7. Risks and uncertainties

The following section examines the major risks and uncertainties that could materially affect YPG's future business results and explains how these risks are managed.

Understanding and managing risks are important parts of YPG's strategic planning process. The Board requires that our senior management identify and properly manage the principal risks related to our business operations. To understand and manage risks at YPG, our Board and senior management analyze risks in three major categories:

1. strategic risks – which are primarily external to the business;
2. financial risks – generally related to matters addressed in the Financial Risk Management Policy and in the Pension Statement of Investment Policy and Procedures; and,
3. operational risks – related principally to risks under the control of management across key functional areas of the organization.

YPG has put in place certain guidelines in order to manage the risks to which it may be exposed. Please refer to the Annual Information Form for a complete description of these risk factors. Despite these guidelines, the Company cannot provide assurances that any such efforts will be successful.

Competition

YPG competes with other directory and classified advertising businesses and with other forms of advertising media. This includes newspapers, television, radio, the Internet, magazines, billboards and direct mail advertising.

These competitors may reduce their prices to increase their market share or may be able to offer their services at lower costs than we can. In either case, YPG could 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 future competitors could have a number of impacts such as, a reduction in its advertiser base, lower rates and increased costs. This could have a material adverse effect on our financial condition and on our results of operations.

A significant portion of YPG's organic growth resulted from 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 us to maintain growth at historical rates through price increases.

We actively monitor and assess our competition and determine our competitiveness within each of our markets. We address this competition by ensuring we best meet customer needs through targeted offers and pricing. Ongoing refinements to our customer segmentation model will support our strategies to attract and retain customers.

We continuously enhance the value of our directories with initiatives such as:

• the addition of new features;
• the re-design of certain directories; and,
• the upgrade of search functionalities of our print and online products.

We use multimedia campaigns to promote our brand and deliver our message to the market reinforcing the value our directory offers.

The Vertical Media business faces competition for advantageous retail display placement. In the retail environment, the Vertical Media business competes with all print publications that are co-displayed at any time. Local distribution managers, through frequent contact with third party distributors, retailers and wholesalers, closely monitor the flow of publications to ensure that an adequate number of copies are available for sale or distribution, while minimizing the number of unsold or undistributed copies. In many of Trader's regions, this process has been automated through the use of planning software. The failure of our 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. We are developing innovative product placement practices, such as the free supply of attractive display racks to retailers, long-term display arrangements with retailers and third-party maintenance of retail display racks.

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 transaction and other classified web sites. 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.

We continuously enhance the value of our online offer with initiatives such as:

• the addition of new search functionality; and
• the addition of editorial content.

Decline in overall usage of directories and vertical media

YPG could be materially adversely affected if the usage of printed telephone directories or vertical publications declines significantly. For example, increased usage of the Internet by consumers to find information could result in a decline in their use of print directory and vertical media. Such declines 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 their purchases; and,
• discourage businesses that do not already 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 either or both YPG's printed directories and vertical publications could impair YPG's' revenues and have a material adverse effect on our business.

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 generating a positive impact on usage.

As we have acknowledged, our industry is subject to changes arising from the increased usage of Internet-based products and other new technologies. To capitalize on this, 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 Directories and Vertical Media segments 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 our earnings.

We manage interest rate exposure by managing a balanced schedule of debt maturities, and through a combination of fixed and floating interest rate obligations. YPG monitors market conditions and the impact of interest rate fluctuations on our 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

We have a Billing and Collection Services Agreement with Bell Canada and a Master Billing and Collection Services Agreement with TELUS, a Billing and Collection Services Agreement with MTS Allstream Inc. and a Billing and Collection Service Agreement with Bell Aliant. Through these agreements, our billing is included as a separate line item on the telephone bills of Bell, TELUS, MTS Allstream Inc. and Bell Aliant customers who use our services respectively. Bell Canada, TELUS, MTS Allstream Inc. and Bell Aliant (the Telco Partners) contract with third parties to conduct monthly billing of customers who use them as their local telephone service provider. In addition, the Telco Partners provide collection services for YPG with those advertisers who are also their customers. Additionally, YPG has entered into publishing agreements with each Telco Partner. If YPG fails to perform its obligations under these agreements and the agreements are consequently terminated by such Telco Partner, other agreements with such Telco Partners may also be terminated, including the Bell Canada Trademark License Agreement, the TELUS Trademark License Agreement, the MTS Allstream Inc. Branding and Trademark Agreement and the Bell Aliant Branding and Trademark Agreement, as well as non-competition covenants we benefit from such Telco Partners.

We have agreements with outside service suppliers to print and distribute our directories and publications. These agreements are for services that are integral to our business.

The failure of the Telco Partners or any of the other suppliers to fulfill their contractual obligations under these agreements could result in a material adverse effect on our business until we could find a replacement supplier for those services.

Advertisers who do not use the Telco Partners as their local telephone provider are billed directly by YPG. Our internal billing and collection services are cost-effective and can be grown as our customer base expands.

Integration of Trader

The integration process of the combined Vertical Media may result in significant challenges. 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 guarantee that management of YPG will be able to integrate the operations successfully.

In order to properly manage the integration, we have prepared an integration plan with a list of initiatives, dates of execution, costs associated with the execution and expected synergies. That plan is now being executed and is, to date, progressing on schedule.

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 our results from operations and our financial condition.

It is possible that third parties could infringe upon, misappropriate or challenge the validity of YPG's trademarks or our other intellectual property rights. This could have a material adverse effect on our business, our financial condition or our 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, its trade secrets or to determine the validity and scope of the proprietary rights of others. We cannot ensure that we will be able to prevent infringement of our intellectual property rights or misappropriation of our proprietary information.

Any such infringement or misappropriation could harm any competitive advantage we currently derive, or may derive, from our 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 judgement arising from 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 against 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 development and 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 dates in the future. If YPG is unable to renew these agreements as they come up for renegotiation from time to time, it could result in work stoppages and other labour disturbances which could have a material adverse effect on our business.

We manage labour relations risk by ensuring that collective agreements' expiration dates are strategically positioned to minimize potential disruptions on both a regional (geographic) or on a functional (sales and clerical) basis. Also, every negotiation process to renew a collective agreement includes a cross-functional team in which all business units are represented. This team has the responsibility to develop and ultimately implement an effective contingency plan that would allow YPG to continue its day to day operations with minimal disruptions in the event of a labour dispute.

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 or the Trust Units. In addition, Trust Notes and 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 June 22, 2007, Bill C-52 received Royal Assent. The SIFT Rules contained in Bill C-52 are not expected to apply to the Fund until 2011 as the government has allowed a transition for publicly-traded trusts that existed prior to November 1, 2006. To qualify for the interim period, we must continue to comply with the Normal Growth Guidelines regarding equity capital as outlined by the government. The Normal Growth Guidelines provide for a safe harbour amount equal to 20% of the October 31, 2006 Market Capitalization for each of the 2008 to 2010 calendar years. These amounts of safe harbour are cumulative during the interim 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 SIFT Rules until January 1, 2011. We intend to fully comply with these guidelines. However there can be no assurance that the Fund will be able to retain the benefit of the deferred application of the SIFT Rules until 2011. If the Fund is deemed to have undergone undue expansion during the period up to December 31, 2010, as described in the Normal Growth Guidelines, the SIFT Rules would become effective on a date earlier than January 1, 2011.

On June 26, 2007, the Québec Ministère des Finances (MFQ) published Information Bulletin 2007-5 which confirms the MFQ's previously announced intention to harmonize Québec's tax legislation with the SIFT Rules through the implementation of a separate tax regime. Specifically, the MFQ has announced that a SIFT Trust with an establishment in Québec at any time in a taxation year would be subject to a tax at a rate generally equal to the Québec tax rate applicable to corporations. The Canadian Department of Finance has not yet indicated if the SIFT Rules will be amended to take into account the proposed Québec tax regime.