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:

¹ Includes 19,000,000 Exchangeable Units of YPG LP issued as partial consideration for the acquisition of TMC, which are presented as part of Unitholders' capital as the criteria of Emerging Issues Committee Abstract 151 Exchangeable Securities Issued by Subsidiaries of Income Trust are met.
² Includes 1,205,090 Restricted units pursuant to the Restricted Unit Plan.

³ Includes 204,578 Restricted units pursuant to the Restricted Unit Plan for a total amount of $2.6 million.

Units issued are as a result of the transactions described in Notes 1 and 3.

Warrants

On August 22, 2006, the Fund issued 25,000,000 Warranted Units consisting of 25,000,000 units and 25,000,000 one-half of one Warrant. Each one half of one Warrant was issued at $0.25. Each Warrant entitles the holder to purchase one Fund Unit at a price of $17.50 on or before December 17, 2007.

14. Distributions to unitholders

The Fund intends to make distributions to its Unitholders and Exchangeable Unitholders of its available cash to the maximum extent possible. The Fund intends to make equal monthly cash distributions to Unitholders and Exchangeable Unitholders on the last day of each month, after deducting estimated cash amounts required for expenses, other obligations of the Fund, cash redemptions of units and any tax liabilities.

Cash distributions are payable monthly to the Unitholders and Exchangeable Unitholders of record on the last business day of each month and are paid on the 15th day of the following month.

During the year ended December 31, 2006, the Fund declared total distributions to Unitholders and Exchangeable Unitholders of $527.9 million (2005 - $419.2 million) or $1.0291 per unit (2005 - $0.9566).

15. Interest in joint ventures

The Fund has a 12.86% interest in Aliant Directory Services, a general partnership. The Fund also has a 50% interest in Vertical Guides Limited Partnership.

The Fund's proportionate share of Aliant Directory Services' and Vertical Guides Limited Partnership's assets, liabilities and results of operations included in the consolidated financial statements is as follows:

16. Earnings per unit

The following tables reconcile the net earnings and the weighted average number of units outstanding used in computing basic earnings per unit to weighted average number of units outstanding used in computing diluted earnings per unit:

The Exchangeable Units are included in the number of units for both basic and diluted earnings per unit.

The diluted earnings per unit calculation does not take into consideration the potentially dilutive effect of the Warrants since their impact is anti-dilutive.

The calculation of basic earnings per unit for the year ended December 31, 2005 includes a reduction to earnings available to Unitholders of $8.3 million relating to distributions declared on April 30, 2005 pertaining to the subscription receipts.

The calculation of diluted earnings per unit for the year ended December 31, 2005 includes a reduction to earnings available to Unitholders of $5.1 million relating to the interest earned on the funds held in escrow pertaining to the subscription receipts.

17. Stock-based compensation plans

The Fund's stock-based compensation plans consist of a Restricted Unit Plan and a Stock Option Plan. No options have been granted to employees and non-employees since the inception of the Fund.

Restricted Unit Plan

On August 30, 2004, YPG LP, through its general partner YPG GP, established the YPG Co. Restricted Unit Plan (the “RU Plan”) to encourage ownership of units, to enhance YPG Co's ability to attract, motivate and retain key personnel, to reward the participants for significant performance and associated growth in distributable cash of the Fund and to align the interests of the participants and the Unitholders of the Fund.

Under the RU Plan, YPG GP, as general partner of YPG LP, may grant to directors and eligible employees either a fixed dollar or fixed unit incentive amount which is then used by the plan custodian to purchase units of Yellow Pages Income Fund on the open market of the Toronto Stock Exchange (the “Restricted Units”). The Restricted Units so awarded may vest pursuant to a time-based or a performance-based criteria as determined by YPG GP. Time-based Restricted Units will vest 36 months after the date of determination of the incentive amount while performance-based Restricted Units will vest at the later of 36 months after the date of determination of the incentive amount and the date of confirmation by the Board of the achievement of the specified performance targets. The Board will determine, not later than October 31 of the year following the end of the performance period whether the performance-based vesting condition has been achieved. The performance-based units which have not achieved the vesting condition shall automatically be forfeited and cancelled.

Cash distributions received on all Restricted Units awarded to eligible employees and directors are reinvested in additional Restricted Units and vest according to the terms of the grant pursuant to which they are paid. Cash distributions received on all Restricted Units awarded to non-executive directors are not reinvested in additional Restricted Units and will be paid according to the terms of the grant pursuant to which they are paid. Unless instructed otherwise by a participant, upon the vesting of the Restricted Units, the plan custodian shall sell the Restricted Units of the participant on the open Market of the Toronto Stock Exchange and remit to the participant the net proceeds from the sale thereof after deducting all applicable taxes and other costs associated therewith.

Upon termination for cause or resignation, all Restricted Units not vested shall be forfeited and cancelled. Upon a participant's retirement, termination without cause, death and long-term disability, the time-based Restricted Units will vest as a pro-rata of the performance cycle completed versus the 36 month period. All performance-based Restricted Units that are not vested on the date of the participant's retirement, termination without cause, death or long-term disability shall be forfeited and cancelled on such date.

The Restricted Units have vesting acceleration provisions under certain circumstances.

Employees who were awarded units under the RU Plan prior to January 1, 2006 (pre-2006 grants), were granted Restricted Units in equal proportions between time-based vesting and performance-based vesting criteria. During the year, YPG LP awarded Restricted Units to key executives for the period from 2006 to 2008 which are performancebased vesting only and also awarded Restricted Units to non-executive directors of YPG GP, the general partner of YPG LP, which are time-based vesting only (2006 grants).

During the year ended December 31, 2006, 522,276 Restricted Units were granted at an average market price of $16.62. This includes 100,000 Restricted Units granted to Directors. Except for Restricted Units granted to Directors, the number of Restricted Units that vest can potentially reach two times the actual number of Restricted Units awarded if the actual performance reaches the maximum level of the objectives. Consequently, $15.7 million was used to purchase 941,292 Restricted Units of the Fund on the open market of the Toronto Stock Exchange, which are held in escrow in order to provide for a 200% pay-out subject to adjustment at time of vesting. In addition, an amount of $0.9 million was used to reinvest in 59,220 Restricted Units using the proceeds from the distributions on the Restricted Units held in escrow. This includes 22,231 Restricted Units associated with the portion which provides for 200% pay-out.

The following table summarizes the status of the grants:

As at December 31, 2006 there were 71,827 Restricted Units which were not allocated to any specific employee and 413,814 Restricted Units representing the portion which provides for a 200% pay-out as discussed above.

Total compensation expense for the year ended December 31, 2006 of $5.3 million (2005 - $0.8 million) was recorded in the consolidated statements of earnings.

Stock Options

Employee participants

Prior to the inception of the Fund, the Fund issued to certain employees options to purchase common shares of YPG Holdings Inc. Employees who participated in the equity plan were granted options in equal proportions between time-based vesting and performance-based vesting criteria. Employees who did not participate in the equity plan only received performance-based options. Time-based options are exercisable as to 20% to 33 1/3 % per year on the anniversary of the grant date in each of the three to five subsequent years. Performance-based options are exercisable as to 20% per year on the anniversary of the grant date in each of the five subsequent years provided that YPG Co. achieves specified performance targets. Performance targets not achieved are considered to be met if the performance is achieved on a cumulative basis in subsequent years. The performance-based options become fully exercisable on the ninth anniversary of the date of grant whether or not the performance targets are achieved.

Stock options have vesting acceleration provisions under certain circumstances.

Upon the termination of an optionee's employment, all unexercisable options expire immediately and exercisable options expire within 180 days of the date of termination. The plan and certain termination agreements provide for the Fund to pay, in cash, terminated optionholders any appreciation value of the options to cancel exercisable options. Subject to certain prior events of expiry, such as the termination of the employee's employment for cause, all exercisable options expire on the tenth anniversary of the date of grant.

Non-employee participants

The Fund also granted stock options to certain non-employees to acquire up to an aggregate of 207,607 common shares of YPG Holdings Inc. at an exercise price of $3.92 per share. Options are exercisable as to 33 1/3 % per year on the anniversary of the grant date in each of the three subsequent years.

The following table summarizes the status of the stock option program:

The following table summarizes information about the stock option program as of December 31, 2006:

Compensation expense for the year ended December 31, 2006 of $0.4 million (2005 - $0.4 million) was recorded in the consolidated statements of earnings. No options have been granted to employees and non-employees since the inception of the Fund.

18. Supplemental disclosure of cash flow information

Change in operating assets and liabilities:

Supplemental information:

Cash and cash equivalents consist of:

19. Commitments and contingencies

Under certain lease agreements, there are inducements for leasehold improvements. The lease inducements are accounted for as part of other deferred credits and amount to $25 million.

b. The Fund has three billing and collection services Agreements. The initial term of the Billing & Collection Services Agreement with Bell expires on January 25, 2008, with an automatic renewal period for three years thereafter unless the Fund provides prior notice not to renew. The agreement with TELUS includes automatic renewal for successive one-year periods. The Fund may terminate this agreement at any time upon providing no less than 60 days' prior written notice. The agreement with MTS Allstream Inc. expires on October 2, 2016, with two automatic renewal periods for ten years up to a maximum of 30 years unless the Fund provides prior notice not to renew. The Fund may terminate this agreement at any time upon providing no less than 90 days' prior written notice.

Pursuant to publication agreements with each of Bell Canada, TELUS and MTS Allstream Inc., YPG produces alphabetical listing telephone directories for each of these companies in order for them to meet their regulatory obligations. The White Pages Publication and Distribution Agreement with Bell Canada will continue in force until the later of the termination or expiration of Bell's non-compete obligations and the cessation of all regulatory requirements requiring Bell Canada to publish and distribute alphabetical listing telephone directories, unless terminated earlier in accordance with its terms. The Publishing Agreement with TELUS is in force for a period of thirty years unless terminated earlier in accordance with the provisions of the agreements. The Directory Publication and Distribution Agreement with MTS Allstream Inc. is in force until the earlier of thirty years from October 2, 2006, and the cessation of all regulatory requirements requiring MTS Allstream to publish alphabetical listing telephone directories.

Y PG also entered into several other agreements with Bell Canada, TELUS and MTS Allstream Inc., providing for the use of listing information and trademarks for the publications of directories. If YPG materially fails to perform its obligations under the publication agreements mentioned above and as a result they are terminated in accordance with their terms, these other agreements with any of Bell Canada, TELUS or MTS Allstream Inc. may also be terminated.

c. The Fund entered into directory printing agreements with its printing suppliers to print, bind and furnish alphabetical, classified and combined directories as well as other publications. It also entered into distribution agreements. These agreements will terminate between 2008 and 2020.

d. The Fund is subject to various claims and proceedings which have been instituted against it during the normal course of business for which certain of the claims are provided for and included in accounts payable and accrued liabilities based on management's best estimate of the likelihood of the outcome. Management believes that the disposition of the matters pending or asserted is not expected to have any material adverse effect on the financial position, results of operations or cash flows of the Fund.

20. Financial charges, net

The significant components of the Fund's financial charges are as follows:

21. Financial instruments

Credit risk

The Fund is exposed to credit risk with respect to accounts receivable from customers. Pursuant to billing and collection services agreements, Bell, TELUS , and MTS Allstream Inc. receive money from customers on behalf of the Fund. There are no individual customers that account for 1% or more of revenues. There are no accounts receivable from any one customer that exceed 1% of the total balance at any point in time during the year. Included in trade accounts receivable is approximately $46.5 million (2005 - $44.6 million) to be remitted by Bell, $4.4 million (2005 - nil) to be remitted by MTS Allstream Inc., and $23.9 million by TELUS (2005 - $25.5 million) under the billing & collection services agreements.

The Fund is exposed to credit risk if counterparties to its derivative financial instruments fail to meet their obligations. The Fund expects that its counterparties will meet their obligations because they are highly-rated financial institutions that have strong credit ratings.

Interest rate exposures

The amounts drawn under the credit facilities and the commercial paper facility bear variable interest rates primarily at Bankers' Acceptance rates plus a spread.

The Fund uses interest rate swap contracts to manage the combination of fixed and floating interest rates on its long-term debt and to manage interest rate risk on planned debt issuances.

In May 2005, concurrently with the acquisition of ADS, the Fund terminated interest rate swap agreements for a nominal amount of $125 million which were used to convert to floating a portion of the $250 million Series 3 Medium Term Notes, and simultaneously entered into interest rate swap agreements for a nominal amount totaling $400 million maturing on December 25, 2005 to convert a portion of the drawings under the Old Term Credit Facilities to fixed rate. The Funds paid a fixed interest rate of 1.2% on the swaps and received a floating rate based on Banker's Acceptance plus a spread of 0.7%. A $5.2 million gain resulting from the termination of the swaps which was realized by obtaining a lower than market (1.2%) rate on the fixed leg for the $400 million interest rate swap agreements mentioned above was deferred and will be recognized over the remaining term of the underlying debt which matures on November 18, 2019.

In November 2005, concurrently with the full repayment of the Old Term Credit Facilities, the Fund terminated these interest rate swap agreements of $400 million.

In February 2006, the Fund entered into two interest rate swap agreements for a nominal amount of $75 million each totalling $150 million to hedge the Series 6 Medium Term Notes. The Fund receives interest on these swaps at 4.65%. The first swap agreement stipulates that the Fund pays a floating rate equal to the Banker's Acceptance plus a spread of 0.28% and the second swap agreement stipulates that the Fund pays a floating rate equal to the Banker's Acceptance plus a spread of 0.35%. The swaps mature on February 28, 2011 matching the maturity date of the underlying debt. As at December 31, 2006, the interest rate swaps met the criteria for hedge accounting.

Bond Forward Agreements

Between June and September 2005, the Fund entered into bond forward transactions totaling $325 million in order to effectively lock in the Government of Canada rate on a portion of an expected issuance of 10-year Medium Term Notes. The rates on these contracts were between 3.88% and 3.95%. In November 2005, the Fund also entered into bond forward transactions totaling $200 million in order to effectively lock in the Government of Canada rate on a portion of an expected issuance of 30-year Medium Term Notes. The rates on these contracts were between 4.29% and 4.38%. The bond forward agreements were designated as hedges. In November 2005, concurrently with the issuance of the 10-year and 30-year Medium Term Notes, the bond forward agreements were terminated. A gain of $5.3 million was deferred and will be amortized over the term of the underlying debt which matures on February 15, 2016 and a loss of $1.7 million was also deferred and will also be amortized over the term of the underlying debt which matures on February 15, 2036.

Swaptions

In December 2005, the Fund entered into interest rate swaption agreements for a nominal amount of $200 million maturing on June 30, 2006. The Fund received a premium of $2.1 million on the sale of the options. From December 2005 to June 2006, changes in fair value of the swaptions were recorded in earnings as the criteria for hedge accounting were not met. On June 30, 2006, the counterparties exercised their options to enter into interest rate swap agreements with the Fund and as a result, the interest rate swap agreements' fair value of $8 million was presented in Deferred credits. Using hedge accounting, those interest rate swap agreements were converting $200 million of the $550 million Series 4 Medium Term Notes to a floating rate. Accordingly, the Fund received a fixed interest rate of 5.25% on the swaps and paid a floating rate based on Banker's Acceptance plus a spread of 0.7%. The interest rate swaps were to mature on February 15, 2016 matching the underlying debt. In November 2006, the Fund terminated these interest rate swaps and received an amount of $3.5 million which was also deferred and will be amortized over the term of the underlying debt which matures on February 15, 2016.

Fair values

The fair value is the amount at which a financial instrument could be exchanged between willing parties, based on current markets for instruments with the same risk, principal and remaining maturity. Fair value estimates are based on present value and other valuation techniques using rates that reflect those that the Fund could currently obtain, on the market, for loans with similar terms, conditions and maturities.

The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities is approximately equal to their carrying values due to their short-term maturity.

Fair values of derivative financial instruments are determined based on market rates prevailing at the balance sheet date and obtained from financial institutions for similar financial instruments.

These estimates are significantly affected by assumptions including the amount and timing of estimated future cash flows and discount rates, all of which reflect varying degrees of risk.

The following schedule represents the carrying values and the fair values of financial instruments:

¹ The carrying value consists of the liability portion of the Exchangeable Debentures

22. Restructuring and special charges

During 2005, the Fund recorded a provision for restructuring and special charges of $24.1 million in connection with the acquisition of ADS. The Fund adopted a formal plan to integrate and restructure the acquired business. Consequently, the Fund established provisions related to planned termination of employment of certain employees of the acquired business who are performing functions already available through its existing structure and other restructuring of the acquired business' operations. The other special charges are composed mainly of costs to exit or terminate specific leases and contracts which the Fund intends to modify or terminate. The liabilities related to these costs were initially included in the underlying net identifiable assets acquired. During the fourth quarter of 2005, the Fund revised its initial estimate to $25.2 million. The additional $1.1 million was recorded as restructuring and special charges in the period relating to workforce reduction.

In addition, during the fourth quarter of 2005, the Fund recorded restructuring charges of $7.3 million related to an internal reorganization and workforce reduction following the integration of the acquired business.

During 2006, the Fund recorded provisions for restructuring and special charges of $21.7 million, $17 million and $8.3 million in connection with the acquisitions of TMC, Trader Canada, and MTS, respectively. The Fund has adopted formal plans to integrate and restructure the acquired businesses. Consequently, the Fund established provisions related to planned termination of employment of certain employees of the acquired businesses who are performing similar functions and other restructuring of the acquired businesses' operations. The other special charges are composed mainly of costs to exit or terminate specific leases and contracts which the Fund intends to modify or terminate. The liabilities related to these costs were initially included in the underlying net identifiable assets acquired. During the fourth quarter of 2006, the Fund revised the provision related to the ADS acquisition to $25.8 million. As a result, an increase of $3.2 million was recorded in operating costs and a decrease of $2.6 million was recorded against goodwill.

The following table sets forth the restructuring reserve activities and special charges provision related to the acquisitions:

¹ Goodwill was reduced by the reversal of the provision related to the ADS acquisition in the amount of $2.6 million net of related income taxes of $0.8 million.

23. Guarantees

In the normal course of operations, the Fund has entered into agreements that contain certain features which meet the definition of a guarantee under the guidance provided by CICA Accounting Guideline 14, Disclosure of Guarantees and which are customary in the industry.

The Fund has entered into agreements which contain indemnification of its trustees and officers indemnifying them against expenses (including legal fees), judgments, fines and any amount actually and reasonably incurred by them in connection with any action, suit or proceeding in which the trustees and/or officers are sued as a result of their service, if they acted honestly and in good faith with a view to the best interests of the Fund. The Fund benefits from directors' and officers' liability insurance which is purchased by the Fund. No amount has been accrued in the consolidated balance sheet as of December 31, 2006 with respect to this indemnity. Pursuant to the acquisitions of ADS, TMC, Trader Canada and MTS, the Fund has entered into agreements whereby the Fund agrees to indemnify and hold harmless the vendors from and against any and all claims, liabilities, costs and expenses arising out of, based upon or related to (i) any breach by the Fund in the performance of its obligations under these agreements and (ii) any breach of a representation contained herein. Furthermore, agreements entered into by TMC and Trader Canada prior to the acquisitions contain indemnifications similar to the ones just described. No amount has been accrued in the consolidated balance sheet as of December 31, 2006, with respect to these indemnities.

The nature of these guarantees prevents the Fund from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties.

24. Segmented information

The Fund's reportable segments are strategic business units that offer different products. Following the acquisition of Trader Canada, management has determined that the Fund operates under two reportable segments: Directories and Vertical Media. The Directories segment operates in print and online directories, and specialized publications. The Vertical Media segment operates in the vertical print publications and web sites by topic or area of interest. The accounting policies of the segments are the same as those used for the consolidated annual financial statements.

The tables below summarize the selected financial information by segment:

In 2005, the Fund only operated in the Directories segment.

25. Comparative figures

Certain comparative figures have been reclassified to conform to the current year's presentation.