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LIFE INYELLOW

Yellow Pages Income FundAnnual Report 2009

Times have changed and so has your Yellow Pages™ directory. As Canadians turn more and more to the Internet and to mobile devices to find answers to their questions, our company is undergoing a major transformation.

The Yellow Pages brand is now digital.

With this transformation comes a major shift in our brand identity. Our new logo has a contemporary look encompassing our online, print and mobile offering. The rounded shape signifies the interconnectedness between all of our properties and the fact that you can always access our brand, whenever you want, wherever you are.

The Yellow Pages icon is resolutely modern and relevant to today’s consumer’s needs.

2010 will be a year of change and positive transformation as we continue building YPG for the future. In 2010 and beyond, we want Canadians to see and experience…

LIFE IN YELLOW.

INTRODUCING THE NEW

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BRINGING CONSUMERS AND BUSINESSES TOGETHER VIA OUR NETWORK OF MOBILE, WEB AND PRINT PROPERTIES.

We are determined to remain the helpful resource Canadians turn to when looking for local businesses, people, places and products.

In a world of information overload, we are more relevant than ever as we point consumers in the right direction and help them make smarter decisions.

Our advertisers, too, are facing rapid change. We don’t think they should face this challenge alone.

We stand ready to partner with our advertisers to build successful lead generation programs, inclusive of new innovative search engine solutions.

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WE STARTED 2010 AS A SOLID COMPANY WITH STRONG BUSINESS FUNDAMENTALS AND WELL POSITIONED FOR FUTURE GROWTH.

MARC P. TELLIERPresident and Chief Executive Officer

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In the face of an uncertain economic environment, Yellow Pages Group (YPG) started 2010 as a solid company with strong business fundamentals and well positioned for future growth.

During 2009, we remained focused on delivering oper-ational excellence, concentrating on what we could control and on our strategic imperatives. We made the necessary adjustments to adapt to challenging market conditions. We have maintained best-in-class performance metrics and outperformed most of our peers in directories and, more broadly, in the media industry.

We have been successful in proving that our direc-tories business is resilient, even in tough economic times. In 2009, we continued to invest in market coverage, new product introduction as well as in tech-nology, putting us in a better position to capitalize on growth opportunities as the economy recovers.

The economic downturn has had a greater impact at Trader. We dedicated time and resources to cost- containment and the completion of restructuring initiatives. Our team remained energized and focused on the deployment of Dealer Smart Solutions, an inte-grated, cost-effective solution for automotive dealers that has been instrumental in our repositioning of the business online.

For 2009, our consolidated Adjusted Revenues reached $1.65 billion compared to $1.7 billion in 2008. Online revenues represented the most significant lever of growth for both platforms through increased penetra-tion of our offerings and the introduction of new products. For the year ended December 31, 2009, online revenues reached $304 million, representing organic growth of 24 per cent.

Adjusted EBITDA for the year was $898 million com-pared to $931 million in 2008. Decisive actions to control expenditures across the entire company have translated into continuing high EBITDA conver-sion. The Adjusted EBITDA margin was 54.4 per cent at year end.

The ongoing resilience of the directories business, combined with cost-containment measures translated

into distributable cash of $714 million in 2009 com-pared to $751 million in 2008. Distributable cash per unit amounted to $1.40 in 2009 compared to $1.43 in 2008.

While managing our business with prudence through-out the year, we developed and executed a plan to strengthen our capital structure and prepare for the conversion from an income trust to a traditional corporation, which will take place by the end of 2010.

EXECUTING OUR STRATEGY

Consistent with our objective to improve our value proposition to advertisers, we continued to expand our product offering to provide them with high quality leads through compelling multimedia bundles. The successful introduction of our integrated bundles to new market and customer segments contributed to meeting their needs for new online products while driving strong internet revenue growth.

The Enhanced Directory Plus bundle, the Showcase bundle and our online video product, Profile Plus - all launched in 2008 - continued to show great momen-tum in 2009. These products provide advertisers with print and online visibility, coupled with increased advertising exposure through video, additional busi-ness information on their profile page and Google Adwords™.

Customer First remains a key priority to improve the customer experience. In 2009, we improved our automated client information tools and invested in technology to support new sales and operations functions. These investments are aimed at driving productivity and reducing operating costs across the company.

In addition to increasing productivity, we have made significant progress in growing the role of our sales representative into that of a trusted media advisor. We continued to provide our Media Account Consul-tants with the right tools, new powerful applications and appropriate training so that they efficiently focus on selling the right solutions to small and medium-sized enterprises (SME), now more and more inclusive of online performance products.

MESSAGE TO OUR UNITHOLDERS

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As consumers increasingly turn to the web to find local businesses, digital and online media spen-ding over the next five years is expected to grow at a healthy rate. We intend to tap into this high growth market and help our advertisers optimize their local media spending by extending our services to include Search Engine Marketing as part of our full service offering.

The strategic agreement we concluded in October with Marchex Inc., a leader in local search and per-formance platforms, represents the first step for YPG in the field of Search Engine Marketing and, overall, performance marketing. This partnership will allow us to provide simple, local, online performance-based advertising products and services to Canadian SMEs starting in the first quarter of 2010.

EVOLVING WITH CONSUMER NEEDS

With the acceleration of technological change in recent years, consumers are increasingly embracing new media and methods of communications. In order to maintain our best-in-class product offering, we are positioning ourselves where our advertisers and consumers expect us to be -- a step ahead of their evolving needs.

To address these needs, we have notably accelerated the pace at which we add features and functionalities to our leading online directory, YellowPages.ca™. In 2009, we launched several new features aimed at improving the user experience, while providing compelling and relevant advertising opportunities to businesses. Key areas of improvement include geo- relevant results based on merchants closest to the user’s location, interactive mapping functions, and

WE ARE BUILDING THE NECESSARY PLATFORMS TO ENSURE WE EMERGE AS THE UNDISPUTED LEADER IN LOCAL COMMERCIAL SEARCH.

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additional options for users to refine their search. Businesses now also benefit from an optimized profile page with improved information organization.

Given the nature of our business, mobile applications hold tremendous potential for future growth – espe-cially as consumers increasingly turn to their mobile device for fast, relevant, and local information. Mobile communication represents the next opportunity in terms of access to our products and services. We are determined to make the right investments to ensure that we emerge as the leading provider of local mobile search capabilities.

We have successfully introduced mobile search appli-cations for users of BlackBerry®, Google Android™ and iPhone™ smart phones. These applications provide user-friendly tools to search for local busi-nesses from mobile devices. Users have full access to merchant content, including video as well as busi-ness, person and reverse phone number look-ups. New features include local proximity-based searches using GPS and maps, as well as specialized saving and sharing capabilities.

We are seeing tremendous success with our mobile applications. At the end of 2009, the iPhone and Blackberry apps had been downloaded more than 650,000 times.

Our assets are unique. In 2009, we made significant progress in leveraging our capabilities to provide value to our advertisers and users alike. We are building the necessary platforms to ensure we emerge as the undisputed leader in local commercial search. Overall, our strengths are deep-seated and varied, supporting a business that is well equipped for sustained growth.

TRANSFORMING TRADER CORPORATION

The impact of the recession was most seriously felt at Trader, requiring some necessary cost-containment initiatives to adapt to the challenging economic environment. Despite these difficult decisions, we continued to invest in new technology to support our strategy of creating a national sales platform, auto-mating our back-office processes, and consolidating our production and call centre activities.

From its early beginnings as a traditional print busi-ness, Trader has undergone a significant transformation, culmi nating in 2009 with the successful roll-out of our Dealer Smart Solutions. This represents a critical step for Trader, serving as a springboard for our migration to online and marking the expansion of our business model into a comprehensive, end-to-end commercial solution.

Dealer Smart Solutions provides dealers with a full spectrum of services including content capture, inventory management, website presence, marketing campaign management, as well as monitoring and tracking tools. It allows dealers to measure the effec-tiveness of their marketing campaigns, demonstrating the return on investment so they can in turn optimize their advertising budget allocation.

The rollout of Dealer Smart Solutions was completed in the latter part of 2009 and provided an immediate contribution to revenue. We expect to continue leverag-ing this solution and its different components in 2010.

In the first quarter of 2009, we launched HomeTrader.ca, our national online real estate platform. Initially, the platform targeted the rental, new home and condo market, and was recently expanded to include re-sale homes as well.

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OUR BUSINESS FUNDAMENTALS ARESOLID AND WE HAVE A STRONG CAPITALSTRUCTURE TO SUPPORT OUR BUSINESSIN THE LONG TERM.

HomeTrader.ca features innovative capabilities such as interactive mapping with geo-targeted listings based on the user’s location. It provides location of neighbourhood amenities and services near each home listing, powered by YellowPages.ca™. It also features options to yield more relevant results, editorial content including expert advice and tips, as well as save and share features to send search results to friends.

In the generalist vertical, Trader took full ownership of LesPAC, Quebec’s number one classified advertising website. LesPAC revamped its site to improve theuser experience and introduce video capability for consumers to showcase their items on sale. LesPAC remains one of Quebec’s most popular and visited Internet sites reaching approximately 2 million unique visitors monthly, with a new ad posted by consumers every 12 seconds.

Trader also made a number of enhancements to its popular AutoTrader.ca™ website that attracts some two million unique visitors every month. The company redesigned the site’s home page and optimized its search capabilities. An upgraded search engine was introduced in test format in late 2009 and improve-ments will continue into 2010.

The progress accomplished at Trader during 2009 should position the business for growth as the economy recovers.

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STRENGTHENING OUR CAPITAL STRUCTURE

Early in 2009, we established an objective to achieve a stronger capital structure as we transition from an income trust to a traditional corporate structure. In 2009, we raised more than $1.25 billion in the fixed-income and equity capital markets through a series of very successful financing initiatives. These decisive actions have allowed us to fully pay down bank borrowings and extend the average term of our indebtedness. At year-end 2009, the net debt to adjusted EBITDA ratio stood at 2.5 times compared to 2.9 times at the end of 2008 and we expect it to further improve by the end of 2010.

As we have communicated on several occasions, we have carefully planned and implemented our path to conversion from an income trust to a corporation over the past quarters. With that in mind, we made the decision to reduce our annual cash distributions per unit from $1.17 in 2008 to $0.80 in May 2009. This precautionary measure was adopted in the best long-term interest of all our stakeholders. The decision to reduce the level of our payout helped us secure additional financial flexibility and strengthen our capital structure while still providing an attractive source of recurring income for our investors. We have since then affirmed our intention to maintain cash distributions of $0.80 per unit annually until December 2010.

Above and beyond the conversion process, we remain committed to protecting our investment grade credit ratings and to diversifying our sources of funding.

EMBRACING THE FUTURE

There is no doubt that 2009 was a challenging year. However, we have been facing headwinds with convic-tion, confident that our business fundamentals are solid and that we have a strong capital structure to support our business in the long term.

Our objectives are clear moving forward: we will develop our local search capabilities and invest in acquiring relevant, local content for our properties; we will enhance the online and mobile consumer experi-ence; and we will help businesses build successful marketing and lead-generation programs.

We stand on solid foundations on which to continue to grow the business. We have long-lasting relationships with hundreds of thousands of small and medium-sized enterprises from coast to coast. We own rich local content offered under strong, trusted brands. And, above all, we have a workforce committed to compete, committed to win.

All good reasons for us to embrace 2010 with confidence.

MARC L. REISCHChairman of the Board

MARC P. TELLIERPresident and Chief Executive Officer

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Over the past several years, our Corporate Social Responsibility (CSR) program has become an impor-tant part of the company’s culture. We are particularly proud of the progress we made in 2009 through our commitment to the environment.

We announced, in April, our participation in the Chang-ing the world, one step at a time program, developed by Équiterre, a leading environmental organization in Quebec, and supported by Green Communities Canada. As the first national company to join this initiative, we are taking concrete steps to improve our environmental performance over the next three years.

We are committed to strengthening our environmental initiatives on an ongoing basis and the Changing the world, one step at a time program provides the frame-work for us to focus on certain priorities and measure our performance.

We are pleased to report that we are already taking some important environmental actions as part of our day-to-day business practices. For example, we produce directories composed of post-consumer fibre from Canadian suppliers, and we use vegetable-based ink and hot-melt glue, rendering them entirely recyclable. We also purchase only 100% recycled and FSC-certified (Forest Stewardship Council) office paper for all our offices across the country.

This is just a beginning. Here are additional concrete measures we have taken in 2009 to support our commitment to the environment.

A NEW GUIDE FOR LIVING GREEN

This past year, we successfully launched the ecoGuide, a valuable local reference with helpful tips on responsible consumption, located in the front section

of all new Yellow Pages™ directories. This guide includes tips on responsible consumption, recycling do’s and don’ts, and the proper way to dispose of hundreds of household items. More specifically, people can find:

w a directory to Reuse & Recycle more than 400 household items such as tires, computers,

electronics, mattresses, carpets and smoke detectors to be disposed of ecologically and a list of addresses of where to take them;w a list of materials that are accepted/refused in

recycling bins, along with details on the collection of green and hazardous domestic waste;w 35 ecological certifications to help consumers make more responsible purchases; and w 15 simple ways to reduce our environmental

impact (composting, temperature control, reducing water consumption, etc.) while saving fuel, electricity and, of course, money.

The ecoGuide was developed in collaboration with a number of leading environmental organizations, municipalities and local recycling councils and is adapted to reflect the local resources available in each market. Our goal is to meet Canadians’ need to find relevant environmental services in their commu-nity. Our efforts were acknowledged by the Recycling Council of Ontario with a silver award in recognition of the ecoGuide’s contribution to informing Ontarians about waste reduction.

The different regional ecoGuides are also available online at www.eco.yellowpages.ca.

OFFERING CONSUMERS THE CHOICE

The majority of Canadians continue to use and value their Yellow Pages™ directory. A growing number of

INVESTING FOR A BETTER FUTURE:WE ARE TAKING CONCRETE STEPS TO IMPROVE OUR ENVIRONMENTAL PERFORMANCE.

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consumers turn to online local search tools to find local businesses, we also want to offer them the option to choose the format in which they wish to receive our rich directory content, namely print, online or mobile. With this in mind, we launched the Custom Delivery Program in 2009. Canadians can opt out from the distribution list or increase the number of print Yellow Pages™ directory copies they want to receive by simply filling the online form or calling our toll-free number.

The program has been very well received by consum-ers and environmental groups as it demonstrates our commitment to reducing our environmental footprint and to meeting consumers changing patterns.

MEASURING OUR ENVIRONMENTAL FOOTPRINT

One of our key strategic environmental initiatives this year was the finalization of our 2008 Greenhouse Gas (GHG) emissions inventory, which will effectively measure our progress in reducing our emissions year-over-year. In 2009, we were able to broaden the scope of our GHG inventory to have a more accurate assessment of our carbon footprint. With a solid base of factual information, established by external environ-mental specialists, we are now in a better position to set clear goals and communicate to our key stake-holders how we are improving on these goals.

SUPPORTING OUR LOCAL COMMUNITIES

For the past few years, we have been offering our national “Make it Real: Better Businesses for Better Communities” annual program to recognize the community involvement of selected small businesses across the country. Again in 2009, 20 companies were rewarded for their efforts to improve their communities. They each received a cash award and secured a donation to a charity of their choice.

ATTRACTING TALENT

We place a high priority on offering our employees a stimulating and rewarding work environment. In recognition of our efforts, for the fifth consecutive year, Maclean’s magazine listed us as one of Canada’s top 100 employers. In 2009, we were again ranked among the country’s best companies for the quality of our work environment as well as our compensation and employee benefits program.

In 2009, YPG ranked among the Top 10 companies to work for by the Financial Post. For the fourth consecutive year, we also figured on the list of Montreal’s 15 best employers published by The Gazette and Le Devoir. We also continue to hold the distinction as one of Canada’s 10 Most Admired Corporate Cultures by Waterstone Human Capital. Most notably, we are highly rated for our vision, our values, our leadership, and our operational and financial performance.

INVESTING FOR A BETTER FUTURE

Taking part in the Changing the world, one step at a time program this year was certainly a step in the right direction towards improving our environmental performance. In 2010, we will put particular emphasis on energy efficiency by evaluating energy consumption in our various office locations and identifying ways to reduce it.

We will continue monitoring and reporting on our progress, in order to create a better working environ-ment for our employees, and for the communities we serve across the country.

More information about our CSR initiatives can be found on our corporate web site at www.ypg.com.

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1. Reducing greenhouse gas emissions from business travel 2. Encouraging green commuting solutions 3. Promoting socially responsible and sustainable purchasing 4. Making socially responsible and sustainable purchasing choices 5. Promoting and purchasing certified fair trade products 6. Promoting local and organic agriculture 7. Implementing energy efficiency measures in our offices 8. Collaborating with our distributors to reduce their greenhouse gas emissions 9. Implementing paper reduction initiatives 10. Supporting directory recycling 11. Enhancing source reduction and recycling in our offices 12. Contributing to employee social involvement

CHANGING THE WORLD, ONE STEP AT A TIME BY:

Ecological AgricultureSubstainable Transportation

Fair Trade and Ethical ConsumptionEnergy Efficiency

Waste ManagementSocial and Community Involvement

Compared to virgin paper, the 3,055 kg of Rolland Enviro 100 paper used in this report reduced our ecological footprint by:

57 trees1,646 kg of solid waste

155,743 L of water 3,615 kg of air emissions

2.5x2.9x

NET DEBT TO EBIDTA

Dec

. 31, 2008

Dec

. 31, 2009

FINANCIAL HIGHLIGHTS(in millions of Canadian dollars, except unit information)

Adjusted Revenues

Adjusted EBITDA

Distributable Cash

Distributable Cash per Unit

2008 2009

$1,697 $1,651

$931 $898

$751 $714

$1.43 $1.40

$14

CAGR67%

$304

ONLINE REVENUES 2003

2009

$640

CAGR17%

$1,651

ADJUSTED REVENUES

2003

2009

$372

CAGR16%

$898

ADJUSTED EBITDA

2003

2009

$0.92

CAGR7% $1.40

2003

2009

DISTRIBUTABLE CASH PER UNIT

TABLE OF CONTENTS

Management’s Discussion and Analysis .............................1

Management’s Report ......................................................44

Auditors’ Report ...............................................................45

Consolidated Balance Sheets............................................46

Consolidated Statements of Earnings ................................47

Consolidated Statements of Comprehensive Income ...........48

Consolidated Statements of Unitholders’ Equity .................49

Consolidated Statements of Cash Flows ............................50

Notes to the Consolidated Financial Statements.................51-83

2009

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YELLOW PAGES INCOME FUND Management’s Discussion and Analysis

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Management’s Discussion and Analysis

February 11, 2010

This management’s discussion and analysis (MD&A) is intended to help the reader understand and assess trends and significant changes in the results of operations and financial condition of Yellow Pages Income Fund and its subsidiaries for the years ended December 31, 2009 and 2008 and should be read in conjunction with our audited consolidated financial statements and accompanying notes. Quarterly reports, the annual report and supplementary information can be found under the “financial reports” section of our corporate web site: www.ypg.com. Additional information, including our annual information form (AIF), can be found on SEDAR at www.sedar.com. In this MD&A, the words “we”, “us”, “our”, “the Company”, “the Fund” and “YPG” refer to Yellow Pages Income Fund and its subsidiaries (including Yellow Media Inc. (previously YPG Holdings Inc.), Yellow Pages Group Co., Yellow Pages Group, LLC and YPG Directories, LLC (collectively YPG USA), and Trader Corporation), which are reported under the following segments:

“Directories,” which refers to our print and online directories, and our specialized guides; and

“Vertical Media,” which refers to our print and online vertical publications which are targeted to specific audiences (or verticals) based on topic or area of interest – such as automotive or real estate.

Our reporting structure reflects how we manage our business and how we classify our operations for planning and for measuring our performance. This MD&A contains assertions about the objectives, strategies, financial condition, results of operations and businesses of YPG. These statements are considered “forward-looking” because they are based on current expectations of our business, on the markets we operate in, and on various estimates and assumptions.

These forward-looking statements describe our expectations on February 11, 2010.

Our actual results could be materially different from our expectations if known or unknown risks affect our business, or if our estimates or assumptions turn out to be inaccurate. As a result, we cannot guarantee that any forward-looking statements will materialize.

Forward-looking statements do not take into account the effect that transactions or non-recurring items, announced or occurring after the statements are made, may have on our business.

We disclaim any intention or obligation to update any forward-looking statements, except as required by law, even if new information becomes available through future events or for any other reason. It is the current practice of the Company to compare performance on a periodic basis with the targets established through our ongoing business planning process.

Risks that could cause our actual results to differ materially from our current expectations are discussed in Section 7 – Risks and Uncertainties.

This MD&A is divided into the following sections:

1. Our Business, Mission, Strategy and Capability to Deliver Results 2. Results 3. Liquidity and Capital Resources 4. Distributable Cash 5. Outlook, Capital Structure and Payout Considerations 6. Critical Assumptions 7. Risks and Uncertainties 8. Controls and Procedures

1. Our Business, Mission, Strategy and Capability to Deliver Results

Our Business

Yellow Pages Group is a leading media company serving Canadians and Canadian businesses from coast to coast. We are a leader in our two national platforms, Directories and Vertical Media, and have a presence in the United States through YPG Directories in the Mid-Atlantic and the Southeast American markets. This section provides an overview of our business, our current priorities and how we strive to manage our operations.


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Directories

YPG is Canada’s leading digital and print local commercial search provider.

We operate Canada’s leading online local search platforms including YellowPages.ca™ and Canada411.ca™, as well as the CanadaPlus.ca™ group of city sites. YellowPages.ca™ can be accessed on mobile devices, at mobile.yp.ca on cell phones and through mobile applications on BlackBerry™, Apple iPhone™ and Google™’s Android™.

In addition we are the official directory publisher for Bell Canada (Bell), TELUS Communications Inc. (TELUS), Bell Aliant Regional Communications LP (Bell Aliant), MTS Allstream Inc. and for a number of other incumbent telephone companies that have a leading share in their respective markets. We publish annually more than 340 different telephone directories with a total circulation of approximately 28 million copies.

We also publish print community directories in the United States under the Your Community Phonebook brand name in selected Mid-Atlantic and Southeast American markets.

YPG manages one of the largest face-to-face sales forces for small and medium-sized enterprises (SMEs) in Canada that serves approximately 385,000 advertising customers across the country.

Our directories are delivered into almost every household and business in our markets, and are available online and through a variety of digital options. Our content is rich and diverse which draws consumers to our directories and in so doing generates leads, calls, visits and clicks, and in turn attracts yet more advertisers.

YPG is the exclusive owner of the Yellow Pages™, Pages Jaunes™ Walking Fingers & Design™ and Canada411™ trademarks in Canada.

Vertical Media

We are the Canadian leader in Vertical Media through Trader Corporation (Trader). Trader has over 140 publications and 20 web sites covering four main product verticals: automotive, real estate, generalist, and employment.

Trader is the leading Canadian new and used car destination with its AutoTrader.ca™ web site. It also offers a unique integrated online advertising solution dedicated to promote dealership and its inventory.

Trader is home to such print brands as Auto Trader™, Auto HebdoMC, The Bargain Finder™, Home Renters’ Guide™, Renters News™, and Buy & Sell™. Online, Trader owns Internet destinations such as www.autotrader.ca, www.autohebdo.net, www.homebase.ca, hometrader.ca, www.visitenet.com, www.buysell.com and lesPAC.com.

Mission

Bringing local consumers and businesses together via our network of mobile, web and print properties.

Strategy

We have implemented a business strategy to improve our operations and achieve sustainable growth in revenues and profitability while pursuing two avenues for growth: organic and external.

The three pillars of our organic growth strategy are to: improve the user experience, grow traffic to our network of properties and extend our services to customers.

The continuing transition in the media and publishing industries towards more online and targeted content is driving us to develop new products that leverage the demand for new media while ensuring that our print products remain a key component of our advertisers’ media mix.


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Organic Growth

Organic growth means creating new opportunities to extend and enhance our existing print, online, mobile product and service offerings. This brings greater value to existing assets, provides new advertising opportunities to our advertisers and gives users new capabilities to find what they need, when and where they need it.

We remain focused on the following areas to drive organic growth:

Enhancing both YPG and Trader product offerings and solutions in response to evolving consumer and advertiser needs to generate additional revenue streams;

Securing compelling online and mobile opportunities for our advertisers and users;

Leveraging relationships with key portals; and

Exploring new efficiencies in the sales process in both Directories and Vertical Media.

External Growth

External growth means acting on opportunities to create new sources of revenue, largely through acquiring or developing new assets. During the past several years, we have acted decisively and effectively in this area through the acquisition of new directory operations and through our entry into Vertical Media. More recently, we have made more targeted, tuck-in acquisitions and investments to enhance our capability to launch and deliver new products and solutions or increase the depth and breadth of our content to improve consumer experience and therefore increase web traffic to our properties.

Sustainable Profitability

We achieve profitability by maximizing our operating efficiency and constantly reviewing all of our operations with a view to ensuring we maintain a competitive cost structure. Improving our cost structure remains a key priority and will continue to be achieved through:

Business process redesign;

Cost containment initiatives; and

Investment in technology to better support our operations and customer service.

Directories

For a review of developments and performance relative to key priorities identified for 2009, see Section 2 – Results.

Our key priorities for 2010 in our directory business are:

Enhancement of our product and service offering; and

Continued focus on customer relationship management through our “Customer First” program.


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Enhancement of Product Services

The 2010 growth plan entails building upon the drivers listed below:

Customer Acquisition – In 2010, focus will remain on customer acquisition efforts as strategies, offers and processes are further refined and optimized;

Integrated Bundles – In 2010, this broader bundling strategy will continue to provide a means to address customer needs through simplified value added offers. The Showcase bundle was launched in 2008 to enhance the advertisers’ value proposition. It is a complete media solution which includes a quarter column print ad, a bold alpha directory listing, the online video product Profile Plus and all the components of Enhanced Directory Plus. The Finder and Builder bundles were launched in 2009 as “lighter” versions of the Showcase bundle and do not contain the online video product. The bundle strategy has been further expanded to include a number of pilots in different markets across the country to test various multimedia bundles;

User Experience – In October 2009, an enhanced version of YellowPages.ca was released and included a new simplified search page, a new results page and search results that are more geo-relevant. Enhancing user experience will continue to be a priority in 2010 as new versions of the site are released with improved user features and additional content;

New Online Placement Products – The launch of the enhanced YellowPages.ca platform has also enabled the development of new online placement products that provide greater potential to target local markets. The available product set will be broadened, inclusive of both limited inventory items with guaranteed visibility or high visibility and non-limited inventory placement products;

Mobile – In 2009, YPG launched YellowPages.ca on mobile applications for iPhone™, Blackberry™ and Google™ Android™ smartphones. In 2010, we will continue to focus and invest in the mobile user experience both by continuing to improve the mobile applications and by further leveraging and enhancing our deep local content; and

Search Engine Marketing/ Search Engine Optimization – Important steps were taken in 2009 to position YPG for the implementation of search engine marketing (SEM), a marketing approach designed for increasing visibility of advertisers on search engines. We executed a commercial agreement with MDNH, Inc. (Marchex) in October which provides a platform for our new SEM services branded under Search Engine Solutions. The Marchex platform will allow us to take a mass-market approach to the provisioning of SEM and enable the leveraging of industry best practices. SEM is positioned for launch in the first quarter of 2010 and will be initially targeted at our existing customers. The objective of this SEM offer is to capture online advertising share of wallet. SEM will provide a more complete portfolio of products to the Media Account Consultant, enabling the sale of products that provide both presence and performance to advertisers.

Customer First

Customer First has formed the centrepiece of our customer retention and service enhancement activities for the past five years. We operate in a highly competitive environment and the onus is on us to come up with new and better ways of serving customers to ensure they continue to use our products and services. Customer First encompasses two elements:

A philosophy that defines how we treat our customers, how we recognize their loyalty and the overall attitude we expect our employees to adopt in all their customer interactions – the customer must always be our priority; and

A computer-based tool that allows us to act on that philosophy and improve service to our customers and add value in tangible and meaningful ways.

This tool enables us to conduct our operations in a virtual paperless environment. The phases of implementation include:

1. Business profiles – providing a single source of complete customer profiles and production information combined with real-time claim processing;

2. Ad request process – covering the flow of information between the sales organization and both the assignment center and ad production;

3. Call planning – addressing sales assignment and call planning via a multi-dimensional view; and

4. Contract closure – allowing for value-based pricing.

Phases 1, 2 and 3 of our Customer First tool have been completed. The roll-out of contract closure was completed in the second quarter of 2009 for Central and Atlantic regions. Following our acquisition of YPG USA’s directory systems and services in the United States, we reviewed our plan to roll out contract closure to the rest of Canada and we now plan to deploy contract closure in Western Canada beginning in the first quarter of 2010.


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Vertical Media

For a review of developments and performance relative to key priorities identified for 2009, see Section 2 – Results.

Our key priorities for 2010 in Vertical Media are:

Enhancement and expansion of our product and service offerings; and

Completion of digital ad-taking system.

Enhancement and expansion of our product and service offerings

Continued deployment of Dealer Smart Solutions - During 2009, we expanded the breadth of Trader’s online advertising solutions. In January 2009, Trader entered into a long-term partnership with Dealer.com to deliver enhanced inventory management tools, web site development and management services, lead tracking and search engine marketing optimization solutions for auto dealers in Canada. The Trader value proposition known as Dealer Smart Solutions is a fully integrated, cost effective and one-stop solution that is designed to better promote the dealership and its inventory. The focus of efforts in 2009 was the roll-out of Dealer Smart Solutions to a significant proportion of our vehicle customers (dealerships) across the country. In 2010, roll-out efforts will continue addressing customers not targeted on initial implementation. For customers that have already converted to Dealer Smart Solutions there is also an opportunity to continue to grow the customer account through package upgrade and additional components, such as video and SEM;

Expand Dealer Smart Solution to non-passenger vehicles - This product expansion will leverage all the successful components of Dealer Smart Solutions but will customize the offering to the specificities of the different segments;

Increase Penetration of our Real Estate Platform - In 2009, HomeTrader.ca was launched on a national basis. With the economy stabilizing, increased traction is expected from the real estate vertical notably in the New Homes & Condos category;

Further monetize online content and traffic - The leadership position occupied by AutoTrader.ca nationally continues to provide growth opportunities. There is continued momentum coming from national advertisers who are attracted by the targeted audience AutoTrader.ca delivers;

Improve User and Advertiser Experience - The introduction of a search engine on AutoTrader.ca is a key step in differentiating the user experience. Additional improvements are planned around personalization, usability and category improvements. On the advertiser side, a more complete suite of products will be launched for private and commercial customers. This will provide sellers new advertising options to promote their products and their business; and

Reinforce the online and mobile offering by providing value-add functionality for both new and used cars.

Improvement of productivity through investment in technology and business process

During the first quarter of 2010, we intend to complete the roll-out of the digital ad-taking system across the country. This new national customer database will allow for standardization and productivity gains, optimizing our ad workflow.

As we did in prior years, Trader will continue optimizing and harmonizing best practises and initiatives to increase sales force effectiveness and operating efficiencies.

Capability to Deliver Results

This section of our MD&A explains how we are equipped to continue to operate our business on a financially viable and progressive basis.

Capital Resources

YPG generates sufficient cash flow from its operations to fund cash distributions to its unitholders, to support required capital expenditures and to service its debt obligations. Its cash flow, along with its ability to access external capital if necessary, and the availability under its long term committed bank facilities provide sufficient resources to finance its cash requirements in the foreseeable future while maintaining adequate liquidity. Please refer to Section 3 – Liquidity and Capital Resources of this MD&A for an analysis of the company’s ability to generate sufficient cash and to access financial resources to meet operating needs in the current market environment. The reader should also refer to Section 4 – Distributable Cash to understand the impact of new tax proposals issued on October 31, 2006 by the Federal Minister of Finance on cash flow from operations.


6

Non-capital Resources

YPG’s critical intangible resources include:

Strong brands;

Established relationships with customers;

Breadth and depth of local content;

Dedicated and experienced employees; and

Culture and values that characterize our organization.

Strong Brands

YPG is the exclusive owner of a number of leading brands which have high-recognition value among our various audiences.

Established Relationships with Customers

We employ a sales force of approximately 2,000 people across our two segments, including sales support staff. This large and primarily face-to-face sales force is broken down into various customer segments allowing a more dedicated relationship between the sales force and the SMEs resulting in over 88% of our advertisers renewing their advertising with us each year.

Print and Online Content

The quality of our print and online content generates usage which in turn encourages local and national advertisers to advertise in our print and online properties in both our Directory and our Vertical Media segments.

Employees

Our employees have consistently improved our operations. Despite economic challenges, our employees have executed on the initiatives needed to build an impressive track record and we are confident that they will continue to remain focused on our common objectives.

Culture and Values

We have a performance-based culture. That culture is defined by all of our values and influences our thinking and our actions which drive our desire to compete to win. This focus on performance also dictates the competencies and skills we seek to attract and retain. All our employees are expected to value teamwork and be focused on our customers; they should act with integrity, respect and passion for the job at hand while maintaining open communications.

We believe that our culture and our values form the foundation of this organization and are critical to its sustained success.


7

2. Results

This section provides an overview of our financial performance in 2009 compared to 2008 and 2008 compared to 2007. It is also important to note that in order to help investors better understand our performance we rely on several metrics, some of which are not measures recognized by Canadian Generally Accepted Accounting Principles (GAAP). Definitions of these metrics are provided following the charts below and are important aspects which should be considered when analyzing our performance.

Overall Performance

Adjusted Revenues decreased by $46.9 million or 2.8% over the previous year to $1,650.5 million. Revenues decreased by $56.8 million or 3.3% to $1,639.9 million over the previous year;

Adjusted EBITDA decreased by $32.6 million or 3.5% over the previous year to $898.4 million. Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges decreased by $39.3 million or 4.2% to $893.4 million over the previous year; and

Distributable cash per unit decreased by $0.03 over the previous year to $1.40.

Highlights by Segment 1 (in thousands of Canadian dollars– except unit information) Years ended December 31, DDirectories Vertical Media Consolidated 2009 2008 2009 2008 2009 2008 Revenues $$1,392,029 $1,376,036 $$247,855 $320,677 $$1,639,884 $1,696,713 Income from operations before

depreciation and amortization, impairment of goodwill and restructuring and special charges $821,904 $824,508 $$71,534 $108,198 $$893,438 $932,706

Basic earnings per unit $0.40 $0.97 Cash flow from operating activities $$750,187 $692,356 Adjusted Revenues2 $$1,402,666 $1,376,787 $$247,855 $320,677 $$1,650,521 $1,697,464 Adjusted EBITDA2 $$826,821 $822,754 $$71,534 $108,198 $$898,355 $930,952 Distributable cash3 $$714,281 $750,870 Distributable cash per unit $$1.40 $1.43

1 We closed the acquisitions of the assets of TBayTel (Thunder Bay) on February 19, 2008, Get It Pages on August 6, 2008 and the assets of YPG USA on September 5, 2008. As such, included in the 2008 and 2009 results are the results of each acquired business from the respective date of acquisition. Trader’s American operations were divested on October 31, 2008 resulting in the exclusion of those results in the Vertical Media segment from that date.

2 Please refer to definitions relative to understanding our results on page 8 of this MD&A and Consolidated Results table on page 10 of this MD&A for a reconciliation of Adjusted Revenues and Adjusted EBITDA.

3 Please refer to Section 4 for a reconciliation of Distributable Cash.

$1.43 $1.40

0.00

0.25

0.50

0.75

1.00

1.25

1.50

2008 2009

Distributable Cash per Unit

(2.1%)

Adjusted Revenues (in millions of dollars)

1402.7 1,376.8

247.9320.7

0

300

600

900

1,200

1,500

1,800

2008 2009

Vertical MediaDirectories

1,697.5 1,650.5

(2.8%)

Adjusted EBITDA(in millions of dollars)

826.8822.8

898.4

71.5

108.2

0

150

300

450

600

750

900

1050

2008 2009

Vertical MediaDirectories

931(3.5%)


8

Definitions relative to understanding our results

Adjusted Revenues

We report on our revenue, by removing the effect of purchase accounting related to business acquisitions in our Directories segment (Adjusted Revenues). Adjusted Revenues is a non-GAAP measure not likely to be comparable to similar measures used by other publicly traded companies. For a reconciliation with Canadian GAAP please refer to Consolidated Operating and Financial Results later in this section.

Adjusted Revenues reflect the level of advertising activity that is generally billed in accordance with contractual terms with our advertisers. It is recognized on a monthly basis over the estimated life of our products. In print directories, it commences with the delivery of the directory; for online, it commences with the display date of the advertisement. Amounts billed up front for directories are deferred and recognized over the period for which the corresponding directories are in circulation. Revenues are generally recognized and billed over periods not exceeding twelve months, or in the case of certain alphabetical directories, not exceeding twenty-four months.

Adjusted Income from Operations before Depreciation and Amortization, Impairment of Goodwill and Restructuring and Special charges (Adjusted EBITDA)

We report on our EBITDA (Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges) (Adjusted EBITDA) by removing the effect of purchase accounting related to business acquisitions in the Directories segment. Adjusted EBITDA is a key measure used by management to evaluate performance. Adjusted EBITDA is also used to make decisions relating to our cash distributions to unitholders and to measure compliance with debt covenants. We believe Adjusted EBITDA assists investors in assessing our performance on a consistent basis without regard to restructuring and special charges and impairment of goodwill – which are non-recurring by nature and without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending on accounting methods or on non-operating factors such as historical cost.

As stated, EBITDA is not a calculation based on GAAP and is not considered an alternative to income from operations or net earnings in the context of measuring YPG’s performance. EBITDA does not have a standardized meaning and is therefore not likely to be comparable with similar measures used by other publicly traded companies. For a reconciliation with GAAP, please refer to Consolidated Operating and Financial Results later in this section. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed on page 27 of this MD&A.

Distributable Cash

Distributable cash is a non-GAAP measure generally used by Canadian income trusts as an indicator of financial performance. It should not be seen as a measurement of liquidity or as a substitute for comparable metrics prepared in accordance with GAAP. Distributable cash is commonly used by investors, management and other stakeholders to evaluate the ongoing performance of YPG. Distributable cash may differ from similar calculations as reported by other companies and should not be considered comparable. For a reconciliation with GAAP, please refer to Section 4 – Distributable Cash of this MD&A.

Cash Distributions per Unit

We report on cash distributions per unit because it is a measure of return used by investors. Cash distributions per unit depend on our distributable cash and YPG’s distribution policy. We make monthly cash distributions to unitholders of record on the last business day of each month. For a description of our cash distribution policy, please refer to Section 4 – Distributable Cash of this MD&A.

Performance Relative to Business Strategy

Organic growth

Directories

Customer First

In our efforts to improve customer facing productivity and experience, we continued to work on Customer First, our automated client information tools. The deployment of phase 4 - contract closure, is now complete in our Canadian Central and Eastern regions. We have completed our revised plan, following our expansion in the United States and accordingly, we are currently in the process of preparing the system to roll out contract closure in the Canadian Western region beginning in the first quarter of 2010.

Enhancement and expansion of products

Online growth continued to be strong in the fourth quarter driven by a consistent focus on expanding the strategy related to directory category bundles and continued innovation in online offerings for both the user and the advertiser. Online growth continued to benefit from the Enhanced Directory Plus and Showcase bundles, both of which were originally rolled out in 2008. The bundle strategy was also extended in 2009 with the launch of the Finder and Builder bundles in the first quarter and, more recently, with the piloting of other multimedia bundles in several markets across Canada.


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From a consumer perspective we successfully launched and updated YellowPages.ca™ mobile search applications for the iPhone™, Blackberry™ and Google™ Android™ smartphones during the year. These applications provide consumers with a user-friendly tool to easily search for local businesses and people from their mobile devices. During the third quarter of 2009, a new version of the application was launched for the iPhone™ featuring advertiser video content. The application now provides full access to merchant content, including video, business, person and reverse phone number look-up, save to your favourites, share listing results with others via email/SMS, local proximity-based search using GPS and maps and direct connect to voice search. In the fourth quarter of 2009, the number of downloaded applications continued to increase at an impressive rate with recurring usage remaining strong and the daily search statistics continuing to build.

The user experience was also enhanced with the launch of the new YellowPages.ca™ site in October 2009 featuring a new simplified home page, a new results page with interactive mapping and increased flexibility for users to refine their search. The business profile page has also been redesigned to have a more optimized organization of information. In addition, the platform has been enhanced to further enable geo-relevant searches through improvements in the search algorithm. Users may now search by directory scope or on the basis of landmarks, neighbourhoods or, in the case of mobile search, based on the geo-location of the device they are using. With the site enhancements, a new suite of placement products has also been developed to optimize the traffic across a broader set of products and pricing to make placement on YellowPages.ca accessible to all advertisers.

These product innovations translate into an improved value proposition for our advertisers and enhance our position as Canada’s leading local commercial search provider.

Vertical Media

Improvement of productivity through investment in technology and business processes

Trader continues to focus on deploying its ad taking system and new sales tools while progressing in the digitization of sales processes as planned. This deployment also includes sharing and harmonizing best practices in order to increase sales force effectiveness and operating efficiencies.

The roll-out of the new digital ad-taking system and digitization of sales processes have been deployed in Ontario and Western Canada allowing for standardization, productivity gains and ad workflow optimization. The full national rollout is expected to be completed in the first half of 2010.

Enhancement and expansion of products

The commercial launch of “Dealer Smart Solutions”, which results from our long-term commercial agreement with Dealer Dot Com, Inc. (Dealer.com), is well underway and sales training has been completed in all provinces. The initial rollout of Dealer Smart Solutions has been completed in Ontario and Western Canada. The rollout in Quebec and Atlantic Canada is in process and will be completed in the first quarter of 2010. Dealer Smart Solutions expands the breadth of Trader’s online advertising solutions and leverages the investments we have made in developing best in class inventory management systems. The new offer includes enhanced inventory management, inventory syndication, dealer web site management, search engine optimization and advertising campaign marketing and tracking tools, all of which are dedicated to promoting the dealership and its inventory. Dealer Smart Solutions offers customers unequalled access to best-in-class online solutions under one fully integrated platform, allowing them to maximize their efficiency and reduce their costs.

External growth

Acquisition of Les PAC

In April 2009, Trader exercised its option to acquire the remaining 50% interest in LesPAC in which Trader already had a 50% interest for a cash consideration of $25.2 million (including acquisition related costs of $0.2 million). LesPAC.com is Quebec’s leading classified web site in the generalist category.

Partnership with Dealer.com

In January 2009, Trader announced a strategic agreement with Burlington, Vermont-based Dealer.com, a leading provider of online marketing solutions to the vehicle industry. The long-term, exclusive commercial agreement makes Dealer.com’s web solutions available to Trader’s customer base in Canada served under its AutoTrader™ brand. Concurrent with the agreement, Trader acquired a 20% equity interest in Dealer.com for a cash consideration of US$35 million, with an option to increase its ownership in the privately held company over time. In January 2010, Trader exercised a portion of its option and raised its equity interest to approximately 30% for an additional consideration of US$20 million.

This strategic agreement enables Trader to deliver a one-stop integrated solution to Canadian auto dealers, at a time when dealerships of all kinds are looking for opportunities to more effectively manage their inventory levels and advertising spending.

Restaurantica

In January 2010, YPG announced the acquisition of Restaurantica, one of Canada’s largest growing restaurant and dining communities. The site lists 400,000 restaurants with over 200,000 user contributed reviews.


10

Consolidated Operating and Financial Results

Consolidated Results (in thousands of Canadian dollars – except unit information)

Years ended December 31,

2009 2008 2007

Revenues $$1,639,884 $1,696,713 $1,624,424

Operating costs 7746,446 764,007 750,264

Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges (EBITDA) 893,438 932,706 874,160

Depreciation and amortization 1142,414 186,065 225,584

Impairment of goodwill 3315,000 - -

Restructuring and special charges 440,316 36,225 -

Income from operations 3395,708 710,416 648,576

Financial charges, net 1114,600 142,261 137,361

Impairment of available-for-sale investment -- 4,775 -

Earnings before dividends on Preferred shares, income taxes, share of losses from equity investees and non-controlling interests 281,108 563,380 511,215

Dividends on Preferred shares, Series 1 and 2 222,427 22,750 16,026

Earnings before income taxes, share of losses from equity investees and non-controlling interests 258,681 540,630 495,189

Provision for (recovery of) income taxes 442,710 30,664 (33,108)

Share of losses from equity investees 77,089 - -

Earnings before non-controlling interests 2208,882 509,966 528,297

Non-controlling interest related to investments 5552 739 588

Dividends on Preferred shares, Series 3 and 5 44,075 - -

Net earnings $204,255 $509,227 $$527,709

Basic earnings per unit $$0.40 $0.97 $0.99

Diluted earnings per unit $$0.36 $0.89 $0.95

Revenues $$1,639,884 $1,696,713 $1,624,424

Elimination of purchase accounting impact 110,637 751 4,526

Adjusted Revenues1 $1,650,521 $1,697,464 $1,628,950

Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges (EBITDA) $$893,438 $932,706 $874,160

Elimination of purchase accounting impact 44,917 (1,754) (3,113)

Adjusted EBITDA1 $898,355 $930,952 $$871,047

Adjusted EBITDA margin 54.4% 54.8% 53.5%

Total assets $$8,941,606 $9,366,219 $9,265,512

Total long-term debt $2,309,606 $2,705,519 $2,413,732

1 Adjusted Revenues and Adjusted EBITDA – The acquisitions in the Directories segment were accounted for using the purchase method of accounting which resulted in the elimination of deferred revenues and deferred publication costs related to those directories published prior to each acquisition. These deferred revenues along with related deferred publication costs would have been recognized in 2007 through 2009, had the acquisitions not occurred. As a result, reported revenues and expenses are not representative of revenues and expenses that would have otherwise been reported and are not representative of revenues and expenses that will be reported in subsequent periods.


11

Analysis of Consolidated Operating and Financial Results

Fiscal 2009 versus 2008

Revenues

Revenues decreased by $56.8 million to $1,639.9 million compared to $1,696.7 million in 2008. The economic slowdown and related reduction in advertising spending in Canada impacted our revenues, especially in the Vertical Media segment. As such, our revenues in Vertical Media decreased by $72.8 million from $320.7 million in 2008. Organic online revenue growth reached 24% for the year below our growth target of 30% mainly due to the Vertical Media performance where overall revenue pressure had a dampening effect online. Online revenues from the Directories and Vertical Media segments combined reached $304.4 million in 2009. Online growth is driven by strong adoption of our online products in both of our segments. Our network of web sites in Directories and Vertical Media attracted 8.9 million unduplicated unique visitors1 on average during the fourth quarter of 2009. The continuing shift in the media and publishing industries towards more online content continues to place some pressure on our traditional print offerings especially in the Vertical Media segment.

EBITDA

EBITDA decreased by $39.3 million to $893.4 million compared to $932.7 million in 2008. The decrease for the year is directly attributable to lower revenues in the Vertical Media segment, which accounts for $36.7 million of the decrease in EBITDA. The Directories EBITDA decreased by $2.6 million for the year.

Cost of sales decreased by $10.9 million to $453.1 million compared to $464 million in 2008. Direct costs decreased as a result of the decline in revenues in the Vertical Media segment while indirect costs were impacted by cost containment initiatives. The cost reduction was partly offset by the costs incurred by YPG USA which was acquired on September 5, 2008.

Gross profit margin was relatively stable at 72.4% in 2009 compared to 72.7% in 2008.

General and administrative expenses decreased by $6.7 million to $293.3 million compared to $300 million in 2008. The decrease in general and administrative expenses is mainly attributable to lower employee-related expenses in the Directories segment and lower costs in both segments following the implementation of our cost containment initiatives. The cost reduction resulting from cost containment initiatives in the Directories segment was offset by costs at YPG USA which was acquired in the third quarter of 2008.

Depreciation and amortization

Depreciation and amortization decreased by $43.7 million to $142.4 million in 2009 compared to $186.1 million in 2008. The decrease is attributable to lower amortization of certain intangible assets related to the acquisitions of Trader and Aliant which have been fully amortized, partly offset by the amortization related to the acquisition of YPG USA.

Impairment of goodwill

During the year, we recorded a charge of $315 million related to the impairment of goodwill in our Vertical Media segment. The charge was recorded following the Company’s two-step impairment test which concluded that the carrying value of the goodwill exceeded its implied fair value of the reporting unit under the second step of the impairment test. Please refer to Section 6 – Critical Assumptions for a more thorough discussion.

Restructuring and special charges

During the year, we recorded expenses relating to an internal reorganization, workforce reduction, the termination of certain contractual obligations and other items amounting to $40.3 million. Similar initiatives amounting to $36.2 million were undertaken in 2008.

Financial charges

Financial charges decreased by $27.7 million to $114.6 million compared to $142.3 million in 2008. The decrease is due to the net gain on repurchase of Preferred shares, Series 1 and 2, long-term debt and exchangeable debentures of $42.8 million in 2009 partly offset by an increase in interest expense of $6 million. The increase in interest expense is due to certain debt refinancing with longer-term funded debt which resulted in higher interest rates. The effective average interest rate on our debt portfolio as of December 31, 2009 was 5.8%.

1 Source: comScore Media Metrix Canada.

Online Usage(in millions)

8.9 9

0

2

4

6

8

10

12

Q4 2008 Q4 2009


12

Dividends on Preferred shares, Series 1 and 2

Dividends on the two series of redeemable Preferred shares amounted to $22.4 million compared to $22.8 million in 2008.

Provision for income taxes

The combined statutory provincial and federal tax rate was 31.4% and 31.8% in 2009 and 2008, respectively. The Fund recorded an expense of 16.5% of the earnings in 2009 compared to 5.7% in 2008. Excluding the impact of the impairment, the expense would have been approximately 7.4% of the earnings in 2009. The difference between the statutory and the effective tax rates is primarily due to inter-company revenues which are not currently taxable when received by YPG LP. The Fund’s subsidiary, YPG LP, is a limited partnership, and as such, is not subject to income taxes whereas YPG LP’s subsidiaries are subject to income tax.

The enactment of the Budget Implementation Act 2007 (Bill C-52) on June 22, 2007, which contained legislation implementing proposed changes to the manner in which publicly-traded income trusts such as the Fund and the distributions from such entities will be taxed (SIFT Rules) effective in the 2011 taxation year has no impact on YPG’s current earnings. The operating activities are being carried on in corporate entities and as such, future income taxes are being calculated on all underlying operating assets and liabilities. For a more complete description of the SIFT Rules and its impact on our results, see Section 7 – Risk and Uncertainties.

Share of losses from equity investees

In 2009, we recorded our share of losses from our equity investments in the amount of $7.1 million. This includes approximately $12.9 million related to amortization of the values assigned to intangible assets recorded accounted for using the equity method.

Dividend on Preferred shares, Series 3 and 5

During the year, the Fund recorded $4.1 million of dividends on Preferred shares, Series 3 and 5. The Fund issued 8.3 million Preferred shares, Series 3 in September 2009 and 5 million Preferred shares, Series 5 in December 2009.

Net earnings

Net earnings decreased by $305 million to $204.3 million in 2009. The decrease results mainly from the impairment of goodwill.


Revenues

Revenues increased by $72.3 million to $1,696.7 million compared to $1,624.4 million in 2007. For the year ended December 31, 2008, the contribution from businesses acquired in 2007 accounted for $20.9 million, excluding their 2008 organic growth. YPG USA contributed $12.3 million of revenues for the period from acquisition to December 31, 2008. Online revenues from the Directories and Vertical Media segments combined reached $246.8 million in 2008, representing growth of 43.5% compared to the previous year.

EBITDA

EBITDA increased by $58.5 million to $932.7 million compared to $874.2 million in 2007. The increase for the year was mainly attributable to organic growth in the Directories segment as well as cost efficiencies realized in both segments resulting from our cost containment initiatives and investment in new technology. The increase for the year was also attributable to the contribution from acquired businesses.

Cost of sales increased by $20.3 million to $464 million compared to $443.6 million in 2007. The increase for the year was directly related to increased revenues and the acquisition of YPG USA on September 5, 2008, and the acquisition of Aliant on April 30, 2007.

Gross profit margin remained stable at 72.7% in 2008 and in 2007.

General and administrative expenses decreased by $6.6 million to $300 million compared to $306.6 million in 2007. The decrease in general and administrative expenses was mainly attributable to lower costs in the Vertical segment due to cost containment initiatives. In 2007, we also recorded transition expenses following the integration of Trader.


During the fourth quarter of 2008, we recorded expenses relating to an internal reorganization, workforce reduction, the termination of certain contractual commitments, the acceleration of business process changes in call centers, the discontinuance of under-performing publications, the closure of certain ad centers, and other items amounting to $36.2 million.


13


Depreciation and amortization decreased by $39.5 million to $186.1 million in 2008 compared to $225.6 million in 2007. The decrease related to lower amortization of certain intangible assets related to the acquisitions of Trader, Aliant, MTS and LesPAC which were fully amortized, offset by the amortization related to the acquisition of YPG USA.

Financial charges

Financial charges increased by $4.9 million to $142.3 million compared to $137.4 million in 2007. The variance was mainly due to lower credits related to derivative financial instruments and an increase in the non-cash amortization of deferred financing costs of $1.4 million. The balance of the variance was related to an increased level of debt to finance acquisitions and to repurchase units under our normal course issuer bid (NCIB) program offset by lower short-term rates compared to 2007. The effective average interest rate on our debt portfolio as of December 31, 2008 was 5.1%.


Dividends on the two series of Preferred shares amounted to $22.8 million compared to $16 million in 2007. The Series 1 and Series 2 Preferred shares were issued in March and June 2007, respectively.


The combined statutory provincial and federal tax rate was 31.8% and 31.6% in 2008 and 2007 respectively. The Fund recorded tax expenses of 5.7% of earnings in 2008 compared to a tax recovery of 6.7% of earnings in 2007. The Fund’s subsidiary, YPG LP, is a limited partnership, and as such, is not subject to income taxes whereas YPG LP’s subsidiaries are subject to income tax. The difference between the statutory and the effective tax rates was primarily due to inter-company revenues which are not currently taxable when received by YPG LP. In 2008, the provision for income taxes increased compared to the prior year reflecting the utilization of the future income taxes in 2008 combined with 2007 being positively impacted by the enactment of lower future income tax rates.

Net earnings

Net earnings decreased by $18.5 million to reach $509.2 million in 2008. The decrease was due to the restructuring and special charges combined with the higher provision for income tax incurred in 2008, offset by an increase in income from operations before restructuring and special charges.

Analysis of Adjusted Consolidated Operating and Financial Results


Adjusted Revenues

Adjusted Revenues decreased by $47 million to $1,650.5 million in 2009 compared to $1,697.5 million last year. The decline in adjusted revenues is due to lower revenues in the Vertical Media segment of $72.8 million offset by the contribution from YPG USA which was acquired on September 5, 2008.

Adjusted EBITDA

Adjusted EBITDA decreased by $32.6 million to $898.4 million compared to $931 million in 2008. The decrease is largely due to lower revenues in the Vertical Media segment where EBITDA decreased by $36.7 million. Adjusted EBITDA for the Directories segment increased by $4.1 million.

Cost of sales decreased by $7.7 million to $458.8 million in 2009 compared to $466.5 million in 2008. The decrease is due to lower revenues in the Vertical Media segment as well as cost containment initiatives and has been partly offset by the costs incurred by YPG USA which was acquired on September 5, 2008.

Gross profit margin was slightly lower at 72.2% in 2009 compared to 72.5% in 2008. The decrease is mainly attributable to lower margins in our US directory publishing operations which were acquired in the third quarter of 2008.

General and administrative expenses decreased by $6.7 million to $293.3 million in 2009 compared to $300 million in 2008. The decrease in general and administrative expenses is mainly attributable to lower employee-related expenses in the Directories segment and lower costs in both segments following the implementation of our cost containment initiatives. The cost reduction resulting from cost containment initiatives in the Directories segment was offset by costs at YPG USA which was acquired in the third quarter of 2008.


14


Adjusted Revenues

Adjusted Revenues increased by $68.5 million to $1,697.5 million in 2008 compared to $1,629 million last year. The increase for the year was mainly due to organic online growth which reached 43.5%. The contribution from businesses acquired in 2007 amounted to $20.9 million, excluding their 2008 organic growth. YPG USA contributed $12.3 million of revenues for the period from acquisition to December 31, 2008.

Adjusted EBITDA

Adjusted EBITDA increased by $59.9 million to $931 million compared to $871 million in 2007. These increases were largely due to organic growth in the Directories segment, cost efficiencies in both segments and contribution of businesses acquired in 2007 and 2008.

Cost of sales increased by $15.2 million to $466.5 million in 2008 compared with $451.3 million in 2007. The increase was directly linked with the increase in revenues. The increase for the year was also attributable to the acquisition of Aliant as the 2007 results included only 12.86% of Aliant for the first four months of 2007.

Gross profit margin remained stable at 72.5% in 2008 compared to 72.3% in 2007.

General and administrative expenses decreased by $6.6 million to $300 million in 2008 compared to $306.6 million in 2007. The decrease in general and administrative expenses was mainly attributable to lower costs in the Vertical segment following our cost containment initiatives.


15

Summary of Consolidated Quarterly Results

Quarterly Results (in thousands of Canadian dollars – except unit information)

2009 2008 QQ4 Q3 Q2 Q1 Q4 Q3 Q2 Q1

Revenues $$405,679 $408,318 $417,534 $408,353 $425,559 $426,141 $430,442 $414,571

Operating costs 1186,382 182,109 193,465 184,490 194,020 188,348 194,461 187,178

Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges (EBITDA) 2219,297 226,209 224,069 223,863 231,539 237,793 235,981 227,393

Depreciation and amortization 335,010 35,282 34,005 38,117 45,872 33,369 50,860 55,964

Impairment of goodwill -- 315,000 - - - - - -

Restructuring and special charges 119,732 - 20,584 - 36,225 - - -

Income (loss) from operations 1164,555 (124,073) 169,480 185,746 149,442 204,424 185,121 171,429

Financial charges, net 228,515 11,128 37,401 37,556 42,644 34,731 30,221 34,665

Impairment of available-for-sale investment -- - - - 418 4,357 - -

Earnings (loss) before dividends on Preferred shares, income taxes, share of losses (earnings) from equity investees and non-controlling interests 1136,040 (135,201) 132,079 148,190 106,380 165,336 154,900 136,764

Dividends on Preferred shares, Series 1 and 2 5,464 5,588 5,687 5,688 5,687 5,688 5,687 5,688

Earnings (loss) before income taxes, share of losses (earnings) from equity investees and non-controlling interests 130,576 (140,789) 126,392 142,502 100,693 159,648 149,213 131,076

(Recovery) provision for income taxes ((19) 24,238 7,898 10,593 21 13,379 13,293 3,971

Share of losses (earnings) from equity investees 2,190 3,488 1,589 (178) - - - -

Earnings (loss) before non-controlling interests 128,405 (168,515) 116,905 132,087 100,672 146,269 135,920 127,105

Non-controlling interest related to investments - - 78 474 182 206 234 117

Dividends on Preferred shares, Series 3 3,798 277 - - - - - -

Net (loss) earnings $$124,607 $(168,792) $116,827 $131,613 $100,490 $146,063 $135,686 $126,988

Basic earnings (loss) per unit $0.25 $(0.33) $0.23 $0.26 $0.19 $0.28 $0.26 $0.24

Diluted earnings (loss) per unit $$0.21 $(0.33) $0.19 $0.21 $0.17 $0.25 $0.24 $0.22

Revenues $$405,679 $408,318 $417,534 $408,353 $425,559 $426,141 $430,442 $414,571

Elimination of purchase accounting impact -- 1,761 3,687 5,189 - 15 178 558

Adjusted Revenues $$405,679 $410,079 $421,221 $413,542 $425,559 $426,156 $430,620 $415,129

Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges (EBITDA) $219,297 $226,209 $224,069 $223,863 $231,539 $237,793 $235,981 $227,393

Elimination of purchase accounting impact -- 823 2,052 2,042 (115) (312) (537) (790)

Adjusted EBITDA $$219,297 $227,032 $226,121 $225,905 $231,424 $237,481 $235,444 $226,603

Adjusted EBITDA margin 554.1% 55.4% 53.7% 54.6% 54.4% 55.7% 54.7% 54.6%

Revenues and Adjusted Revenues for the first and second quarters of 2008 reflected sustained organic growth in our Directories segment quarter over quarter. For the third and fourth quarters of 2008, Revenues and Adjusted Revenues were lower quarter over quarter due to lower revenues in the Vertical Media segment being negatively impacted by adverse economic conditions. This trend continued throughout 2009, reflecting continuing pressure on revenues resulting from the economic downturn facing our industry especially in our Vertical Media segment.

In 2008 and 2009, our Adjusted EBITDA margins remained relatively stable despite the protracted economic downturn which affected our business in the back half of 2008 and in 2009. The negative impact of our lower revenues, especially in the Vertical Media segment was partly compensated for by our cost containment initiatives.


16

Net (loss) earnings were affected by the adverse economic conditions during the four quarters of 2009. In addition, restructuring and special charges impacted the fourth quarter of 2008 and the second and fourth quarters of 2009. Impairment of goodwill also impacted the third quarter of 2009 as well as the gain on repurchase of preferred shares Series 1 and 2, and the loss on the repurchase of exchangeable debentures.

Analysis of fourth quarter 2009 results

Revenues

Revenues decreased by $19.9 million to $405.7 million during the fourth quarter of 2009 compared with the same period last year. The economic slowdown in Canada impacted our revenues, especially in the Vertical Media segment where revenues were lower by $10.4 million. Despite challenging economic and market conditions, organic online revenue growth for the fourth quarter reached 19%. Online revenues from the Directories and the Vertical Media segments combined reached $82.6 million during the fourth quarter of 2009 or $330.4 million annualized. Online growth is driven by strong adoption of our online products in both of our segments.

EBITDA

EBITDA decreased by $12.2 million to $219.3 million during the fourth quarter of 2009 compared with the same period last year. The decrease for the period is mainly attributable to lower revenues in both of our segments.

Cost of sales decreased by $3.2 million to $111.6 million during the fourth quarter of 2009 compared with the same period last year. Direct costs decreased as a result of the decline in revenues in the Vertical Media segment while indirect costs were positively impacted by cost containment initiatives.

Gross profit margin was lower at 72.5% for the fourth quarter of 2009 compared to 73% for the fourth quarter of 2008. The decrease is mainly attributable to lower margins in our US directory publishing operations which were acquired in the third quarter of 2008.

General and administrative expenses decreased to $74.8 million during the quarter compared to $79.2 million in 2008. The decrease in general and administrative expenses is mainly attributable to lower employee-related expenses in the Directories segment.


Depreciation and amortization decreased from $45.9 million to $35 million during the fourth quarter of 2009 compared with the same period last year. The decrease is attributable to lower amortization of certain intangible assets related to the acquisitions of YPG USA which have been fully amortized.


For the fourth quarter of 2009, we recorded expenses relating to an internal reorganization, the termination of certain contractual obligations and other items amounting to $19.7 million. Similar initiatives were undertaken in the fourth quarter of 2008 for an amount of $36.2 million.

Financial charges

Financial charges decreased from $42.6 million in the fourth quarter of 2008 to $28.5 million in the fourth quarter of 2009. The decrease is due to the net gain on repurchase of preferred shares, exchangeable debentures and long-term debt of $12.3 million for the fourth quarter of 2009.


Dividends on the two series of preferred shares amounted to $5.5 million and $5.7 million for the fourth quarter of 2009 and 2008, respectively.


The combined statutory provincial and federal tax rate was 30.97% in 2009 and 31.8% in 2008. The Fund recorded a tax recovery of 0.02% and tax expenses of 0.02% of earnings for the three-month periods ended December 31, 2009 and 2008, respectively.

Share of losses from equity investees

During the fourth quarter we recorded our share of losses from our equity investments in the amount of $2.2 million. This includes approximately $3.6 million related to the amortization of the values assigned to intangible assets accounted for using the equity method.


17

Net earnings

Net earnings increased by $24.1 million to $124.6 million during the fourth quarter of 2009. The increase is due to lower depreciation and amortization, the net gain in the repurchase of preferred shares, Series 1 and 2, exchangeable debentures and long-term debt and lower restructuring and special charges recorded during the fourth quarter of 2009 when compared to the same period last year.

Analysis of adjusted fourth quarter 2009 results

Adjusted Revenues

Adjusted Revenues decreased by $19.9 million to $405.7 million during the fourth quarter of 2009 compared with the same period last year. The economic slowdown in Canada impacted our revenues, especially in the Vertical Media segment where revenues were lower by $10.4 million. Despite challenging economic and market conditions, organic online revenue growth for the fourth quarter reached 19%. Online revenues from the Directories and the Vertical Media segments combined reached $82.6 million during the fourth quarter of 2009 or $330.4 million annualized. Online growth is driven by continued strong adoption of our online products in both of our segments.

Adjusted EBITDA

Adjusted EBITDA decreased by $12.1 million to $219.3 million in the fourth quarter of 2009 compared to the same period last year. The decrease is mainly attributable to lower revenues in both of our segments.

Cost of sales decreased by $3.3 million to $111.6 million in the fourth quarter of 2009 compared with the same period last year. The decrease is due to lower sales-related expenses as a result of lower revenues in the Vertical Media segment as well as cost containment initiatives.

Gross profit margin decreased from 73% in the fourth quarter of 2008 to 72.5% in the fourth quarter of 2009. The decrease is mainly attributable to lower margins in our US directory publishing operations which were acquired in the third quarter of 2008.

General and administrative expenses decreased to $74.8 million during the quarter compared to $79.2 million in 2008. The decrease in general and administrative expenses is mainly attributable to lower employee-related expenses in the Directories segment.

Segmented Information – Directories

Key Performance Indicators

Each year, we set targets to advance our goals and drive results. Our targets were established in August 2008 based on our economic and business outlooks for 2009 at that time. We did not expect the Canadian macroeconomic conditions to deteriorate and persist, or their impact to be as significant. We considered competitive activity in some of our localized markets and our ability to respond to changing market conditions while offering our advertisers new products and services that are intended to position the directory category both print and online. We also considered third party expectations regarding Canadian advertising trends and changing consumer trends affecting local commercial search.

Throughout 2009, we observed a more cautious behaviour from advertisers due to the adverse economic conditions they are experiencing. In this environment, we expected revenue growth from our online product offerings to continue, but also expected revenue pressure to remain in our traditional print offerings. Given the current economic climate we reported that we did not expect to meet our Revenue and EBITDA targets for the Directories segment in 2009 and as such, revised 2009 targets were communicated in our second quarter MD&A. Please refer to Section 5 – Outlook of this MD&A for a more thorough discussion.

Adjusted Revenues declined by 2.7% for the fourth quarter of 2009 and grew by 1.9% for the year ended 2009 when compared to 2008. Adjusted Revenues reached $1,402.7 million for the year in line with our revised target of approximately $1,400 million established in the second quarter. The level of Adjusted Revenue growth reflects expected pressure in the print category. Our objective of providing our customers with high quality leads through compelling print and online bundles continues to support increased online penetration of the print advertiser base and to drive strong internet revenue growth. While directory revenues benefit from some level of diversification across multiple headings and regional geographies, a slowing of the economy and what we believe to be a generalized reduction in advertising spending mitigated revenue growth and impacted EBITDA. Adjusted EBITDA decreased by 2.5% for the fourth quarter but increased by 0.5% for the year to reach $826.8 million. This level of Adjusted EBITDA is in line with our revised targets established in the second quarter to deliver Adjusted EBITDA between $825 million and $830 million.


18

Operating and Financial Results

Operating Results1 (in thousands of Canadian dollars)

Three-month periods ended December 31, Years ended December 31,

22009 2008 2009 2008

Revenues $$345,376 $354,814 $$1,392,029 $1,376,036

Operating costs 1142,154 146,351 5570,125 551,528

Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) 203,222 208,463 8821,904 824,508

Depreciation and amortization 224,130 39,818 1109,846 157,376

Restructuring and special charges 118,574 24,068 333,735 24,068

Income from operations $$160,518 $144,577 $$678,323 $643,064

Revenues $$345,376 $354,814 $$1,392,029 $1,376,036

Elimination of purchase accounting impact -- - 110,637 751

Adjusted Revenues $345,376 $354,814 $$1,402,666 $1,376,787

Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) $$203,222 $208,463 $$821,904 $824,508

Elimination of purchase accounting impact -- (115) 44,917 (1,754)

Adjusted EBITDA $203,222 $208,348 $$826,821 $822,754

1 See Note 27 - Segmented Information of the audited consolidated financial statements of the Company for the year ended December 31, 2009.

Analysis of Operating and Financial Results – Year End and Fourth Quarter

Revenues and Adjusted Revenues

Revenues decreased by $9.4 million to $345.4 million during the fourth quarter of 2009 and increased by $16 million to reach $1,392 million for the year ended December 31, 2009, compared with the same periods last year. Excluding the effect of purchase accounting, Adjusted Revenues decreased by $9.4 million to $345.4 million during the fourth quarter of 2009, and increased by $25.9 million to $1,402.7 million for the year ended December 31, 2009, compared with the same periods last year. For both revenues and Adjusted Revenues, the decline in the quarter is due to the impact of lower advertising sales in our print directories while the increase for the year is due to the continued growth in online revenues partly offset by lower print revenues and the contribution from YPG USA which was acquired in September 2008.

As of December 31, 2009 the number of directories customers choosing to advertise both in print and online was 63.3% across Canada compared to 59% for the corresponding period last year.

EBITDA and Adjusted EBITDA

EBITDA decreased by $5.2 million to $203.2 million in the fourth quarter of 2009 and by $2.6 million to $821.9 million for the year ended December 31, 2009, compared with the same periods last year. Excluding the effect of purchase accounting, Adjusted EBITDA decreased by $5.1 million to $203.2 million in the fourth quarter of 2009 and increased by $4.1 million to $826.8 million for the year ended December 31, 2009, compared with the same periods last year. The decrease for the quarter is directly related to lower revenues and Adjusted Revenues of $9.4 million which was partly offset by lower costs. The

Adjusted Revenues (in millions of dollars)

0 250

500

750

1,000

1,250

1,500

2008 2009

1,402.71,376.8 1.9%

Adjusted EBITDA(in millions of dollars)

822.8 826.8

0

150

300

450

600

750

900

1050

2008 2009

0.5%


19

increase in EBITDA and Adjusted EBITDA for the year is attributable to the contribution of YPG USA, our cost containment initiatives, and lower employee-related expenses partly offset by lower contribution from print revenues.

Cost of sales amounted to $81.7 million in the fourth quarter of 2009 compared with $80 million for the same period last year. For the year ended December 31, 2009, cost of sales was $334 million compared with $310.3 million for the same period last year. Excluding the effect of purchase accounting, cost of sales increased in the fourth quarter of 2009 to $81.7 million compared with $80.1 million for the same period last year. For the year ended December 31, 2009, cost of sales increased to $339.7 million compared to $312.8 million for the same period last year. These increases are mainly due to our new operations in the USA which are partly offset by the results of our cost containment efforts including the creation of a centre of excellence in our publishing operations.

Gross profit margin was lower at 76.4% in the fourth quarter of 2009 compared to 77.5% for the same period last year and 76% for the year ended December 31, 2009 compared to 77.4% for the same period last year. Excluding the effect of purchase accounting, gross profit margin was 76.4% in the fourth quarter of 2009 compared to 77.4% for the same period last year and 75.8% for the year ended December 31, 2009 compared to 77.3% for the same period last year. The lower margins are attributable to the impact of the publishing operations of YPG USA where margins are significantly lower than in Canada.

General and administrative expenses in the fourth quarter of 2009 decreased by $5.9 million to $60.5 million and decreased by $5.1 million to reach $236.1 million for the year ended December 31, 2009, compared with the same periods last year. The decrease for the quarter and for the year reflects lower employee related expenses.


Depreciation and amortization decreased from $39.8 million in the fourth quarter of 2008 to $24.1 million in the fourth quarter of 2009. For the year ended December 31, 2009, compared to the same period last year, depreciation and amortization decreased to $109.8 million from $157.4 million. The decrease for the fourth quarter and for the year ended December 31, 2009 compared to the same periods last year is due to the lower amortization of intangible assets related to the Bell Aliant acquisition which occurred in 2007, offset by the amortization related to the acquisition of YPG USA. Excluding the effect of purchase accounting, depreciation and amortization was $9.5 million for the fourth quarter of 2009, down from $11.2 million for the fourth quarter of 2008 and $39.5 million for the year ended December 31, 2009 compared to $44.6 million for the same period last year.


In 2009, we undertook additional restructuring initiatives to further improve our operational capabilities in light of the economic and market conditions. As a result of an internal reorganization, workforce reductions and the termination of certain contractual obligations, the Fund recorded restructuring and special charges of $18.6 million during the fourth quarter and $33.7 million for the year ended December 31, 2009. Restructuring initiatives undertaken in 2008, amounted to $24.1 million during the fourth quarter and the year then ended.

Segmented Information – Vertical Media

Key Performance Indicators

Each year, we set targets to advance our goals and drive results similarly to the Directories segment. The targets were established in August 2008 based on our economic and business outlooks for 2009 at that time. We did not expect the Canadian macroeconomic conditions to deteriorate and persist or their impact to be as significant. We considered third party expectations regarding Canadian advertising trends as well as the accelerated migration from print to online advertising solutions for advertisers in our Vertical Media segment. In the fourth quarter, approximately 45.8% of Vertical Media revenues were generated from online products. However, we continued to experience pressure in our traditional print offerings. Given these results and the current economic climate, we reported in the first quarter that we did not expect to meet our Revenue and EBITDA targets for the Vertical Media segment in 2009, and as such revised 2009 targets were communicated in our second quarter MD&A. In the third quarter, we further indicated that it was unlikely that we would meet these revised targets. Please refer to Section 5 – Outlook in our second and third quarter MD&A for a more thorough discussion.

For the fourth quarter, excluding US operations sold in October 2008, publications that were discontinued, and ad centers that were closed in late 2008, revenues declined by 12.3%. The adverse economic conditions which have prevailed throughout the year impacted our ability to generate revenue growth and profitability consistent with our targets. In our largest vertical, automotive, representing two-thirds of Trader revenues, reduced spending on vehicle advertising reflected the economic environment which impacted vehicle sales as potential buyers limited their spending. In the real estate vertical, representing approximately 18.4% of revenues, advertising continued to be impacted by the reduced activity in the new homes and condos market. Despite significant cost savings from our cost containment initiatives, EBITDA decreased by 30.3% for the quarter and decreased by 33.9% for the year, as a result of the continued revenue shortfall.


20

Operating and Financial Results

Operating Results1 (in thousands of Canadian dollars) TThree-month periods ended December 31, Years ended December 31,

22009 2008 2009 2008

Revenues $$60,303 $70,745 $$247,855 $320,677

Operating costs 444,228 47,669 1176,321 212,479

Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges (EBITDA) 16,075 23,076 771,534 108,198

Depreciation and amortization 110,880 6,054 332,568 28,689

Impairment of goodwill - - 3315,000 -

Restructuring and special charges 11,158 12,157 66,581 12,157

Income (loss) from operations $$4,037 $4,865 $$(282,615) $67,352

1 See Note 27 – Segmented Information of the audited consolidated financial statements of the Company for the year ended December 31, 2009.

Analysis of Operating and Financial Results – Year end and Fourth Quarter

Revenues

Revenues from our Vertical Media segment amounted to $60.3 million in the three-month period ended December 31, 2009 compared to $70.7 million for the same period last year representing a 14.8% decrease. Revenues for the year ended December 31, 2009 amounted to $247.9 million compared to $320.7 million for the same period last year, representing a decline of 22.7%. Excluding the impact of the U.S. operations sold in October 2008, the discontinued publications and ad centers that were closed in late 2008, the revenue decline for the year ended December 31, 2009, is attributable to lower revenues across all product verticals and regions.

EBITDA

EBITDA decreased by $7 million to $16.1 million for the three-month period ended December 31, 2009 and by $36.7 million to $71.5 million for the year ended December 31, 2009, compared to the same periods last year due to lower revenues. Given that the majority of Trader revenues reside in the Vehicle and Real Estate verticals and that these sectors continue to experience significant downward economic pressure, advertising expenditures have been correspondingly reduced. As a result of this revenue performance, EBITDA contracted in the quarter and during the year. Significant cost containment efforts were executed in the latter part of 2008 and in the first half of 2009 which should position us well for a future economic recovery.

Cost of sales decreased to $30 million for the fourth quarter of 2009 compared to $34.8 million for the same period last year. For the year ended December 31, 2009, cost of sales was $119.1 million compared to $153.7 million for the same period last year. These results directly relate to the decline in revenues and are also a reflection of our cost containment efforts with respect to our call center operations as well as optimization of circulation and distribution capabilities for our print publications.

Gross profit margin remained stable at 50.3% for the fourth quarter of 2009 compared to 50.8% for the same period last year and remained relatively stable at 51.9% for the year ended December 31, 2009 compared to 52.1% for the same period last year.

General and administrative expenses increased by $1.4 million to reach $14.3 million in the fourth quarter of 2009 compared to $12.9 million for the same period last year. The increase for the quarter is due to the timing of certain marketing-related expenses and higher bad debts. For the year ended December 31, 2009, general and administrative expenses were $57.2 million compared to $58.8 million for the same period last year. The reduction for the year ended December 31, 2009 is attributable to our cost containment initiatives, partly offset by higher bad debt expenses.


Depreciation and amortization amounted to $10.9 million in the fourth quarter of 2009 compared to $6.1 million for the same period last year and $32.6 million for the year ended December 31, 2009 compared to $28.7 million for the same period last year. The increase for the quarter relates to the amortization of certain intangible assets. Excluding the effect of purchase accounting, depreciation and amortization was $5.3 million for the fourth quarter of 2009 compared to $6 million for the same period last year, and $20.9 million for the year ended December 31, 2009 compared to $18.4 million for the same period last year due to higher amortization of software.


21

2.5 x

2.9 x

0.0

0.8

1.5

2.3

3.0

3.8

Dec. 31, 2008 Dec. 31, 2009

Net Debt to Latest Twelve Month Adjusted EBITDA1 Ratio

Impairment of goodwill

During the year, we recorded a charge of $315 million related to impairment of goodwill. The charge was recorded following the Company’s two-step impairment test which concluded that the carrying value of the goodwill exceeded its implied fair value under the second step of the impairment test. Please refer to Section 6 – Critical Assumptions for a more thorough discussion.


During the year, we continued to make progress in positioning Trader for future growth and profitability by planning and executing initiatives to optimize our call centres and the circulation and distribution for our print publications. The Fund recorded restructuring and special charges of $1.2 million during the quarter and $6.6 million for the year ended December 31, 2009. Restructuring initiatives were also undertaken in 2008 and resulted in restructuring and special charges of $12.2 million during the quarter and the year then ended.

3. Liquidity and Capital Resources

This section examines the Company’s capital structure, including the sources of liquidity and the various financial instruments of its debt and preferred share portfolio.

Financial Position

Capital Structure (in thousands of Canadian dollars)

As at December 31, 2009 As at December 31, 2008

Cash and cash equivalents $$36,170 $25,054

Medium Term Notes 2,044,947 2,051,370

Exchangeable Debentures 883,886 285,470

Credit facilities 100,000 358,700

Commercial paper 74,000 -

Obligations under capital leases 99,027 13,786

Long-term debt, including current portion $$2,311,860 $2,709,326

Net debt (net of cash and cash equivalents) $2,275,690 $2,684,272

Preferred shares, Series 1 and 2 4472,777 489,072

Non-controlling interest1 3324,130 -

Unitholders’ equity 5,224,740 5,561,492

Total capitalization $8,297,337 $8,734,836

Net debt to total capitalization 227.4% 30.7%

1 Represents 8.3 million and 5.0 million Preferred shares, Series 3 and 5 issued by Yellow Media Inc. in September and December 2009, respectively.

1 Latest twelve month Income from operations before depreciation and amortization, impairment of goodwill, and restructuring and special charges removing the effect of purchase accounting related to the acquisitions in the Directories segment (“Latest Twelve Month Adjusted EBITDA”).

Capital Structure (in millions of dollars)

2,684

5,561 5,225

2,276

489473324

0

2,000

4,000

6,000

8,000

10,000

Dec. 31, 2008 Dec. 31, 2009

EquityNon-controlling interest Preferred Shares

Net Debt

27.4%

30.7%


22

As at December 31, 2009, YPG had approximately $2.3 billion of debt net of cash and cash equivalents, which was $408.6 million lower than the net debt position as at December 31, 2008. The decrease in net debt and Preferred shares, Series 1 and 2 during the year results from positive operating free cash flow, the repayment of the New Credit Facility, the repurchases of Medium Term Notes and Preferred Shares Series 1 and 2 as well as the issuance of Preferred Shares Series 3 and 5. The net debt to Latest Twelve Month Adjusted EBITDA1 ratio as of December 31, 2009 was 2.5 times, compared to 2.9 times as of December 31, 2008. The net debt to total capitalization was at 27.4% compared to 30.7% as of December 31, 2008.

Credit Facilities and Commercial Paper Program

As at February 11, 2010, YPG has in place two senior unsecured credit facilities (the Credit Facilities) totalling $800 million consisting of:

A $700 million unsecured revolving credit facility, which is composed of two tranches (the Principal Revolving Facility):

a $500 million 364-day revolving tranche with a 2-year term-out option maturing in May 2012;

a $200 million 5-year revolving tranche maturing in May 2012;

A $100 million private placement from an institutional investor (the Private Facility) maturing July 23, 2014.

Currently, the total amount of the Principal Revolving Facility can be used as back-up for our commercial paper program and for general corporate purposes. The 364-day tranche can be extended annually, subject to the lender’s consent. If not extended, any amount drawn may be converted, at our option, into a 2-year non-revolving term loan.

On May 8, 2008, the Company increased its sources of liquidity by entering into a new credit facility which, at that time, provided a $250 million senior unsecured revolving credit facility. On December 19, 2008, the size of the new credit facility was increased to $450 million. On April 21, 2009, the Company used the full amount of the new revolving facility to repay its then maturing $450 million Series 1 Medium Term Notes. The Company did not request an extension of the revolving period on the new revolving facility. Therefore, on May 7, 2009, this facility automatically converted to a 2-year non-revolving term loan maturing in May 2011 (the New Credit Facility). From that date, repayments on the New Credit Facility automatically reduced the limit of the facility. On June 25, 2009 and July 22, 2009, the New Credit Facility drawings were repaid in full using a portion of the proceeds from the issuance of Medium Term Notes Series 7, 8 and 9. Please refer to the Medium Term Notes Program section. The New Credit Facility has now been cancelled.

Yellow Media Inc., a subsidiary of YPG, maintains a commercial paper program with an authorized limit of $500 million. The Principal Revolving Facility serves as a back-up facility for the commercial paper program. During the fourth quarter of 2009, the Company continued to take advantage of improved conditions in the Canadian money markets permitting it to issue commercial paper to fund its short term liquidity requirements. As at December 31, 2009, there was $74 million of commercial paper outstanding (no amount was outstanding at December 31, 2008). As of December 31, 2009, there was no amount drawn under the Principal Revolving Facility, compared to $358.7 million drawn as at December 31, 2008.

On July 24, 2009, the Company drew $100 million on the Private Facility. This term facility was used for general corporate purposes and matures on July 23, 2014.

On November 4, 2009, the Company announced its intention to conduct a substantial issuer bid to purchase for cancellation all of its outstanding 5.50% Exchangeable Unsecured Subordinated Debentures. On December 14, 2009, the Company announced that an aggregate of $213.5 million principal amount was deposited under the offer and it had taken up and accepted for purchase and cancellation all of such deposited Exchangeable Debentures. The substantial issuer bid was financed through cash on hand and the commercial paper program.

All credit facilities are subject to customary terms and conditions including limits on pledging assets without the consent of lenders. These facilities are also subject to the maintenance of a maximum ratio of funded debt to Latest Twelve Month Adjusted EBITDA1 of 4.25 times and a minimum ratio of Latest Twelve Month Adjusted EBITDA1 to cash interest expense on total debt of 3.5 times.

YPG was in compliance with all of its debt covenants as at December 31, 2009.

Medium Term Note Program

Yellow Media Inc. had a total of $2 billion of notes outstanding under its Medium Term Note program as of December 31, 2009 with varying maturity dates between 2011 and 2036. The Medium Term Notes Series 1 in the amount of $450 million matured in April 2009 and were repaid using proceeds from the new revolving facility as described above.

1 Latest twelve month Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges removing the effect of purchase accounting related to the acquisitions in the Directories segment (“Latest Twelve Month Adjusted EBITDA”).


23

On June 25, 2009, Yellow Media Inc. issued Medium Term Notes Series 7 for gross proceeds of $260 million maturing on February 2, 2015. These notes bear interest at 7.30% and were issued at par. Of the net proceeds $200 million was used to reduce indebtedness under the New Credit Facility while the balance was used to reduce commercial paper indebtedness as well as for general corporate purposes.

On July 3, 2009, Yellow Media Inc. issued Medium Term Notes Series 8 for gross proceeds of $90 million maturing on December 3, 2013. These notes bear interest at 6.85% and were issued at par. Of the net proceeds $50 million was applied against the New Credit Facility whereas the remainder was used to repay commercial paper indebtedness, and for general corporate purposes.

On July 10, 2009, Yellow Media Inc. re-opened the Medium Term Notes Series 8 for an additional amount of $35 million. Concurrently, Medium Term Notes Series 9 were issued for gross proceeds of $130 million maturing on July 10, 2013. The re-opening of Series 8 was done under the same terms and conditions, whereas the Series 9 notes, offered to retail investors, bear interest at 6.50% and were issued at par. The entire net proceeds of the July 10, 2009 issuances were used to repay the indebtedness under the New Credit Facility.

On November 18, 2009, Yellow Media Inc. announced its intention to exercise its right to redeem all of its outstanding $150 million 4.65% Medium Term Notes, Series 6, due February 28, 2011 on the following terms: (i) redemption date: January 15, 2010; (ii) redemption price: $1,041.681 per $1,000 principal amount of Series 6 Notes; (iii) accrued and unpaid interest: $17.836 per $1,000 principal amount of Series 6 Notes; and (iv) total redemption price and accrued and unpaid interest: $1,059.517 per $1,000 principal amount of Series 6 Notes. The redemption price has been determined in accordance with the terms of the Series 6 Notes and the provisions of the trust indenture dated April 21, 2004 governing the Series 6 Notes. Interest accrued on the Series 6 Notes up to, but excluding, the redemption date will be paid on the redemption date. Yellow Media Inc. plans to finance the redemption through its existing commercial paper program. On January 15, 2010, the redemption was successfully completed.

On November 23, 2009, Yellow Media Inc. completed an issuance of $300 million of 7.75% Medium Term Notes Series 10 due March 2, 2020. The net proceeds of such issuance were used to repay indebtedness under Yellow Media Inc.’s commercial paper program and for general corporate purposes.

The Medium Term Notes Series 7, 8, 9 and 10 were issued under our Short Form Base Shelf Prospectus dated June 20, 2008. This prospectus has a life of 25 months and a remaining balance of $185 million. The recent long-term debt issuances are consistent with our past financing practices, our objective being to refinance drawings under bank credit facilities with longer term funded debt or through the issuance of other capital market securities.

Following the issuance of Medium Term Notes Series 7, 8, 9 and 10, the Company remains subject to a maximum ratio of Funded Debt to Latest Twelve Month Adjusted EBITDA1 of 4.25 times upon the incurrence of additional debt. The Company will be subject to this incurrence test as long as any of Medium Term Notes Series 7, 8, 9 and 10 remain outstanding.

Following the issuance of Medium Term Notes Series 7, 8, 9 and 10, the Company’s credit ratings for the Medium Term Notes program remained unchanged at BBB (high) with a stable trend from DBRS Limited, and BBB- with a stable outlook from Standard & Poor’s Rating Service.

During 2009, the Company repurchased for cancellation $2.5 million face value of Medium Term Notes Series 2, maturing in 2014 with a coupon of 5.71%, $72.8 million face value of Medium Term Notes Series 3, maturing in 2019 with a coupon of 5.85%, $56.3 million face value of Medium Term Notes Series 4, maturing in 2016 with a coupon of 5.25%, and $230.1 million face value of Medium Term Notes Series 5, maturing in 2036 with a coupon of 6.25%.

Exchangeable Unsecured Subordinated Debentures

On July 6, 2006, Yellow Media Inc. issued a total of $300 million of Exchangeable Unsecured Subordinated Debentures outstanding (the Exchangeable Debentures). The Exchangeable Debentures have a maturity date of August 1, 2011 and are exchangeable at any time, at the option of the holder, for units of the Fund at an exchange price of $20.00 per unit. The Exchangeable Debentures are redeemable at par at the option of Yellow Media Inc. after August 1, 2010, subject to certain restrictions. The Exchangeable Debentures also provide Yellow Media Inc. with the option to repay the principal and interest in units of the Fund. An amount of approximately $13 million, representing the value of the exchange option, has been classified as a component of Unitholders’ equity on the balance sheet.

On November 4, 2009, the Company authorized a substantial issuer bid to purchase for cancellation all of its outstanding 5.50% Exchangeable Debentures at a purchase price of $1,020 in cash for each $1,000 principal amount of Exchangeable Debentures plus accrued interest. The Company secured a committed $300 million multi-draw term loan to fund the tender offer.



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On December 14, 2009, the Company announced that an aggregate of $213.5 million principal amount had been deposited under the offer and it had taken up and accepted for purchase and cancellation all of such deposited Exchangeable Debentures. Existing liquidity was used to fund the payment thereof. As a result, the Company cancelled the $300 million committed multi-draw term loan.

Cumulative Redeemable Preferred Shares

Yellow Media Inc. has two series of cumulative redeemable first preferred shares outstanding. On March 6, 2007, 12,000,000 cumulative redeemable preferred shares, Series 1 (Preferred Shares Series 1) were issued for gross proceeds of $300 million. A dividend of $1.0625 per share per annum is payable quarterly on the Preferred Shares Series 1, yielding 4.25% per annum. The Preferred Shares Series 1 are redeemable by the issuer at par for cash on or after March 31, 2012, or by the issuance of units of the Fund between March 31, 2012 and December 31, 2012. The Preferred Shares Series 1 are also retractable for cash at the holder's option on or after December 31, 2012 at a price equal to $25.00 per share plus any accrued and unpaid dividends in arrears.

On June 8, 2007, 8,000,000 cumulative redeemable preferred shares, Series 2 (the Preferred Shares Series 2) were issued for gross proceeds of $200 million. A dividend of $1.25 per share per annum is payable quarterly, yielding 5.0% per annum. The Preferred Shares Series 2 are redeemable by the issuer at a decreasing premium for cash on or after June 30, 2012, or by the issuance of units of the Fund between June 30, 2012 and June 30, 2017. The Preferred Shares Series 2 are also retractable for cash at the holder’s option on or after June 30, 2017 at a price equal to $25.00 per share plus any accrued and unpaid dividends in arrears.

On June 9, 2009, the Fund received approval from the Toronto Stock Exchange on its notice of intention to make a normal course issuer bid for its first preferred shares through the facilities of the Toronto Stock Exchange from June 11, 2009 to June 10, 2010, in accordance with applicable regulations of the Toronto Stock Exchange. Under its normal course issuer bid, the Fund intends to purchase for cancellation up to 1,200,000 and 800,000 of its outstanding Preferred Shares Series 1 and 2, respectively. These figures represent 10% of the public float of each series of preferred shares outstanding on June 9, 2009. Since June 11, 2009, 85,466 Preferred Shares Series 1 and 658,226 Preferred Shares series 2 were repurchased at average prices of $22.88 and $17.86, respectively, including brokerage fees.

The total cost of repurchasing preferred shares amounted to $13.7 million, including brokerage fees.

Rate Reset Preferred Shares

Yellow Media Inc. has two series of rate reset first preferred shares outstanding.

On September 23, 2009, 7,500,000 cumulative rate reset preferred shares, Series 3 (the Preferred Shares Series 3) were issued for gross proceeds of $187.5 million. On September 28, 2009, an additional 800,000 cumulative rate reset preferred shares, Series 3 (the Preferred Shares Series 3) were issued for gross proceeds of $20 million. A dividend of $1.6875 per share per annum is payable quarterly, yielding 6.75% per annum for the initial five year period ending December 31, 2014. The dividend rate will be reset on September 30, 2014 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 4.17%. The Series 3 Preferred Shares will be redeemable by the Issuer on or after September 30, 2014, in accordance with their terms. Holders of the Series 3 Preferred Shares will have the right, at their option, to convert their shares into cumulative floating rate preferred shares, series 4, (the "Series 4 Preferred Shares") subject to certain conditions, on September 30, 2014 and every five years thereafter. Holders of the Series 4 Preferred Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.17%.

On December 7, 2009, 5,000,000 cumulative rate reset preferred shares, Series 5 (the Preferred Shares Series 5) were issued for gross proceeds of $125 million. A dividend of $1.7250 per share per annum is payable quarterly, yielding 6.90% per annum for the initial five and one-half year period ending June 30, 2015. The dividend rate will be reset on June 30, 2015 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 4.26%. The Series 5 Preferred Shares will be redeemable by the Issuer on or after June 30, 2015, in accordance with their terms. Holders of the Series 5 Preferred Shares will have the right, at their option, to convert their shares into cumulative floating rate preferred shares, series 6, (the "Series 6 Preferred Shares") subject to certain conditions, on June 30, 2015 and on June 30 every five years thereafter. Holders of the Series 6 Preferred Shares will be entitled to receive cumulative quarterly floating dividends at a rate equal to the three-month Government of Canada Treasury Bill yield plus 4.26%.

Net proceeds resulting from the sale of the Series 3 and 5 Preferred Shares were used to repay indebtedness under the Principal Revolving Facility and commercial paper program, and for general corporate purposes.


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Liquidity

As part of its financial policy capital structure guidelines, YPG remains committed to maintaining adequate liquidity at all times. To this end, YPG has access to committed bank lines, and has been proactive in increasing its liquidity and capital resources. As at December 31, 2009, YPG maintained two credit facilities totalling $800 million, providing sufficient liquidity to fund its operations.

On December 31, 2009, cash and cash equivalents amounted to $36.2 million. In addition to cash and cash equivalents, Yellow Media Inc. may issue additional notes amounting to $426 million under its commercial paper program and access another $200 million under its Principal Revolving Facility. Alternatively, if additional notes are not issued under the commercial paper program, Yellow Media Inc. may access the full $626 million available under its Principal Revolving Facility.

Unit data

As at February 11, 2010 outstanding unit data was as follows:

Outstanding Unit Data As at December 31, 2009 and February 11, 2010 AAs at December 31, 2008

Units outstanding 513,044,685 518,301,059

Options outstanding 383,986 394,912

The units are voting and participate equally in the income, losses and capital distributions of the Fund. In February 2006, 19,000,000 Exchangeable Units of YPG LP (exchangeable for units of the Fund) were issued as a partial consideration for the acquisition of Trader Media Corp. (TMC), one of two companies from which we have built our Vertical Media business. As at December 31, 2008, 8,185,000 Exchangeable Units of YPG LP had been exchanged for an equal number of units of the Fund. On March 30, 2009 and on April 9, 2009, 1,000,000 and 1,100,000 Exchangeable Units of YPG LP were exchanged for an equal number of units of the Fund, respectively. In the fourth quarter of 2009, 5,000,000 Exchangeable Units of YPG LP were repurchased for cancellation by the Company. On December 24, 2009, 1,715,000 Exchangeable Units of YPG LP were exchanged for an equal number of units of the Fund. As a result, at February 11, 2010, 2,000,000 Exchangeable Units of YPG LP remain outstanding. The units underlying the outstanding Exchangeable Units of YPG LP are included in the outstanding unit data.

No options were granted following the inception of the Fund.

Yellow Media Inc. also has a total of $86.5 million of Exchangeable Debentures which are exchangeable at any time, at the option of the holder into units of the Fund at an exchange price of $20.00 per unit.

As at December 31, 2009, there were 11,914,534 Preferred Shares Series 1 and 7,341,774 Preferred Shares Series 2 outstanding. Both series of preferred shares are redeemable by the issuer under certain conditions through the issuance of units of the Fund.

On April 1, 2009, the normal course issuer bid for the units of the Fund expired and was not renewed.

Pension Obligations

YPG sponsors a registered pension plan with a defined benefit component and a defined contribution component covering substantially all employees of Yellow Pages Group (the “YPG Pension Plan”). The Fund also sponsors a separate defined contribution pension plan covering substantially all employees of Trader (the “Trader Pension Plan”).

As at December 31, 2009, the plan assets totalled $401 million and were invested in a diversified portfolio of Canadian fixed income securities and Canadian and international equity securities. The plan’s rate of return on assets for 2009 was 16.4%, 1.5% higher than that of our benchmark portfolio, reflecting the strong capital market returns and the strong performance of our pension managers in 2009. The return of our plan also exceeded its benchmark portfolio by 3% in 2008.

The most recent actuarial valuation of the YPG Pension Plan for funding purposes was performed as at December 31, 2008. This valuation established the amount of contributions the Company is required to make under the YPG Pension Plan from the valuation date until the next valuation, which is due no later than December 31, 2011. The December 2008 valuation resulted in a going concern surplus of $25 million and a solvency surplus of $22 million. For 2010, in the context of new pension regulations enacted in 2009, the Fund will have to make annual contributions to the Plan for an amount equivalent to the current service contributions of approximately $10 million for the defined benefit component in 2010.


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Contractual Obligations and Other Commitments

Contractual obligations (in thousands of Canadian dollars)

Payments due for the periods ending December 31

TTotal 1 – 3 years 4 – 5 years After 5 years

Long-term debt1,2 $2,313,894 $310,549 $652,500 $1,350,845

Obligations under capital leases 9,027 6,689 2,326 12

Preferred shares2 481,408 297,863 - 183,545

Operating leases 169,555 68,149 40,541 60,865

Purchase obligations 24,225 21,100 250 2,875

Total contractual obligations $2,998,109 $704,350 $695,617 $1,598,142

1 Including Exchangeable Debentures 2 Principal amount

Obligations under capital leases

We enter into capital lease agreements for office equipment and software. As of December 31, 2009, minimum payments under these capital leases up to 2015 totalled $9 million.

Operating leases

We rent our premises and equipment under various operating leases. As of December 31, 2009, minimum payments under these operating leases up to 2019 totalled $169.6 million.

Purchase obligations

We use the services of outside suppliers to distribute our directories and have entered into long-term agreements with a number of these suppliers. These agreements expire between 2010 and 2038. As at December 31, 2009, we have an obligation to purchase services for $24.2 million over the next five years and thereafter. Cash from operations will be used to meet these purchase obligations.


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Sources and Uses of Cash

Consistent with other directories and media companies active in vertical media, the Company has minimal capital spending requirements combined with low operating costs.

Sources and Uses of Cash (in thousands of Canadian dollars)


2009 2008

Cash flow from operating activities

Cash flow from operations $690,349 $746,290

Change in operating assets and liabilities 59,838 (53,934)

$750,187 $692,356

Cash flow used in investing activities

Acquisition of equity investments $(47,698) $-

Business acquisitions, net of cash acquired and bank indebtedness assumed (25,189) (212,125)

Acquisition of fixed assets (44,428) (43,423)

Acquisition of intangibles (246) (100)

Proceeds from lease inducements 863 266

$(116,698) $$(255,382)

Cash flow used in financing activities

Issuance of long-term debt $1,621,300 $424,055

Repayment of long-term debt (1,443,844) (141,866)

Distributions to unitholders (488,386) (599,431)

Repurchase of units (40,905) (122,102)

Purchase of Preferred shares, Series 1 and 2, Medium Term Notes and Exchangeable Debentures (538,492) -

Issuance of Preferred shares, Series 3 and 5 332,500 -

Other (63,591) (25,970)

$(621,418) $$(465,314)

Cash flow from operating activities

Cash flow from operating activities increased by $57.8 million to $750.2 million for the year ended December 31, 2009 from $692.4 million in the same period last year. Cash flow from operations decreased by $55.9 million for the year ended December 31, 2009 mainly due to lower EBITDA, higher restructuring and special charges recorded during the year and higher interest expense. The change in operating assets and liabilities for the year ended December 31, 2009 increased cash flow by $59.8 million compared with a decrease of $53.9 million for the year-end December 31, 2008. The improvement for the year is mainly due to the reduction of accounts receivable balances, prepaid expenses and deferred publication costs throughout the year. In 2008, the variance was due to the timing of the payment of certain accounts payable and accrued liabilities as reflected on our balance sheet.

The Company generates sufficient cash flow from operations to fund capital expenditures, distributions, working capital requirements and to service its debt obligations. Please refer to Section 4 – Distributable Cash in this MD&A to understand the impact of new tax proposals from the Federal Minister of Finance on cash flow from operating activities.


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Cash flow used in investing activities

Cash used in investing activities decreased by $138.7 million during the year from $255.4 million in 2008 to $116.7 million in 2009. In 2009, the Fund made an investment in Dealer.com representing a total cash outflow of $44.9 million. It also exercised an option to acquire the remaining 50% interest in LesPAC in which the Fund already had a 50% interest representing a total cash outflow of $25.2 million. In 2008, we acquired the directory assets of TBayTel, YPG USA and the shares of Get It Pages for $212.1 million. In 2009, acquisition of fixed assets net of lease inducements decreased by $1.1 million compared to 2008 as described below:

Acquisition of Fixed Assets, Net of Lease Inducements (in thousands of Canadian dollars)


2009 2008

Transition capital $8,263 $4,530

Maintenance 14,264 21,101

New initiatives 21,613 16,450

Leasehold improvements, net of lease inducements 2,069 5,030

Total $46,209 $47,111

Adjustment to reflect expenditures on a cash basis (2,644) (3,954)

Acquisition of fixed assets, net of lease inducements $43,565 $43,157

Transition Capital – these expenditures relate to the acquisition of YPG USA. The amount to be deployed relative to the acquisition of YPG USA was initially estimated at $10 million. The cumulative amount invested to date stands at $12.8 million. The increase over 2008 is due to the fact that the acquisition was made in the third quarter of 2008 and most of the capital was deployed during 2009.

Maintenance capital expenditures decreased from $21.1 million in 2008 to $14.3 million in 2009. The lower level of investment reflects reduced spending mainly in the Vertical Media segment.

Capital spending for new initiatives increased to $21.6 million for 2009 compared with $16.5 million for 2008. The increase was driven by the launch of new product initiatives such as Dealer Smart Solutions.

In 2009, we incurred $2.1 million of leasehold improvements related to new premises.

Total capital expenditures for the year amounted to $46.2 million and were in line with expectations.

Cash flow used in financing activities

The decrease in the level of cash distributions per unit, combined with a reduced number of units outstanding, resulted in a decrease in distributions to unitholders from $599.4 million in 2008 to $488.4 million in 2009. During 2009, the Fund issued Preferred Shares Series 3 and 5 for a combined proceeds of $332.5 million. In addition, the Fund purchased Preferred Shares Series 1 and 2, Medium term Notes and exchangeable debentures for $538.5 million.

Off-Balance Sheet Arrangements

(See Notes 21 and 24 of the Consolidated Financial Statements of the Company for the year ended December 31, 2009).

Financial and Other Instruments

(See Note 24 of the Consolidated Financial Statements of the Company for the year ended December 31, 2009).

The Company’s financial instruments consist of cash and short-term investments, accounts receivable, other investments, accounts payable, distributions payable, short-term and long-term debt, exchangeable debentures, preferred shares and interest rate derivatives.


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Derivative Instruments

We use various derivative financial instruments to manage our exposure to interest rate risks on debt financing. YPG does not hold or use any derivative instruments for speculative trading purposes. We formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in our hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

In October 2008, the Fund entered into floating-to-fixed interest rate swaps to fix the rate on our floating rate exposure to the Canadian Banker’s acceptance rate. The Fund was to pay a fixed rate of interest of 2.25% and receive a floating rate corresponding to the Banker’s acceptance rate on an amount of $150 million between November 3, 2008 and May 3, 2009, increasing to $300 million from May 3, 2009 to January 5, 2010. The interest rate swaps are comprised of two tranches: a first tranche of $50 million which increased to $100 million on May 3, 2009, and a second tranche of $100 million which increased to $200 million on May 3, 2009.

On June 1, 2009, the Fund discontinued hedge accounting on the first tranche and on June 19, 2009, the Fund discontinued hedge accounting on the second tranche. The Fund continues to hold the swaps as it continues to have the floating rate exposure under its commercial paper program. Please refer to Note 24 of the Consolidated Financial Statements of the Company for the year ended December 31, 2009 for further details.

In February 2009, the Fund entered into additional floating-to-fixed interest rate swaps to fix the rate on its floating rate exposure to the Canadian Banker’s acceptance rate. The Fund will pay a fixed rate of interest of between 0.73% and 0.74% and receive a floating rate corresponding to the Banker’s acceptance rate on an amount of $200 million between April 21, 2009 and December 21, 2009. On July 22, 2009, the interest rate swaps were unwound concurrently with the repayment of the New Credit Facility for an amount of $0.3 million.

In August 2009, the Fund also entered into three interest rate swaps totalling $130 million to hedge the Series 9 Medium Term Notes. The Fund receives interest on these swaps of 6.5% and pays a floating rate equal to the three-month Banker’s Acceptance plus an average spread of 4.33%. The swaps mature July 10, 2013, matching the maturity date of the underlying debt. As at December 31, 2009, the interest rate swaps met the criteria for hedge accounting.

Taking into consideration the debt instruments outstanding, the preferred shares, cash and the above-mentioned derivative instruments, our fixed-to-floating ratio was 100% fixed rate as at December 31, 2009. While the counterparties of these agreements expose YPG to credit losses in the event of non-performance, we believe that the possibility of incurring such losses is remote, due to the creditworthiness of all counterparties, all of whom are highly-rated Canadian chartered banks.

The Preferred Shares Series 1 and 2 contain options for redemption. These options meet the definition of an embedded derivative. They are recorded at their fair value on the consolidated balance sheet with changes in fair value recognized in earnings.

The carrying value of outstanding interest rate derivatives was a liability of $0.8 million and the carrying value of embedded derivatives was an asset of $2.6 million on December 31, 2009. The carrying value is calculated as is customary in the industry using discounted cash flows with quarter-end market rates. For the year ended December 31, 2009, we reported unrealized gains of $1.5 million (2008 – $0.2 million), on derivatives, excluding the loss on derivatives designated as cash flow hedges in prior periods transferred to earnings in the period and payments on interest rate swaps that have discontinued hedge accounting .

Accounts receivable

YPG is exposed to credit risk with respect to accounts receivable from customers. Through our billing and collection services agreements, Bell, TELUS, MTS Allstream Inc. and Bell Aliant receive money from customers on behalf of YPG. There are no individual customers that account for 1% or more of revenues and there are no accounts receivable from any one individual customer and certified marketing representative that exceeds 5% of the total balance of accounts receivable at any point in time during the year. Included in trade accounts receivable of $215.4 million at December 31, 2009 is $43.7 million (2008 - $45.8 million) to be remitted by Bell, $24.6 million (2008 – $26.7 million) to be remitted by TELUS, $3.1 million (2008 - $2.9 million) to be remitted by MTS Allstream Inc. and $4.5 million (2008 - $4.4 million) to be remitted by Bell Aliant under their respective billing and collection services agreements.


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4. Distributable Cash

The Fund’s primary source of cash for distributions is cash flow from operating activities. A reconciliation between cash flow from operating activities and distributable cash is provided below:

Distributable Cash (in thousands of Canadian dollars)

Three-month periods ended December 31, Years ended December 31,

2009 2008 2009 2008

Cash flow from operating activities $198,734 $177,651 $750,187 $692,356

Operating non-cash items1 (6,034) (3,706) (16,818) (19,741)

Change in operating assets and liabilities2 (36,281) (22,229) (59,838) 53,934

Maintenance capital expenditures3 (3,524) (5,293) (14,264) (21,101)

Restructuring and special charges4 19,732 36,225 40,316 36,225

Other5 356 1,899 14,698 9,197

Distributable cash $172,983 $184,547 $714,281 $750,870

Weighted average number of units outstanding 506,694,949 517,811,656 510,658,375 523,444,129

Distributable cash per unit6 $0.34 $0.36 $1.40 $1.43

Distributions declared $101,329 $151,302 $471,897 $599,930

Distributions declared per unit $0.20 $0.29 $0.92 $1.15

Payout ratio7 59% 81% 66% 80%

1 Represents operating items with no impact on current cash flow such as pension expense and employee-related expenses through restricted unit awards. The likelihood of those elements materializing into outflows on a long term basis is such that management believes it should be included in the calculation in order to reflect the cash generated from the ongoing operations.

2 Changes in operating assets and liabilities are not considered a source or use of distributable cash. As a result, it is excluded from the calculation as it would introduce cash flow variability and affect underlying cash flow available for distributions. Various working capital items, including but not limited to the timing of receivables collected and payment of payables and accruals, can have a significant impact on the determination of free cash flow available for distribution. Accordingly, management excludes the impact of changes in non-cash working capital items to remove the resulting variability of including such amounts in the determination of free cash flow available for distribution. Realized changes in working capital and working capital acquired by way of acquisition are typically funded from excess free cash flow available for distribution or the Fund’s cash on hand and available credit facilities.

3 Maintenance capital expenditures refer to capital expenditures that are necessary to sustain current productive capacity. Management believes that maintenance capital expenditures should be funded by cash flow from operating activities. Capital spending for new initiatives are expected to improve future distributable cash and as such are not deducted from cash flow from operating activities. Transition capital is provided for as part of the financing plan of specific business acquisitions and is therefore not funded from distributable cash.

4 Restructuring and special charges are excluded from the calculation as they do not reflect the ongoing operations of the business. 5 Includes amounts related to non-controlling interest in LesPAC, tax related amounts and other amounts that do not reflect the ongoing operations of the business. 6 Please refer to Section 2 – Highlights by Segment for the calculation of Basic (loss) earnings per unit. 7 The level of distributions paid is reviewed periodically to take into account the current and prospective performance of the business and other items considered to

be prudent. See the section Distribution Policy.


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Distributable Cash (in thousands of Canadian dollars)

Three-month period ended December 31,

Year ended December 31,

Previously completed fiscal years

22009 2009 2008 2007

Cash flow from operating activities $198,734 $750,187 $692,356 $695,540

Net earnings $124,607 $204,255 $509,227 $527,709

Actual cash distributions declared $(101,329) $(471,897) $(599,930) $(581,986)

Excess of cash flows from operating activities over cash distributions declared $97,405 $278,290 $92,426 $113,554

Excess (shortfall) of net earnings over cash distributions declared $23,278 $(267,642) $(90,703) $(54,277)

Impact of purchase accounting on net earnings $20,216 $397,033 $122,981 $166,592

Excess of net earnings over cash distributions declared excluding impact of purchase accounting $43,494 $129,391 $32,278 $112,315

Net earnings exceeded distributions by $23.3 million for the three-month period ended December 31, 2009. Distributions declared exceeded net earnings by $267.6 million for the year ended December 31, 2009. The Fund does not use net earnings as a basis to calculate distributions. Net earnings in accordance with GAAP include expenses which do not affect cash such as amortization of non-compete agreements, customer contracts, customer relationships, acquired software and impairment of goodwill. As a result of our acquisitions over the past several years, our net earnings have been affected by purchase accounting, resulting in an increased amount of amortization related to the acquired intangibles. The costs of these intangible assets are included in the purchase price but there are no future cash outflows associated with maintaining these intangible assets. If we exclude the impact of purchase accounting, which includes the impairment of goodwill, net earnings exceeded distributions declared by $43.5 million and $129.4 million for the three-month and year ended December 31, 2009, respectively.

Cash distributions declared were lower than distributable cash resulting in a payout ratio of 59% for the three-month period ended December 31, 2009, and 66% for the year ended December 31, 2009. The level of distributions declared is reviewed periodically to take into account the current and prospective performance of the business and other items considered to be prudent.

Distributable cash

Distributable cash decreased from $750.9 million in the year ended December 31, 2008 to $714.3 million for the same period this year. The decrease is mainly due to lower EBITDA.

Distributable cash per unit decreased from $1.43 in 2008 to $1.40 in 2009. This decrease represents a reduction of 2.1% for 2009 compared to 2008.

The Fund’s cumulative distributable cash since its Initial Public Offering (“IPO”) in August of 2003 to December 31, 2009 is approximately $3.7 billion, or $7.73 per unit. Total distributions declared during the same period reached approximately $3 billion, or $6.40 per unit representing a cumulative payout ratio of 83%.

In calculating the Fund’s distributable cash, we take into consideration our debt management and our productive capacity maintenance strategies.

Our long-term debt management strategy is to refinance our funded debt at maturity. Our funded debt portfolio currently has an average term of approximately 6.7 years. We are reasonably assured that we will be able to refinance these obligations given our previously demonstrated access to capital markets, our commitment to investment grade credit ratings, and adequate liquidity under our existing credit facilities.

We maintain the value of our asset base over time through constant investment in our productive capacity. Such investment, referred to as maintenance capital expenditures, are funded from operational cash flows and deducted from our distributable cash calculation.

Our debt obligations do not restrict our ability to pay distributions as long as we are in compliance with our credit agreements. Our revolving credit facilities do not provide specific limitations on distributions as long as we maintain our investment grade ratings. The agreements also provide for distributions paid for any given 12-month period not to exceed the total distributable cash plus a provision of $100 million in the event that the Fund becomes non-investment grade, providing us with significant flexibility.


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Furthermore, our Medium Term Note program and our Exchangeable Unsecured Subordinated Debentures, which represent $2.1 billion of our total long-term debt portfolio as of December 31, 2009, do not provide for any contractual limitations on the distribution of cash.

Distributions declared per unit

Distributions declared per unit decreased from $1.17 in 2008 to $0.80 in May 2009.

In the periodic review of distributions, we will continue to take into account the current and prospective performance of our business, amounts to service debt obligations, maintenance capital expenditures, taxes and other amounts considered to be prudent.

Impact of changes to the Canadian Income Tax treatment of income trusts on distributable cash and distributions declared per unit

On October 31, 2006, the Federal Minister of Finance announced that income other than taxable dividends earned by existing publicly-traded income trusts (or other flow-through entities) such as the Fund, would be taxed beginning in 2011 (October 31, 2006 Announcement). To implement this, the Minister introduced the SIFT Rules which received Royal Assent on June 22, 2007.

During the four-year interim period, income trusts are subject to growth guidelines issued and revised by the Federal Department of Finance (the Normal Growth Guidelines). Growth is measured by the amount of equity issued by the Fund, to benefit from the deferred application of the new tax regime to 2011. Please refer to Section 7 – Risks and Uncertainties – Income Tax Matters of this MD&A for more details on the SIFT Rules and the Normal Growth Guidelines.

Following the October 31, 2006 Announcement, we reiterated periodically that these measures would not affect our business model or operating plans.

Distribution policy

On May 7, 2009, the Fund announced a reduction in cash distributions per unit to unitholders from $1.17 to $0.80 annually. This translates to a monthly cash distribution of $0.0667 per unit. The decision to reduce the level of payout provides the Company additional financial flexibility and strengthens its capital structure while still offering an attractive source of income for our investors. In the context of difficult credit market conditions, YPG has been proactive by adopting a prudent approach to managing its liquidity and capital resources.

5. Outlook

The development and execution of our corporate strategy and operating plans continue to be guided by our objectives of achieving sustainable organic growth and positive operating leverage. Each year, we establish targets to advance our goals and to drive results through the execution of initiatives to maximize revenue growth and cash flow generation. These full year targets were established and communicated to investors concurrent with the release of our second quarter results.

We expect to continue to measure our progress against annual targets on a quarterly basis. Consistent with our historical practice, we do not intend however to provide quarterly guidance for key performance metrics. Our preference remains to review on a periodic basis through the MD&A our progress in reaching our stated objectives for the full year taking into account changes in the economic environment, local operating and economic conditions, direct and indirect competition for our products and other relevant factors. We acknowledged in August 2009, following the release of our second quarter results, that late 2009 and 2010 would be challenging given our expectation that there would be no sustained economic recovery before early 2010.


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Key Performance Indicators 2009 Performance and 2010 Outlook

Revised 2009 Target Year ended December 31, 2009

Directories

Adjusted Revenues Stable at approx. $1,400 million $1,403 million

Adjusted EBITDA $825 to $830 million $827 million

Vertical Media

Revenues $255 to 265 million $248 million EBITDA $75 to $80 million $72 million

Consolidated Metrics

Online organic growth Approx. 30% 23.9%

Distributable Cash per unit Stable (2.1%)

Our objectives for the fiscal year ending December 31, 2010 were established in August 2009 based on our economic and business outlooks at that time. This continues to be our operating framework for 2010 and we will measure our progress in achieving these full year objectives on a quarterly basis. As we do each year, we considered Canadian macroeconomic conditions, the expected evolution of the Canadian GDP, competitive activity in some of our localized markets and our ability to respond to changing market conditions while offering our advertisers new products and services. We also considered third party expectations regarding Canadian advertising trends and changing consumer trends affecting local commercial search.

Although we have begun to observe some encouraging signs of stabilization in the economy, we remain cautious about the timing and strength of a full economic recovery and a return to a more normalized revenue environment. In this context, we continue to be selective in terms of funding new initiatives while we continue to contain costs in both of our platforms. We remain steadfast in our paced approach to investing in market coverage, new product introduction and technology in both the Directories and Vertical Media segments, in order to solidify our leadership market positions and to position YPG for sustainable long-term growth. As our 2010 revenues are significantly influenced by the 2009 directory results, there will continue to be some pressure on revenues into the 2010 fiscal year especially in the Directories segment. Accordingly, for 2010 we are focusing on opportunities that should yield benefits in the short-term with a view to supporting improved results in the back half of the year, positioning YPG for a revenue recovery in 2011. The particular areas of focus in the Directories segment are an expanded and more targeted approach to customer acquisition, new integrated bundles, the roll-out of new placement products online and search engine marketing. For the Vertical Media segment, our revenue objectives for 2010 are premised upon continuing success in the Dealer Smart Solutions roll-out and an improvement in the real estate vertical and the economy, more generally.

Following the restructuring initiatives we undertook in 2008 and 2009, we are also confident in our ability to grow Adjusted EBITDA and distributable cash per unit. We believe these initiatives combined with the recurring, predictable and resilient nature of our revenue sources from a diversified customer base in our Directories segment position us well for an economic recovery. In our Vertical Media segment, visibility is limited due largely to the weekly frequency of most of our publications somewhat compensated by strong online organic growth. Please refer to Section 7 – Risks and Uncertainties for a discussion of the major risks and uncertainties that could materially affect YPG’s future business results.

Financial Policy

The Fund’s objectives when managing capital are to ensure sufficient liquidity to cover financial obligations and investment requirements, preserve access to low-cost funding, maintain or improve investment grade credit ratings, and deliver stable returns to investors.

To achieve the above objectives, the Fund intends to continue improving its consolidated financial profile with further debt reduction, pursue a prudent financial policy, and maintain a structure that provides flexibility and diversity of funding sources and timing of debt maturities.

Despite the challenges of a year characterized by the most difficult economic environment faced by the Fund since its inception, the Fund expects to achieve stronger credit protection measures going forward through sustained cash flow generation and deleveraging of the balance sheet.

The June 2009 reduction of the Fund payout ratio has already enabled the Fund to achieve a meaningful reduction in financial leverage. This action fits with our strategy of managing risk without compromising the financial flexibility necessary to respond to growth opportunities and deliver returns to investors.


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Conversion from an income trust to a corporation

We intend to convert from an income trust to a corporation in late 2010. Throughout 2009, we undertook a number of initiatives to strengthen our capital structure and eliminate refinancing risk well through the conversion to a corporation:

Since June 2009, $450.7 million of net debt was reduced through free cash flow generation and preferred equity issuance

Maintain path to deleveraging through expected free cash flow during the transition period to a corporate structure

Yellow Media Inc. raised $1.25 billion in the debt and equity capital markets to refinance upcoming maturities; YPG remains self-funded until May 2013

Consistent with our preliminary dividend policy communicated in May 2009; we have targeted a payout ratio of 60% to 70% of cash earnings per share.

Yellow Media Inc.

As part of our plan to convert from an income trust to a traditional corporate structure, YPG Holdings Inc. has been renamed Yellow Media Inc. The new name builds upon our Company’s legacy of delivering placement and performance products to Canadian businesses. It also reflects our expansion in providing turn-key solutions to businesses through our online, mobile and print multimedia platforms. Following the conversion, Yellow Media Inc. will own Yellow Pages Group and Trader.

6. Critical Assumptions

When we prepare our financial statements in accordance with Canadian GAAP, we must make certain estimates and assumptions about our business. These estimates and assumptions in turn affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements.

In this section we provide detailed information on these important estimates and assumptions which are under continuous evaluation by the Company.

Critical Accounting Estimates

We base our estimates and assumptions on past experience and other factors that are deemed reasonable under normal business practices. This involves varying degrees of judgement and uncertainty, thus the amounts currently reported in the financial statements – which we believe to be valid at this time – could prove to be inaccurate in the future.

Business combinations

YPG’s acquisitions have been accounted for using the purchase method of accounting. Under the purchase method, the acquiring company adds to its own balance sheet the estimated fair values of the acquired company’s assets and liabilities.

There are various assumptions made by YPG in determining the fair values of the acquired companies’ assets and liabilities. The most significant assumptions, and those requiring the most judgment, involve the estimated fair values of trademarks. To determine the fair value of these trademarks, we adopted the “relief from royalty approach”, a valuation technique based on the concept that the Company owns the trademark, and is therefore not required to pay royalties for its use. The amount of the notional royalty payment is used as a surrogate for income attributable to the trademark. The fair value of the trademark is based upon the present value of the expected after-tax royalty or cash flow stream. Among others, significant assumptions include the determination of royalty rates, discount rate, weighted average cost of capital and anticipated average income tax rates.

Intangibles and goodwill

Intangibles and goodwill represented 22.5% and 70.9% respectively (2008 – 22.4% and 71%), of YPG’s consolidated assets as at December 31, 2009. If the Company’s estimated useful lives of these assets were incorrect, we could experience increased or reduced charges for amortization of intangible assets that have finite lives in the future. If the future was to adversely differ from management’s best estimate of key economic assumptions, and if associated cash flows were to materially decrease, YPG could potentially experience future material impairment charges related to its intangible assets that have indefinite lives. If intangible assets with indefinite lives were determined to have finite lives at some point in the future, YPG could experience increased charges for amortization of intangible assets. Such charges do not result in a cash outflow and would not affect YPG’s liquidity.


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Recoverability of intangible assets

Any potential intangible asset impairment is identified by comparing the fair value of the indefinite life intangible asset with value as stated – or carried – on our books. If the fair value of the intangible asset exceeds its carrying value, the intangible asset is not considered to be impaired. However, if the reverse is true and the carrying value of the intangible asset exceeds its fair value, it is considered to be impaired. This impairment is defined as the difference between the fair value and the carrying value. This will result in a reduction in the carrying value of the intangible assets on the consolidated balance sheet and in the recognition of a non-cash impairment charge in our operating income metric. Consistent with current industry-specific valuation methods, YPG uses a “discounted expected future cash flow” model in determining the fair value of its intangible assets.

The most significant assumptions underlying the recoverability of intangible assets with indefinite lives include projected revenues and EBITDA, anticipated market share and projected renewal rates. We perform annual impairment tests of our indefinite life intangible assets. In light of the current economic conditions and a decrease in our unit price, we performed an in-depth review of all assumptions used in our models. We also considered the prevailing conditions in our industries. Based on our analysis, we concluded that no impairment charge was required.

Recoverability of goodwill

Goodwill is not amortized. It is assessed for impairment annually and sometimes more frequently if a change in circumstances indicates that the asset might be impaired. We identify potential goodwill impairment by comparing the fair value of the business to its carrying value on our books. If the carrying value exceeds its fair value, a more detailed goodwill impairment assessment must be undertaken. However, if the reverse is true and the fair value exceeds its carrying value, goodwill is considered not to be impaired. A goodwill impairment loss would be recognized to the extent that the carrying value of goodwill exceeds its implied fair value.

Fair value of goodwill is estimated in the same manner as goodwill is determined at the date of acquisition in a business acquisition. Specifically, goodwill is defined as the excess of the fair value of the business over the fair value of the identifiable net assets of the reporting unit. Any goodwill impairment will result in a reduction in the carrying value of goodwill on the consolidated balance sheet and in the recognition of a non-cash impairment charge in our operating income metric. The Company determines fair value by using a “discounted expected future cash flow” model in accordance with recognized valuation methods. The process of determining these fair values requires management to make a number of estimates and assumptions such as projected future sales, cost of sales, earnings, market conditions and discount rates.

During the year, the Fund determined that the deterioration of the economic environment and its continuing negative impact on our Vertical Media segment revenues was an indicator that the goodwill related to the Vertical Media segment should be tested for potential impairment.

The impairment testing was completed during the year. As a result, an impairment loss of $315 million was recorded in net earnings.

The goodwill impairment charge is an accounting adjustment only and does not affect our ongoing operations; it is a non-cash write-down having no impact on liquidity, cash flows from operating activities, bank credit agreements, bond indentures or future operations.

Allowance for doubtful accounts

We expect that a certain portion of required customer payments will not be made – what we refer to as “doubtful accounts”. To account for this, we maintain an allowance in our books for these doubtful accounts based on our estimate of the likelihood of recovering certain accounts receivable. It incorporates current and expected collection trends. Accounts receivable represented approximately 36.5% (2008 – 40.6%) of our consolidated tangible assets as at December 31, 2009. If economic conditions change, or actual results or specific industry trends differ from our expectations, we will adjust our allowance for doubtful accounts and our bad debt expense accordingly.

Employee future benefits

YPG provides its eligible employees with pension benefits under various pension plans. Certain actuarial and economic assumptions used in determining pension costs, accrued pension benefit obligations, and pension plan assets require significant judgment.

The accrued benefit obligation and expense are determined by independent actuaries on an annual basis, using the “projected benefit method” pro-rated for service. They are also based on management’s best economic and demographic estimates, and on significant actuarial assumptions, including employees’ expected years of service, retirement age, and specified benefit levels. The discount rate, which is used to determine the accrued benefit obligation, is based on market interest rates on high-quality, long-term bonds. Market changes could have an impact on the discount rate, resulting in an obligation for YPG to make future contributions to its pension plan that could differ significantly from the current estimates. Future increases in compensation to employees are based on current benefit policies and on economic forecasts. Defined benefit pension costs are also affected by the quantitative methods used to determine estimated returns on pension plan assets.


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The expected return on the plan assets is determined by considering long-term historical returns, future estimates of long-term investment returns, and asset allocation. There is no assurance that the plan will be able to earn the assumed rate of return.

The significant actuarial assumptions adopted are consistent with what we have used in the past. They reflect the long-term nature of employee future benefits. Significant changes in assumptions could materially affect our employee benefit obligations, future expenses, and overall financial performance. These changes could be caused, for example, by updated historical information or changes in market conditions.

Any immediate impact is lessened, however, as the net actuarial gains and losses in excess of 10% of the greater of the benefit obligation and the fair value of the plan assets would be amortized over the average remaining service period of active employees covered by the plan.

Change in Accounting Policies

a) Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets and Section 3450, Research and development costs. This Section, effective January 1, 2009, establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets including intangible assets developed internally. The provisions of this Section were adopted retrospectively. The adoption of this Section did not have a significant impact on the consolidated financial statements of the Fund or on the carrying value of the goodwill, deferred publication costs, internally developed software and other intangible assets.

b) Emerging Issues Committee (EIC) EIC 173, Credit risk and the fair value of financial assets and financial liabilities. This Abstract concludes that an entity’s own credit risk and the credit risk of the counterparty should be taken into account when determining the fair value of financial assets and financial liabilities including derivative instruments. This Abstract is to apply to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after January 20, 2009. The adoption of this Abstract did not have a significant impact to the Fund’s financial statements.

Effect of New Accounting Standards Not Yet Implemented

a) Section 1582, Business Combinations. This new Section will be applicable to business combinations for which the acquisition date is on or after the Fund’s interim and fiscal year beginning January 1, 2011. Early adoption is permitted. This Section improves the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. The Fund has decided to early adopt this new Section as of January 1, 2010. As a result of this decision, business combinations realized after that date will be accounted for in accordance with Section 1582 requirements.

b) Section 1601, Consolidated financial statements. This new Section will be applicable to financial statements relating to the Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for the preparation of consolidated financial statements. The Fund has decided to early adopt this new Section as of January 1, 2010. The adoption of this Section should not impact the consolidated financial statements of the Fund.

c) Section 1602, Non-Controlling interests. This new Section will be applicable to financial statements relating to the Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Fund has decided to early adopt this new Section as of January 1, 2010. As a result of this decision, non-controlling interests in equity of a consolidated subsidiary will now be classified as a component of equity but separate from the equity of the Fund. Furthermore, non-controlling interests in the profit or loss of a consolidated affiliate will be presented as an allocation of earnings.

d) International Financial Reporting Standards (IFRS).

In February 2008, the Canadian Accounting Standards Board confirmed that Canadian publicly accountable enterprises will be required to adopt IFRS in place of Canadian Generally Accepted Accounting Principles (Canadian GAAP) for interim and annual reporting purposes for fiscal years beginning on or after January 1, 2011. Accordingly, the Fund will issue its last financial statements prepared in accordance with Canadian GAAP in 2010. Starting from the first quarter of 2011, the Fund’s financial statements will be prepared in accordance with IFRS in effect in 2011, with 2010 comparative figures and January 1, 2010 (‘’date of transition’’) opening balance sheet restated to conform to IFRS.

Financial reporting under IFRS differs from Canadian GAAP in a number of respects, some of which are significant. IFRS on the date of adoption also is expected to differ from current IFRS due to new IFRS standards and pronouncements that are expected to be issued before the changeover date.

The Fund has established a changeover plan in order to transition its financial statement reporting, presentation and disclosure under IFRS to meet the January 1, 2011 deadline. An implementation team, which is led by finance management, has been created and third party advisors have been engaged to plan for and achieve a smooth transition to IFRS.


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The implementation project consists of three primary phases, which in certain cases will be in process concurrently as IFRS is applied to specific areas from start to finish:

Phase 1: Scoping and Diagnostic Phase

This phase involved performing a detailed diagnostic comparing Canadian GAAP to IFRS and identifying key areas that may be impacted by the transition to IFRS. Phase 1 included:

Performing a detailed analysis of our actual accounting policies and practices with all relevant IFRS standards and applicable interpretations;

Identifying the different options available to the Fund at the date of transition as well as the ongoing IFRS policy choices that could be applied to prepare subsequent IFRS financial statements; and

Classifying the differences identified by work streams along with the creation of work teams to analyze and resolve the differences. Work teams are composed of members of our implementation team and include internal stakeholders and IT resources that are trained on their respective subjects.

Phase 2: Impact Analysis and Design Phase

In this phase, each area identified from the scoping and diagnostic phase were addressed. Phase 2 included:

Making accounting policy choices, including those under IFRS 1 choices;

Determining the changes required to existing accounting policies;

Determining the changes or additions required to information technology and data systems, internal controls over financial reporting and disclosure controls; and

Developing draft IFRS financial statements.

Phase 3: Implementation and Review Phase

In this last phase, we will implement changes in accounting policies and practices to the different business processes, information systems and internal controls. These changes will be adequately tested before the changeover date to ensure all significant differences have been successfully resolved by the first quarter of 2011.

Current status of our IFRS changeover plan

We have completed Phase 1 and Phase 2 of our conversion project. As a result of this work, we have identified a number of differences and policy alternatives between Canadian GAAP and IFRS that will modify our financial statements at the date of conversion.

The following describes the major identified differences that could be presented in our reconciliation of net earnings and unitholders’ equity upon transition if the conversion was done as of December 31, 2009 with currently applicable standards. Key IFRS exemption options are subsequently presented.

Notwithstanding the above, the current International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) projects are likely to significantly modify some of the actual IFRS requirements which might therefore ultimately impact the following identified major differences.

Major differences with current accounting policies

Employee Benefits – Past service cost

Canadian GAAP – Past service costs arising from plan amendments are amortized on a straight-line basis over the average remaining service period of active employees expected to benefit from the amendment.

IFRS – These costs are amortized on a straight-line basis over the average period until the benefits become vested. To the extent that the amended benefits are already vested, past service costs are recognized immediately.

Income Taxes – Temporary differences on intangible assets

Canadian GAAP – Future income taxes are calculated from temporary differences that are differences between the tax basis of an asset or liability and its carrying amount in the balance sheet. Under the current Canadian Income Tax Act, "eligible capital expenditures" are deductible for tax purposes to the extent of 75 percent of the cost incurred; Section 3465 – Income taxes addresses this specific situation and specifies that for these assets, at any point in time, the tax basis represents the balance in the cumulative eligible capital pool plus 25 percent of the carrying amount.

IFRS – The definition of temporary differences under IFRS is generally consistent with Canadian GAAP. However, IFRS does not provide specific guidance in relation to the determination of the tax basis of eligible capital expenditures such as the one


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described above. As such, the tax basis of these assets, without taking into consideration the 25 percent adjustment of the carrying amount as allowed under Canadian GAAP, should be compared with the carrying amount in the balance sheet to determine the temporary difference relating to these assets.

Business Combinations

Canadian GAAP – Business combinations are currently accounted for using Section 1581 – Business combinations. The recognition and measurement requirements applicable under this Section differ in a number of ways from the IFRS standards applicable to business combinations. However, the early adoption of Section 1582 – Business combinations, as described above, will resolve these differences since this section is converged with IFRS requirements.

Consolidation and non-controlling interests

Canadian GAAP – Section 1600 – Consolidated financial statements currently establishes standards for the preparation of consolidated financial statements. This section differs in a number of ways from the IFRS standards applicable for consolidation and non-controlling interests. However, the early adoption of Section 1601 – Consolidated financial statements and Section 1602 – Non-controlling interests, as described above, will resolve these differences since these sections are converged with IFRS requirements.

Grouping of assets for impairment purposes

Canadian GAAP – When a long-lived asset does not have identifiable cash flows that are largely independent of those from other assets, that asset must be grouped with other related assets for impairment. This is referred to as the asset group.

IFRS – Asset grouping should be done when an asset does not have identifiable cash inflows, as opposed to net cash flows, that are independent of those from other assets.

Key IFRS 1 Exemption Options

1. Business combinations – IFRS 3, Business Combinations, may be applied retrospectively or prospectively. The retrospective basis would require restatement of all business combinations that occurred prior to the transition date. We will not elect to retrospectively apply IFRS 3 to business combinations that occurred prior to the Transition Date and such business combinations will not be restated. Any goodwill arising on such business combinations before the Transition Date will not be adjusted from the carrying value previously determined under Canadian GAAP as a result of applying these exemptions except as required under IFRS 1.

2. Fair value as deemed cost – IFRS 1 provides a choice between measuring property, plant and equipment at its fair value at the date of transition and using those amounts as deemed cost or using the historical valuation under the prior GAAP. We will continue to apply the cost model for property, plant and equipment and will not restate property, plant and equipment to fair value under IFRS. We will use the historical bases under Canadian GAAP as deemed cost under IFRS at Transition Date.

3. Employee benefits – IAS 19, Employee Benefits, allows certain actuarial gains and losses to be either deferred and amortized, subject to certain provisions (corridor approach), or immediately recognized through equity. Retrospective application of the corridor approach for recognition of actuarial gains and losses in accordance with IAS 19 would require us to determine actuarial gains and losses from the date benefit plans were established. We will elect to recognize all cumulative actuarial gains and losses that existed at the Transition Date in opening retained earnings for all of our employee benefit plans.

4. Cumulative translation differences – Retrospective application of IFRS would require us to determine cumulative currency translation differences in accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, from the date a subsidiary or associate was formed or acquired. IFRS 1 permits cumulative translation gains and losses to be reset to zero at the Transition Date. We will elect to reset all cumulative translation gains and losses to zero in opening retained earnings at the Transition Date.

At this time, the quantitative impact on these differences and elections on our future financial position and results of operations is not reasonably determinable or estimable. However, they should not significantly impact distributable cash given that the majority of these adjustments are not cash related.

The following table summarizes the status of our changeover plan based on the recommendations published in October 2008 by the Canadian Performance Reporting Board with regards to the Pre-2011 communications about IFRS conversion.


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Key Activity Milestones / Deadlines Status

Financial statement presentation

Identify differences between IFRS and Canadian GAAP applicable to the Fund

Evaluate and select ongoing IFRS policies

Evaluate and select IFRS 1 choices

Prepare financial statements format

Quantify the effects of changeover to IFRS

Senior management sign off for all items to be completed by the end of 2009.

Subsequent changes to IFRS will be analyzed and reviewed on a quarterly basis

Completed the identification of IFRS differences

Evaluation and selection of accounting policy alternatives is completed but will continue to be assessed

Preparation of draft financial statements is completed

Financial reporting expertise

Provide three levels of training to operating division and head office accounting staff, senior executives and board of directors, including the audit committee.

Level 1 is a general awareness IFRS training.

Level 2 is a detailed training on relevant topics.

Level 3 training is intended to communicate IFRS impacts and solutions proposed.

Level 1 to be completed by the end of the second quarter of 2009

Level 2 to be completed by the end of 2009

Level 3 to be completed by the end of 2010

Level 1 training is completed

Level 2 training is completed

Level 3 training is underway

IT systems Identify and address IFRS differences that require changes to financial systems

Evaluate and select methods to address need for parallel processing of 2010 general ledgers and for planning and monitoring purposes

Required financial systems changes and set up of parallel processing to be completed by the end of 2009

Identification of IFRS differences with system impacts is completed

Selection of parallel processing solution is completed

Implementation of the solution is completed

Business activities:

Financial covenants

Identify impact on financial covenants and business practices

Complete any required renegotiations/changes

Complete required covenants changes, if necessary, by the third quarter of 2010

Process to analyze the contractual implications of IFRS on financing relationships and other arrangements will start in the first quarter of 2010


Compensation arrangements

Identify impact on compensation arrangements

Make any required changes

Complete required compensation arrangement changes, if any, by the third quarter of 2010

Process of identifying internal measures of performance affected by GAAP/IFRS differences will start in the first quarter of 2010


Capital adequacy

Identify impact on capital adequacy


Complete capital plan, if necessary, by the third quarter of 2010

Process of identifying issues will start in the first quarter of 2010


Customer and supplier contracts

Evaluate impact on customer and supplier agreements


Complete review of customer / supplier contracts by the end of the first quarter of 2010

Process of identifying issues started in the fourth quarter of 2009

Control activities:

Internal control over financial reporting

(ICOFR)

Assess required changes to existing internal control processes and procedures

Design and implement internal controls with respect to one-time changeover adjustments and ongoing changes

Assessment of required changes to be completed by the end of 2009

Revision to actual internal controls and modifications planned for the second quarter of 2010

Assessment of required changes is completed

Revision of actual controls will start in 2010

Control activities:

Disclosure controls and procedures (DC&P)

For changes to accounting policies and practices identified, assess the DC&P design and effectiveness implications

See ICOFR deadlines above

Analysis of impact on key performance indicators (KPI) to be completed by the end of 2009

Investors relations special team created

No significant impact on KPI identified to date


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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.

The Vertical Media business also faces substantial online competition due to the lower barriers to entry on the Internet. 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 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.

We continuously enhance our value proposition in both segments with initiatives targeting the following objectives:

Enhancement of our product offerings and extension of our services to customers;

Improvement of user experience; and

Growth of traffic to our network of properties.

We also use multimedia campaigns to promote our brand and deliver our message to the market reinforcing the value both our segments offer.

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.


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Decline in overall usage of print directories and vertical media

YPG could be materially adversely affected if the usage of printed telephone directories or vertical publications declines significantly. The development of new technologies and the widespread use of Internet may cause changes in preferences and consumer habits. In particular, this could eventually have a significant influence on printed products, and the decrease in usage will ultimately lead to lower advertising revenues. Since YPG derives a substantial portion of its advertising revenues from printed publications, the new revenues that YPG could draw from online products may not necessarily offset any decline in print revenues, which could have a material adverse effect on our business. The continuing transition in the media and publishing industries towards more online and targeted content is driving us to develop new products that leverage the demand for new media while ensuring that our print products remain a key component of our advertisers’ media mix.

Availability of Capital

We may need to refinance our available credit facilities or other debt obligations in the future. In addition, future capital expenditures and potential acquisitions may require additional financing. The global financial markets crisis and the global economic slowdown, which may extend for an undetermined period of time and could continue to deteriorate, may further constrain our ability to meet our future financing requirements, increase our weighted average cost of capital and cause other cost increases from counterparties also faced with liquidity problems and higher cost of capital. Disruptions and high volatility in the capital markets could reduce the amount of capital available or increase the cost of such capital. These risks are mitigated to the extent that we currently maintain committed long term bank facilities for a total amount of $800 million, continue to benefit from investment grade credit ratings, and due to our strong financial position (with a net indebtedness to Latest Twelve Month Adjusted EBITDA1 ratio of 2.5 times as at December 31, 2009) and the liquidity provided by cash generated from our operations. Despite such factors, no assurances can be given as to the future availability of capital. If we are unable to obtain such additional financing, when and if required, or to refinance our credit facilities or other debt obligations, or we are only able to obtain such additional financing or refinance these credit facilities or other debt obligations on less favorable and/or more restrictive terms, this could have a material adverse effect on our financial position and on our future growth by limiting acquisitions and capital expenditures, and may also indirectly limit or negatively impact our ability to pay cash distributions.

Interest rate fluctuations

YPG is exposed to fluctuations in short term interest rates on some of its financial obligations bearing variable interest rates. YPG is also exposed to fluctuations in long term interest rates and credit spreads relative to the refinancing of its debt obligations upon their maturity. The interest rate on new long term debt issuances will be based on the prevailing market rates at the time of the refinancing and will depend on the tenor of the new debt issued. Increases in short term interest rates and increases in interest rates on new debt issuances may have a material adverse effect on our earnings.

We manage interest rate exposure by maintaining 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.

Pension Contributions

YPG has been benefiting from a contribution holiday since its latest actuarial valuation. We may be required to make contributions to our pension plans in the future depending on various factors including future returns on pension plan assets, long-term interest rates and changes in pension regulations, which may have a negative effect on our liquidity and results of operations.

The funding requirements of our pension plans, resulting from valuations of our pension plan assets and liabilities, depend on a number of factors, including actual returns on pension plan assets, long-term interest rates, plan demographic and pension regulations. Changes in these factors could cause actual future contributions to significantly differ from our current estimates and could require us to make contributions to our pension plans in the future and, therefore, could have a negative effect on our liquidity and results of operations.

There is no assurance that our pension plans will be able to earn their assumed rate of return. A material portion of our pension plans' assets is invested in public equity securities. As a result, the ability of our pension plans to earn the rate of return that we have assumed significantly depends on the performance of capital markets. The market conditions also impact the discount rate used to calculate our solvency obligations and thereby could also significantly affect our cash funding requirements.

1 Latest twelve month Income from operations before depreciation and amortization, impairment of goodwill, and restructuring and special charges removing the effect of purchase accounting related to the acquisitions in the Directories segment (“Latest Twelve Month Adjusted EBITDA”).


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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 providers. 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 with 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.

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.


43

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

In the normal course of the Fund's activities, the tax authorities are carrying out ongoing reviews. In that respect, the Fund is of the view that all expenses claimed by the different entities of the group are reasonable and deductible and that the cost amount and capital cost allowance claims of such entities' depreciable properties have been correctly determined. There is no assurance that the tax authorities may not challenge these positions. Such challenge, if successful, may have an adverse effect on our earnings and may affect the return to unitholders.

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 Budget Implementation Act which received Royal Assent on June 18, 2008, enacted the Federal Budget of February 26, 2008 which provides, among other things, technical changes to the SIFT provincial tax calculation. These changes result in harmonization between the SIFT Rules and the separate Québec tax regime relating to SIFT entities.

8. Controls and Procedures

As a public entity we must take every step to ensure that material information regarding our reports filed or submitted under securities legislation fairly presents the financial information of YPG. Responsibility for this resides with management, including the President and Chief Executive Officer and the Executive Vice President – Corporate Services and Chief Financial Officer. Management is responsible for establishing, maintaining and evaluating disclosure controls and procedures, as well as internal control over financial reporting.

Disclosure Controls and Procedures (DC&P)

The evaluation of the effectiveness of DC&P as defined in National Instrument 52-109 was performed under the supervision of the President and Chief Executive Officer and the Executive Vice President – Corporate Services and Chief Financial Officer. They conclude that these disclosure controls and procedures were adequate and effective, as at December 31, 2009. YPG’s management can therefore provide reasonable assurance that it receives material information relating to the company in a timely manner so that it can provide investors with complete and reliable information.

Internal Control over Financial Reporting (ICFR)

Management has designed ICFR to provide reasonable assurance that our financial reporting is reliable and that our consolidated financial statements were prepared in accordance with GAAP. The design and effectiveness of ICFR were evaluated as defined in National Instruments 52-109 under the supervision of the President and Chief Executive Officer and the Executive Vice President – Corporate Services and Chief Financial Officer. Based on the evaluations, they conclude that the ICFR is adequate and effective to provide such assurance as at December 31, 2009.

Management also concluded that during the fourth quarter ended December 31, 2009, no changes were made to ICFR that would have materially affected, or would be reasonably considered to materially affect, these controls.

YELLOW PAGES INCOME FUND

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Management’s Report

The accompanying financial statements of Yellow Pages Income Fund and all information in this annual report are the responsibility of management and have been approved by the Board of Directors. The financial statements are based upon management’s best estimates and judgements and have been prepared in conformity with generally accepted accounting principles in Canada. Financial information used elsewhere in the annual report is consistent with that in the financial statements.

To ensure the integrity and objectivity of the data, management maintains internal accounting controls and established policies and procedures designed to ensure reasonable assurance that transactions are recorded and executed in accordance with its authorization, that assets are properly safeguarded and that reliable financial records are maintained. The internal control systems and financial records are subject to review by the external auditors during the examination of the financial statements.

The responsibility of the Board of Directors is pursued principally through the Audit Committee. The Audit Committee, which is composed exclusively of outside directors, meets regularly with the external auditors and with management, to discuss accounting policies and practices, internal control systems, the scope of audit word and to assess reports on audit work performed. The external auditors have direct access to the Audit Committee, with or without the presence of management, to discuss results of their audits and any recommendations they have for improvements in internal controls, the quality of financial reporting and any other matters of interest. The financial statements have been reviewed and approved by the Board of Directors on the recommendation of the Audit Committee.

Christian M. Paupe Executive Vice President, Corporate Services and Chief Financial Officer

Ginette Maillé Chief Accounting Officer

Daniel Verret Vice President and Corporate Controller

Gi

Christian M Paupe

Daniel VerretD


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Auditors’ Report

To the Unitholders of Yellow Pages Income Fund

We have audited the consolidated balance sheets of Yellow Pages Income Fund (the “Fund”) as at December 31, 2009 and 2008 and the consolidated statements of earnings, comprehensive income, unitholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Fund as at December 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.

Montreal, Québec February 3, 2010

1 Chartered accountant auditor permit no 10800


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Consolidated Balance Sheets

As at December 31, (in thousands of Canadian dollars)

2009 2008

ASSETS

CURRENT ASSETS

Cash and cash equivalents $$ 36,170 $ 25,054

Accounts receivable 215,356 249,786

Prepaid expenses 6,480 11,596

Deferred publication costs and other assets 130,844 140,741

Future income taxes (Note 14) 28,812 43,723

417,662 470,900

DEFERRED PUBLICATION COSTS 8,358 12,068

FIXED ASSETS (Note 4) 95,425 104,642

OTHER ASSETS (Note 5) 38,088 2,315

DERIVATIVE FINANCIAL INSTRUMENTS 2,612 4,500

INTANGIBLES (Note 6) 2,008,499 2,102,466

GOODWILL (Note 7) 6,342,580 6,648,667

FUTURE INCOME TAXES (Note 14) 28,382 20,661

$ 8,941,606 $ 9,366,219

LIABILITIES AND UNITHOLDERS’ EQUITY

CURRENT LIABILITIES

Accounts payable and accrued liabilities (Note 8) $$ 204,325 $ 209,284

Distributions payable 34,220 50,709

Deferred revenues 110,402 112,364

Derivative financial instruments 76 –

Future income taxes (Note 14) 34,248 –

Current portion of long-term debt (Note 10) 2,254 3,807

385,525 376,164

DEFERRED CREDITS 23,452 26,143

FUTURE INCOME TAXES (Note 14) 106,253 117,114

ACCRUED BENEFIT LIABILITIES (Note 9) 94,404 78,197

DERIVATIVE FINANCIAL INSTRUMENTS 719 3,974

LONG-TERM DEBT (Note 10) 2,225,720 2,420,049

EXCHANGEABLE DEBENTURES (Note 11) 83,886 285,470

PREFERRED SHARES (Note 12) 472,777 489,072

NON-CONTROLLING INTEREST (Note 13) 324,130 8,544

COMMITMENTS, CONTINGENCIES AND GUARANTEES (Notes 21 and 26)

UNITHOLDERS’ EQUITY 5,224,740 5,561,492

$ 8,941,606 $ 9,366,219

The accompanying notes are an integral part of these consolidated financial statements.

Approved on behalf of the Fund by

Marc L. Reisch, Trustee Stuart H.B Smith, Trustee


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Consolidated Statements of Earnings

For the years ended December 31, (in thousands of Canadian dollars, except per unit information)

2009 2008

Revenues $ 1,639,884 $ 1,696,713

Operating costs 746,446 764,007

Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges 893,438 932,706

Depreciation and amortization 142,414 186,065

Impairment of goodwill (Note 7) 315,000 –

Restructuring and special charges (Note 23) 40,316 36,225

Income from operations 395,708 710,416

Financial charges, net (Note 22) 114,600 142,261

Impairment of available–for–sale investment – 4,775

Earnings before dividends on Preferred shares, income taxes, share of losses from equity investees and non-controlling interests 281,108 563,380

Dividends on Preferred shares, series 1 and 2 22,427 22,750

Earnings before income taxes, share of losses from equity investees and non-controlling interests 258,681 540,630

Provision for income taxes (Note 14) 42,710 30,664

Share of losses from equity investees 7,089 –

Earnings before non-controlling interests 208,882 509,966

Non-controlling interest related to investments 552 739

Dividends on Preferred shares, series 3 and 5 4,075 –

Net earnings $ 204,255 $ 509,227

Basic earnings per unit $ 0.40 $ 0.97

Weighted average number of units outstanding used in computing earnings per unit (Note 18) 510,658,375 523,444,129

Diluted earnings per unit $ 0.36 $ 0.89

Weighted average number of units outstanding used in computing diluted earnings per unit (Note 18) 612,387,219 614,710,805



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Consolidated Statements of Comprehensive Income

For the years ended December 31, (in thousands of Canadian dollars)

2009 2008

Net earnings $ 204,255 $ 509,227

Other comprehensive income (loss), net of related income taxes:

Net gains (losses) on derivatives designated as cash flow hedges1 1151 (4,616)

Net loss (gain) on derivatives designated as cash flow hedges in prior periods transferred to earnings in the year2 33,507 (306)

Change in gains and losses on derivatives designated as cash flow hedges 33,658 (4,922)

Unrealized gain (loss) on available–for–sale investment in the year3

(Note 5) 4418 (3,414)

Unrealized loss on available–for–sale investment transferred to earnings in the year –– 4,775

Change in unrealized gains and losses on available–for–sale investment 4418 1,361

Unrealized (losses) gains on translating financial statements of self-sustaining foreign operations and foreign investees ((15,941) 12,060

Other comprehensive (loss) income ((11,865) 8,499

Comprehensive income $ 192,390 $ 517,726

1 Net of income taxes of $66 (2008 – $2 million). 2 Net of income taxes of $1.4 million (2008 – $125). 3 Net of income taxes of nil (2008 – nil).



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Consolidated Statements of Unitholders’ Equity For the years ended December 31, 2009 and 2008 (in thousands of Canadian dollars)

Unitholders’ Capital

(Note 15)

Equity Component of Exchangeable

Debentures

Restricted Units

Contributed Surplus

Accumulated Other

Comprehensive Income (Loss)

(Note 17) Deficit

Total

Balance, December 31, 2007 $ 6,321,471 $ 12,542 $ (35,397) $ 22,098 $ 632 $ (535,166) $ 5,786,180

Issuance of units (Note 15) 6,422 – – – – – 6,422

Repurchase of units (Note 19) (183,477) – – 49,918 – – (133,559)

Restricted units (Note 19) – – (24,103) 8,756 – – (15,347)

Restricted units vested (Note 19) – – 1,197 (1,197) – – –

Distributions (Note 16) – – – – – (599,930) (599,930)

Other comprehensive income – – – – 8,499 – 8,499

Net earnings for the year – – – – – 509,227 509,227

Balance, December 31, 2008 6,144,416 12,542 (58,303) 79,575 9,131 (625,869) 5,561,492

Issuance of units (Note 15) 43 – – – – – 43

Repurchase of units (Note 15) (82,420) – – 52,972 – – (29,448)

Purchase of exchangeable debentures (Note 11) – (8,924) – 8,924 – – –

Restricted units (Note 19) – – (29,786) 1,946 – – (27,840)

Restricted units vested (Note 19) – – 15,191 (15,191) – – –

Distributions (Note 16) – – – – – (471,897) (471,897)

Other comprehensive loss – – – – (11,865) – (11,865)

Net earnings for the year – – – – – 204,255 204,255

Balance, December 31, 2009 $ 6,062,039 $ 3,618 $ (72,898) $ 128,226 $ (2,734) $ (893,511) $ 5,224,740



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Consolidated Statements of Cash Flows

For the years ended December 31, (in thousands of Canadian dollars)

2009 2008

OPERATING ACTIVITIES

Net earnings $ 204,255 $ 509,227

Items not affecting cash and cash equivalents:

Depreciation and amortization 142,414 186,065

Impairment of goodwill 315,000 –

Amortization and write-off of deferred financing costs 9,279 7,186

Accretion on Exchangeable Debentures 2,444 2,377

Impairment of available–for–sale investment – 4,775

Net benefit plan costs 16,207 12,755

Non-cash derivative financial instruments (368) (200)

Stock compensation expense 1,946 8,756

Gain on purchase of Preferred shares, series 1 and 2, Medium Term Notes and Exchangeable Debentures (42,763) –

Future income taxes (Note 14) 29,774 18,945

Non-controlling interest related to investments 552 739

Dividends on Preferred shares, series 3 and 5 4,075 –

Share of losses from equity investees 7,089 –

Other non-cash items 445 (4,335)

Change in operating assets and liabilities (Note 20) 59,838 (53,934)

750,187 692,356

INVESTING ACTIVITIES

Acquisition of equity investments (Note 5) (47,698) –

Business acquisitions, net of cash acquired and bank indebtedness assumed (Note 3) (25,189) (212,125)

Acquisition of fixed assets (44,428) (43,423)

Acquisition of intangibles (246) (100)

Proceeds from lease inducements 863 266

(116,698) (255,382)

FINANCING ACTIVITIES

Issuance of long-term debt 1,621,300 424,055

Repayment of long-term debt (1,443,844) (141,866)

Distributions to unitholders (488,386) (599,431)

Distributions to non-controlling interest (1,634) (2,417)

Proceeds from exercise of options (Note 15) 43 2,284

Purchase of Preferred shares, Series 1 and 2, Medium Term Notes and Exchangeable Debentures (538,492) –

Issuance of Preferred shares, series 3 and 5 (Note 13) 332,500 –

Dividends on Preferred shares, series 3 (3,722) –

Repurchase of units (Note 15) (40,905) (122,102)

Purchase of restricted units (Note 19) (29,786) (24,103)

(Payments made) proceeds received from derivative financial instruments (Note 24) (3,403) 560

Debt and preferred share issuance and other costs (25,089) (2,294)

(621,418) (465,314)

Effect of exchange rates changes on cash and cash equivalents denominated in foreign currencies (955) 119

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,116 (28,221)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,054 53,275

CASH AND CASH EQUIVALENTS, END OF YEAR $ 36,170 $ 25,054 Supplemental disclosure of cash flow information (Note 20)


YELLOW PAGES INCOME FUND Notes to the Consolidated Financial Statements – December 31, 2009 and 2008

(all tabular amounts are in thousands of Canadian dollars, except unit information)

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1. Description of the 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 the Trust, a wholly-owned trust, in partnership units of YPG LP and shares of YPG GP, the general partner of YPG LP. YPG LP, through subsidiaries, operates print and online directories and classified advertising in all the Provinces of Canada and also operates independent directories in selected Mid-Atlantic and Southeast American markets.

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.

2. Significant accounting policies

Basis of presentation

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

Adoption of new accounting policies

The following standards were adopted effective January 1, 2009.

a) Section 3064, Goodwill and intangible assets, replacing Section 3062, Goodwill and other intangible assets and Section 3450, Research and development costs. This Section, effective January 1, 2009, establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets including intangible assets developed internally. The provisions of this Section were adopted retrospectively. The adoption of this Section did not have a significant impact on the consolidated financial statements of the Fund or on the carrying value of the goodwill, deferred publication costs, internally developed software and other intangible assets.

b) Emerging Issues Committee (“EIC”) EIC 173, Credit risk and the fair value of financial assets and financial liabilities. This Abstract concludes that an entity’s own credit risk and the credit risk of the counterparty should be taken into account when determining the fair value of financial assets and financial liabilities including derivative instruments. This Abstract is to apply to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after January 20, 2009. The adoption of this Abstract did not have a significant impact to the Fund’s consolidated financial statements.

c) Section 3862, Financial Instruments – Disclosures. In June 2009, the CICA amended Section 3862 to improve fair value and liquidity risk disclosures. Section 3862 now requires that all financial instruments measured at fair value be categorized into one of three hierarchy levels, described below, for disclosure purposes. Each level is based on the transparency of the inputs used to measure the fair values of assets and liabilities:

Level 1 – inputs are unadjusted quoted prices of identical instruments in active markets.

Level 2 – inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – inputs used in a valuation technique are not based on observable market data in determining fair values of the instruments.

Determination of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The Fund has also enhanced the liquidity disclosures by including the sources of funding. The additional disclosures required as a result of the adoption of these standards are included in the notes to the consolidated financial statements (Note 24).

Principles of consolidation

The Fund’s consolidated financial statements include the accounts of the Trust, YPG LP, YPG GP, Yellow Media Inc. (formerly YPG Holdings Inc.), Yellow Pages Group Co. (“YPG Co.”), Snap Guides Inc., Vertical Guides Limited Partnership (“Vertical Guides LP”), Trader Corporation (“Trader”), LesPAC s.e.n.c. (“LesPAC”), and those of YPG (USA) Holdings, Inc., Yellow Pages Group, LLC and YPG Directories, LLC (collectively “YPG USA”). All intercompany transactions and balances have been eliminated.

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. Cash and cash equivalents are presented at fair value and changes are recorded in Financial Charges.

YELLOW PAGES INCOME FUND Notes to the Consolidated Financial Statements – December 31, 2009 and 2008 (all tabular amounts are in thousands of Canadian dollars, except unit information)

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Investments

Investments – equity method

The equity method is used to account for investments in companies in which the Fund has significant influence. These investments are presented in Other Assets. The Fund’s share of earnings is recorded separately net of income taxes in the Consolidated Statement of Earnings.

Investment – available–for–sale

The investment is recorded at fair value, with changes reported through other comprehensive income in each period. The Fund monitors its investment for other than temporary declines in fair value and charges impairment losses to net earnings when other than a temporary decline in estimated fair value occurs.

Revenues

The Fund recognizes revenue for both segments based on the principles below only when fees charged are fixed or determinable, the Fund’s customers understand the specific nature and terms of the agreed-upon transactions and collectibility is reasonably assured.

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. Amounts billed up front for the directories are deferred and recognized over the estimated life of the corresponding directories 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 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 directories not yet published or displayed are deferred. Upon publication or display, these costs are amortized over the same period in which the related revenues are recognized.

Fixed assets

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

Office equipment 10 years Computer equipment 3 years Other equipment 3 - 12 years Leasehold improvements Over the terms of the various leases

Assets under development consist primarily of internally developed software that is not amortized until the assets are available for use at which time they will be reclassified in software and amortized over its expected useful life.

Intangibles

Intangible assets developed internally (consisting of software used by the company) are recognized to the extent the criteria in CICA Section 3064, Goodwill and Intangible Assets are met. Development costs for internally generated intangible assets are recognized at cost if and only if the Fund can demonstrate:

the technical feasibility of completing the asset so that it will be available for use or sale;

the intention to complete the intangible asset and use or sell it;

the ability to use or sell the intangible asset;

how the intangible asset will generate probable future economic benefits;



53

the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognized for internally-developed intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-developed intangible asset can be recognized, development expenditure is charged to the statement of earnings in the period in which it is incurred.

Internally developed intangibles include the cost of software tools and licenses used in the development of the Fund’s systems, as well as all directly attributable payroll and consulting costs. These items are not amortized until the assets are available for use.

Intangible assets acquired separately are reported at cost less accumulated amortization and accumulated impairment losses. Intangible assets acquired in a business combination are identified and recognized separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the date of acquisition.

Intangibles assets are amortized, unless their useful lives are indefinite. Intangibles with finite lives are amortized as follows:

Non-competition agreements and logos Straight-line over life of agreement Customer contracts Pro rata based on related revenues, not exceeding 12 months Customer relationships Pro rata based on related revenues, not exceeding 24 months Trademark related to Advertising Directory Solutions Holdings Inc. (“ADS”) Straight-line over 6 years Domain names related to ADS Straight-line over 18 years Software Straight-line over 3 years

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.

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 not amortized and is assessed for impairment annually on December 31 or more frequently should an event or change in circumstances indicate that the asset might be impaired. 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, a more detailed goodwill impairment assessment must be undertaken. A goodwill impairment loss is recognized to the extent that the carrying value of goodwill exceeds its implied fair value. The implied fair value of goodwill is estimated in the same manner as goodwill is determined at the date of acquisition in a business acquisition, that is, the excess of the fair value of the reporting unit over the fair value of its identifiable assets and liabilities.

Employee benefit plans

The Fund maintains pension plans with defined benefit and defined contribution components which cover substantially all of the employees of the Fund. On April 30, 2007, pursuant to the acquisition of Aliant Directory Services (“Aliant”), YPG Co. became the sponsor of the Aliant defined benefit plan. On December 19, 2008, the merger of the Aliant Actimedia pension plan and the YPG Co. pension plan was approved by pension authorities effective April 30, 2007. 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 debt instruments with cash flows that match the timing and amounts of expected benefit payments; and

management’s best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected healthcare costs.



55

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, the restructuring and special charges provision, the fair value of financial instruments and purchase price allocations. These estimates are revised periodically. Actual results may differ materially from the above estimates.

Financial Instruments Financial assets and liabilities are initially recorded at fair value. Subsequently, financial instruments classified as financial assets available for sale, held for trading and derivative financial instruments, part of a hedging relationship or not, have to be measured at fair value on the balance sheet at each reporting date, whereas other financial instruments are measured at amortized cost using the effective interest method.

The Fund has made the following classifications:

Cash and cash equivalents are classified as financial assets held for trading and are measured at fair value. Changes in fair value are recorded in net earnings.

Other than temporary investments will be classified as either financial assets held to maturity and will be measured at amortized cost or as available–for–sale and will be marked–to–market through comprehensive income at each balance sheet date.

Accounts receivable are classified as loans and receivables and are recorded at amortized cost.

Accounts payable and accrued liabilities, distributions payable, long-term debt, Exchangeable Debentures, and Preferred shares, Series 1 and 2 are classified as other liabilities and measured at amortized cost.

Transaction costs

Transaction costs are comprised primarily of legal, accounting, underwriters’ fees and other costs directly attributable to the issuance of the respective financial assets and liabilities. Transaction costs are capitalized to the cost of financial assets and liabilities classified as other than held for trading.

Non-financial and embedded derivatives

In addition, in order to comply with Section 3855, the Fund reviewed all contracts in place to identify non-financial derivatives and embedded derivatives. The Fund has chosen January 1, 2003 as its transition date for embedded derivatives, as permitted by the standard. This had no impact on the consolidated financial statements.

Hedging

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

Fair value hedge

The carrying value of the hedged item is adjusted based on the gains or losses attributable to the hedged risk with a corresponding amount in net earnings. The hedging derivative is carried at fair value on the balance sheet with changes in fair value recorded in net earnings.

Cash flow hedge

The effective portion of the changes in fair value of the hedging item is recognized in “Accumulated Other Comprehensive Income”, whereas the ineffective portion is recognized in “Financial Charges”. The amounts recognized in “Accumulated Other Comprehensive Income”, with respect to cash flow hedges, are reclassified in net earnings in the period or periods during which the hedged item affects net earnings.

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.


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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. The Fund uses a December 31 measurement date for the plans. 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, 2008 for the pension benefit plans, and as at December 31, 2007 for other retirement and post-employment benefit plans. The next valuations for funding purposes will be performed no later than December 31, 2011 for the pension benefit plan. The next valuation for other retirement and post-employment benefit plans will be performed as at December 31, 2010.

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 19, whereby a compensation expense is recognized over the vesting period of all stock-based compensation awards and where applicable, based on the best available estimates of the outcome of the performance conditions.

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.

In addition, the Fund complies with section 1651, Foreign Currency Translation for its US operations. This section establishes standards for the translation of transactions of a reporting company that are denominated in a foreign currency and financial statements of a foreign operation for incorporation in the financial statements of a reporting company. The self-sustaining operations, with economic activities largely independent of the parent company, are accounted for using the current rate method. Under this method, assets and liabilities of subsidiaries denominated in a foreign currency are translated into Canadian dollars at exchange rates in effect at the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the year. Resulting unrealized gains or losses are accumulated and reported as a net change in unrealized gain on translating financial statements of self-sustaining foreign operations in the Consolidated Statements of Comprehensive Income. The accounts of the foreign operation, which is financially or operationally dependent on the parent company, is accounted for using the temporal method. Under this method, monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date, and non-monetary assets and liabilities are translated at historical exchange rates. Revenue and expenses (other than depreciation and amortization, which are translated at the corresponding asset rates) are translated at average rates for the year. Translation exchange gains or losses of such subsidiaries are reflected in net earnings.

Income taxes The Fund is a mutual fund trust for income tax purposes. As such, the Fund is currently only taxable on any amount not distributed to Unitholders and income tax liabilities relating to distributions of the Fund are taxed in the hands of the Unitholders. As substantially all taxable income is distributed to the Unitholders, minimal provision for current income taxes on earnings of the Fund is made in the financial statements. On June 12, 2007, the Canadian federal government substantively enacted legislation whereby the income tax rules applicable to publicly traded trusts and partnerships was 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 legislation is effective for the 2007 taxation year, but the application of the rules is delayed to the 2011 taxation year with respect to trusts that were publicly traded prior to November 1, 2006, within certain guidelines. For the Fund, only temporary differences expected to reverse after January 1, 2011 are taken into account in the determination of the provision for income taxes.

The Fund uses the liability method of tax allocation in accounting for income taxes of its subsidiaries and for the Fund starting on June 12, 2007 for temporary differences expected to reverse on or after January 1, 2011. Under this method, temporary differences between the carrying amount of balance sheet items and their corresponding tax basis 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. The enactment of the new legislation did not have a significant impact on the Fund’s consolidated financial statements.

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.

72070_ANG_RA_Financial_09.indd 54 12/03/10 3:03 PM



55

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, the restructuring and special charges provision, the fair value of financial instruments and purchase price allocations. These estimates are revised periodically. Actual results may differ materially from the above estimates.

Financial Instruments

Financial assets and liabilities are initially recorded at fair value. Subsequently, financial instruments classified as financial assets available for sale, held for trading and derivative financial instruments, part of a hedging relationship or not, have to be measured at fair value on the balance sheet at each reporting date, whereas other financial instruments are measured at amortized cost using the effective interest method.

The Fund has made the following classifications:

Cash and cash equivalents are classified as financial assets held for trading and are measured at fair value. Changes in fair value are recorded in net earnings.

Other than temporary investments will be classified as either financial assets held to maturity and will be measured at amortized cost or as available–for–sale and will be marked–to–market through comprehensive income at each balance sheet date.

Accounts receivable are classified as loans and receivables and are recorded at amortized cost.

Accounts payable and accrued liabilities, distributions payable, long-term debt, Exchangeable Debentures, and Preferred shares, Series 1 and 2 are classified as other liabilities and measured at amortized cost.

Transaction costs

Transaction costs are comprised primarily of legal, accounting, underwriters’ fees and other costs directly attributable to the issuance of the respective financial assets and liabilities. Transaction costs are capitalized to the cost of financial assets and liabilities classified as other than held for trading.

Non-financial and embedded derivatives

In addition, in order to comply with Section 3855, the Fund reviewed all contracts in place to identify non-financial derivatives and embedded derivatives. The Fund has chosen January 1, 2003 as its transition date for embedded derivatives, as permitted by the standard. This had no impact on the consolidated financial statements.

Hedging

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

Fair value hedge

The carrying value of the hedged item is adjusted based on the gains or losses attributable to the hedged risk with a corresponding amount in net earnings. The hedging derivative is carried at fair value on the balance sheet with changes in fair value recorded in net earnings.

Cash flow hedge

The effective portion of the changes in fair value of the hedging item is recognized in “Accumulated Other Comprehensive Income”, whereas the ineffective portion is recognized in “Financial Charges”. The amounts recognized in “Accumulated Other Comprehensive Income”, with respect to cash flow hedges, are reclassified in net earnings in the period or periods during which the hedged item affects net earnings.

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.


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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.

Future accounting changes

The CICA has issued new accounting standards:

a) International Financial Reporting Standards. The Accounting Standards Board of Canada ("AcSB") will converge Canadian GAAP for publicly accountable enterprises with International Financial Reporting Standards ("IFRS") over a transition period that will end effective January 1, 2011 with the adoption of IFRS. The AcSB announced on February 13, 2008 that IFRS will be required in 2011 for publicly accountable profit-oriented enterprises. The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011.

IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosure requirements. As a result, the Fund has established a changeover plan to convert to these new standards according to the timetable set with these new rules. An implementation team has been created and third party advisors have been engaged to provide training to our staff. The Fund completed the scoping and diagnostic phase and is now in the implementation and review phase. At this time, the impact on our future financial position and results of operations is not reasonably determinable or estimable.

b) Section 1582, Business Combinations. This new Section will be applicable to business combinations for which the acquisition date is on or after the Fund’s interim and fiscal year beginning January 1, 2011. Early adoption is permitted. This Section improves the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. The Fund has decided to early adopt this new Section as of January 1, 2010. As a result of this decision, business combinations realized after that date will be accounted for in accordance with Section 1582 requirements.

c) Section 1601, Consolidated financial statements. This new Section will be applicable to financial statements relating to the Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for the preparation of consolidated financial statements. The Fund has decided to early adopt this new Section as of January 1, 2010. The adoption of this Section should not impact the consolidated financial statements of the Fund.

d) Section 1602, Non-Controlling interests. This new Section will be applicable to financial statements relating to the Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Fund has decided to early adopt this new Section as of January 1, 2010. As a result of this decision, non-controlling interests in equity of a consolidated subsidiary will now be classified as a component of equity but separate from the equity of the Fund. Furthermore, non-controlling interests in the profit or loss of a consolidated affiliate will be presented as an allocation of earnings.

3. Business acquisitions

2009

a) Acquisition of LesPAC

On April 30, 2009, the Fund exercised its option to acquire the remaining 50% interest in LesPAC in which the Fund already had a 50% interest for a cash consideration of $25.2 million (including acquisition related costs of $0.2 million). The acquisition of LesPAC was financed with cash on hand.

The Fund accounted for the acquisition of non-controlling interest as a step-purchase. The excess of the purchase price over the net book value of the non-controlling interest acquired was allocated to the net identifiable assets acquired on the basis of their fair value. The Fund’s share in the fair value increments of the underlying net identifiable assets of LesPAC acquired was allocated as follows:



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Current liabilities

Accounts payable and accrued liabilities $ (296)

Intangibles

Trademark 1,500

Customer contracts 145

Future income tax liabilities (526)

Net identifiable assets acquired 823

Non-controlling interest acquired 7,462

Goodwill 16,904

Purchase price $ 25,189

Consideration:

Cash $ 25,000

Transaction costs 189

$ 25,189

2008

a) Acquisition of TBay Tel Directory Business

On February 19, 2008, a subsidiary of the Fund acquired the assets of the directory business of TBay Tel (“ThunderBay”) for a cash consideration of $17.3 million (including acquisition related costs of $0.2 million). The acquisition was financed with cash on hand.

ThunderBay publishes the City of Thunder Bay directory for a circulation of over 120,000 copies. The business is included in the Directories segment.

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 ThunderBay acquired is allocated as follows:

Intangibles

Non-competition agreement $ 3,536

Customer contracts 1,270

Customer relationships 3,798

Net identifiable assets acquired 8,604

Goodwill 8,646


Consideration:

Cash $ 17,050

Transaction costs 200

$ 17,250

b) Acquisition of Volt Information Sciences Inc.’s Systems and Get It Pages

In August and September of 2008, subsidiaries of the Fund acquired all of the outstanding shares of 613417 Saskatchewan Ltd, doing business as Get It Pages (“Get It Pages”) and the directory assets of Volt Information Sciences Inc. as well as its directory publishing operations (collectively “Volt”) for a combined cash consideration of $194.9 million (including acquisition related costs of $3.4 million). The acquisitions were financed with cash on hand and existing credit facilities.

Get It Pages publishes four directories in Saskatchewan: Battleford, Meadow Lake and area; Prince Albert and area; Yorkton, Melville and area; and Estevan, Weyburn and area. Volt provides systems and services for the production and management of databases as well as the digitization of display advertisements for directory and other media publishers. In addition, the Fund acquired from Volt the publishing operations of Data National, a publisher of independent directories in selected Mid-Atlantic and Southeast American markets. The company publishes print community directories under the Community Phonebook brand name.

The acquired businesses are included in the Directories segment.


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The Fund accounted for the acquisitions using the purchase method of accounting. The purchase prices were allocated to the net identifiable assets acquired on the basis of their fair values. The fair values of the underlying net identifiable assets of YPG USA and Get It Pages acquired is allocated as follows:

Current assets and liabilities

Cash and cash equivalents $ 71

Accounts receivable 4,803

Prepaid expenses 145

Deferred publication costs 1,647

Future income tax assets 2,748

Accounts payable and accrued liabilities (9,870)

Deferred revenues (6,059)

Fixed assets 2,277

Intangibles

Acquired software 100,000

Non-competition agreement 2,750

Customer contracts 6,000

Customer relationships 15,000

Trademark 17,000

Net identifiable assets acquired 136,512

Goodwill 58,434


Consideration:

Cash $ 191,596

Transaction costs 3,350

$ 194,946

4. Fixed assets

December 31, 2009

Cost Accumulated Depreciation Net Book Value

Office equipment $ 18,411 $ 8,333 $ 10,078

Office equipment under capital lease 88,325 3,345 4,980

Computer equipment 335,822 25,060 10,762

Computer equipment under capital lease 66,353 3,081 3,272

Other equipment 77,078 3,840 3,238

Leasehold improvements 446,416 17,338 29,078

Assets under development 334,017 – 34,017

$ 156,422 $ 60,997 $ 95,425

December 31, 2008

Cost Accumulated Depreciation Net Book Value

Office equipment $ 18,050 $ 6,543 $ 11,507

Office equipment under capital lease 17,609 8,906 8,703

Computer equipment 38,091 24,250 13,841

Computer equipment under capital lease 8,163 3,157 5,006

Other equipment 6,729 2,940 3,789

Leasehold improvements 44,451 12,446 32,005

Assets under development 29,791 – 29,791

$ 162,884 $ 58,242 $ 104,642



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During the year, fixed assets with a cost of $9.8 million (2008 – $2.2 million) and an accumulated depreciation of $9.8 million (2008 – $2.2 million) were written off. As part of the restructuring and special charges described in Note 23, the Fund also recorded a write down in 2009 of certain fixed assets having a cost of $11.9 million and accumulated depreciation of $7.8 million. In addition, internally developed software included in assets under development with a cost of $29.9 million (2008 – $41.9 million) were reclassified to software once they became available for use. Depreciation for the year ended December 31, 2009, was $20.3 million (2008 – $23.8 million).

5. Other assets

December 31, 2009 December 31, 2008

Investments – equity method $$ 34,977 $ –

Investment – available for sale 646 228

Other 2,465 2,087

$ 38,088 $ 2,315

Investments – equity method

On February 6, 2009, a subsidiary of the Fund acquired an equity interest in Dealer Dot Com Inc. of approximately 20% (“Dealer.com”) for a cash consideration of $44.9 million (including acquisition related costs of $1.8 million). The acquisition was financed with cash on hand. During the period from acquisition to December 31, 2009, the Fund’s share of losses from the equity investee was $6.7 million. The Fund incurred operating costs of $3.8 million with Dealer.com. These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. As at December 31, 2009, $1.6 million was included in accounts payable and accrued liabilities.

On April 9, 2009, a subsidiary of the Fund acquired a 24% equity interest in a small technology provider for a cash consideration of $2.8 million (including acquisition related costs of $0.6 million). The acquisition was financed with cash on hand. During the period from acquisition to December 31, 2009, the Fund’s share of losses from the equity investee was $0.4 million.

The difference between the acquisition cost and the Fund’s share of the underlying net book value of the investees’ assets for the equity method investments, at the date of purchase amounted to $45.3 million. The difference was assigned to the acquired net identifiable assets based on their fair values. These differences were assigned to intangible assets (consisting mainly of software, trademark, customer contracts and customer relationships) in the amount of $36.3 million and will be amortized over their expected useful lives with the exception of the trademark which has an indefinite service life and is not amortized. The difference between the acquisition costs and the assigned values in the amount of $9 million is similar to goodwill (equity method goodwill) and is not amortized.

Investments – available for sale

The investment in common shares of Call Genie Inc. is classified as an available-for-sale investment and recorded at fair value with unrealized gains and losses recorded in other comprehensive income. The Fund evaluates the carrying value of the investment in Call Genie and tests for impairment to the extent necessary, due to events or circumstances that occur. During 2008, in light of the prolonged decline in fair value, the Fund concluded a triggering event had occurred requiring an evaluation of the investment for recoverability. As a result of the evaluation, the Fund concluded that $4.8 million of the investment was impaired. The Fund therefore reduced the carrying value of the investment to equal its estimated fair value and transferred the related unrealized losses accumulated in other comprehensive losses to net earnings as an impairment of an available-for-sale investment of $4.8 million for the year ended December 31, 2008. During 2009, the increase in the fair value of the investment of $0.4 million was recorded in other comprehensive income.


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6. Intangibles

December 31, 2009

Cost Accumulated Amortization Net Book Value

Trademarks $$ 1,354,817 $ – $ 1,354,817

Trademark related to ADS 224,500 12,250 12,250

Non-competition agreements and logos 6630,393 108,526 521,867

Customer contracts 77,382 7,334 48

Customer relationships 118,943 18,848 95

Domain names 119,050 10,500 8,550

Domain names related to ADS 55,700 950 4,750

Software 2211,388 105,266 106,122

$$ 2,272,173 $ 263,674 $ 2,008,499

December 31, 2008

Cost Accumulated Amortization Net Book Value

Trademarks $ 1,356,002 $ – $ 1,356,002

Trademark related to ADS 24,500 8,167 16,333

Non-competition agreements and logos 643,528 96,530 546,998

Customer contracts 37,148 33,700 3,448

Customer relationships 181,083 172,380 8,703

Domain names 19,050 – 19,050

Domain names related to ADS 5,700 633 5,067

Software 226,335 79,470 146,865

$ 2,493,346 $ 390,880 $ 2,102,466

During the year, intangibles with a cost of $246.2 million (2008 – $580.9 million) and an accumulated amortization of $246.2 million (2008 – $580.9 million) were written off. Amortization for the year ended December 31, 2009, was $122.1 million (2008 – $162.3 million), including $10.5 million related to certain domain names.

7. Goodwill

The changes in the book value of goodwill are as follows:

December 31, 2009

DDirectories Vertical Media Total

Balance, beginning of year $ 5,685,280 $ 963,387 $ 6,648,667

Business acquisitions and other (Note 3) – 16,904 16,904

Impairment – (315,000) (315,000)

Other – (1,039) (1,039)

Foreign currency translation adjustment (6,952) – (6,952)

Balance, end of year $ 5,678,328 $ 664,252 $ 6,342,580

December 31, 2008

Directories Vertical Media Total

Balance, beginning of year $ 5,607,359 $ 963,387 $ 6,570,746

Business acquisitions and other (Notes 3 and 15) 71,218 – 71,218

Foreign currency translation adjustment 6,703 – 6,703

Balance, end of year $ 5,685,280 $ 963,387 $ 6,648,667

During the year, the Fund determined that the deterioration of the economic environment in the vehicle and real estate industries and its continuing negative impact on our Vertical Media segment revenues was an indicator that the goodwill related to the Vertical Media segment should be tested for potential impairment.



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The goodwill impairment test involves a two-step methodology. The first step is accomplished by comparing the fair value of the reporting unit to its carrying value. The Fund determines fair value, by using the “discounted expected future cash flow” model. The process for determining the fair value requires management to make a number of estimates and assumptions such as market conditions, projected future sales, cost of sales, earnings and discount rates. If the carrying value of the reporting unit exceeds its estimated fair value, a second step is required. In the second step, the Fund must allocate the fair value of the reporting unit to the reporting unit’s net identifiable assets, with any value in excess allocated to goodwill. A goodwill impairment loss would be recognized to the extent that the carrying value of goodwill exceeds its implied fair value.

The impairment testing was completed during the year and the Fund has determined that the goodwill of the Vertical Media segment was impaired by $315 million. As a result, an impairment loss was recorded in the consolidated statement of earnings.

8. Accounts payable and accrued liabilities


Trade $ 58,511 $ 47,936

Payroll related accruals 18,864 27,773

Publishing related accruals 16,156 11,385

Accrued interest 38,891 37,684

Normal course issuer bid – 11,457

Other accrued liabilities 15,295 17,757

Income and commodity taxes 15,746 14,233

Restructuring and special charges (Note 23) 40,862 41,059

$ 204,325 $ 209,284

9. Employee benefit plans

The Fund maintains pension plans with defined benefit and defined contribution components which cover substantially all of the employees of the Fund, as described in Note 2. The Fund maintains unfunded supplementary defined benefit pension plans for certain executives and also maintains other retirement and post-employment benefits (“other benefits”) plans which cover substantially all employees of the Fund.


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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, 2009 and 2008 were as follows:


Pension Other Pension Other

Benefits Benefits Benefits Benefits

Fair value of plan assets, beginning of year $$ 378,141 $ – $ 476,403 $ –

Actual return (loss) on plan assets 554,079 – (60,389) –

Benefit payments ((29,622) (2,145) (37,087) (2,018)

Transfers from defined benefit to defined contribution component of the plan ((2,963) – (2,049) –

Employer contributions 6611 2,145 506 2,018

Employee contributions 7709 – 757 –

Fair value of plan assets, end of year 400,955 – 378,141 –

Accrued benefit obligation, beginning of year 3394,438 38,079 509,287 54,444

Current service cost 110,797 806 16,181 1,070

Employee contributions 7709 – 757 –

Interest cost 229,436 2,834 28,209 2,536

Actuarial losses (gains) 555,027 5,432 (122,909) (17,953)

Benefit payments ((29,622) (2,145) (37,087) (2,018)

Accrued benefit obligation, end of year 460,785 45,006 394,438 38,079

Funded status - plan deficit ((59,830) (45,006) (16,297) (38,079)

Unamortized plan amendment1 –– (4,923) – (5,502)

Unamortized net actuarial losses (gains) 224,460 (9,105) (3,015) (15,304)

Accrued benefit liabilities, end of year $ (35,370) $ (59,034) $ (19,312) $ (58,885)

1 A modification to the other benefits plan in 2005 resulted in a gain of approximately $7.5 million which is amortized over the expected average remaining service life of the employees at that time, which was 13 years.

Pension benefits and other benefits are shown as accrued benefit liabilities on 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, 2009 and 2008, were as follows:


Pension Other Pension Other

Benefits Benefits Benefits Benefits

At December 31

Accrued benefit obligation

Discount rate, end of year 66.50% 6.50% 7.50% 7.50%

Rate of compensation increase 33.25% 3.50% 3.25% 3.50%

For the years ended December 31

Net benefit plan costs

Discount rate, end of preceding year 77.50% 7.50% 5.50% 5.50%

Rate of compensation increase 33.25% 3.50% 3.25% 3.50%

Expected long-term rate of return on plan assets 77.25% – 7.25% –

Expected average remaining service life 16 years 15 years 16 years 15 years

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 2009. The rate of increase of the cost of medication was assumed to gradually decline to 4.5% by 2018 and to remain at that level thereafter. A 4.5% annual increase in per capita cost of covered dental care benefits was assumed in 2009.



63

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:

One-Percentage- Point - Increase One-Percentage- Point - Decrease

Effect on other benefits – total service and interest costs $ 227 $ (240)

Effect on other benefits – accrued benefit obligation $ 1,645 $ (1,744)

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

For the years ended December 31,

2009 2008

Pension Benefits

Other Benefits

Pension Benefits

Other Benefits

Current service cost $$ 10,797 $ 806 $ 16,181 $ 1,070

Interest cost 229,436 2,834 28,209 2,536

Actual (return) loss on plan assets ((54,079) – 60,389 –

Actuarial losses (gains) 555,027 5,432 (122,909) (17,953)

Benefit costs before adjustments 441,181 9,072 (18,130) (14,347)

Adjustments to recognize long-term nature of employee benefit plan costs:

Actual loss (return) over expected return on plan assets 227,673 – (93,933) –

Difference between annual amortization and plan amendment –– (579) – (579)

Difference between annual amortization and actuarial gains on obligation

(55,148) (6,199)

122,909 17,310

Net benefit plan costs for the YPG Co. defined benefit plans $ 13,706 $ 2,294 $ 10,846 $ 2,384

Net benefit plan costs for the YPG Co. defined contribution plans 2,963 – 2,049 –

Net benefit plan costs for the Trader defined contribution plans 2,193 – 2,487 –

Total net benefit plan costs $ 18,862 $ 2,294 $ 15,382 $ 2,384

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:

(in percentages - %) 2009 2008

% %

Pension Plan

Asset categories in the Master Trust:

Cash and other short-term investments 44 4

Publicly traded equity securities 660 50

Publicly traded fixed income securities 332 42

Pending MTS transfer 4 4

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

The total cash payments for employee benefit plans and pension benefit plans made by the Fund amounted to $5 million for 2009 (2008 – $5 million).

As at December 31, 2009 and December 31, 2008, 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.


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10. Long-term debt

December 31, 2009

Principal amount Fair value adjustment

of hedged item Deferred

financing costs Total

Medium Term Notes $ 2,053,345 $ 10,703 $ (19,101) $$ 2,044,947

Credit facilities 100,000 – – 1100,000

Commercial paper 74,000 – – 774,000

Obligations under capital leases1 9,027 – – 99,027

2,236,372 10,703 (19,101) 22,227,974

Less current portion of long-term debt 2,254 – – 22,254

$ 2,234,118 $ 10,703 $ (19,101) $ 2,225,720

1 Less imputed interest at varying rates not exceeding 15.6% (2008 – 15.6%).

December 31, 2008

Principal amount Fair value adjustment

of hedged item Deferred

financing costs Total

Medium Term Notes $ 2,050,000 $ 15,909 $ (14,539) $ 2,051,370

Credit facilities 358,700 – – 358,700

Obligations under capital leases1 13,786 – – 13,786

2,422,486 15,909 (14,539) 2,423,856

Less current portion of long-term debt 3,807 – – 3,807

$ 2,418,679 $ 15,909 $ (14,539) $ 2,420,049

1 Less imputed interest at varying rates not exceeding 15.6% (2008 – 15.6%).

Medium Term Notes

Medium Term Notes were issued in various series between April 2004 and November 2009. The terms and conditions of these notes are governed by a Trust indenture dated April 2004. Medium Term Notes outstanding as at December 31, 2009 are as follows:

- $297.5 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

- $177.2 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

- $493.7 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

- $19.9 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

- $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

- $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

- $260 million of 7.3% Series 7 Notes maturing on February 2, 2015 priced at par, for an initial yield to the noteholders of 7.3% compounded semi-annually

- $125 million of 6.85% Series 8 Notes maturing on December 3, 2013 priced at par, for an initial yield to the noteholders of 6.85% compounded semi-annually

- $130 million of 6.50% Series 9 Notes maturing on July 10, 2013 priced at par, for an initial yield to the noteholders of 6.50% compounded semi-annually and

- $300 million of 7.75% Series 10 Notes maturing on March 2, 2020 priced at par, for an initial yield to the noteholders of 7.75% compounded semi-annually



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During the year, Yellow Media Inc. issued 7.3% Series 7 Medium Term Notes for gross proceeds of $260 million, 6.85% Series 8 Medium Term Notes for gross proceeds of $125 million, 6.5% Series 9 Medium Term Notes for gross proceeds of $130 million and 7.75% Series 10 Medium Term Notes for gross proceeds of $300 million. The proceeds from these issuances were used to reduce indebtedness under the New Credit Facility while the balance was used to reduce commercial paper indebtedness as well as for general corporate purposes. In addition, during the year, $450 million Series 1 Medium Term Notes matured and were repaid. Yellow Media Inc. also repurchased for cancellation an amount of $2.5 million of the Series 2 Medium Term Notes, $72.8 million of the Series 3 Medium Term Notes, $56.3 million of the Series 4 Medium Term Notes and $230.1 million of the Series 5 Medium Term Notes for a total cash consideration of $307.1 million. The difference between the purchase price and the carrying value of the Medium Term Notes of $52.3 million was recorded in net earnings.

All Series of Notes are unsecured and are unconditionally guaranteed by the Fund, YPG Trust, YPG LP, YPG Co., Trader, YPG (USA) Holdings, Yellow Pages Group, LLC and YPG Directories, LLC. as to the payment of principal and interest.

Credit Facilities

The Fund has in place two senior unsecured credit facilities (the “Credit Facilities”) totalling $800 million consisting of:

A $700 million facility (the “Principal Facility”) which is comprised of:

a $500 million 364-day revolving tranche with a 2-year term-out option maturing in May 2012; and,

a $200 million 5-year revolving tranche maturing in May 2012.

The Principal Facility can be used for general corporate purposes and as back-up for the commercial paper program.

A $100 million 5-year non-revolving term loan maturing in July 2014 (the “Private Facility”).

The Private Facility can be used for general corporate purposes.

As at December 31, 2009, no amount was drawn on the Principal Facility. The revolving tranche can be extended annually, subject to the lender’s consent. If not extended, any amount drawn may be converted, at the Fund’s option, into a 2-year non-revolving term loan. The Principal Facility bears interest at BA rates plus a spread of 0.575% for the $200 million tranche and 2.5% for the $500 million tranche. These spreads are based on a ratings grid.

On May 8, 2008, the Fund increased its sources of liquidity by entering into a new credit facility which, at that time, provided a $250 million senior unsecured revolving credit facility. On December 15, 2008, the size of the new credit facility was increased to $450 million. On April 21, 2009, the Fund used the full amount of the new revolving facility to repay its then maturing $450 million Series 1 Medium Term Notes. The Fund did not request an extension of the revolving period on the new revolving facility. Therefore, on May 7, 2009, this facility automatically converted to a 2-year non revolving term loan maturing in May 2011 (the “New Credit Facility”). From that date, repayments on the New Credit Facility automatically reduced the limit of the facility. In July 2009, the New Credit Facility was fully repaid and cancelled.

On July 23, 2009, the Fund entered into a five year term loan. The Private Facility bears interest at approximately BA rates plus 5%. The proceeds were used for general corporate purposes. As at December 31, 2009, there was $100 million outstanding on the Private Facility.

The Credit Facilities are unsecured and are unconditionally guaranteed by the Fund, YPG Trust, YPG LP, YPG Co., Trader, YPG (USA) Holdings Inc., Yellow Pages Group, LLC and YPG Directories, LLC as to the payment of principal and interest.

The Credit Facilities are subject to customary terms and conditions including limits on pledging assets without the consent of lenders. These facilities are also subject to the maintenance of a maximum ratio of funded debt to Latest Twelve Month Adjusted EBITDA1 of 4.25 times and a minimum ratio of Latest Twelve Month Adjusted EBITDA1 to cash interest expense on total debt of 3.5 times.

The Fund was in compliance with all of its debt covenants as at December 31, 2009.

Interest rate swaps

The Fund has entered into interest rate derivative agreements described in Note 24 in order to manage its fixed and variable rate ratio on its long-term debt.

Commercial paper

Yellow Media Inc. maintains a commercial paper program (the “Commercial Paper program”) with an authorized limit of $500 million. The commercial paper matures up to but not exceeding 365 days from the date of the issue. As at December 31, 2009, there was $74 million outstanding under the Commercial Paper program. The commercial paper bears interest at approximately BA rates plus an applicable spread and commission. 1 Latest twelve month Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges, removing the

effect of purchase accounting related to the acquisitions in the Directories segment. (“Latest Twelve Month Adjusted EBITDA”).


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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, 2009, are as follows:

Long-term debt1 Capital leases

2010 $ – $ 2,898

2011 150,000 2,693

2012 74,000 2,518

2013 255,000 1,660

2014 397,500 822

Thereafter 1,350,845 13

Total principal repayments and future minimum lease payments 2,227,345 10,604

Less imputed interest at varying rates not exceeding 15.6% – 1,577

$ 2,227,345 $ 99,027

1 Excludes Exchangeable Debentures (see Note 11)

11. Exchangeable debentures


Principal amount $ 86,549 $ 300,000

Equity component ((3,618) (12,542)

Accretion 22,362 5,653

Deferred financing costs ((1,407) (7,641)

$ 83,886 $ 285,470

On July 6, 2006, Yellow Media 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 and interest 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 principal amount.

Accretion of $2.4 million (2008 – $2.4 million) is recorded in financial charges for the year ended December 31, 2009 (Note 22).

The Exchangeable Debentures are unconditionally guaranteed on a subordinated basis by the Fund, YPG Trust, YPG LP, YPG Co., Trader, YPG (USA) Holdings, Yellow Pages Group, LLC and YPG Directories, LLC as to the payment of principal and interest.

On November 4, 2009, the Fund authorized a substantial issuer bid (“SIB”) to purchase for cancellation all of its outstanding 5.50% Exchangeable Debentures at a purchase price of $1,020 in cash for each $1,000 principal amount of Exchangeable Debentures. Under the SIB, $213.5 million principal amount of Exchangeable Debentures were purchased for a total cash consideration of $220.7 million, including fees of $3 million and excluding accrued interest. The carrying value of the Exchangeable Debentures was $206.7 million. The excess between the purchase price and the carrying value of the Exchangeable Debentures of $14 million was recorded in net earnings. The portion of the conversion option amounting to $8.9 million related to the purchase was credited to contributed surplus.



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12. Preferred shares


Series 1 and 2 $$ 481,408 $ 500,000

Derivative component 1,161 1,396

Deferred financing costs (9,792) (12,324)

$ 472,777 $ 489,072

a) Series 1

On March 6, 2007, Yellow Media Inc. issued 12,000,000 Series 1 cumulative redeemable first preferred shares (“Series 1 shares”) for net proceeds of $291 million after deducting underwriters’ fees in the amount of $8 million and other issuance costs of $1 million.

Voting rights

All of the issued and outstanding Series 1 shares are non-voting, except under special circumstances when the holders are entitled to one vote per share.

Entitlement to dividends

The holders of the Series 1 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors, in an amount equal to $1.0625 per Series 1 share per annum, payable quarterly.

Redemption by the issuer

On or after March 31, 2012, Yellow Media Inc, may, at its option, redeem at par for cash the Series 1 shares, in whole or in part. Also, on or after March 31, 2012, and prior to December 31, 2012, Yellow Media Inc. may, at its option, exchange the outstanding Series 1 shares, in whole or in part, into freely-tradable units of the Fund. In addition, the Series 1 shares will be redeemable at a premium in cash or exchangeable at the option of Yellow Media Inc., in whole into Units of the Fund on or after March 31, 2007 provided that any exchange prior to March 31, 2012 shall be limited to circumstances in which the Series 1 shares are entitled to vote separately as a class or series by law or court order. This option meets the definition of an embedded derivative under GAAP and is recorded at fair value on the consolidated balance sheet with changes in fair value recognized in earnings.

Redemption by the holder

On or after December 31, 2012, each preferred share is redeemable, at the option of the holder, at a price equal to $25.00 per share plus any accrued and unpaid dividends in arrears.

b) Series 2

On June 8, 2007, Yellow Media Inc. issued 8,000,000 Series 2 cumulative redeemable first preferred shares (“Series 2 shares”) for net proceeds of $193 million after deducting underwriters’ fees in the amount of $6 million and other issuance costs of $1 million.

Voting rights



The holders of the Series 2 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors, in an amount equal to $1.25 per Series 2 share per annum, payable quarterly.


On or after June 30, 2012, Yellow Media Inc. may, at its option, redeem for cash the Series 2 shares, in whole or in part at a decreasing premium until June 30, 2016 and at par thereafter. Also, on or after June 30, 2012, and prior to June 30, 2017, Yellow Media Inc. may, at its option, exchange the outstanding Series 2 shares, in whole or in part, into freely-tradable Units of the Fund at a decreasing premium until June 30, 2016 and at par thereafter. In addition, the Series 2 shares will be redeemable at a premium in cash or exchangeable at the option of Yellow Media Inc., in whole into Units of the Fund on or after June 30, 2007 provided that any exchange prior to June 30, 2012 shall be limited to circumstances in which the Series 2 shares are entitled to vote separately as a class or series by law or court order. This option meets the definition of an embedded derivative under GAAP and is recorded at fair value on the consolidated balance sheet with changes in fair value recognized in earnings.


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Redemption by the holder

On or after June 30, 2017, each preferred share is redeemable, at the option of the holder, at a price equal to $25.00 per share plus any accrued and unpaid dividends in arrears.

Normal course issuer bid

On June 9, 2009, the Fund received approval from the Toronto Stock Exchange (“TSX”) on its notice of intention to make a normal course issuer bid for its first preferred shares through the facilities of the TSX from June 11, 2009 to June 10, 2010, in accordance with applicable rules of the TSX.

Under its normal course issuer bid, the Fund can purchase for cancellation up to 1,200,000 and 800,000 of its outstanding first preferred shares, series 1 (“Series 1 shares”) and first preferred shares, series 2 (“Series 2 shares”), respectively. As at December 31, 2009, the Fund had purchased for cancellation 85,466 Series 1 shares of the Fund for a total cash consideration of $1.9 million including brokerage fees at an average price of $22.88 per Series 1 share and 658,226 Series 2 shares of the Fund for a total cash consideration of $11.8 million including brokerage fees at an average price of $17.86 per Series 2 share. The carrying value of these Series 1 and Series 2 shares was $2.1 million and $16.1 million, respectively. The difference between the purchase price and the carrying value of the Series 1 and Series 2 shares of $4.5 million was recorded in net earnings.

13. Non-controlling interest


Shares issued, net of issuance costs and income taxes $$ 324,130 $ –

Interest in LesPAC – 8,544

$ 324,130 $ 8,544

Series 3

On September 23, 2009, Yellow Media Inc. issued 7,500,000 Series 3 cumulative rate reset preferred shares (“Series 3 shares”) at a purchase price of $25.00 per share. On September 28, 2009, Yellow Media Inc. issued an additional 800,000 Series 3 shares pursuant to the exercise of the over allotment option granted to the underwriters for combined net proceeds of $200.5 million after deducting underwriters’ fees in the amount of $6 million and other issuance costs of $1 million and excluding income tax recovery of $2 million on the fees.

Voting rights



The holders of the Series 3 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors, in an amount equal to $1.6875 per Series 3 share per annum, payable quarterly, for the initial five year period ending September 30, 2014. The dividend rate will be reset on September 30, 2014 and every 5 years thereafter.


On September 30, 2014, and on September 30 every five years thereafter, Yellow Media Inc. may, at its option, redeem at par for cash the Series 3 shares, in whole or in part.

Conversion at the option of the holder

On September 30, 2014, each preferred share is convertible, at the option of the holder, into Series 4 preferred shares (“Series 4”) on a one to one basis. The Series 4 shares will be entitled to floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors, payable quarterly. The floating quarterly dividend rate will be equal to the sum of the three-month government of Canada Treasury bill yield plus 4.17% per annum.

Series 5

On December 22, 2009, Yellow Media Inc. issued 5,000,000 Series 5 cumulative rate reset preferred shares (“Series 5 shares”) at a purchase price of $25.00 per share for net proceeds of $120.3 million after deducting underwriters’ fees in the amount of $3.7 million and other issuance costs of $1 million and excluding income tax recovery of $1.4 million on the fees.



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Voting rights



The holders of the Series 5 shares are entitled to receive fixed cumulative preferential cash dividends, if, as and when declared by the Board of Directors, in an amount equal to $1.725 per Series 5 share per annum, payable quarterly, for the initial five year period ending June 30, 2015. The dividend rate will be reset on June 30, 2015 and every 5 years thereafter.


On June 30, 2015, and June 30 every five years thereafter, Yellow Media Inc. may, at its option, redeem at par for cash the Series 5 shares, in whole or in part.

Conversion at the option of the holder

On June 30, 2015, each preferred share is convertible, at the option of the holder, into Series 6 preferred shares (“Series 6”) on a one to one basis. The Series 6 shares will be entitled to floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors, payable quarterly. The floating quarterly dividend rate will be equal to the sum of the three-month government of Canada Treasury bill yield plus 4.26% per annum.

As these shares were issued by Yellow Media Inc., the Series 3 and 5 shares are classified as non-controlling interest on the balance sheet.

14. Income taxes

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


2009 2008

Earnings before income taxes, share of losses from equity investees and non-controlling interests $ 258,681 $ 540,630

Combined Canadian federal and provincial tax rates 31.39% 31.82%

Income tax expense at statutory rates $$ 81,200 $ 172,028

Increase (decrease) resulting from:

Intercompany interest income earned in non-taxable entities (135,599) (157,176)

Other 4,181 4,725

Impairment of goodwill 99,242 –

Non-deductible dividend expense 7,415 7,756

Non-deductible amortization of intangible assets 384 5,219

Net tax impact of foreign activities (6,960) 622

Effect of enacted future rates on temporary differences (7,694) (3,051)

Corporate minimum tax 541 541

Provision for income taxes $ 42,710 $ 30,664

Provision for income taxes for the years ended:


Current $ 12,395 $ 11,178

Future 29,774 18,945

Corporate minimum tax 541 541

$ 42,710 $ 30,664


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


Deferred financing costs and redemption fees $$ (1,778) $ 3,388

Non-capital losses carryforward – 12,029

Deferred revenues 26,715 35,272

Accrued benefit liabilities 31,817 28,897

Net deferred loss on hedging activities 53 5,772

Accrued liabilities 9,598 15,129

Capital assets and lease inducements 1,088 4,452

Intangibles (150,800) (157,669)

Future income tax liabilities, net $ (83,307) $ (52,730)

Financial statement presentation as at:


Current future income tax assets $$ 28,812 $ 43,723

Long-term future income tax assets 28,382 20,661

Current future income tax liabilities (34,248) –

Long-term future income tax liabilities (106,253) (117,114)

Future income tax liabilities, net $ (83,307) $ (52,730)

15. 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 earnings, 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.

December 31, 2009 Number of Units Amount

Balance, December 31, 2008 5518,301,059 $ 6,144,416

Units issued 10,926 43

Repurchase of units ((5,267,300) (82,420)

Balance December 31, 2009 1,2 513,044,685 $ 6,062,039

December 31, 2008

Number of Units Amount

Balance, December 31, 2007 533,188,571 $ 6,321,471

Units issued 582,688 6,422

Repurchase of units (15,470,200) (183,477)

Balance, December 31, 2008 1,2 518,301,059 $ 6,144,416

1 Includes 2,000,000 (2008 – 10,815,000) Exchangeable Units of YPG LP issued as partial consideration of the Trader Media Corp. (“TMC”) acquisition, 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 8,455,650 Restricted Units (2008 – 4,497,126) pursuant to the Restricted Unit Plan.



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Normal course issuer bid

On March 28, 2008, the Fund received approval from the Toronto Stock Exchange (“TSX”) on its notice of intention to make a normal course issuer bid for its units through the facilities of the TSX from April 2, 2008 to April 1, 2009, in accordance with applicable rules of the TSX. On April 1, 2009, the normal course issuer bid for its units expired and was not renewed.

Under its normal course issuer bid, the Fund could purchase for cancellation up to 25 million of its outstanding units. During the year ended December 31, 2009, the Fund purchased for cancellation 267,300 (2008 – 15,470,200) Units of the Fund for a total cash consideration of $1.9 million (2008 – $133.6 million) including brokerage fees. These Units were purchased at an average price of $7.20 per unit (2008 – $8.63). The average carrying value of these Units was $11.86 per Unit. The difference between the purchase price and the carrying value of the Units of $1.2 million (2008 – $49.9 million) was credited to Contributed Surplus. An amount of $11.5 million representing 1,789,600 Units repurchased in the last three days of December 2008 was settled in January 2009.

Purchase of Units

During the year ended December 31, 2009, 5,000,000 Exchangeable Units of YPG LP issued as partial consideration of the TMC acquisition were purchased and cancelled by the Fund for a total cash consideration of $27.5 million . The Exchangeable Units of YPG LP were presented as part of Unitholders’ capital. These units had a carrying value of $15.85 per unit. The difference between the purchase price and the carrying value of the units of $51.7 million was credited to Contributed Surplus.

Exercise of options

During the year ended December 31, 2009, optionholders exercised 10,926 (2008 – 582,688) options at an exercise price of $3.92 per option for cash consideration of $43 thousand (2008 – $2.3 million). These options were exercised into 10,926 (2008 – 582,688) shares of Yellow Media Inc. which were automatically exchanged into 10,926 (2008 – 582,688) units of the Fund pursuant to the Optionholders’ Liquidity Agreement, at an average stated value of approximately $3.92 (2008 – $11.02) per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of nil (2008 – $4.1 million).

16. Distributions to unitholders

The Fund’s distribution policy is to make distributions of its available cash taking into account the current and prospective performance of its business, amounts to service debt obligations, maintenance capital expenditures, taxes and other items considered to be prudent.

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, 2009, the Fund declared total distributions to Unitholders and Exchangeable Unitholders of $471.9 million (2008 – $599.9 million) or $0.9233 per unit (2008 – $1.1467).

17. Accumulated other comprehensive income (loss)

The components of Accumulated other comprehensive income (loss) are as follows:

December 31, 2009

Net gain on derivatives designated as cash flow hedges, net of income taxes1 $ 729

Unrealized losses on translating financial statements of self-sustaining foreign operations and foreign investees (3,881)

Unrealized gain on available–for–sale investment 418

Balance December 31, 2009 $ (2,734)

December 31, 2008

Net losses on derivatives designated as cash flow hedges, net of income taxes1 $ (2,929)

Unrealized gains on translating financial statements of self-sustaining foreign operations 12,060

Balance December 31, 2008 $ 9,131

1 The gains and losses on derivatives designated as cash flow hedges in prior periods will be transferred to net earnings over the term of the underlying debt which matures on January 2010, May 2011, February 2016 and February 2036.


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18. Earnings per unit

The following table reconciles 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:

For years ended December 31,

2009 2008

Weighted average number of units outstanding used in computing basic earnings per unit 510,658,375 523,444,129

Dilutive effect of options 392,433 571,432

Dilutive effect of Restricted Units1 6,602,795 4,014,311

Dilutive effect of Series 1 Preferred shares 57,253,961 32,505,350

Dilutive effect of Series 2 Preferred shares 37,479,655 21,670,233

Dilutive effect of Exchangeable Debentures – 32,505,350

Weighted average number of units outstanding used in computing diluted earnings per unit 612,387,219 614,710,805

1 Subject to specific pay-out conditions.

Earnings per unit


2009 2008

Net earnings $ 204,255 $ 509,227

Impact of assumed conversion of Exchangeable Debentures, net of applicable taxes – 15,465

Impact of assumed conversion of Series 1 Preferred shares, net of applicable taxes 12,548 12,625

Impact of assumed conversion of Series 2 Preferred shares, net of applicable taxes 6,166 9,416

Net earnings adjusted for dilutive effect $ 222,969 $ 546,733

The Exchangeable Units of YPG LP issued as partial consideration of the TMC acquisition described above are included in the number of units for both basic and diluted earnings per unit.

For the year ended December 31, 2009, the diluted earnings per unit calculation did not take into consideration the potentially dilutive effect of the Exchangeable Debentures since their impact was anti-dilutive.

19. Stock-based compensation plans

The Fund’s stock-based compensation plans consist of a Restricted Unit Plan and a Stock Option Plan.

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.



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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) and subsequent to 2008, were granted Restricted Units in equal proportions between time-based vesting and performance-based vesting criteria. During the years 2006 to 2008, YPG LP awarded Restricted Units to key employees which are performance-based and vest between 2009 to 2011. The Fund also awarded Restricted Units to non-executive directors of YPG GP, the general partner of YPG LP, which are time-based vesting only.

During the year ended December 31, 2009, an amount of $16.9 million (2008 – $11.3 million) representing 2,775,913 (2008 – 998,841) Restricted Units were granted at an average market price of $6.09 (2008 – $11.35). For the 2006 to 2008 grants to key employees, 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. In the case of the 2009 grants to key employees, the number of performance-based Restricted Units that vest can potentially reach two and a half times the actual number of performance-based Restricted Units awarded. Consequently, $24.1 million (2008 – $19.8 million) was used to purchase 3,849,791 (2008 – 1,742,404) Restricted Units of the Fund on the open market of the Toronto Stock Exchange, which will be held in escrow in order to provide up to a 250% pay-out subject to adjustment at time of vesting. In addition, an amount of $5.7 million (2008 – $4.3 million) was used to reinvest in 1,008,595 (2008 – 471,223) Restricted Units using the proceeds from the distributions on the Restricted Units held in escrow. This includes 479,001 (2008 – 230,725) Restricted Units associated with the maximum pay-out provisions.

The following table summarizes the status of the grants:

December 31, 2009

Number of Restricted Units

2007 to 2009 Grants

Outstanding, beginning of year 2,221,443

Granted 2,775,913

Vested (508,082)

Forfeited (460,200)

Cash distributions reinvested 529,594

Outstanding, end of year 4,558,668

Weighted average remaining life 1.96 years

December 31, 2008

Number of Restricted Units

Pre-2006 Grants 2006 to 2008 Grants

Outstanding, beginning of year 69,915 1,167,613

Granted – 998,841

Vested (68,163) (16,168)

Forfeited (2,271) (168,822)

Cash distributions reinvested 519 239,979

Outstanding, end of period – 2,221,443

Weighted average remaining life 1.63 years

As at December 31, 2009, there were 166,689 (2008 – 227,652) Restricted Units which were not allocated to any specific employee and 3,730,293 (2008 – 2,048,031) Restricted Units associated with the maximum pay out provisions. Total compensation expense for the year ended December 31, 2009 of $1.9 million (2008 – $8.8 million) was recorded in the consolidated statement of earnings.


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Stock Options

Employee participants

Prior to the inception of the Fund, certain employees were issued options to purchase common shares of Yellow Media 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 were 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 were 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. At December 31, 2007, YPG Co. had achieved the performance targets identified at the time of establishment of the Stock Option Plan and all of the performance-based options became exercisable in 2008.

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

December 31, 2009

NNumber of options Weighted average exercise price per option

Outstanding, beginning of year 3394,912 $ 3.92

Exercised ((10,926) 3.92

Outstanding, end of year 383,986 $ 3.92

Exercisable, end of year 383,986 $ 3.92

December 31, 2008

Number of options Weighted average exercise price per option

Outstanding, beginning of year 977,600 $ 3.92

Exercised (582,688) 3.92

Outstanding, end of year 394,912 $ 3.92

Exercisable, end of year 394,912 $ 3.92

The following table summarizes information about the stock option program as of December 31, 2009:

Options outstanding and exercisable

Exercise price per option Number of options Weighted average remaining life Weighted average exercise price Number of options

$3.92 383,986 2.54 years $3.92 383,986

No options have been granted to employees and non-employees since the inception of the Fund.

20. Supplemental disclosure of cash flow information

Change in operating assets and liabilities:


2009 2008

Accounts receivable $ 33,908 $ (19,473)

Prepaid expenses 5,100 (2,359)

Deferred publication costs and other assets 12,226 (15,374)

Accounts payable and accrued liabilities 8,342 (19,528)

Deferred revenues 262 2,800

$ 59,838 $ (53,934)



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Supplemental information:


2009 2008

Interest paid $ 142,437 $ 136,415

Dividends on Preferred shares paid, Series 1 and 2 $ 22,434 $ 22,750

Income taxes and capital taxes paid $ 10,551 $ 23,306

Additions to fixed assets under capital leases $ 1,891 $ 773

Additions to fixed assets included in accounts payable and accrued liabilities $ 6,183 $ 6,459

Cash and cash equivalents consist of:

As at December 31,

2009 2008

Cash $ 36,170 $ 10,254

Short-term investments – 14,800

$ 36,170 $ 25,054

21. Commitments and contingencies

a) The Fund has commitments under various leases for premises, equipment and purchase obligations through long-term distribution agreements for each of the next five years and thereafter, as of December 31, 2009, and in the aggregate of:

2010 $ 445,245

2011 222,319

2012 221,685

2013 220,530

2014 220,261

Thereafter 663,740

$ 193,780

Under certain lease agreements, there are inducements for leasehold improvements. The lease inducements are accounted for as part of deferred credits and amount to $23.5 million. These lease inducements are recorded as a reduction of rent expense on a straight-line basis over the term of the lease.

b) The Fund has four billing and collection services Agreements. The term of the Billing & Collection Services Agreement with Bell Canada (“Bell”) expires on December 31, 2014, with an automatic renewal of two successive one-year periods thereafter unless the Fund provides prior notice not to renew. The agreement with TELUS Communications Inc. (“TELUS”) includes automatic renewal for successive one-year periods. 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. The agreement with Bell Aliant Regional Communications LP (“Bell Aliant”) expires on April 30, 2017, with two automatic renewal periods for ten years.

Pursuant to publication agreements with each of Bell, TELUS, MTS Allstream Inc. and Bell Aliant, YPG Co. produces alphabetical listing telephone directories for each of these companies in order for them to meet their regulatory obligations.

YPG Co. also entered into several other agreements with Bell, TELUS, MTS Allstream Inc. and Bell Aliant, providing for the use of listing information and trademarks for the publications of directories. If YPG Co. 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, TELUS, MTS Allstream Inc. or Bell Aliant 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 2010 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.


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22. Financial charges, net

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


2009 2008

Interest on Medium Term Notes $ 107,992 $ 107,501

Interest on Credit Facilities 8,589 4,281

Interest on Exchangeable Debentures, net of accretion 15,983 16,500

Interest on Commercial paper 5,664 3,969

Standby fees and other financial charges, net 3,665 1,948

Other (credits) charges related to derivative financial instruments 2,707 (200)

Gain on purchase of Series 1 and 2 shares, Medium Term Notes and Exchangeable Debentures, net (42,763) –

Amortization of deferred financing costs 8,164 7,186

Write-off of deferred financing costs 1,115 –

Accretion on Exchangeable Debentures 2,444 2,377

Accretion on Series 2 shares (128) (124)

Foreign exchange loss (gain) 1,168 (1,177)

$ 114,600 $ 142,261

23. Restructuring and special charges

In connection with the acquisitions of ADS, Trader, MTS Media (“MTS”), Aliant, and YPG USA, the Fund recorded provisions for restructuring and special charges of $25.8 million, $38.7 million, $8.3 million, $0.9 million, and US$6.5 million (CDN$6.9 million), 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 were performing functions already available through its existing structure 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, and costs related to decommissioning of the existing technology platforms following the integration of the acquired business’ operations. The liabilities related to these costs were initially included in the underlying net identifiable assets acquired. During the fourth quarter of 2008, the Fund recorded charges relating to an internal reorganization, workforce reduction, the termination of certain contractual commitments, the acceleration of business process changes in call centers, the discontinuance of under-performing publications, the closure of certain ad centers and other items in the amount of $36.2 million. Included in these restructuring and special charges of $36.2 million are write-off of costs totalling $3.6 million.

During the year, the Fund recorded additional restructuring and special charges of $40.3 million related to an internal reorganization, workforce reduction and termination of certain contractual commitments. Included in these restructuring and special charges are write-offs of deferred lease improvements, deferred publication costs, fixed assets under capital leases and other amounts totalling $3.3 million.

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

Restructuring charges Other special charges Total

Balance as at December 31, 2007 $$ 5,281 $ 9,837 $ 15,118

Provision related to restructuring 27,098 9,127 36,225

Provision related to the acquisition of YPG USA 5,496 1,374 6,870

Utilized in 2008:

Cash (6,621) (6,915) (13,536)

Write-off – (3,618) (3,618)

Balance as at December 31, 2008 31,254 9,805 41,059

Provision related to 2009 initiatives 99,574 30,742 40,316

Utilized in 2009:

Cash ((24,777) (12,475) (37,252)

Write-off – (3,261) (3,261)

Balance as at December 31, 2009 $ 16,051 $ 24,811 $ 40,862



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24. Financial risk management

Credit Risk

Credit risk stems primarily from the potential inability of a customer or counterparty to a financial instrument to meet its contractual obligations. The Fund is exposed to credit risk with respect to cash and cash equivalents, accounts receivable from customers and derivative financial instruments. The carrying amount of financial assets represents the Fund’s maximum exposure.

Credit risk associated with cash and cash equivalents is minimized substantially by ensuring that these financial assets are placed with creditworthy counterparties. An ongoing review is performed to evaluate changes in the status of counterparties.

The Fund’s extension of credit to customers involves considerable judgment. The Fund has established internal controls designed to mitigate credit risk, including a formal credit policy managed by its credit department. New customers, customers increasing their advertising spend by a certain threshold and customers not respecting payment terms are subject to a specific vetting and approval process.

The Fund considers that it has limited exposure to concentration of credit risk with respect to accounts receivable from customers due to its large and diverse customer base operating in numerous industries and its geographic diversity. There are no individual customers that account for 1% or more of revenues and there are no accounts receivable from any one individual customer and certified marketing representative that exceeds 5% of the total balance of accounts receivable at any point in time during the period.

Bell, TELUS, MTS Allstream Inc. and Bell Aliant provide the Fund with customer collection services with respect to advertisers who are also their customers. As such they receive money from customers on behalf of the Fund. The Fund retains the ultimate collection risks on these receivables.

Allowance for doubtful accounts and past due receivables are reviewed by management at each balance sheet reporting date. The Fund updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability of accounts receivable balances of each customer taking into account historic collection trends of past due accounts. Accounts receivable are written-off once determined not to be collectable.

Pursuant to their respective terms, accounts receivable are aged as follows as at December 31, 2009:

Current $$ 133,867

Past due less than 180 days 62,867

Past due over 180 days 18,622

Accounts receivable $ 215,356

The Fund’s accounts receivable are stated after deducting a provision of $45.8 million at December 31, 2009. The movements in the provision for doubtful accounts were as follows:

December 31, 2009

Balance, beginning of year $$ 40,449

Bad debt expense, net of recovery 45,496

Written-off (40,169)

Balance, end of year $ 45,776

December 31, 2008

Balance, beginning of year $ 35,848

Bad debt expense, net of recovery 30,714

Written-off (26,113)

Balance, end of year $ 40,449

In addition, 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.


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Interest Rate Risk

The Fund is exposed to interest rate risks through its financial obligations bearing variable interest rates. The interest rates on Yellow Media Inc.’s bank facility, commercial paper issuances, and cash and short-term investments are generally based on the Canadian Banker's Acceptance rate. As of December 31, 2009, including the impact of the financial derivatives described below, the net amount exposed to short-term rates fluctuations was $32.2 million. Based on this exposure as at December 31, 2009, an assumed 0.5 percentage point increase or decrease in the Banker's Acceptance rate would have an unfavourable impact of $0.1 million impact on net earnings with an equal but opposite effect for an assumed 0.5 percentage point decrease. The Fund is also exposed to fluctuations in long-term interest rates relative to the refinancing of its debt obligations upon their maturity. The interest rate on new long-term debt issuances will be based on the prevailing rates at the time of the refinancing, and will also depend on the tenor of the new debt issued. The Fund manages interest rate risk exposure by having a balanced schedule of debt maturities, as well as a combination of fixed and floating interest rate obligations and uses interest rate derivative products when appropriate to hedge interest rate risk.

The Fund uses derivative 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.

On April 8, 2008, the Fund terminated the two interest rate swaps with a notional amount of $75 million each totalling $150 million, for gross proceeds of $3.2 million, which equalled the carrying value of these derivative financial instruments at that date. These interest rate swap agreements were originally entered into in February 2006 to convert the fixed interest rate of the Series 6 Medium Term Notes into floating interest rates. The $3.2 million was deferred and will be amortized over the term of the underlying debt.

In October 2008, the Fund entered into bond forward transactions totalling $100 million in order to effectively lock in the 5-year Government of Canada rate on a portion of an expected long-term refinancing. These contracts matured in December 2008 and were at rates varying between 2.73% and 2.77%. In December 2008, the Fund terminated these bond forwards which resulted in a loss of $2.7 million. The loss was recorded in Other Comprehensive Income and will be transferred to net earnings over the term of the underlying debt which matures in May 2011.

In October 2008, the Fund entered into floating to fixed interest rate swaps to fix the rate on its floating rate exposure to the Canadian Banker’s acceptance rate. The Fund was to pay a fixed rate of interest of 2.25% and receive a floating rate corresponding to the Banker’s acceptance rate on an amount of $150 million between November 3, 2008 and May 3, 2009, increasing to $300 million from May 3, 2009 to January 5, 2010.

The interest rate swaps are comprised of two tranches:

the first tranche was a $50 million interest rate swap that increased to $100 million on May 3, 2009, and

the second tranche was a $100 million interest rate swap that increased to $200 million on May 3, 2009.

The Fund discontinued hedge accounting on the first tranche effective June 1, 2009. On June 19, 2009, the Fund discontinued hedge accounting on the second tranche. All of the accumulated losses on the interest rate swaps remain in accumulated other comprehensive income and will be reclassified to net earnings over the life of the interest rate swaps which mature January 5, 2010. As the Fund continues to hold these swaps, the difference between their fair value from their date of discontinuance of hedge accounting and their value at the balance sheet date is recognized in earnings.

In February 2009, the Fund entered into floating to fixed interest rate swaps to fix the rate on its floating rate exposure to the Canadian Banker’s acceptance rate. The Fund was to pay a fixed rate of interest of between 0.73% and 0.74% and receive a floating rate corresponding to the Banker’s acceptance rate on an amount of $200 million between April 21, 2009 and December 21, 2009. On July 22, 2009, the Fund terminated these interest swaps for a loss of $0.3 million. The accumulated losses on the interest rate swaps remained in accumulated other comprehensive income and were reclassified to net earnings over the life of the interest rate swaps which matured on December 21, 2009.

In August 2009, the Fund also entered into three interest rate swaps totalling $130 million to hedge the Series 9 Medium Term Notes. The Fund receives interest on these swaps at 6.5% and pays a floating rate equal to the three-month Banker’s Acceptance plus a spread of 4.3%. The swaps mature July 10, 2013, matching the maturity date of the underlying debt. As at December 31, 2009, the interest rate swaps met the criteria for hedge accounting.

Foreign Exchange Risk

The Fund operates in the United States and is exposed to foreign exchange risk arriving from various currency transactions. Foreign exchange transaction risk arises primarily from future commercial transactions that are denominated in a currency that is not the functional currency of the Fund’s business unit that is party to the transaction. The Fund is exposed to fluctuations in the US dollar. The effect on net earnings and other comprehensive income from existing US dollar exposures of a 1 point increase or decrease in the Canadian/US dollar exchange rate is not significant.



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Liquidity Risk

Liquidity risk is the exposure of the Fund to the risk of not being able to meet its financial obligations as they become due. The Fund manages liquidity risk through the management of its capital structure and financial leverage as outlined in Note 25 - Capital Disclosures.

The following are the contractual maturities of the financial liabilities and related capital amounts:

Payments due for the years ending December 31

Total 1 – 3 years 4 – 5 years After 5 years

Non-derivative financial liabilities

Long-term debt1,2 $2,313,894 $310,549 $652,500 $1,350,845

Obligations under capital leases2 9,027 6,689 2,326 12

Preferred shares, Series 1 and 22 481,408 297,863 – 183,545

2,804,329 615,101 654,826 1,534,402

Derivative financial liabilities

Interest rate swaps

Inflows (2,691) (2,691) – –

Outflows 3,284 1,413 1,871 –

593 (1,278) 1,871 –

Total $2,804,922 $613,823 $656,697 $1,534,402

1 Including Exchangeable Debentures 2 Principal amount

On December 31, 2009, cash and cash equivalents amounted to $36.2 million. In addition Yellow Media Inc. may issue additional notes amounting to $426 million under its commercial paper program and access another $200 million under its Credit Facilities. Alternatively, if notes are not issued under the commercial paper program, Yellow Media Inc. may access the full $626 million available under the Credit Facilities.

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, Credit Facilities and commercial paper is approximately equal to their carrying values due to their short-term maturity.

The fair value of the investment classified as available–for–sale, Exchangeable Debentures and Preferred shares is evaluated based on quoted market prices at the balance sheet date.

Fair values of Medium Term Notes and 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.


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

December 31, 2009

Carrying Value Fair Value

Other assets – Investment – available for sale $ 646 $ 646

Long-term debt due within one year $$ 2,254 $ 2,254

Long-term debt $ 2,225,720 $ 2,199,289

Exchangeable Debentures1 $$ 83,886 $ 86,767

Preferred shares, Series 1 and 2 $$ 472,777 $ 431,281

Derivative financial instruments

– Redemption option on Preferred shares $$ 2,612 $ 2,612

– Interest rate swaps - liabilities

Short – term $$ 76 $ 76

Long – term $$ 719 $ 719

December 31, 2008

Carrying Value Fair Value

Other assets – Investment – available for sale $ 228 $ 228

Long-term debt due within one year $ 3,807 $ 3,807

Long-term debt $ 2,420,049 $ 2,205,828

Exchangeable Debentures1 $ 285,470 $ 249,479

Preferred shares, Series 1 and 2 $ 489,072 $ 318,000

Derivative financial instruments

– Redemption option on Preferred shares $ 4,500 $ 4,500

– Interest rate swaps $ 3,974 $ 3,974

1. The carrying value includes the liability portion of the Exchangeable Debentures

Fair value hierarchy

The following table summarizes the financial instruments measured at fair value in the consolidated balance sheet as at December 31, 2009, classified using the fair value hierarchy described in Note 1:

Level 1 Level 2 Level 3 Total

Financial asset or liability

Cash $36,170 $– $– $36,170

Investment – available for sale 646 – – 646

Interest rate swaps – 795 – 795

Redemption option on Preferred shares – 2,612 – 2,612

Total $36,816 $3,407 $– $40,223

The Fund’s available-for-sale investment is comprised of an actively traded equity security and is carried at fair value based on available quoted prices.

The Fund’s derivatives transactions are accounted for on a fair value basis and are comprised of non-speculative interest rate swaps to hedge interest rate exposures. These derivatives are valued using either industry standard or internally developed valuation models. Where applicable, these models use market-based observable inputs including interest-rate-yield curves, volatility of certain prices or rates and credit spreads. In certain cases, market-based observable inputs are not available and, in those cases, judgment is used to develop assumptions used to determine fair values. The Fund currently does not use unobservable inputs that are significant to the fair value measurement in its entirety.

At the beginning of the year, the Fund’s valuation techniques used were modified to include credit risk spreads upon adoption of EIC 173, Credit risk and the fair value of financial assets and financial liabilities. The adoption of this Abstract did not have a significant impact to the fair values established.



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25. Capital disclosures

The Fund’s objective in managing capital is to:

Ensure sufficient liquidity to cover financial obligations and investment requirements;

Preserve access to low-cost funding;

Maintain or improve investment grade credit ratings; and

Deliver stable results to investors.

The Fund actively manages and monitors its capital structure and makes adjustments based on the objectives described above in response to changes in economic conditions and the risk characteristics of the underlying assets.

The primary measure used by the Fund to monitor its financial leverage is its ratio of net debt to Latest Twelve Month Adjusted EBITDA1. The Fund also uses other financial metrics to monitor its financial leverage including net debt and preferred shares to Latest Twelve Month Adjusted EBITDA1, Fixed Charges Coverage Ratio and Net Debt to Capitalization.

The Fund’s capital is comprised of Net debt and Preferred shares and Unitholders’ equity as follows:


Cash and cash equivalents $$ 36,170 $ 25,054

Medium Term Notes 22,044,947 2,051,370

Exchangeable Debentures 883,886 285,470

Credit Facilities 100,000 358,700

Commercial paper 74,000 –

Obligations under capital leases 99,027 13,786

Long-term debt, including current portion 22,311,860 2,709,326

Net debt (net of cash and cash equivalents) 22,275,690 2,684,272

Preferred shares, Series 1 and 2 4472,777 489,072

Non-controlling interest2 3324,130 –

Unitholders’ equity 55,224,740 5,561,492

Total capitalization $$ 8,297,337 $ 8,734,836

Net debt to total capitalization 227.4% 30.7%

2 Represents 8.3 million and 5 million Preferred Shares, Series 3 and 5 issued in September 2009 and December 2009, respectively (2008 – nil). For the year ended


Latest Twelve Month Adjusted EBITDA1 $$ 898,355 $ 940,630

Net Debt to Latest Twelve Month Adjusted EBITDA ratio1 22.5 2.9


26. 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, 2009, with respect to this indemnity.

Pursuant to the acquisitions of Aliant, LesPAC, and YPG USA, 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


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breach of a representation contained herein. Furthermore, agreements entered into by Trader and its predecessor companies prior to the acquisition contain indemnifications similar to the ones just described. No amount has been accrued in the consolidated balance sheet as December 31, 2009, 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.

27. Segmented information

The Fund's reportable segments consist of strategic business units that offer different products. Management has determined that the Fund operates in 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 financial statements. The Fund or chief operating decision maker analyzes the performance of its operating segments based on their income from operations which is not a measure of performance under GAAP; however, management uses this performance measure for assessing the operating performance of its reportable segments.

The tables below summarize the selected financial information by segment:

For the year ended December 31, 2009

Directories1 Vertical Media Consolidated

Revenues $$ 1,392,029 $ 247,855 $ 1,639,884

Operating costs 570,125 176,321 746,446

Income from operations before depreciation and amortization, impairment of goodwill and restructuring and special charges 821,904 71,534 893,438


Impairment of goodwill – 315,000 315,000

Restructuring and special charges 33,735 6,581 40,316

Income (loss) from operations $$ 678,323 $ (282,615) $ 395,708

For the year ended December 31, 2008

Directories1 Vertical Media Consolidated

Revenues $ 1,376,036 $ 320,677 $ 1,696,713

Operating costs 551,528 212,479 764,007

Income from operations before depreciation and amortization and restructuring and special charges 824,508 108,198 932,706


Restructuring and special charges 24,068 12,157 36,225

Income from operations $ 643,064 $ 67,352 $ 710,416

1 Included in the Directories segment are the results of YPG USA. Consequently, $37.2 million (2008 - $12.3 million) of revenues are included for the year ended December 31, 2009 and were generated in the United States of America. Revenues are attributed to countries based on the location of the customer.

December 31, 2009

Directories1 Vertical Media2 Consolidated

Intangibles $$ 1,681,391 $ 327,108 $ 2,008,499

Goodwill $$ 5,678,328 $ 664,252 $ 6,342,580

Total assets $$ 7,799,723 $ 1,141,883 $ 8,941,606

December 31, 2008

Directories1 Vertical Media2 Consolidated

Intangibles $ 1,768,649 $ 333,817 $ 2,102,466

Goodwill $ 5,685,280 $ 963,387 $ 6,648,667

Total assets $ 7,971,215 $ 1,395,004 $ 9,366,219

1 Included in the Directories segment is goodwill of $56 million (December 31, 2008 – $63 million) and capital assets of $86.2 million at December 31, 2009 (December 31, 2008 – $125.2 million) relating to YPG USA. Included in the total assets of the Directories segment is $2.4 million (2008 – nil) related to the recent equity-investment acquisition.

2 The amount of investment in Dealer.com of $32.6 million (2008 – nil) is included in the total assets of the Vertical Media segment.



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2009 2008

Additions to fixed assets1

Directories $ 32,767 $ 25,732

Vertical Media $ 13,276 $ 17,456

Additions to intangible assets

Directories $ 246 $ 100

Vertical Media $ – $ –

1 These amounts represent total expenditures for additions to fixed assets, whether they are paid or not. The additions include internally developed software which will be reclassified to intangible assets once they become available for use.

28. Comparative figures

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

29. Subsequent events

Financing

On January 15, 2010 the Fund redeemed all of its outstanding $150 million 4.65% Medium Term Notes, Series 6 which were due February 28, 2011. The Fund financed the purchase with drawings under the commercial paper program. The Fund redeemed the Series 6 Medium Term Notes at a redemption price of $1,041.681 per $1,000 principal amount in accordance with the terms of the Series 6 Notes and the provisions of the trust indenture dated April 21, 2004.

Acquisition

On January 5, 2010 Trader acquired an additional 10% equity interest in Dealer.com for US$20 million, bringing its total equity interest to approximately 30%. The acquisition was financed with drawings under existing credit facilities and cash on hand. This increase in ownership has not been accounted for in these financial statements.

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Board of Trustees

Leadership Team

Michael T. BoychukPresident and Chief Executive Offi cer Bimcor Inc.Member of the Audit Committee and of the Corporate Governance and Nominating Committee

John R. GauldingChairman of Gaulding & Co.Chairman of the Corporate Governance and Nominating Committee and Member of the Human Resources and Compensation Committee

Paul GobeilVice-Chairman of the Board of Metro Inc.Member of the Audit Committee and of the Corporate Governance and Nominating Committee

Michael R. LambertChief Financial Offi cer of The Forzani Group Ltd.Chairman of the Human Resources and Compensation Committee

Corporate Services

Marc P. TellierPresident and Chief Executive Offi cer

Christian M. PaupeExecutive Vice-President, Corporate Services and Chief Financial Offi cer

François D. RamsaySenior Vice-President, General Counsel and Secretary

Josée DubucChief Talent Offi cer

Ginette MailléChief Administration Offi cer

Barbara E. OberleitnerVice-President and Treasurer

Stephen PortVice-President, Corporate Performance

Yvan ProteauChief Information Offi cer

D. Lorne RichmondVice-President, Supply Chain & Logistics

Daniel VerretVice-President, Controller

Anthony G. MillerCorporate DirectorMember of the Audit Committee

Heather E.L. Munroe-BlumProfessor, Principal and Vice-Chancellor of McGill UniversityMember of the Corporate Governance and Nominating Committee and of Human Resources and Compensation Committee

Martin NisenholtzSenior Vice-President, Digital Operations of The New York Times CompanyMember of the Audit Committee

Marc L. ReischChairman of the Board Chairman, President and Chief Executive Offi cer of Visant CorporationMember of the Human Resources and Compensation Committee

Directories

Helena CainSenior Vice-President, Sales

Stéphane MarceauChief Marketing Offi cer

Paul BatchelorVice-President, Sales, Alberta and British Columbia

Nicolas GaudreauVice-President, Digital Media

David K. GilbertVice-President, SalesYour Community Phonebook (US)

Paul LalondeVice-President and General Manager, Sales, Central Region

Patrick LauzonVice-President and General Manager, National Markets

Lise R. LavoieVice-President, Sales, Québec andAtlantic Canada

Linda McFarlaneVice-President, Sales Support

J. Heidi RoizenChief Executive Offi cer of Skinny Little Things, LLCMember of the Corporate Governance and Nominating Committee

Stuart H. B. SmithChairman of EPIC Realty Partners Inc.Chairman of the Audit Committee

Marc P. TellierPresident and Chief Executive Offi cer ofYellow Pages Group Co.

Gregory S. ShearerVice-President, Business Solutions

Edward D. ValentineVice-President, Publishing

Vertical Media

Douglas A. ClarkePresident

Jamie BlundellVice-President, Operations

Jacky HillVice-President, National Real Estate

Jeff KnisleyVice President, Commercial Sales, Automotive & Generalist

Nicolas LavoieChief Financial Offi cer

Geneviève LeBrunVice-President, Marketing

Normand ThébergeVice-President, Business Development

Corporate Information

Yellow Pages Group16 Place du CommerceVerdun, Québec H3E 2A5www.ypg.com

Trader Corporation401 The West MallEtobicoke, Ontario M9C 5J5www.tradercorporation.com

Investor Relations1 877 YLO-2003 (1 877 956-2003)[email protected]

AuditorsDeloitte & Touche LLP

Units and Other Securities Listed on the Toronto Stock ExchangeYLO.UN UnitsYPG.DB Exchangeable DebenturesYPG.PR.A Series 1 Cumulative Redeemable First Preferred sharesYPG.PR.B Series 2 Cumulative Redeemable First Preferred sharesYPG.PR.C Series 3 Cumulative Rate Reset First Preferred sharesYPG.PR.D Series 5 Cumulative Rate Reset First Preferred shares

Transfer AgentCIBC Mellon Trust Company2001 University StreetSuite 1600Montréal, Québec H3A 2A6Telephone: 1 800 387-0825E-Mail Inquiries: [email protected]

Annual ReportTo consult the online interactive version of our Annual Report, visit: www.ypg.com/annualreport2009.

Ce rapport est également disponible en français. Pour obtenir la version française, veuillez communiquer avec la Compagnie Trust CIBC Mellon à l’adresse indiquée ci-haut.

Annual and Special MeetingThe Annual and Special Meeting of Yellow Pages Income Fund’s unitholders will be held on Thursday, May 6, 2010.The meeting will take place at 11:00 a.m. (ET) at The Windsor, 1170 Peel, Montréal, Québec, Canada.

www.ypg.com

This annual report is printed on Rolland Enviro 100, the environmentally responsible choice, because it is processed chlorine free, accredited Eco-Logo and 100% post-consumer. In other words, no new trees have been cut and all the fibres necessary to make this paper come only from recycling bins.

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