ANALYSIS OF OPERATING AND FINANCIAL RESULTS

The Fund

YPG

Adjusted Revenues

Adjusted Revenues grew by $27.2 million or 4.2% to $667.4 million in 2004 compared to $640.2 million in 2003. The increase in revenues is mainly attributable to increased advertising revenues in our print directories arising from new pricing models, improved sales coverage and new neighbourhood directories. During 2004, we maintained an account renewal rate of more than 90%.

Online advertising revenues from our internet-based directories, which are offered as a complement to our print directories, increased by $6.8 million to $21.3 million in 2004, compared to $14.5 million in 2003, representing an increase of 46.9%. In 2004, 32% of our print advertisers also advertised online, compared to 14% in 2003. Initiatives such as the upgrade of search functionalities and the Google agreement undertaken during the year, resulted in increased traffic from consumers which benefited our advertisers and consequently had a positive effect on our on-line revenues.

Based on actual results and on our organic growth strategy, we anticipate that Adjusted Revenues should grow by 3% to 4% in 2005.

Adjusted EBITDA

Cost of sales amounted to $168.8 million in 2004 compared to $163.2 million for the previous year. Gross profit increased from 74.5% in 2003 to 74.7% in 2004 as a result of lower printing costs which were negotiated in 2003 and for which benefits were recognized.

General and Administrative expenses, including pension and post-employment expenses, increased to $109.8 million or 16.5% of Adjusted Revenues in 2004 compared to $104.7 million or 16.4% of Adjusted Revenues in 2003. The increase is mainly due to additional restructuring costs we incurred in 2004 and additional costs associated with being a public company for the entire year compared to 2003 when we operated as a public company for only five months.

As a result, Adjusted EBITDA margin improved slightly to 58.3% compared to 58.2% in 2003.

We expect to continue to realize benefits from initiatives undertaken in 2003 and 2004. Combined with our continued focus on process and system improvements in 2005, we are confident in our ability to grow Adjusted EBITDA by 3% to 5% in 2005.

Depreciation and amortization

There was a substantial decrease in depreciation and amortization during 2004 due to lower amortization on intangibles such as customer contracts and customer relationships. On November 29, 2002, when we acquired the directory businesses from Bell, those intangible assets were recorded at fair value and were amortized over their expected useful lives, pro rata relative to revenues, for a period not exceeding 24 months. The unamortized balance of those particular intangibles as at January 1, 2004, was minimal and as such, the related amortization decreased by $265.7 million in 2004 to $15.6 million compared to the previous year.

Restructuring and Special charges

Restructuring and special charges amounting to $144.1 million were recorded in 2003. These charges related primarily to the refinancing on August 1, 2003, of the credit facilities initially entered into on November 29, 2002, and also included amounts related to initiatives that were undertaken to improve efficiencies following a thorough review of all aspects of our operations. The restructuring and special charges recognized in 2003 consisted of:

• A write-off of $83.2 million of previously deferred financing costs, $15.4 million in redemption fees and a $20.1 mil-lion charge due to the settlement of cross-currency interest rate swaps, all related to the repayment of our old credit facilities;
• The write-off of $4.7 million of deferred financing costs, related to the partial repayment of the Term B loan facility of our new credit facilities entered into on August 1, 2003; and
• A $9.3 million workforce reduction charge comprised primarily of severances and related benefits as well as impairment charges of $5.6 million recognized on capital assets and $5.8 million of other charges taken on other items.

Financial charges

Financial charges amounted to $49.6 million in 2004 compared to $120.6 million in 2003, a decrease of $71 million.

Interest expense (including stand-by fees) decreased by 68% from $131.7 million in 2003 to $42.1 million in 2004. The decrease in interest expense results from significant changes in YPG's capital structure and funding sources over the last two years. A portion of the proceeds from our IPO in August 2003 along with a follow-on equity offering in December of the same year were used to reduce the level of borrowings in the latter half of 2003. Additionally, the debt originally raised at the time of the Acquisition was entirely refinanced with lower cost bank facilities, commercial paper and Medium Term Notes.

Foreign exchange gains of $17.6 million were recognized in 2003 resulting from foreign exchange fluctuations associated with the U.S.-dollar-denominated long-term debt for the period ended January 24, 2003, the date at which the debt became fully hedged. As at December 31, 2004, our debt portfolio was entirely denominated in Canadian dollars.

Income taxes

The combined provincial and federal tax rates were 33.9% and 35.3% in 2004 and 2003, respectively. The effective tax rate for the year ended December 31, 2004, was 10.5% compared to 61.4% in 2003. The legal entity YPG LP is a limited partnership and as such is not subject to income taxes other than large corporation taxes and provincial minimum taxes whereas its subsidiaries are subject to income tax. The variance between the statutory and the effective tax rates is primarily due to inter-company revenues which are not taxable when received by YPG LP.