7. Risks and Uncertainties
Understanding and managing risks are important parts of YPG's strategic planning. The Board requires that the Company's senior management identifies the principal risks related to the Company's business operations and properly manages such risks. To understand and manage risks at YPG, the Company's Board and senior management analyze risks in three major categories: strategic, financial and operational. Strategic risks are in the most part external to the business. Financial risks generally relate to matters addressed in the Financial Risk Management Policy and in the Pension Statement of Investment Policy and Procedures. Finally, operational risks relate principally to risks under the control of management across key functional areas in the organization. The Company has put in place certain guidelines in order to manage the risks to which it may be exposed. Refer to the Annual Information Form for a complete description of risk factors.
The following section includes the major risks and uncertainties that could materially affect YPG's future business results and some information as to how these risks are managed.
Competition
YPG competes with other directory and classified advertising businesses and other forms of advertising media, including newspapers, television, radio, the Internet, magazines, billboards and direct mail advertising.
These competitors may cut prices to increase market share or may be able to offer their services at lower cost than YPG. In either case it is possible that YPG will be forced to reduce prices or offer and perform other services in order to remain competitive. YPG's failure to compete effectively with its current or any future competitors could result in, among other things, reductions in its advertiser base and rates and increases in its costs, and could have a material adverse effect on its financial condition and results of operations.
YPG has historically achieved revenue growth principally via increased prices for its products and services on an annual basis. There can be no assurance that YPG will be able to continue to increase prices in the future. Entry of competitors into YPG's markets may make it more difficult for YPG to maintain its growth at historical rates.
We actively monitor and analyze the competition and determine our competitiveness within each of our markets. Our marketing efforts are directed to better meet customer needs through targeted offers and pricing. Further refinements to our customer segmentation model will support our strategies to attract and retain customers.
We continuously enhance our directories with initiatives such as the inclusion of alphabetical business listings in some markets, the addition of many new features, the re-design of certain directories and the upgrade of search functionalities of the online products. Concurrent with the delivery of these new directories, we use multi-media campaigns to promote our brand and deliver our message to the market about the value our directories offer.
The Vertical Media business faces competition for advantageous retail display placement. In this sphere, the Vertical Media business competes with all print publications distributed at the same location as its own publications. New product placement practices, such as the free supply of attractive display racks to retailers, long-term display arrangements with retailers and third party control of retail display racks, are developing. The failure of the Vertical Media business to remain competitive and maintain favourable placement of its publications on retailer display racks could have a material adverse effect on the circulation of its publications.
The Vertical Media business also faces substantial online competition due to the lower barriers to entry on the Internet. For example, Trader competes with the online classified advertising businesses of web sites such as globemegawheels.com, autonet.ca, Canada.com, Yahoo.ca, eBay.ca, Lespac.com and Craigslist.org. In addition, increased online penetration and the resulting increase in the availability of free classified advertising opportunities may cause a decrease in the total revenues for classified advertising, particularly if the Vertical Media business is unable to find a way to effectively generate revenue from online activities.
Decline in overall usage of directories and vertical media
YPG could be materially adversely affected if usage of printed telephone directories or vertical publications declines materially. For example, increased usage of the Internet by consumers to find information could result in a decline in print directory and vertical media usage. Any declines in usage could impair YPG's ability to maintain or increase YPG's advertising prices, cause businesses that purchase advertising in YPG's directories and vertical publications to reduce or discontinue those purchases, and discourage businesses that do not purchase advertising in YPG's directories and vertical publications from doing so. Any of the factors that may contribute to a decline in usage of YPG's printed directories and vertical media publications, or a combination of them, could impair YPG's' revenues and have a material adverse effect on the business of YPG.
As previously mentioned, our continuous efforts to improve the content of our directories and vertical publications combined with advertising campaigns are initiatives undertaken to improve users' satisfaction and awareness of the content, therefore impacting usage.
Our industry is subject to changes arising from the increased usage of Internet-based products and technology advancement. As a result, we have aligned our online and print strategies in a continuous effort to find the best seller for each buyer. With sustained consumer use of print publications and an increase in online searches, our directory and vertical media categories as a whole are growing.
Interest rate fluctuations
YPG may be exposed to fluctuations in interest rates under its borrowings. Increases in interest rates may have an
adverse effect on the earnings of YPG.
The Company manages interest rate exposure by having a balanced schedule of debt maturities, as well as a combination
of fixed and floating interest rate obligations. YPG monitors market conditions and the impact of interest rate
fluctuations on its fixed-to-floating interest rate exposure mix. From time to time, we enter into interest rate swap agreements and other interest rate derivatives in order to manage this exposure.
YPG's reliance on outsourcing for billing, collection, printing and binding and other services
Pursuant to the Billing and Collection Services Agreement with Bell Canada and the Master Billing and Collection Services Agreement with TELUS, YPG's billing is included as a separate line item on the telephone bills for Bell Canada's customers and TELUS' customers. Bell Canada and TELUS contract with third parties to conduct monthly billing of customers who use Bell Canada or TELUS as the case may be, as their local telephone service provider. In addition, Bell Canada and TELUS provide collection services for YPG with respect to advertisers who are also their customers. If YPG fails to perform its obligations under these agreements, and as a result the agreements are terminated by Bell Canada or TELUS, certain of YPG's other agreements with Bell Canada or TELUS, may also be terminated. These other agreements include the Billing and Collection Services Agreement with Bell and the Master Billing and Collection Services Agreement with TELUS, the Bell Canada Trademark License Agreement, the TELUS Trademark License Agreement and all the non-competition covenants.
Pursuant to the Billing and Collection Services Agreement with MTS Allstream Inc., MTS Allstream Inc. provides billing and collection services for YPG with respect to all advertisers regardless of whether they use MTS Allstream Inc. as their local telephone service provider. If YPG fails to perform its obligations under this agreement, and as a result the agreement is terminated by MTS Allstream Inc., certain of YPG's other agreements with MTS Allstream Inc. including the Billing and Collection Services Agreement and all the non-competition covenants, may also be terminated by MTS Allstream Inc.
YPG also uses outside service suppliers to print and distribute its directories and publications and has concluded agreements with such suppliers. These agreements are for services that are integral to YPG's business. The failure of Bell Canada, TELUS, MTS Allstream Inc. or any of the other suppliers to fulfill their contractual obligations under these agreements could result in a material adverse effect on YPG's business until YPG finds a replacement supplier for those services.
Advertisers who do not use Bell Canada or TELUS as their local telephone provider are billed directly by the Company and our internal billing and collection services are cost-effective and scalable.
Integration of Trader
Achieving the anticipated synergies resulting from the integration of the combined Vertical Media business will depend in part upon the ability of management to manage and integrate the TMC and the Trader Canada businesses in an efficient and effective manner. The integration process may result in significant challenges, and management may be unable to accomplish the integration successfully. In addition, the inability of management to successfully integrate the operations of the acquired businesses could have a material adverse effect on the business and financial condition of YPG. There can be no assurance that management of YPG will be able to integrate the operations successfully or that the anticipated synergies between the businesses will be realized. Moreover, the timing of synergies expected to be realized, if any, is uncertain.
In order to properly plan for and execute the integration, management has prepared an integration plan with a list of initiatives, dates of execution, costs associated with the execution and expected synergies.
Reliance on key brands and trademarks and failure to protect intellectual property rights
YPG relies heavily on its existing brands and trademarks for a significant portion of its revenues. Failure to adequately maintain the strength and integrity of these brands and trademarks or to develop new brands and trademarks could adversely affect YPG's results from operations and financial condition.
Third parties may infringe, misappropriate or challenge the validity of YPG's trademarks or other intellectual property rights which could have a material adverse effect on the business of YPG, its financial condition or operating results. The actions that YPG takes to protect its trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce or protect YPG's intellectual property rights, protect its trade secrets or determine the validity and scope of the proprietary rights of others. YPG cannot ensure that it will be able to prevent infringement of its intellectual property rights or misappropriation of its proprietary information. Any infringement or misappropriation could harm any competitive advantage YPG currently derives or may derive from its proprietary rights. Third parties may assert infringement claims against YPG. Any such claims and any resulting litigation could subject YPG to significant liability for damages. An adverse determination in any litigation of this type could require YPG to design around a third party's patent or to license alternative technology from another party. In addition, litigation may be time-consuming and expensive to defend and could result in the diversion of YPG's time and resources. Any claims from third parties may also result in limitations on YPG's ability to use the intellectual property subject to these claims.
We devote significant resources to the protection of our trademarks and take a proactive approach to protecting our brand exclusivity.
Labour relations
Certain non-management employees of YPG are unionized. Current union agreements range between two to four years in duration and are subject to expiration at various times in the future. If YPG is unable to renew these agreements as they become subject to renegotiation from time to time, it could result in work stoppages and other labour disturbances which could have a material adverse effect on the business of YPG.
As part of our commitment to excellence, we believe in investing in our people for the long term and invested $3.1 million during 2006 in employee training and development through various programs.
Distribution of securities on redemption or termination of the Fund
Upon redemption of Units or termination of the Fund, the Trustees may distribute the Trust Notes directly to the Unitholders, subject to obtaining all required regulatory approvals. There is currently no market for the Trust Notes and the Trust Units. In addition, Trust Notes and the Trust Units are not freely tradable or listed on any stock exchange.
We believe that the execution of our business strategy combined with the achievement of selected critical initiatives for maximizing the long-term sustainability of our business should result in recurring and sustainable cash flow generation.
Income Tax Matters
On October 31, 2006, the Minister of Finance (Canada) announced new tax proposals concerning the taxation of income trusts and other flow-through entities. The October 31, 2006 Proposal was followed by the release of draft legislation by the Department of Finance on December 21, 2006. The 2006 Proposed Amendments, if enacted as currently drafted, will subject the Fund to trust level taxation as of January 1, 2011. In addition, the taxable distributions received by investors from the Fund, would be treated as taxable dividends.
There can be no assurance that the Fund will be able to retain the benefit of the deferred application of the new tax regime until 2011. If the Fund is deemed to have undergone “undue expansion” during the period from November 1, 2006 to December 31, 2010, as described in the Normal Growth Guidelines issued by the Department of Finance on December 15, 2006, the 2006 Proposed Amendments would become effective on a date earlier than January 1, 2011.
The Normal Growth Guidelines indicate that the Fund will not lose the benefit of the deferred application of the new tax regime to 2011 if the equity capital of the Fund does not grow as a result of issuances of new equity (which includes trust units, debt that is convertible into trust units, and potentially other substitutes for such equity) before 2011 by an amount that exceeds the greater of $50 million and an objective “safe harbour” amount based on a percentage of the Fund's October 31, 2006 Market Capitalization. The Normal Growth Guidelines provide for a “safe harbour” amount equal to 40% of the October 31, 2006 Market Capitalization for the period from November 1, 2006 to the end of 2007, and 20% for each of the 2008 to 2010 calendar years. These amounts of “safe harbour” are cumulative during the transition period. The Fund's October 31, 2006 Market Capitalization was approximately $7.8 billion. It is therefore assumed, for the purposes of this summary that the Fund will not be subject to the 2006 Proposed Amendments until January 1, 2011. However, in the event that the Fund issues additional Units or convertible debentures (or other equity substitutes) on or before 2011, the Fund may become subject to the 2006 Proposed Amendments prior to 2011. No assurance can be given that the 2006 Proposed Amendments will not apply to the Fund prior to 2011. Loss of the benefit of the deferred application of the new tax regime until 2011 could have a material and adverse effect on the value of units of the Fund.
On December 20, 2006, the ministère des Finances (Québec) (the “Ministère”) published Information Bulletin 2006-6 which sets out Ministère's position regarding the October 31, 2006 Proposals to the effect that Québec's tax legislation will be harmonized with the federal tax legislation but that a separate Québec tax regime will be implemented.
Currently, a trust will not be considered to be a mutual fund trust if it is established or maintained primarily for the benefit of non-residents of Canada unless all or substantially all of its property is property other than “taxable Canadian property” as defined in the Tax Act. The management of the Fund has stated that the Fund has adopted mechanisms to ensure that the Fund is not maintained primarily for the benefit of non-residents of Canada.
|
