9. RISKS AND UNCERTAINTIES
Understanding and managing risk are important parts of YPG's strategic planning. The Board requires that the Company's senior management identify the principal risks related to the Company's business operations and properly manages such risks. The Company has put in place certain guidelines in order to manage the risks to which it may be exposed.
The following section summarizes the major risks and uncertainties that could materially affect YPG's future business results.
Competition
YPG competes with other directory businesses and other forms of advertising media, including newspaper, television, radio, the Internet, magazines, billboards and direct mail advertisers. Increased competition may adversely affect prices, YPG's advertiser base, market share and costs.
We actively monitor and analyze the competition and determine our competitiveness within each of our markets. Our marketing efforts are directed to better meet customer needs through targeted offers and pricing. Further refinements to our customer segmentation model will support our strategies to attract and retain customers.
We continuously enhance our directories with initiatives such as the addition of many new features, the re-design of certain directories and the upgrade of search functionalities of the online product. Concurrent with the delivery of these new directories, we use multi-media campaigns to promote our brand and deliver our message to the market about the value our directories offer.
Interest rate fluctuation
YPG's sensitivity to interest rate movements is related to its cash and short-term investments, commercial paper and medium term note issuances and any future refinancing activity. Increases in interest rates may have an adverse effect on the earnings, distributable cash and financial position of YPG.
The Company manages interest rate exposure by having a balanced schedule of debt maturities, as well as a combination of fixed and floating interest rate obligations. YPG monitors market conditions and the impact of interest rate fluctuations on its fixed-to-floating interest rate exposure mix. From time to time, we enter into interest rate swap agreements and other interest rate derivatives in order to manage this exposure.
Decline in overall directory usage
Any declines in usage could impair YPG's ability to maintain or increase advertising prices, cause businesses that purchase advertising in YPG to reduce or discontinue those purchases and discourage businesses that do not purchase advertising in YPG's directories from doing so. A decline in directory usage may therefore have an adverse effect on revenues and the business's operations.
As previously mentioned, our continuous efforts to improve the content of our directories combined with advertising campaigns are initiatives undertaken to improve users' satisfaction and awareness of the content, therefore impacting usage.
Our industry is subject to changes arising from the increased usage of Internet-based products and technology advancement. As a result, we have aligned our online and print strategies in a continuous effort to connect buyers and sellers. With sustained consumer use of print directories and an increase in online searches, our directory category as a whole is growing.
Labour relations
Most non-management employees of YPG, including sales representatives, are unionized. Current union agreements are typically two to three years in duration and expire at various times in the future. If YPG is unable to renew these agreements as they become subject to renegotiation from time to time, it could result in work stoppages and other labour disturbances which could have a material adverse effect on YPG's business.
As part of our commitment to excellence, we believe in investing in our people for the long term and invested $1.3 million during 2005 in employee training and development through various programs.
Distributions
Although the Fund intends to continue paying its monthly distributions, there can be no assurance regarding the amounts of income to be generated by YPG's business or ultimately distributed to the Fund. The actual amount distributed in respect of the Units is not guaranteed and depends on numerous factors, including YPG's profitability, the fluctuation in YPG's working capital and capital expenditures.
We believe that the execution of our business strategy combined with the achievement of selected critical initiatives for maximizing the long-term sustainability of our business should result in recurring and sustainable free cash flow generation.
Income tax matters
There can be no assurance that Canadian federal income tax laws and administrative policies respecting the treatment of mutual fund trusts will not be changed in a manner which adversely affects the unitholders.
Restructuring and special charges
Although YPG concluded that the elimination of duplicative costs, as well as the realization of other efficiencies related to the Combined Business will offset incremental transaction and business combination related costs over time, this net benefit may not be achieved in the near term.
Billing and collection
Pursuant to billing and collection services Agreements with each of Bell Canada and Telus, certain billing and collection services are performed by these two entities on behalf of YPG. These include billing revenue and collecting related receivables from the Company's advertisers who are also Bell Canada customers in Ontario and Québec, or Telus customers in Alberta, British Columbia and Québec. Services include invoicing advertisers on a separate line item of the monthly telephone bill as well as receipt and application of payments.
Approximately 70% of YPG's revenues are billed pursuant to these two agreements. The initial term of the Bell Canada agreement ends on January 25, 2008 and is automatically renewable by the Company for a three-year term. The Telus agreement ends on June 29, 2031. The agreements provide for early termination in certain specific circumstances.
These agreements are for services that are integral to YPG's business. The failure of Bell Canada or Telus to fulfill their contractual obligations under these agreements could result in an adverse effect on YPG's business until a replacement provider is found for those services.
Advertisers who do not use Bell Canada or Telus as their local telephone provider are billed directly by the Company. They receive their bill for advertising services monthly for 12 months following initial distribution (except for national accounts which are billed annually). Our internal billing and collection services are cost-effective and scalable, which are key considerations as we continue to expand our advertiser base beyond our traditional base of incumbent telephone company's customers.
Disclosure controls and procedures
As of December 31, 2005, an evaluation was carried out, under the supervision of and with the participation of management, including the President and Chief Executive Officer and the Executive Vice President – Corporate Services and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Multilateral Instrument 52-109. Based on that evaluation, the President and Chief Executive Officer and the Executive Vice President – Corporate Services and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.
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