/(decrease) in creditors and provisions 68.1 (5.4) Net cash inflow from operating activities 312.3 219.7 (b) Returns on investments and servicing of finance Interest received 2.4 2.7 Interest paid (44.3) (25.1) Cancellation of interest rate swaps (18.7) Interest element of hire purchase contracts and finance lease payments (3.3) (7.0) Fees on issue of bond and loan facilities (1.3) (1.6) Net cash outflow from returns on investments and servicing of finance (65.2) (31.0) (c) Capital expenditure and financial investment Purchase of tangible fixed assets (179.8) (107.4) Sale of fixed asset properties 25.4 4.4 Sale of other tangible fixed assets 7.1 4.1 Deposits for rolling stock 16.7 Net cash outflow from capital expenditure and financial investment (147.3) (82.2) (d) Acquisitions and disposals Purchase of subsidiary undertakings (33.7) Purchase of businesses (26.4) (28.1) Net cash acquired with purchase of subsidiary undertakings and businesses 10.4 1.8 Sale of investment in joint venture 2.5 Net cash outflow from acquisitions and disposals (49.7) (23.8) (e) Financing Issue of share capital 2.5 Own shares repurchased (29.2) (17.1) Bond 2019 250.0 New bank loans 312.1 Repayments of amounts borrowed: Bank loans (149.2) (285.1) Loan notes (0.6) (2.5) New hire purchase contracts and finance leases 10.2 Capital element of hire purchase and finance lease payments (35.0) (57.3) Net cash inflow/(outflow) from financing 46.2 (47.4)

55 At Other At 31 March Cash non-cash 31 March 25 Analysis of net debt 2003 flow changes 2004 m m m m Cash at bank and in hand 35.6 65.1 (5.8) 94.9 Bank overdrafts (10.0) (23.0) (33.0) Cash 25.6 42.1 (5.8) 61.9 Current asset investments 45.7 (15.4) 30.3 Bank loans due within one year (30.0) 11.0 (19.0) Bank loans due after one year (286.8) 138.2 38.0 (110.6) Sterling bond 2013 (295.1) (0.4) (295.5) Bond 2019 (248.7) 9.1 (239.6) Obligations under hire purchase contracts and finance leases (61.9) 24.8 0.2 (36.9) Loans and loan notes (21.9) 0.6 (21.3) Financing (695.7) (74.1) 46.9 (722.9) Net debt (624.4) (47.4) 41.1 (630.7) Current asset investments represent unencumbered bank deposits of maturity of less than one year. 26 Major non-cash transactions Other non-cash movements in note 25 include 41.9m (2003: 26.6m) of foreign exchange movements. 2004 2003 27 Summary of purchase of businesses m m Fair value of net assets acquired: Tangible assets 15.5 12.0 Other current assets 7.3 1.6 Cash at bank and in hand 1.8 Other creditors (11.3) (5.5) 11.5 9.9 Goodwill 14.9 18.2 26.4 28.1 Satisfied by cash paid and payable 26.4 28.1 There was no material difference between the book value and the fair value of the net assets acquired and there were no adjustments required in respect of accounting policy alignments. The businesses acquired during the year contributed 8.6m (2003: 4.2m) to the Group s net operating cash flows. There were no other cash flow movements from the businesses acquired during the year or the previous year. The businesses acquired during the year and dates of acquisition were: Coach USA Transit 1 July 2003 J Balesera Bus Company 10 July 2003 Wilson Bus Company 8 August 2003 Beechmont 12 December 2003 Contract Transport Services 1 January 2004 RSD Inc 26 March 2004

56 Notes to the financial statements continued 28 Commitments Capital commitments Capital commitments at the end of the year for which no provision has been made are as follows: 2004 2003 m m Contracted for but not provided 2.1 31.6 Operating leases The rail businesses have contracts with Network Rail for access to the railway infrastructure (track, stations and depots). They also have contracts under which they lease rolling stock. Commitments for payments in the next year under these operating leases are as follows: 2004 2003 m m Operating leases which expire: Within one year 13.2 215.8 From one to five years 223.1 123.7 Over five years 52.6 Commitments for payments in the next year under other operating leases are as follows: 288.9 339.5 Land and Land and buildings Other buildings Other 2004 2004 2003 2003 m m m m Operating leases which expire: Within one year 0.7 3.0 1.9 3.5 From one to five years 8.4 14.8 8.7 11.8 Over five years 2.0 1.6 1.3 5.3 11.1 19.4 11.9 20.6 29 Contingent liabilities To support subsidiary undertakings in their normal course of business, the Company has indemnified certain banks and insurance companies who have issued performance bonds for 186.8m as at 31 March 2004 (2003: 149.8m) and letters of credit for 138.0m as at 31 March 2004 (2003: 93.0m). The performance bonds relate to the North American businesses ( 103.6m) and the UK Rail franchise operations ( 83.2m). The letters of credit relate substantially to insurance arrangements in the UK and North America. The Company has provided a 9.0m (2003: 9.0m) unsecured loan facility to Great Eastern Railway Limited (GER), a 15.5m (2003: 15.5m) unsecured loan facility to Great Western Trains Company Limited (GWT) and a 6.5m (2003: 6.5m) unsecured loan facility to North Western Trains Company Limited (NWT) as required by the Director of Passenger Rail Franchising. Neither of the GER or GWT loans were drawn at 31 March 2004 or 31 March 2003, while the NWT loan was fully drawn at 31 March 2003 and undrawn at 31 March 2004. The Company is party to the guarantees granted to banks for overdraft and cash management facilities provided to itself and subsidiary undertakings. The Company has given guarantees for the liabilities of its subsidiary undertakings arising under certain loan notes, hire purchase contracts, finance leases, operating leases, supply contracts and to certain pension scheme trustees. It also provides cross guarantees to certain subsidiary undertakings as required by VAT legislation. UK bus subsidiaries have provided guarantees on a joint and several basis to Trustees of the UK Occupational Pension Scheme. Certain of the Company s subsidiaries have issued guarantees to the Company s bondholders. These guarantees rank pari passu with guarantees provided by those subsidiaries to lenders participating in the Group s 400m syndicated bank facility.

57 30 Pension schemes The Group operates or participates in a number of pension schemes which cover the majority of UK employees and certain North American employees. These are principally defined benefit schemes under which benefits provided are based on employees number of years of service and final salary. The scope of benefits varies between schemes. The assets of the schemes are held in separately administered trusts which are managed independently of the Group s finances by investment managers appointed by the schemes trustees. Formal independent actuarial valuations are undertaken at least triennially. The various defined benefit schemes include five UK Bus Division schemes where the subsidiary undertaking is a participating employer in a scheme operated by a local authority. These schemes are subject to relevant local government regulations. Great Eastern Railway Limited, Great Western Trains Company Limited, North Western Trains Company Limited, GB Railways Group Plc and First/Keolis TransPennine Limited have sections in the Railways Pension Scheme (RPS) which is an industry-wide arrangement for employees of those companies previously owned by British Railways Board. All other Group schemes are self-administered. At their last triennial valuations, the defined benefit schemes had funding levels between 68% and 118%. For those schemes that do not meet the minimum funding requirement, additional payments totalling 1.0m per annum are being made. The market value of the assets at 31 March 2004 for all defined benefit schemes totalled 1,254m (2003: 934m). Contributions are paid to all defined benefit schemes in accordance with rates recommended by the schemes actuaries. The total charge to the profit and loss account in the year in respect of defined benefit schemes was 31.9m (2003: 24.1m). The valuation assumptions used for accounting purposes have been made uniform to Group standards, as appropriate, when each scheme is actuarially valued. For these new valuations (excluding the local government and RPS schemes), the assumptions which are being used are that the rate of return on investment will be 7.0% pre-retirement (6.75% in respect of future benefit accrual), and 6.0% post-retirement (5.75% in respect of future benefit accrual), the rate of earnings growth will be 4.0% and the rate of inflation will be 2.5%. These new valuations are made using the projected unit method. Prepayment A net prepayment of 41.5m (2003: 33.2m) is included in the Group s consolidated balance sheet in respect of the sum of the cumulative differences between contributions paid by the Group into the schemes and the charge to the profit and loss account under SSAP 24, and the surpluses and deficits that have been recognised on acquisition. For accounting purposes the pension costs for the RPS are determined by spreading the expected company cash contributions over the term of the relevant franchise. Defined contribution schemes In addition, the Group operates some defined contribution schemes, the assets of which are held in separately administered trusts. The cost of these in the year was 2.3m (2003: 2.0m). The Group pays certain costs on behalf of the various pension schemes and then re-charges the costs to the schemes. Transitional FRS 17 disclosures The additional disclosures required by FRS 17 during the transitional period for the defined benefit schemes are set out below. They are based on the most recent actuarial valuations described above, which have been updated by independent professionally qualified actuaries to take account of the requirements of FRS 17. The main financial assumptions (per annum) used in this update were as follows: 2004 2003 2002 % % % Rate of increase in salaries 4.1 3.6 4.0 Rate of increase of pensions in payment* 2.5 2.1 2.5 Rate of increase of pensions in deferment 2.5 2.1 2.5 Discount rate 5.7 5.7 6.0 Inflation assumption 2.6 2.1 2.5 *Certain in-house bus schemes pensions in payment receive LPI increases of 2.5% (2003: 2.1%) and LPI increases with a minimum of 3.3% (2003: 3.0%).

58 Notes to the financial statements continued 30 Pension schemes continued The value of the schemes assets and the expected rates of return as at 31 March 2004 were: Expected rate of return UK Bus Rail US Total % m m m m Equities 8.8 610.5 234.8 8.9 854.2 Bonds 4.7 205.2 37.4 2.4 245.0 Property 6.7 88.2 22.9 111.1 Other 4.1 42.3 1.4 43.7 946.2 295.1 12.7 1,254.0 Total market value of assets 946.2 295.1 12.7 1,254.0 Present value of scheme liabilities (1,165.7) (335.2) (25.3) (1,526.2) Pension deficits (219.5) (40.1) (12.6) (272.2) Related deferred tax asset 65.9 12.0 4.8 82.7 Net pension deficit (153.6) (28.1) (7.8) (189.5) As noted in the Financial review, the net FRS 17 deficit of 189.5m at 31 March 2004 comprises 162.0m (2003: 194.3m deficit) relating to non-rail schemes (including 0.6m relating to GB Railfreight and Hull Trains) and 27.5m (2003: 20.4m deficit) relating to rail franchises where we believe that no liability will be borne beyond the period of the franchise. The value of the schemes assets and the expected rates of return as at 31 March 2003 were: Expected rate of return UK Bus Rail US Total % m m m m Equities 8.8 469.8 146.8 6.5 623.1 Bonds 4.5 184.7 18.5 2.8 206.0 Property 6.7 46.5 14.6 61.1 Other 3.6 42.2 1.5 43.7 743.2 179.9 10.8 933.9 Total market value of assets 743.2 179.9 10.8 933.9 Present value of scheme liabilities (1,006.4) (209.1) (27.3) (1,242.8) Pension deficits (263.2) (29.2) (16.5) (308.9) Related deferred tax asset 79.0 8.8 6.4 94.2 Net pension deficit (184.2) (20.4) (10.1) (214.7) The value of the schemes assets and the expected rates of return as at 31 March 2002 were: Expected rate of return UK Bus UK Rail US Total % m m m m Equities 8.0 647.8 201.8 8.1 857.7 Bonds 5.1 160.0 24.3 4.6 188.9 Property 6.6 32.2 14.1 46.3 Other 4.5 48.9 0.5 49.4 888.9 240.2 13.2 1,142.3 Total market value of assets 888.9 240.2 13.2 1,142.3 Present value of scheme liabilities (928.4) (230.6) (21.6) (1,180.6) Pension surpluses 43.7 9.6 53.3 Pension deficits (83.2) (8.4) (91.6) Net pension (deficit)/surplus (39.5) 9.6 (8.4) (38.3) Related deferred tax asset/(liability) 11.9 (2.9) 3.2 12.2 Net pension (deficit)/surplus (27.6) 6.7 (5.2) (26.1)

59 30 Pension schemes continued If FRS 17 had been adopted in these financial statements, the Group s net assets and profit and loss reserve would have been as follows: 2004 2003 m m Net assets excluding pension liability 355.6 402.8 Pension liability (189.5) (214.7) 166.1 188.1 Less: SSAP 24 items included in net assets that will be reversed on implementation of FRS 17 (29.0) (23.2) Net assets on FRS 17 basis 137.1 164.9 Profit and loss reserve excluding pension liability 86.8 134.9 Pension reserve (189.5) (214.7) (102.7) (79.8) Less: SSAP 24 items included in net assets that will be reversed on implementation of FRS 17 (29.0) (23.2) Profit and loss reserve on FRS 17 basis (131.7) (103.0) It should be noted that the 131.7m profit and loss deficit above is on a consolidated basis. As at 31 March 2004 FirstGroup plc had 664.1m of retained profits available for distribution. Had the Group adopted FRS 17 the amounts charged to the profit and loss account would have been as follows: Analysis of amount charged to operating profit: 2004 2003 m m Current service costs 41.4 39.1 Past service costs 0.9 Gain on settlements and curtailments (1.9) Total operating charge 40.4 39.1 Analysis of amount charged/(credited) to net finance charges: 2004 2003 m m Expected return on pension scheme assets (66.6) (77.2) Interest on pension scheme liabilities 68.7 67.3 Net return 2.1 (9.9) Analysis of the actuarial gain/(loss) in the consolidated statement of total recognised gains and losses (STRGL): 2004 2003 m m Actual return less expected return on pension scheme assets 141.0 (300.2) Experience gains and losses arising on scheme liabilities 6.4 26.8 Changes in assumptions underlying the present value of scheme liabilities (106.1) (9.5) Actuarial gain/(loss) recognised in STRGL 41.3 (282.9) Movement in schemes deficit during the year: 2004 2003 m m Deficit at beginning of year (308.9) (38.3) Movement in year: Acquisitions and new rail franchises (4.6) Current service cost (41.4) (39.1) Contributions 42.5 41.5 Past service costs (0.9) Curtailment costs 1.9 Net finance (cost)/income (2.1) 9.9 Actuarial gain/(loss) 41.3 (282.9) Deficit at end of year (272.2) (308.9)

60 Notes to the financial statements continued 30 Pension schemes continued History of experience gains and losses 2004 2003 Difference between the expected and actual return on scheme assets: Amount ( m) 141.0 (300.2) Percentage of scheme assets (%) 11.2 32.1 Experience gains on scheme liabilities: Amount ( m) 6.4 26.8 Percentage of the present value of scheme liabilities (%) 0.4 2.2 Total actuarial gain/(loss) in the statement of total recognised gains and losses: Amount ( m) 41.3 (282.9) Percentage of the present value of scheme liabilities (%) 2.7 22.8 31 Share option schemes (a) Savings related share option scheme The Company operates an Inland Revenue approved savings related share option scheme. Grants were made in October 1995 and June 1999 and further grants were made in December 2002 and December 2003. The scheme is based on eligible employees being granted options and their agreement to opening a sharesave account with a nominated savings carrier and to save weekly or monthly over a specified period. Sharesave accounts are held with Lloyds TSB for the 2002 and 2003 grants. The right to exercise the option is at the employee s discretion at the end of the period previously chosen for a period of six months. Options granted in December 2002 and December 2003 are exercisable after three years. The number of options outstanding under each grant at the end of the year was as follows: 2004 2003 Earliest Number of Ordinary 5p Number of Ordinary 5p Exercise exercise Grant date employees shares employees shares price (p) date October 1995 55 64,204 107.72 November 02 June 1999 68 19,059 359.73 September 02 December 2002 5,229 5,945,274 5,865 6,642,805 192.00 February 06 December 2003 2,497 1,903,176 232.00 February 07 7,726 7,848,450 5,988 6,726,068 During 2002, the Company launched a Share Incentive Plan, the Buy As You Earn scheme (BAYE). BAYE enables eligible employees to purchase shares from their gross income. The Company provides two matching shares for every three shares bought by employees, subject to a maximum Company contribution of shares to the value of 20 per month. The shares are held in trust for up to five years, in which case, no income tax and national insurance will be payable. The matching shares will be forfeited if the corresponding partnership shares are removed from trust within three years of award. At 31 March 2004 there were 3,938 (2003: 3,058) participants in the BAYE scheme who have purchased 730,258 (2003: 92,570) shares with the Company contributing 217,513 (2003: 29,261) matching shares. (b) Executive share option schemes The executive share option scheme, together with the deferred share element of the Executive Annual Bonus Plan, replaced the Long-term incentive plan (LTIP) described below. Executive share options are exercisable between three and ten years of the date of grant provided that the pre-determined performance criteria are met. Further details of the scheme including the performance criteria, are included in the Directors remuneration report. Details of executive share options outstanding at 31 March 2004 are set out below: Ordinary 5p shares 2004 2003 Exercise Date original Scheme No. No. price (p) option granted FirstGroup Executive Share Option Scheme 742,715 756,562 346.5 August 01 FirstGroup Executive Share Option Scheme 1,148,189 1,261,651 269.0 June 02 FirstGroup Executive Share Option Scheme 1,246,983 287.0 November 03 3,137,887 2,018,213

61 31 Share option schemes continued (c) LTIP Up to March 2000 the Group operated a LTIP for senior executives. The exercise of awards under the scheme was conditional upon the attainment of performance targets. To achieve the maximum value under an award, the Company s total shareholder return over a performance period (of not less than three years) must be such to place the performance relative to the returns earned by the companies in the top 25% of companies in the FTSE 250 Share Index (excluding investment trusts). An award is not exercisable if the Company s performance would place the Company below the 50th percentile of the index. Performance between the 25th percentile and the 50th percentile of the index results in a proportion of the award being exercisable in accordance with a sliding scale. Regardless of performance relative to the index, an award will not be exercisable unless growth in earnings per share has been greater than RPI over the performance period. The price payable for shares upon the exercise of any award is fixed at the date of grant. Awards are, in effect, exercisable at no cost (other than any tax charges) to the participant. The award prices and the maximum number of shares subject to awards are as follows: Ordinary 5p shares 2004 2003 Award Date of award No. No. price (p) 3 July 2000 369,644 935,960 236.00 For the three-year period ended 31 March 2003, FirstGroup plc s total shareholder return was 10.7%, which was the 16.6th percentile of the index. As a result, participants were entitled to 200% of the 2000 award which was equivalent to the maximum number of shares.

62 Group financial summary 2004 2003 2002 2001 2000 Consolidated profit and loss account m m m m m Group turnover 2,479.0 2,291.0 2,164.1 2,054.0 1,795.1 Operating profit before goodwill amortisation and exceptional items 204.1 216.1 215.0 214.3 185.7 Goodwill amortisation (25.9) (25.8) (27.3) (25.9) (13.0) Exceptional items, net (13.5) (10.6) (20.5) (53.5) (11.6) Operating profit 164.7 179.7 167.2 134.9 161.1 Profit before interest 184.3 189.7 164.2 201.3 165.5 Net interest payable (42.8) (56.3) (56.3) (64.5) (44.0) Exceptional interest charge (18.7) Profit before taxation 122.8 133.4 107.9 136.8 121.5 Taxation (30.6) (35.8) (33.9) (55.2) (32.0) Profit after taxation 92.2 97.6 74.0 81.6 89.5 Earnings per share pence pence pence pence pence Adjusted basic 27.3 26.8 25.8 23.4 25.3 Basic 22.3 23.4 17.6 18.4 21.6 Cash 52.4 50.6 48.5 44.1 42.6 Dividend per share 11.7 11.0 10.3 9.4 8.5 Consolidated balance sheets m m m m m Fixed assets 1,259.4 1,273.2 1,346.0 1,327.7 1,289.9 Net current liabilities (92.9) (115.5) (127.4) (210.6) (153.1) Creditors: amounts due after more than one year (682.8) (630.9) (687.9) (622.6) (750.9) Provision for liabilities and charges (128.1) (124.0) (110.7) (93.8) (85.5) Equity minority interests (2.1) (1.1) (1.0) (0.9) (9.8) Equity shareholders funds 353.5 401.7 419.0 399.8 290.6 Share data Number of shares in issue million million million million million At year end 403.0 413.4 419.8 422.4 433.5 Average 410.0 416.7 419.8 422.2 396.8 Share price pence pence pence pence pence At year end 268 240 302 305 174 High 306 339 365 312 399 Low 219 200 243 140 152 Market capitalisation m m m m m At year end 1,078 992 1,268 1,288 754

63 Shareholder information Shareholder enquiries The Company s share register is maintained on our behalf by Lloyds TSB Registrars, who are responsible for making dividend payments and updating the register, including details of changes to shareholders addresses and purchases and sales of the Company s shares. If you have any questions about your shareholding in the Company or need to notify any changes to your personal details you should contact: Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA. Telephone: 0870 600 3973. Employees with queries about shares held in the Company s employee share schemes should contact Lloyds TSB Registrars at the same address or by telephoning 0870 241 3938. Duplicate shareholder accounts If you receive more than one copy of Company mailings this may indicate that more than one account is held in your name on the Register. This happens when the registration details of separate transactions differ slightly. If you believe more than one account exists in your name you may contact the Registrars to request that the accounts are combined. There is no charge for this service. Direct dividend payments If you would like your dividend to be paid directly into your bank or building society account, you should contact the Registrars or complete the dividend mandate attached to your dividend cheque. Mandating your dividends has a number of advantages. Firstly, the dividend will go into your account on the payment date there is no chance of it being delayed in the post and you do not have to wait for a cheque to clear. Secondly, the payment method is more secure than receiving a cheque through the post. Thirdly, you still receive tax information about the dividend, which is sent direct to you at your registered address. Online information The Registrars also provide an online service enabling you to access details of your shareholding. To view your details and a range of general information about holding shares, visit www.shareview.co.uk. FirstGroup policy on discounts for shareholders Shareholders are reminded that it is not Group policy to offer travel or other discounts to shareholders, as they may be used only by a small number of individuals. The Group would rather maximise dividends, which are of benefit to all shareholders. Unsolicited mail As the Company s share register is, by law, open to public inspection, shareholders may receive unsolicited mail from organisations that use it as a mailing list. To limit the amount of unsolicited mail you receive, write to the Mailing Preference Society, FREEPOST 22, London W1E 7EZ or register online at www.mpsonline.org.uk. Shareholder profile At 30 April 2004 Number of Shares held holders % (m) % By category Individuals 44,129 95.6 64.9 16.1 Banks and nominees 1,793 3.9 324.1 80.4 Insurance and assurance 2 0.1 Other companies 215 0.5 13.9 3.5 Other institutions 2 46,141 100.0 403.0 100.0 By size of holding 1-1,000 34,700 75.2 9.2 2.3 1,001-5,000 8,844 19.2 19.6 4.9 5,001-10,000 1,395 3.0 9.7 2.4 10,001-100,000 886 1.9 22.8 5.6 Over 100,000 316 0.7 341.7 84.8 46,141 100.0 403.0 100.0 Financial calendar Annual General Meeting 8 July 2004 Shares trade ex dividend 21 July 2004 Record date for final dividend* 23 July 2004 Final dividend paid 27 August 2004 Interim results announced November 2004 Interim dividend paid February 2005 Preliminary announcement of full year results May 2005 *Shareholders recorded on the register at this date will receive the final dividend.

Principal and Registered office FırstGroup plc 395 King Street Aberdeen AB24 5RP Telephone: 01224 650100 Facsimile: 01224 650140 Registered in Scotland number SC157176 London office FırstGroup plc 3rd floor E Block Macmillan House Paddington Station London W2 1FG Telephone: 020 7291 0505 Facsimile: 020 7636 1338 FırstGroup web site www.fırstgroup.com Designed and Produced by Pauffley Ltd www.pauffley.com Printed by Royle Corporate Print