HOME    FINANCIAL STATEMENTS    NOTES OF CONSOLIDATED FINANCIAL STATEMENT

Yellow Pages Income Fund
Notes to the Consolidated Financial Statements
For the years ended December 31, 2006 and 2005
(all tabular amounts are in thousands of Canadian dollars, except unit information)

1. Description of the Fund
2. Significant Accounting Policies
3. Business acquisitions
4. Capital assets
5. Other assets
6. Intangibles
7. Accounts payable and accrued liabilities
8. Deferred credits
9. Employee benefit plans
10. Long-term debt
11. Exchangeable debentures
12. Income taxes
13. Unitholders' capital
14. Distributions to unitholders
15. Interest in joint ventures
16. Earnings per unit
17. Stock-based compensation plans
18. Supplemental disclosure of cash flow information
19. Commitments and contingencies
20. Financial charges, net
21. Financial instruments
22. Restructuring and special charges
23. Guarantees
24. Segmented information
25. Comparative figures

1. Description of the Fund

Yellow Pages Income Fund (“the Fund”) is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario on June 25, 2003 by a declaration of trust and amended by amended and restated declarations. The Fund has been created to invest, through YPG Trust (the “Trust”), a wholly-owned trust, in partnership units of YPG LP and shares of YPG General Partner Inc. (“YPG GP”), the general partner of YPG LP. YPG LP, through subsidiaries, operates print and online directories and classified advertising primarily in the Provinces of Québec, Ontario, British Columbia, Alberta and Manitoba. References herein to the Fund represent the financial position, results of operations, cash flows and disclosures of the Fund and its subsidiaries on a consolidated basis.

On January 1, 2006, YPG Holdings Inc. amalgamated with Yellow Pages Holdings Inc., (formerly Advertising Directory Solutions Holdings Inc. (“ADS”)). Immediately thereafter, YPG Holdings Inc. sold its 100% interest in Yellow Pages Inc. to Yellow Pages Group Co. Subsequently, Yellow Pages Inc. and Yellow Pages Group Co. were amalgamated.

On February 14, 2006, as partial consideration for the acquisition of Trader Media Corp. (“TMC”), the Fund issued 19,000,000 Exchangeable Units of YPG LP at a price of $15.85 per Exchangeable Unit. The Exchangeable Units are exchangeable on a one-for-one basis at any time at the option of the holder into fully paid units of the Fund, representing an ownership interest of approximately 4%. The holders of the Exchangeable Units of YPG LP are entitled to receive equivalent distributions to Unitholders of the Fund. The Exchangeable Units of YPG LP are subject to lock-up and other restrictions until February 14, 2007.

On February 27, 2006, the Fund issued 15,000,000 units to the public in exchange for net proceeds of $242.4 million, after deducting underwriters' fees in the amount of $10.1 million and other issuance costs of $1 million. The net proceeds were used to repay indebtedness and for general corporate purposes.

On June 8, 2006, the Fund acquired all of the outstanding shares of Classified Media (Canada) Holdings Inc. (“Trader Canada”) for a total consideration of $767.1 million (See Note 3 – Business Acquisitions).

On August 22, 2006, the Fund issued 25,000,000 warranted units (“Warranted Units”). Each Warranted Unit consisted of one Unit and one-half of one Fund Unit purchase warrant (each whole Fund Unit purchase warrant, a “Warrant”) to the public for net proceeds of $364.3 million after deducting underwriters' fees in the amount of $15.3 million and other issuance costs of $1.7 million. The net proceeds were used to repay indebtedness and for general corporate purposes.

On October 2, 2006, the Fund acquired MTS Media (“MTS”) for a total consideration of $279 million (See Note 3 – Business Acquisitions).

For the year ended December 31, 2005, the results of ADS have been consolidated from May 25, 2005. For the year ended December 31, 2006, the results of TMC have been consolidated from February 14, 2006, the results of Trader Canada have been consolidated from June 8, 2006, and the results of MTS have been included from October 2, 2006.

2. Significant Accounting Policies

Basis of presentation

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).

Principles of consolidation

The Fund's consolidated financial statements include the accounts of the Trust, YPG GP, YPG LP, YPG Holdings Inc., Yellow Pages Group Co. (“YPG”), Aliant Directory Services, Snap Guides Inc., Vertical Guides Limited Partnership, and those of TMC and Trader Canada. All intercompany transactions and balances have been eliminated. The Fund accounts for its 12.86% general partnership interest in Aliant Directory Services and its 50% interest in Vertical Guides Limited Partnership, using the proportionate consolidation method.

Cash and cash equivalents

Cash and cash equivalents consist of funds on deposit and, from time to time, highly liquid investments with a purchased maturity of three months or less.

Revenues

Directories

Revenues are earned through the sale of telephone directory advertising. Advertising revenues are generally billed, in accordance with the contractual terms with advertisers, and recognized on a monthly basis over the estimated life of the print directory or electronic directory advertising, not exceeding twelve months, or in the case of certain alphabetical directories, not exceeding twenty-four months, commencing with the delivery or display date, respectively. Amounts billed up front for the directories are deferred and recognized over the billing period for which the corresponding directories are in circulation, not exceeding twelve months, or in the case of certain alphabetical directories, not exceeding twenty-four months.

Vertical Media

Private and commercial classified advertisements and display advertisements are published on a daily, weekly and monthly basis for which revenues are recognized at the time the advertisements are published. Revenues related to advertisements appearing on multiple occasions are deferred and recognized during the period the advertisements are displayed.

Circulation revenues, net of returns, are recognized on a weekly basis at the time the publications are delivered to customers. Circulation revenues are earned primarily upon the delivery of magazines by independent distributors to retail outlets.

Deferred publication costs

Direct and incremental costs incurred for sales, manufacturing and distribution of telephone print directories not yet published are deferred. Upon publication, these costs are amortized over the same period in which the related revenues are recognized.

Capital assets, depreciation and amortization

Capital assets are recorded at cost and are depreciated and amortized over their expected useful lives using the straight-line method as follows:

The cost of internally developed software is capitalized and included in capital assets at the point at which the conceptual formulation, design and testing of possible software project alternatives are complete and management authorizes and commits to funding the project. The Fund does not capitalize pilot projects and projects where it believes that future economic benefits are less than probable.

Internally developed software costs include the cost of software tools and licenses used in the development of the Fund's systems, as well as payroll and consulting costs.

Assets under development consist primarily of internally developed software that is not amortized until the assets are available for use.

Deferred financing costs

Deferred financing costs include discount or premium on long-term debt. Deferred financing costs are amortized on a straight-line basis over the terms of the related debt. Deferred financing costs incurred in connection with the issuance of Exchangeable Debentures are amortized using the effective interest rate method over the term of the debt.

Intangibles

Intangibles are recorded at cost. Intangibles with finite lives are amortized as follows:

Certain trademarks and domain names are considered intangible assets with indefinite lives and are not amortized; however, they are assessed for impairment annually or more frequently if circumstances change, on the basis of their fair values. Fair value is determined using discounted expected future cash flows. The trademark and domain names related to the acquisition of ADS were not amortized as they had been considered to have an indefinite useful life at the time of acquisition. During the last quarter of 2006, the trademark and domain names were determined to have a finite life, following an analysis of pertinent factors including the expected use of the assets by the Fund, competition and other economic factors. As a result, an impairment charge was recorded as described in Note 6. In addition, based on the determination of their finite lives, the trademark and the domain names are amortized straight-line over 6 years and 18 years, respectively.

Impairment of long-lived assets

Long-lived assets with finite lives are reviewed when events or changes in circumstances cause their carrying value to exceed the total undiscounted cash flows expected from their use and eventual disposition. The impairment loss is calculated by deducting the fair value of the asset from its carrying value.

Goodwill

Goodwill represents the excess of the cost of an acquired enterprise over the net of the amounts assigned to assets acquired and liabilities assumed less any subsequent writedowns for impairment. Goodwill is subject to an annual impairment test. Goodwill impairment is evaluated between annual tests upon the occurrence of certain events or circumstances. Goodwill impairment is assessed based on a comparison of the fair value of a reporting unit to the underlying carrying value of the reporting unit's net assets, including goodwill. When the carrying amount of the reporting unit exceeds its fair value, the fair value of the reporting unit's goodwill is compared with its carrying amount to measure the amount of impairment loss, if any. The fair value of goodwill is determined using the estimated discounted future cash flows of the reporting unit.

Employee benefit plans

The Fund maintains a pension plan with defined benefit and defined contribution components which covers substantially all of the employees of Yellow Pages Group Co. Prior to January 1, 2006, the Fund maintained a defined benefit plan which covered substantially all the employees of Yellow Pages Group Co. and a defined benefit plan which was acquired as part of the ADS acquisition which covered substantially all the employees of ADS. The YPG Co. plan was non-contributory and the Fund was responsible to fund the plan. The ADS plan was contributory with both the Fund and the employees responsible for making contributions to adequately fund the plan. On January 1, 2006, the YPG Co. and ADS plans were merged and the merged plan was amended to include a defined contribution component for all new employees starting on January 1, 2006 and thereafter. On October 2, 2006, pursuant to the acquisition of MTS, employees of MTS Media joined the defined benefit component of the plan. The Fund also maintains unfunded supplementary defined benefit pension plans for certain executives and other retirement and post-employment benefits plans which cover substantially all employees of the Fund.

The Fund accrues its obligations for employee benefit plans. The cost of pensions and other retirement benefits earned by employees is actuarially determined using:

• the projected benefit method, pro rated on service;
• a discount rate based on market interest rates on high-quality long-term bonds; and
• management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected healthcare costs.

The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the remaining service period of active employees with a weighted average of 16 years at period end. The expected return on plan assets is based on the expected long-term rate of return on plan assets which are measured at fair value. A valuation is performed at least every three years to determine the actuarial present value of the accrued pension and other employee future benefits for funding purposes. The latest actuarial valuations were performed as at December 31, 2005 for the YPG and ADS pension benefit plans, respectively, and as at January 1, 2005 and December 31, 2005 for the YPG and ADS other employee future benefit plans, respectively. The next valuations for funding purposes will be performed as at December 31, 2008 for the pension benefit plans and as at December 31, 2007 for other employee future benefit plans.

Stock-based compensation plans

The Fund uses the fair value method of accounting for all Restricted Units and stock options granted, as described in Note 17, whereby a compensation expense is recognized over the vesting period of all stock-based compensation awards.

Foreign currency translation

Transactions in foreign currencies are translated into Canadian dollars at rates in effect at the date of the transaction. At the balance sheet date, monetary foreign currency assets and liabilities are translated at exchange rates then in effect. The resulting translation gains or losses are recognized in the determination of earnings.

Income taxes

The Fund is a mutual fund trust for income tax purposes. As such, the Fund is only taxable on any amount not distributed to Unitholders. As substantially all taxable income will be distributed to the Unitholders, no provision for income taxes on earnings has been made in these consolidated financial statements. Income tax liabilities relating to distributions of the Fund are taxed in the hands of the Unitholders.

The Fund uses the liability method of tax allocation in accounting for income taxes of its subsidiaries. Under this method, temporary differences between the carrying amount of balance sheet items and their corresponding tax bases result in either future income tax assets or liabilities. Future income taxes are computed using substantively enacted tax rates applicable to the years in which the differences are expected to reverse. Future income tax assets are only recognized to the extent that, in the opinion of management, they will more likely than not be realized.

Proposed Canadian income tax rule changes

On October 31, 2006, the Department of Finance of the Canadian Federal Government announced the “Tax Fairness Plan” whereby the income tax rules applicable to publicly traded trusts and partnerships (the “proposed legislation”) will be significantly modified. In particular, income earned by these entities will be taxed in a manner similar to income earned and distributed by a corporation. The proposed legislation will be effective for the 2007 taxation year with respect to trusts which commence public trading after October 31, 2006, but the application of the rules will be delayed to the 2011 taxation year with respect to trusts which were publicly traded prior to November 1, 2006 provided that certain “normal growth” guidelines are met.

Currently, the Fund is only taxable on amounts that are not distributed to Unitholders. If enacted in its current form, the proposed legislation will result in a change in which the earnings of the Fund will be subject to income tax regardless of whether amounts are distributed to the Unitholders or not.

The Fund is currently considering the possible impact of the proposed legislation. However, the proposed legislation has not yet been substantively enacted, and therefore the impact of the implementation is uncertain as of the balance sheet date, and as such, no amounts have been recorded in the financial statements. The possible impact of the proposed legislation has been taken into account in the review for impairment of goodwill.

Leases

Leases are classified as either capital or operating in nature. Capital leases are those which substantially transfer the benefits and risks of ownership to the lessee. Assets acquired under capital leases are amortized over their expected useful lives using the straight-line method. Obligations recorded under capital leases are reduced by the principal portion of lease payments. The imputed interest portion of lease payments is charged to expense.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Significant items requiring the use of management estimates relate to the determination of collectibility of accounts receivable, valuation of intangibles, impairment of assets, pension and other employee benefits, useful lives for amortization, future income taxes, long-term incentive plans and the restructuring and special charges provision. These estimates are revised periodically. Results as determined by actual events could differ materially from the above estimates.

Hedging relationships

The Fund uses derivative financial instruments to manage its interest risk exposures on debt financing. The Fund's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Fund formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

Derivatives that are economic hedges, but do not qualify for hedge accounting are recognized on the balance sheet at fair value with changes in fair value recorded in earnings. When hedging instruments mature or become ineffective before their maturity and are not replaced within the Fund's documented hedging strategy, deferred gains or losses on such instruments continue to be deferred and are charged to earnings in the same period as the corresponding gains or losses on the hedged items. Gains and losses that are realized subsequent to the maturity of the hedging instruments or subsequent to the hedging instruments becoming ineffective, are charged directly to earnings. If the hedged item ceases to exist due to its maturity, expiry, cancellation or exercise before the hedging instrument expires, deferred gains or losses are charged to earnings.

The Fund generally classifies cash flows from its derivative financial instruments in the same manner as the cash flows from the item that the derivative is hedging. Typically, this is included in cash flows from (used in) operating activities in the consolidated statement of cash flows.

Variable interest entities

Effective January 1, 2005, the Fund adopted the Canadian Institute of Chartered Accountants (“CICA”) Accounting Guideline 15 (“AcG-15”), Consolidation of Variable Interest Entities (“VIEs”). AcG-15 applies to interim periods beginning on or after November 1, 2004. VIEs are entities in which equity investors do not have controlling financial interest or the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. AcG-15 requires the consolidation of a VIE by its primary beneficiary (i.e., the party that receives the majority of the expected residual returns and/or absorbs the majority of the entity's losses). Management of the Fund conducted a review of the ownership and contractual interest in entities and determined that the adoption of this guideline did not have any impact on the Fund's consolidated financial statements.

Future accounting changes

Financial instruments

The CICA has issued three new accounting standards:

1. Section 3855, Financial Instruments – Recognition and Measurement, effective for fiscal years beginning on or after October 1, 2006. This section describes the standards for recognizing and measuring financial instruments in the balance sheet and the standards for reporting gains and losses in the financial statements. Financial assets available for sale, assets and liabilities held for trading and derivative financial instruments, part of a hedging relationship or not, have to be measured at fair value. The impact of remeasuring our financial assets and liabilities at fair value will be recognized in opening deficit and opening accumulated other comprehensive income as appropriate. The impact of the adoption of this new section on the consolidated financial statements is not expected to be material.
2. Section 1530, Comprehensive Income, effective for fiscal years beginning on or after October 1, 2006. It describes reporting and disclosure recommendations with respect to comprehensive income and its components. Comprehensive income is the change in Unitholders' equity, which results from transactions other than those resulting from investments by Unitholders and distributions to Unitholders. These transactions and events include unrealized gains and losses resulting from changes in fair value of certain financial instruments.
3. Section 3865, Hedges, effective for fiscal years beginning on or after October 1, 2006. The recommendations expand the guidelines outlined in Accounting Guideline 13 (“AcG-13”), Hedging Relationships. This section describes when and how hedge accounting can be applied as well as the disclosure requirements. Hedge accounting enables the recording of gains, losses, revenues and expenses from the derivative financial instruments in the same period as for those related to the hedged item. The impact of the adoption of this new section on the consolidated financial statements is not expected to be material.

These standards will be effective for the Fund as of January 1, 2007 and will be adopted on a retroactive without restatement basis.

3. Business acquisitions

2006

On February 14, 2006, the Fund acquired all of the outstanding shares of TMC for a consideration of $443.8 million (including acquisition related costs of $7.7 million).

The acquisition of TMC was financed through the issuance of Exchangeable Units of YPG LP and drawings under existing credit facilities and cash on hand.

TMC is Ontario's largest publisher of classified advertising and related web sites. It operates in the local print and online classified advertising for automotive, real estate, employment and general merchandise product verticals.

The Fund accounted for the acquisition using the purchase method of accounting. The purchase price was allocated to the net identifiable assets acquired on the basis of their fair values. The fair value of the underlying net identifiable assets of TMC acquired is allocated as follows:

On June 8, 2006, the Fund acquired all of the outstanding shares of Trader Canada for a consideration of $767.1 million (including acquisition related costs of $5.8 million).

The acquisition was financed through new credit facilities, drawings under existing credit facilities and cash on hand. Trader Canada publishes 137 publications and nine web sites for the automotive, real estate and general merchandise verticals.

The Fund accounted for the acquisition of Trader Canada using the purchase method of accounting. The purchase price was allocated to the net identifiable assets acquired on the basis of their fair values. The fair value of the underlying net identifiable assets of Trader Canada acquired is allocated as follows:

On October 2, 2006, the Fund acquired the assets of MTS for a consideration of $279 million (including acquisition related costs of $4 million).

The acquisition of MTS was financed through drawings under existing credit facilities and cash on hand.

MTS is Manitoba's incumbent and largest directory publisher. It publishes 11 different titles with a total circulation of approximately 1.7 million copies. MTS also produces and markets online advertising products through its online directory.

The Fund accounted for the acquisition using the purchase method of accounting. The purchase price was allocated to the net identifiable assets acquired on the basis of their fair values. The purchase price allocations are preliminary and are subject to changes once the final valuations of the assets acquired and the liabilities assumed are completed and the final determination of the costs related to acquisition have been made. The fair value of the underlying net identifiable assets of MTS acquired is allocated as follows:

During the year, optionholders exercised 822,780 options at an exercise price of $3.92 per option for cash consideration of $3.2 million. These options were exercised into 822,780 shares of YPG Holdings Inc. which were automatically exchanged into 822,780 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average fair value of approximately $15.92 per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of $9.9 million.

2005

On April 1, 2005, the Fund issued 104,100,000 subscription receipts at a price of $13.45 per subscription receipt for proceeds of $1.37 billion (net of one half of the underwriters' fees, or $28 million) pursuant to the filing of a prospectus and placed in escrow by CIBC Mellon Trust pending the closing of the acquisition of ADS which occurred on May 25, 2005. Each subscription receipt entitled the holder thereof to automatically receive one Unit of the Fund upon closing of the acquisition.

In addition, holders of subscription receipts were entitled to receive an amount per subscription receipt equal to the per Unit distribution, if any, actually paid or payable to Unitholders in respect of all record dates occurring between April 1, 2005 and the closing of the acquisition, as if the subscription receipts had been converted to Units immediately prior to such record dates. On May 25, 2005, these subscription receipts were exchanged for 104,100,000 Units of the Fund for proceeds of $1.34 billion (net of underwriters' fees of $56 million) which has been recorded in Unitholders' equity. A private placement of Units also closed on May 25, 2005 resulting in the issuance of 22,727,273 Units for proceeds of $288 million (net of placement fees of $12 million). These proceeds combined with new debt financing and cash on hand were used to purchase all of the outstanding shares of ADS for a purchase price consideration of $2.6 billion (including acquisition related costs of $76 million).

ADS was the second largest telephone directories publisher in Canada. It published directories under the SuperPagesTM brand name, and published directories in Alberta, British Columbia and in certain parts of Québec where TELUS is the incumbent telephone service provider.

The Fund accounted for the acquisition using the purchase method of accounting. The purchase price was allocated to the net identifiable assets acquired on the basis of their fair values. The fair value of the underlying net identifiable assets of ADS was allocated as follows:

RRepayment of ADS notes

On May 25, 2005, a portion of the consideration paid for the acquisition was utilized to repay long-term debt of ADS. The Fund deposited US $ 180 million in escrow with the US National Bank Association as Trustee for a period of 30 days in accordance with the terms of a trust indenture. The funds remained in escrow until June 24, 2005 at which time the funds were released and used to discharge the long-term debt of ADS.

During the year ended December 31, 2005, optionholders exercised 1,087,763 options at an exercise price of $3.92 per option for cash consideration of $4.27 million. These options were exercised into 1,087,763 shares of YPG Holdings Inc. which were automatically exchanged into 1,087,763 units of the Fund pursuant to the Optionholders' Liquidity Agreement, at an average fair value of approximately $14.90 per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of $11.9 million.

4. Capital assets

During the year, capital assets with a cost of nil (2005 - $1.5 million) and accumulated depreciation of nil (2005 - $0.6 million) were written off. Depreciation and amortization for the year ended December 31, 2006, was $36.4 million (2005 - $23.3 million).

5. Other assets

In connection with the issuance of the new Medium Term Notes described in Note 10, the Fund incurred financing costs of $0.9 million. Also in connection with the issuance of the Exchangeable Debentures described in Note 11, the Fund incurred financing costs of $13.6 million. The balance of the financing costs incurred in connection with the issuance of the New Credit Facilities described in Note 10 was written off since the underlying debt was fully repaid during the third quarter of 2006.

During 2005, the Fund incurred financing costs of $11.6 million in connection with the issuance of the Medium Term Notes. Also, in connection with the Old Credit Facilities described in Note 10, the Fund incurred financing costs of $31.7 million of which $21.3 million was recorded in financial charges in the consolidated statement of earnings as the $1.5 billion subordinated equity bridge facility originally included in the above credit facilities was cancelled as a result of the issuance of units. The balance of these deferred financing costs was written off since the underlying debt was fully repaid during the last quarter of 2005.

6. Intangibles

Amortization for the year ended December 31, 2006, was $135.9 million (2005 - $204.8 million).

As part of the acquisition of ADS, the Fund allocated $31.5 million to the SuperPages trademark and $6.7 million to the domain names. During the fourth quarter, the Fund performed an impairment test following an analysis of pertinent factors including the expected use of the assets by the Fund, competition and other economic factors. This resulted in a $7 million impairment of the trademark and a $1 million impairment of the domain names' carrying value.

7. Accounts payable and accrued liabilities

8. Deferred credits

On June 30, 2006, the Fund entered into interest rate swap agreements when the counterparties exercised their options under the interest rate swaption agreements as discussed in Note 21 and as a result, $8 million was recorded as a deferred credit. In November 2006, the Fund terminated these interest rate swap agreements and a $3.5 million credit was recorded. The total $11.5 million deferred credit is amortized over the remaining term of the underlying debt which matures on February 28, 2016.

During 2005, the Fund terminated interest rate swap agreements as discussed in Note 21 and a $5.2 million gain was recorded. The deferred gain will be amortized over the remaining term of the underlying debt which matures on November 18, 2019. In addition, the Fund settled the bond forward agreements triggering a deferred loss of $1.7 million and a deferred gain of $5.3 million for a combined net $3.6 million gain as discussed in Note 21. The deferred loss of $1.7 million will be amortized over the remaining term of the underlying debt which matures on February 15, 2036. The deferred gain of $5.3 million will be amortized in financial charges over the remaining term of the underlying debt which matures on February 15, 2016.

9. Employee benefit plans

The Fund maintains a pension plan with defined benefit and defined contribution components which covers substantially all of the employees of YPG Group Co. Prior to January 1, 2006, the Fund maintained a defined benefit plan that provided for pension benefits for substantially all the employees of Yellow Pages Group Co. based on length of service and rate of pay. The Fund also maintained a contributory defined benefit plan acquired as part of the acquisition of ADS that provides for pension benefits for substantially all the employees of ADS. Effective on January 1, 2006, these plans were merged and all new employees joined the newly created defined contribution component of the merged plan. The Fund maintains unfunded supplementary defined benefit pension plans for certain executives. The Fund also maintains other retirement and post-employment benefits (“other benefits”) plans which cover substantially all employees of the Fund.

The changes in the accrued benefit obligations and in the fair value of assets and the reconciliation of the funded status of the defined benefit plans to the amount recorded on the consolidated balance sheets for the years ended December 31, 2006 and 2005 were as follows:

The pension benefits and the other benefits are shown as accrued benefit assets and as accrued benefit liabilities, respectively, within the consolidated balance sheets.

While all the plans are not considered fully funded for financial reporting purposes, registered plans are funded in accordance with the applicable statutory funding rules and regulations governing the particular plans.

The significant assumptions adopted in measuring the Fund's pension and other benefit obligations as at December 31, 2006 and 2005, were as follows:

For measurement purposes, a 9% annual increase in the per capita cost of covered health care benefits (the health care cost trend rate) was assumed in 2006. The cost of medication was assumed to gradually decline to 4.5% by 2015 and to remain at that level thereafter.

Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in assumed healthcare cost trend rates would have the following effects:

The net benefit plan costs for the years included the following components:

Plan assets are represented primarily by Canadian and foreign equities, government and corporate bonds, debentures and secured mortgages. Plan assets are held in trust and the asset allocation was as follows as at December 31:

The expected return on plan assets is determined by considering long-term historical returns, future estimates of long-term investment returns and asset allocations.

Total cash payments for employee future benefit plans made by the Fund amounted to $3.2 million for 2006 (2005 - $3.5 million).

As at December 31, 2006 and December 31, 2005, the publicly traded equity securities did not directly include any units of the Fund.

The Fund's funding policy is to make contributions to its pension plans based on various actuarial cost methods as permitted by pension regulatory bodies. The Fund is responsible to adequately fund the plans. Contributions reflect actuarial assumptions concerning future investment returns, salary projections and future service benefits.

10. Long-term debt

Medium Term Notes

2006

On February 27, 2006, YPG Holdings Inc. issued additional Series 5 Medium Term Notes and Series 6 Medium Term Notes for combined gross proceeds of $250.7 million. Details are as follows:

1. $100 million of 6.25% Series 5 Notes maturing on February 15, 2036 priced at $100.933, for an initial yield to the noteholders of 6.181% compounded semi-annually; and
2. $150 million of 4.65% Series 6 Notes maturing on February 28, 2011 priced at $99.841, for an initial yield to the noteholders of 4.686% compounded semi-annually.

The proceeds from the issuance of the Medium Term Notes were used to repay part of the amounts outstanding under the commercial paper facility and for general corporate purposes.

2005

On November 23, 2005, YPG Holdings Inc. issued Series 4 and Series 5 Medium Term Notes for combined gross proceeds of $796.4 million. Details are as follows:

1. $550 million of 5.25% Series 4 Notes maturing on February 15, 2016 priced at $99.571, for an initial yield to the noteholders of 5.31% compounded semi-annually; and
2. $250 million of 6.25% Series 5 Notes maturing on February 15, 2036 priced at $99.514, for an initial yield to the noteholders of 6.29% compounded semi-annually.

The proceeds from the issuance of the Medium Term Notes were used to repay the Old Term Credit Facilities and for general corporate purposes.

2004

On April 21, 2004, YPG Holdings Inc. issued Series 1 and Series 2 Medium Term Notes for combined gross proceeds of $749.9 million. Details are as follows:

1. $450.0 million of 4.57% Series 1 Notes maturing on April 21, 2009 priced at $99.982, for an initial yield to the noteholders of 4.57% compounded semi-annually; and
2. $300.0 million of 5.71% Series 2 Notes maturing on April 21, 2014 priced at $99.985, for an initial yield to the noteholders of 5.71% compounded semi-annually.

On November 18, 2004, YPG Holdings Inc. issued Series 3 Medium Term Notes for gross proceeds of $250.0 million as follows:

1. $250.0 million of 5.85% Series 3 Notes maturing on November 18, 2019 priced at par, for an initial yield to the noteholders of 5.85% compounded semi-annually.

All Series of Notes are unsecured and are unconditionally guaranteed by the Fund, YPG Trust, YPG LP, YPG Co., TMC, Trader Canada and Trader Publications Corp. as to the payment of principal and interest.

New Credit Facilities

In connection with the acquisition of Trader Canada, the Fund established new credit facilities for a total of $600 million for YPG Holdings Inc. with a syndicate of banks consisting of the following two tranches (collectively, the “Term Facility”):

1. $350 million 5-year non-revolving multiple draw unsecured senior term facility; and
2. $250 million 2-year non-revolving single draw unsecured senior term facility

These facilities bear interest at a combination of prime rate and Bankers' Acceptance “BA” rates plus 0.625%. During the third quarter of 2006, the Fund fully repaid and cancelled these facilities with the net proceeds of the Warranted Units and the Exchangeable Debentures offerings. Repayments on the Term Facility were not subject to repayment penalties.

Old Term Credit Facilities and Revolving Facilities

On May 25, 2005, in connection with the acquisition of ADS, the Fund established credit facilities for YPG Holdings Inc. with a syndicate of banks consisting of $1 billion of term facilities (the “Old Term Credit Facilities”) and $500 million of revolving term facilities. During the last quarter of 2005, the Fund fully repaid and cancelled the Old Term Credit Facilities. Repayments on these facilities were not subject to repayment penalties.

Revolving Facilities

A $500 million senior unsecured revolving credit facility composed of two tranches:

1. $300 million, 364-day revolving credit facility with a two year term-out option maturing May 24, 2008, and
2. $200 million 5-year revolving credit facility maturing May 25, 2010.

Subsequently, in November 2005, the size of the revolving credit facility described in a) above was increased from $300 million to $500 million and its maturity date was extended to May 2009.

On December 31, 2006, the revolving facilities remain undrawn. The revolving facilities are used as back-up for the commercial paper program and for general corporate purposes. These facilities bear interest at BA rates plus 0.625%.

The Revolving Facilities provide for certain restrictive undertakings and covenants to be complied with by the Fund, all of which have been met.

The Revolving Facilities are unconditionally guaranteed by the Fund, YPG Trust, YPG LP, YPG Co., TMC, Trader Canada and Trader Publications Corp. as to the payment of principal and interest.

Interest rate derivatives

During the year, the Fund entered into interest rate derivative agreements described in Note 21 in order to manage its fixed and variable rate ratio on its long-term debt.

Commercial paper

In October 2003, the Fund established a commercial paper program (the “Commercial Paper program”) with an authorized limit of $300 million. The commercial paper matures up to but not exceeding 365 days from the date of the issue. In the fourth quarter of 2005, the Fund increased the authorized limit by $200 million to $500 million. The commercial paper bears interest at approximately BA rates plus 0.14%.

Obligations under capital leases

The Fund entered into several lease agreements with third parties for office equipment and for software. The obligations under capital leases are secured by a moveable hypothec on the office equipment leased.

Future repayments

Future principal repayments and minimum capital lease payments to be made during the next five years and thereafter, as of December 31, 2006, are as follows:

¹ Excludes Exchangeable Debentures (see Note 11)

11. Exchangeable debentures

On July 6, 2006, YPG Holdings Inc. issued exchangeable unsecured subordinated debentures for a principal amount of $300 million (“Exchangeable Debentures”). The Exchangeable Debentures bear interest, payable semi-annually at a rate of 5.5% and mature August 1, 2011. The Exchangeable Debentures may be exchanged at any time, at the option of the holder, for units of the Fund at an exchange price of $20 per unit. On or after August 1, 2009 and prior to August 1, 2010, the Exchangeable Debentures may be redeemed in whole or in part at the option of the Fund at a price equal to their principal amount plus accrued interest thereon, provided that the market price of the units on the date on which notice is given is not less than 125% of the conversion price of $20 per unit. After August 1, 2010, the Fund has the option to redeem the Exchangeable Debentures in whole or in part at a price equal to their principal amount plus accrued interest. The Fund may also, at its option and subject to certain conditions, elect to satisfy its obligation to repay all or any portion of the principal amounts of the Exchangeable Debentures that are to be redeemed or repaid at maturity, by issuing Fund units. The number of units a holder will receive in respect of each Exchangeable Debenture will be determined by dividing the principal amount of the Exchangeable Debentures that are to be redeemed or repaid at maturity by 95% of the market price of the units.

The conversion option was valued at $12.5 million at the date of issuance and is included in Unitholders' equity. The liability portion of the Exchangeable Debentures is being accreted such that the liability at maturity will equal the gross proceeds less conversions.

Accretion of $1.0 million is recorded in financial charges for the year ended December 31, 2006. Proceeds resulting from the sale of the Exchangeable Debentures were used by the Fund to repay an amount of $288 million on the Term Facility and for general corporate purposes.

The Exchangeable Debentures are unconditionally guaranteed by the Fund, YPG Trust, YPG LP, YPG Co., TMC, Trader Canada and Trader Publications Corp. as to the payment of principal and interest.

12. Income taxes

A reconciliation of income taxes at Canadian statutory rates with reported income taxes is as follows:

Provision for (recovery of) income taxes for the years ended:

Future income tax assets (liabilities) are attributable to the following items as at:

Financial statement presentation:

As at December 31, 2006, the Fund has non-capital losses available for carryforward to reduce future taxable income of $104.5 million expiring from 2007 to 2026. A future income tax asset of $33.3 million has been recorded with respect to these non-capital losses.

13. Unitholders' capital

The Fund's Declaration of Trust provides that an unlimited number of units may be issued. Each unit is transferable and represents an equal undivided beneficial interest in any distributions from the Fund, whether of net income, net realized capital gains (other than net realized capital gains distributed to redeeming Unitholders) or other amounts, and in the net assets of the Fund in the event of termination or winding up of the Fund. All Trust Units are of the same class with equal rights and privileges. The units issued are not subject to future calls or assessments, and entitle the holders thereof to one vote for each whole unit held at all meetings of Unitholders.

Units issued and outstanding: