Yellow Pages
Annual Report 2012

Plain-text annual report

yellow media limited. annual report 2012 / 2012 financial review /w f Table of contents Management’s Discussion and Analysis ......................................................................1 Management’s Report .................................................................................................... 33 Independent Auditor’s t Report....................................................................................... 34 Consolidated Statements of Financial f Position....................................................... 35 Consolidated Income Statements ............................................................................... 36 Consolidated Statements of Comprehensive f (Loss) Income.............................. 37 Consolidated Statements of Changes f in Equity .............................................. 38-39 Consolidated Statements of Cash f Flows ................................................................... 40 Notes to the Consolidated Financial Statements..............................................41-77 management’s discussion and analysis. February 5, 2013 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 Media Limited and its subsidiaries for the years ended December 31, 2012 and 2011 and should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2012. 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. The financial information presented herein has been prepared on the basis of International Financial Reporting Standards (IFRS) for financial statements and is expressed in Canadian dollars, unless otherwise stated. The audited IFRS-related disclosures and values in this MD&A have been prepared using the standards and interpretations currently issued and effective at the end of our reporting period, December 31, 2012. In this MD&A, the words “we”, “us”, “our”, “the Company”, “the Corporation”, “Yellow Media” and “YPG” refer to Yellow Media Limited and its subsidiaries (including YPG Financing Inc. (formerly Yellow Media Inc.), Yellow Pages Group Corp., Wall2Wall Media Inc. (Wall2Wall), YPG (USA) Holdings, Inc. and Yellow Pages Group, LLC (the latter two collectively YPG USA)). After the completion of the sale of Trader Corporation in July 2011, management reassessed its operating segments and concluded that the “Directories” segment is the Company’s only operating segment, which refers to our print and online directories as well as performance marketing solutions and real estate publications. On December 20, 2012 (the Effective Date), Yellow Media Limited implemented a recapitalization transaction (Recapitalization). The new corporation, Yellow Media Limited, was formed for the purpose of effecting the Recapitalization. Pursuant to the Recapitalization, Yellow Media Limited issued new common shares (New Common Shares) and warrants (Warrants) on behalf of Yellow Media Inc. and became the parent company of Yellow Media Inc. Yellow Media Inc. changed its name to YPG Financing Inc. The key components of the Recapitalization are as follows: (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) The exchange of the Company’s credit facility (Credit Facility) and medium term notes (Medium Term Notes) (collectively the Senior Unsecured Debt), representing $1,772.7 million of the Company’s debt, for a combination of: (cid:2)(cid:2) $800 million of 9.25% senior secured notes maturing in 2018 (the Senior Secured Notes); (cid:2)(cid:2) $100 million of senior subordinated unsecured exchangeable debentures due in 2022, with interest payable in cash at 8.0% or in additional debentures at 12.0% (the Exchangeable Debentures); (cid:2)(cid:2) 23,062,943 New Common Shares, representing 82.5% of the issued and outstanding New Common Shares; and (cid:2)(cid:2) $275 million of cash. The exchange of the existing convertible debentures for a combination of: (cid:2)(cid:2) $7.5 million of Exchangeable Debentures; (cid:2)(cid:2) 497,852 New Common Shares representing 1.8% of the New Common Shares; and (cid:2)(cid:2) 484,487 10-year Warrants to purchase New Common Shares at the exercise price of $28.16, representing in the aggregate 1.7% of the New Common Shares. The exchange of the existing preferred shares and common shares of the Company for a combination of: (cid:2)(cid:2) 4,394,282 of New Common Shares representing 15.7% of the New Common Shares; and (cid:2)(cid:2) 2,511,019 10-year Warrants to purchase New Common Shares at the exercise price of $28.16, representing in the aggregate 9% of the New Common Shares. Please refer to Section 3 – Liquidity and Capital Resources of this MD&A for a description of the Recapitalization. Forward-looking information 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. Forward-looking information and statements are based on a number of assumptions which may prove to be incorrect. In making certain forward-looking statements, we have assumed that we will succeed in continuing to implement our business plan, that we will be able to attract and retain key personnel in key positions, that the directories, digital media and advertising industries into which we sell our products and services will demonstrate strong demand for our products and services, that the decline in print revenues will not accelerate beyond what is currently anticipated, that online growth will not be slower than what is currently anticipated and that general economic conditions will not deteriorate beyond currently anticipated levels. Forward-looking information and statements are also based upon the assumption that none of the identified risk factors that could cause actual results to differ materially from the anticipated or expected results described in the forward-looking information and statements will occur. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 1 management’s discussion and analysis. When used in this MD&A, such forward-looking statements may be identified by words such as “aim”, “anticipate”, “believe”, “could”, “estimate”, “expect”, “goal”, “intend”, “objective”, “may”, “plan”, “predict”, “seek”, “should”, “strive”, “target”, “will”, “would” and other similar terminology. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of this MD&A. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future results or performance, and will not necessarily be accurate indications of whether or not such results or performance will be achieved. A number of factors could cause actual results or performance to differ materially from the results or performance discussed in the forward-looking statements, including, but not limited to, the factors discussed under “Substantial competition could reduce the market share of the Corporation and could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “A higher than anticipated rate of decline in print revenue resulting from changes in preferences and consumer habits could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “The inability of the Corporation to successfully enhance and expand its offering of digital and new media products could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “The inability of the Corporation to generate sufficient funds from operations, debt financings, equity financings or refinancing transactions could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “The Corporation’s substantial indebtedness could adversely affect its efforts to refinance or reduce its indebtedness and could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “Incremental contributions by the Corporation to its pension plans could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “Failure by either the Corporation or the Telco Partners to fulfill the obligations set forth in the agreements between the Corporation and the Telco Partners could result in a material adverse effect on the Corporation, its business, results from operations and financial condition”, “Failure by the Corporation to adequately protect and maintain its brands and trade-marks, as well as third party infringement of such, could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “Work stoppages and other labor disturbances could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “Challenge by tax authorities of the Corporation’s position on certain income tax matters could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “The loss of key relationships or changes in the level or service provided by internet portals, search engines and individual websites could have a material adverse effect on the Corporation, its business, results from operations and financial condition”, “The failure of the Corporation’s computers and communications systems could have a material adverse effect on the Corporation, its business, results from operations and financial condition” and “The Corporation might be required to record additional impairment charges” of the “Risks and Uncertainties” section of this MD&A. Additional risks and uncertainties not currently known to management or that are currently deemed to be immaterial may also have a material adverse effect on the Corporation’s business, financial position or financial performance. Although the forward-looking statements contained in this MD&A are based upon what management of the Corporation believes are reasonable assumptions, the Corporation cannot assure investors that actual results will be consistent with these forward-looking statements and cautions readers not to place undue reliance on them. These forward-looking statements are made as of the date of this MD&A, and the Corporation assumes no obligation to update or revise them to reflect new events or circumstances, except as may be required pursuant to securities legislation. Definitions relative to understanding our results Income from Operations before Depreciation and Amortization, Impairment of Goodwill, Intangible Assets and Property, Plant and Equipment, Acquisition-related Costs and Restructuring and Special Charges (EBITDA) We report on our EBITDA (Income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition-related costs, and restructuring and special charges). EBITDA is not a performance measure defined under IFRS and is not considered an alternative to income (loss) from operations or net earnings (loss) 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. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, taxes, interest payments, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed on page (cid:2)3 of this MD&A. Free cash flow Free cash flow is a non-IFRS measure generally used as an indicator of financial performance. It should not be seen as a substitute for cash flow from operating activities. Free cash flow is defined as cash flow from operating activities from continuing operations, as reported in accordance with IFRS less an adjustment for capital expenditures. This MD&A is divided into the following sections: 1.(cid:2) 2.(cid:2) 3.(cid:2) 4.(cid:2) 5.(cid:2) 6.(cid:2) 7.(cid:2) 2 Our Business, Mission, Strategy and Capability to Deliver Results Results Liquidity and Capital Resources Free Cash Flow Critical Assumptions Risks and Uncertainties Controls and Procedures YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. 1.(cid:2) Our Business, Mission, Strategy and Capability to Deliver Results / Our Business Yellow Media is a leading media and marketing solutions company offering its services to small and medium enterprises (SMEs) across Canada. The Company offers businesses personalized marketing consulting services and exposure to marketing products, including print, online and mobile Yellow Pages, websites and search solutions. Our advertisers’ local business information is published, marketed and distributed via a variety of both owned and operated properties, and through other local search networks. Yellow Media is also a leader in national digital advertising through Mediative, a digital advertising and marketing solutions provider to national agencies and advertisers. This section provides an overview of our business and our current priorities. We serve approximately 309,000 local businesses, through our nation-wide sales force of approximately 1,100 media consultants, including sales support staff. We own and operate some of Canada’s leading properties and publications including Yellow Pages™ directories, YellowPages.ca™, Canada411.ca™, Canpages.ca™ and RedFlagDeals.com™. Our online destinations reach approximately 9 million unique visitors monthly. YellowPages.ca™ can also be accessed on mobile devices through our various mobile applications on BlackBerry™, Apple iPhone™ and iPad™, Windows Mobile™ and Android™. The Company owns and operates additional mobile search applications including ShopWise, Urbanizer, and RedFlagDeals, alongside a public application programming interface (API) in YellowAPI.com. YellowAPI contains a list of 1.5 million Canadian businesses and enhanced content on over 300,000 businesses. Our mobile applications for finding local businesses and deals have been downloaded over 5 million times. 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. In 2012, we published more than 375 different print telephone directories with a total circulation of approximately 18 million copies. Our local content is rich and diverse, which draws consumers to our directories and in so doing generates leads, calls, visits and clicks for advertisers. Mission As we exist to champion the new neighbourhood economy, our mission is to connect people and businesses like never before. As such, we strive to actively contribute to the success of every local merchant we partner with and offer each of our business partners valuable marketing programs that fit their specific needs and objectives. Strategy Our strategy remains to leverage our multiplatform media and marketing solutions, to enhance services to our advertisers, build traffic to our network of properties and improve user experience. Our focus is to continue transforming from a print directory business to a leading technology and digital media company offering marketing solutions to SMEs across Canada. As such, our goal is to become: (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) the #1 local destination for consumers in Canada; the partner of choice for small and medium sized businesses in Canada; and the leading digital company in Canada. As we invest further in our transformation, we will continue to maximize our operating efficiency and constantly review our cost structure to remain competitive. For a review of developments and performance relative to key priorities that were identified for 2012, see Section 2 – Results. Our key priorities for 2013 are directly related to our customer promise, which aims to deliver:(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) Right Value – having knowledgeable advisors provide marketing programs that will deliver real value to our advertisers; Right Products – offering our advertisers the optimal mix of ever evolving digital marketing products; Right Execution and Customer Experience – delivering flawless execution of our advertisers’ marketing campaigns and an overall superior customer experience; and Right Consumer Audiences – enabling our advertisers to reach and target local qualified consumers. Right Value The Yellow Pages 360º Solution is central in enabling our advertisers to be reached by the right consumers, enabling them to manage and grow their businesses. To promote successful execution of the Yellow Pages 360º Solution, we will enhance existing sales tools and training and provide advertisers with knowledgeable advisors capable of building valuable marketing programs. In 2013, we will also continue demonstrating value through Yellow Analytics. This performance reporting tool provides valuable insight into advertisers’ campaigns and allows them to gain access to online statistics on visits, clicks, traffic trends and more. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 3 management’s discussion and analysis. Right Products Our advertisers are entitled to the optimal mix of products to meet their needs for smarter neighbourhood marketing. In 2013, we will be introducing differentiated products and services to our different segments of advertisers with a continued focus on our local high-end advertisers. We will also introduce new mobile placement products and industrialize our Digital PowerPlayTM offering. Digital PowerPlayTM establishes and optimizes a business’ digital presence by determining the necessary steps to maximize qualified leads across various digital channels while offering our highest level of service and support to our customers. As 94% of our advertisers continue to advertise in our print products, we will also continue to assess new print product alternatives and implement new book formats. Right Execution and Customer Experience Our advertisers deserve a flawless execution of their marketing campaigns and an overall superior customer experience. Our strategy to improve our execution and customer experience is to leverage new technology to ensure we have sustainable, scalable, and efficient solutions in place. In 2013, we plan on implementing new enterprise workflows to deliver operational excellence in product fulfillment. A new sales front-end and a simplified tool set will also be deployed to improve the efficiency of our sales force. Right Consumer Audiences The success of our advertisers lies in their ability to attract qualified local customers. In 2013, we will extend our brand promise through mass communication campaigns and grow consumer audiences through strategic investments in traffic and distribution. We will evolve our mobile and search engine optimization offerings as well as our digital tools and platforms to build engaging digital experiences and enable consumers to discover their neighbourhood and make smarter purchasing decisions, whenever and wherever they are. Capability to Deliver Results This section of our MD&A explains how we are positioning the Company to operate on a financially viable and progressive basis. Capital Resources YPG generates sufficient cash flow from its operations to support required capital expenditures and to service its debt obligations. Its cash flow generation and cash on hand 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 meet operating needs in the current market environment. Non-capital Resources YPG’s critical intangible resources include: (cid:2)(cid:2) (cid:2)(cid:2) Strong brands; Established relationships with customers; Breadth and depth of local content; (cid:2)(cid:2) (cid:2)(cid:2) Dedicated and experienced employees; and (cid:2)(cid:2) Culture and values that characterize our organization. Strong Brands We are the exclusive owner of the Yellow Pages™, Pages Jaunes™ Walking Fingers & Design™, as well as the Canada411™ and RedFlagDeals.com™ and Mediative™ trademarks in Canada. Established Relationships with Customers We employ a sales force of approximately 1,100 people, 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 86% of our advertisers renewing their advertising with us this year. Breadth and Depth of Local Content The quality of our expanding local content generates usage which in turn encourages local and national advertisers to advertise in our print and digital properties. Dedicated and Experienced Employees Our employees have consistently improved our operational efficiencies. Despite a challenging environment, our employees have executed on the initiatives needed to position the Company for transformation 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 our organization and are critical to its sustained success. 4 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. 2.(cid:2) Results / This section provides an overview of our financial performance in 2012 compared to 2011 and 2010. 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 IFRS. Definitions of these financial metrics are provided on page 2 of this MD&A and are important aspects which should be considered when analyzing our performance. Overall (cid:2)(cid:2) (cid:2)(cid:2) Revenues decreased by $221.2 million or 16.6% to $1,107.7 million compared to the previous year. If we exclude the results of Canpages, LesPAC.com (LesPAC), YPG USA and our Deal of the Day products, which are entities or lines of businesses we no longer operate in, revenues decreased by 11.9% compared to the previous year. Income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition-related costs and restructuring and special charges (EBITDA) decreased by $109.1 million or 16.1% to $570.6 million compared to the previous year. If we exclude the results of Canpages, LesPAC, YPG USA and our Deal of the Day products, EBITDA decreased by 15% compared to the previous year. Highlights1,2,3 (in thousands of Canadian dollars– except share information) Revenues Income from operations before depreciation and amortization, impairment of goodwill intangible assets and property, plant and equipment, acquisition-related costs and restructuring and special charges (EBITDA) Net loss Basic loss per share attributable to common shareholders4 From continuing operations Total Cash flows from operating activities from continuing operations Free cash flow from continuing operations3 Years ended December 31, 2012 2011 $ 1,107,715 $ 1,328,866 $ 570,600 $ 679,707 $ (1,954,005) $ (2,828,999) $ $ $ (70.66) (70.66) 238,573 $ 198,338 $ $ $ $ (97.66) (102.14) 336,573 275,174 1 On March 25, 2011, the Company announced that it had reached a definitive agreement to sell Trader Corporation. Consequently, the results of the Vertical Media segment are presented as discontinued operations. The transaction closed on July 28, 2011. 2 We also disposed of the assets of LesPAC on November 14, 2011. As such, the results of LesPAC are included in the 2011 results up to the date of its divestiture. 3 Please refer to Section 4 for a reconciliation of free cash flow from continuing operations. 4 As previously described, pursuant to the closing of the Recapitalization approved by the Court, the common shares of the Company were exchanged for New Common Shares of the Company. As a result, the weighted average number of shares outstanding during the period and for prior periods has been adjusted to reflect the Recapitalization. Revenues (in millions of dollars) 2011 2012 EBITDA (in millions of dollars) $95.2 $1,328.9 $1,107.7 (16.6%) 2011 2012 $21.3 Revenues from Canpages, LesPAC, Deal of the Day and YPG USA EBITDA from Canpages, LesPAC, YPG USA and Deal of the Day $17.6 $570.6 $7.6 $6(cid:24)(cid:26).7 (16.1%) YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 5 management’s discussion and analysis. Performance Relative to Business Strategy As we reinforced Yellow Media’s position as a leading digital media, marketing solutions and technology company, our key priorities for 2012 were to: Execute the Yellow Pages 360° Solution Sales Approach; (cid:2)(cid:2) (cid:2)(cid:2) Deliver Superior Customer Value; and (cid:2)(cid:2) Lead our Industry Transformation. Execute the Yellow Pages 360° Solution Sales Approach Yellow Pages 360º Solution is a unique value proposition and a key element of our digital transformation. It is a complete suite of products and services along with marketing support to meet the local performance marketing needs of our advertisers. It enables advertisers to get visibility with online, mobile and print media platforms, and access to various services such as website development, search engine marketing (SEM), search engine optimization (SEO) and Yellow PagesTM Analytics. As at December 31, 2012, the penetration of our 360º Solution offering, which we define as advertisers who subscribe to 3 product categories or more, amongst our advertiser base was 16.5% compared to 5.5% at the end of the same period last year. Mobile products continue to be a key component of the Yellow Pages 360º Solution, having reached a penetration of 8.0% in the fourth quarter of 2012 compared to 1.1% for the same period last year. As at December 31, 2012, the Company had approximately 24,600 Canadian SMEs purchasing mobile products, representing approximately 46,600 mobile units. Through our growing suite of online and mobile applications, we continue to find new ways to engage consumer audiences and enhance visibility and awareness of local businesses and services across Canada. In early October 2012, we launched a new advertising campaign focusing on the consumer’s neighbourhood. The objective behind the advertising campaign was to communicate our role in fuelling a rebirth of local neighborhoods by connecting consumers and businesses in new ways. The marketing campaign promotes the brand’s digital capabilities and is aimed at making consumers and business owners aware of our various digital-friendly tools. Deliver Superior Customer Value Our first and foremost goal is to serve the needs of our advertisers, enabling them to manage and grow their businesses. A primary focus in 2012 was to continue to deliver a superior value proposition by expanding our product portfolio to meet the needs of large advertisers, increasing digital leads to advertisers and demonstrating value through Yellow PagesTM Analytics. In 2012, we focused on strategically managing our largest customer accounts across the country through the High Priority Accounts (HPA) management process. The HPA management process, which began in the first quarter of 2012, is meant to mitigate revenue risk and optimize revenue growth of larger advertisers through a differentiated product and servicing model. A comprehensive profiling methodology was put in place to guide the evaluation of account needs and opportunities. The profiling includes a review of Yellow PagesTM Analytics results, website audits and competitive rankings, SEM estimates, social media and Google Places reviews. The profiling is followed by the definition of an appropriate strategy, which is determined by the sales representative, sales manager and performance marketing advisor. The HPA management process is now fully deployed across the country and is made up of approximately 30 managers who serve our larger customers and work in tandem with the dedicated HPA servicing support team that is responsible for managing the fulfillment, reporting and post-sale servicing of these larger advertisers. This dedicated team is comprised of a cross functional group including sales support, production, content management, creative design, quality assurance, results reporting and customer service. Also during the year, we launched a new product line called Digital PowerPlayTM. Digital PowerPlayTM establishes and optimizes a business’ digital presence by determining the necessary steps to maximize qualified leads across various digital channels while offering our highest level of service and support to our customers. Digital PowerPlayTM was launched in our top tier sales channel, which serves our largest local customers. We are planning to pilot Digital PowerPlayTM in our mid-tier sales channels in the coming months. Lead our Industry Transformation We are in the midst of a significant business transformation from a print directory business to a leading technology and digital company offering media and marketing solutions to SMEs across Canada and have continued to make progress throughout 2012. Online – We remain focused on increasing traffic and improving the user experience across our online properties. Online visits on YPG’s network of sites reached 103.4 million visits during the fourth quarter of 2012, compared to 98.4 million visits for the same period last year. During 2012, the Company improved the SEO of YellowPages.ca to ensure increased indexation on search engines. YPG also launched a redesigned Canpages.ca website based on the concept of “Life Around Me.” The website proposes a new user experience, focusing on the user’s geographic location and life needs within the context of a local search. 6 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. YellowAPI.com – As at December 31, 2012, over 2,500 developers had signed up to use our platform compared to 1,500 at the same period last year. These developers work on creating new digital applications using YPG’s business database. Since its initial launch in late 2010, YellowAPI.com has embodied YPG’s digital leadership and gained vast industry recognition. YellowAPI plays a key role in the Canadian developer community, notably by participating in organizations such as HackDays (hackdays.ca), which brings together innovative developers across Canada. YellowAPI contains a list of 1.5 million Canadian businesses and enhanced content on over 300,000 businesses. In the fourth quarter of 2012, YPG and Yahoo! Canada announced they had expanded their six-year partnership to provide Yahoo! Canada users with an enhanced local search experience due in large part to YPG’s YellowAPI technology. Partnering with Yahoo! Canada enables YPG to extend its advertisers’ reach on a platform that is outside its network of properties. Mobile – Our business transformation revolves around the continued improvement of the mobile user experience in order to provide additional value for our advertisers. As at December 31, 2012, our mobile applications were downloaded more than 5.0 million times compared to 3.7 million times as at the end of last year. In November 2012, YPG was awarded “Best in Digital Advertising” at the 2012 Digi Awards for its Scratch ‘N Win mobile lottery contest, which promoted the deals feature on the YellowPages.ca™ mobile application. This marks the second Digi Award for YPG, having won “Best in Mobile” at last year’s event for its location-based services on the YellowPages.ca™ mobile application. The YellowPages.ca™ mobile application was also included in Apple’s “Best of 2012” list. During the year, we further improved our ShopWise application, introducing new functionalities as well as an enhanced design. These latest innovations, which were launched just in time for Black Friday, included the integration of a product catalogue featuring more than seven million items, and a list of 600 local and national retailers. The data stems from a partnership with Shoptoit, Canada's leading shopping search engine. In an effort to further enhance its mobile offering to advertisers, the Company launched two new mobile products during the fourth quarter of 2012, Mobile Sponsored Placement Prestige and Mobile Placement Leader. Mobile Sponsored Placement Prestige secures maximum, exclusive visibility for business listings by offering larger displays and ensuring listings appear in the top spot of mobile search results. Mobile Placement Leader positions business listings to appear in the top five search results. Mediative – Mediative is a digital marketing company providing performance services and access to media platforms to national advertisers. During the year, Mediative enhanced its location-based offering with the launch of a flexible mobile advertising network enabling advertisers to reach consumers based on their intent to buy. In addition to providing broad and flexible local-based targeting options to multiple ad exchanges, Mediative also offers a premium network of more than 20 mobile-enabled sites and applications to help marketers reach specific audiences. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 7 management’s discussion and analysis. Consolidated Operating and Financial Results (in thousands of Canadian dollars – except share and per share information) Revenues Operating costs Income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition- related costs and restructuring and special charges Depreciation and amortization Impairment of goodwill, intangible assets and property, plant and equipment Acquisition-related costs Restructuring and special charges (Loss) income from operations Financial charges, net Gain on settlement of debt Gain on disposal of subsidiary (Loss) earnings before dividends on Preferred shares, series 1 and 2, income taxes and impairment and (earnings) losses from investments in associates Dividends on Preferred shares, series 1 and 2 (Loss) earnings before income taxes and impairment and (earnings) losses from investments in associates (Recovery of) provision for income taxes Impairment of investment in associate (net of income taxes) (Earnings) losses from investments in associates Net (loss) earnings from continuing operations Net loss from discontinued operations, net of income taxes Net (loss) earnings Basic (loss) earnings per share attributable to common shareholders3 From continuing operations Total Diluted (loss) earnings per share attributable to common shareholders3 From continuing operations Total Total assets Commercial paper Long-term debt (including short-term portion) Exchangeable and Convertible instruments Preferred Shares Series 1 and 2 (including short-term portion) Years ended December 31, 20122 2011 20101 $ 1,107,715 $ 1,328,866 $ 1,401,129 537,115 649,159 644,021 570,600 104,293 3,267,847 (cid:2) 44,923 679,707 160,906 2,900,000 7,743 26,142 757,108 180,265 (cid:2) 30,575 31,391 (2,846,463) (2,415,084) 514,877 146,265 (978,589) (cid:2) 130,582 (cid:2) (6,211) 148,437 (cid:2) (cid:2) (2,014,139) (2,539,455) 366,440 17,694 19,187 21,171 (2,031,833) (2,558,642) 345,269 (75,935) (cid:2) (1,893) 87,149 50,271 12,060 93,583 (cid:2) 19,900 (1,954,005) (cid:2) (2,708,122) 231,786 (120,877) (2,380) $ (1,954,005) $ (2,828,999) $ 229,406 $ $ $ $ (70.66) $ (97.66) $ (70.66) $ (102.14) $ (70.66) $ (97.66) $ (70.66) $ (102.14) $ 7.48 7.97 7.48 7.97 $ 1,756,476 $ 5,048,932 $ 9,211,110 (cid:2) (cid:2) 295,000 $ $ $ 801,831 $ 1,613,231 $ 1,926,872 86,667 $ (cid:2) $ 184,214 $ 319,029 398,886 $ 446,725 1 Included in the 2010 figures are the results of Yellow Pages Income Fund, a predecessor of the Company. 2 Included in net loss attributable to shareholders of Yellow Media for the year ended December 31, 2012 are net losses attributable to shareholders of YPG Financing Inc. for the period of January 1 until December 19, 2012. 3 As previously described, pursuant to the closing of the Recapitalization approved by the Court, the common shares of the Company were exchanged for New Common Shares of the Company. As a result, the weighted average number of shares outstanding during the period and for prior periods has been adjusted to reflect the Recapitalization. 8 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. Analysis of Consolidated Operating and Financial Results The consolidated income statements of Yellow Media up to net (loss) earnings from continuing operations represent the results of the restated Directories segment given the presentation of the results of the automotive and generalist print and online business of Trader Corporation as discontinued operations in 2011. Fiscal 2012 versus 2011 Revenues Revenues decreased by 16.6% to $1,107.7 million during 2012 compared with $1,328.9 million for 2011. On a comparable basis, revenues decreased by 11.9% during 2012. The decrease for the year ended December 31, 2012 is due to lower print revenues, primarily amongst larger advertisers who are reducing their advertising spend. 18% of renewing advertisers1 experienced a decrease in spending over the last twelve months, unchanged versus last year. Advertisers experiencing a decrease in spending are mainly larger advertisers, as we need to further adjust our digital product and service offering to better meet their advertising needs. However, 51% of renewing advertisers1 experienced an increase in spending over the last twelve months, as compared to 43% last year. As at December 31, 2012, the number of advertisers, excluding Canpages’ advertisers, was 309,000 compared to 340,000 as at December 31, 2011, reflecting a decrease of 9.1%. During the last 12 months, YPG acquired approximately 17,000 new advertisers versus 23,000 new advertisers last year. Advertiser renewal decreased to 86% as at December 31, 2012 compared to 87% as at December 31, 2011. The average revenue per advertiser (ARPA) decreased to $3,300 during 2012, as compared to $3,400 in 2011. Online revenues reached $367.2 million in 2012, representing a growth of 6.1% in 2012. Excluding the impact of the Canpages, LesPAC and Deal of the Day businesses and YPG USA business, online revenues increased by 15.7% during 2012 when compared to the same period last year. As at December 31, 2012, the number of advertisers choosing to advertise both in print and online was 61.4% across Canada compared to 63.4% for the corresponding period last year. Online only advertisers at the end of the fourth quarter of 2012 reached approximately 18,000 compared to approximately 13,000 as at December 31, 2011. Our network of websites attracted 9 million unduplicated unique visitors2 on average during the fourth quarter of 2012, representing a reach of 32.3%2 of the Canadian internet population. Although online revenue growth is not expected to compensate for the declining revenue in our traditional print offerings in the near future, our 360º Solution strategy is showing positive signs. As at December 31, 2012, 35% of our advertisers had purchased an online placement product compared to 19% in 2011. Also, 8% had purchased a mobile placement product compared to 1% last year. As at December 31, 2012, our Revenue Generating Units3 (RGU) per advertiser increased to 1.74 compared to 1.68 for the same period last year. The increase demonstrates the progress we are making through our 360° Solution strategy (defined as advertisers who subscribe to three product categories or more). EBITDA EBITDA decreased by $109.1 million to $570.6 million during 2012 compared with $679.7 million in 2011. The decrease in EBITDA is due principally to print revenue pressure, as our new digital products are not compensating for the loss in print revenues. Our EBITDA margin for 2012 was 51.5% compared to 51.1% for 2011. Lower revenues were offset by lower bad debts and general cost containment efforts. Cost of sales decreased by $54.2 million to $338.8 million during 2012 compared with $393 million for 2011. The decrease for the year results mainly from lower sales costs associated with Canpages given the migration of that business within YPG. We also incurred lower selling and manufacturing costs associated with lower print revenues and reduced rates following the renegotiation of supply chain contracts in the third quarter. Gross profit margin decreased to 69.4% for 2012 compared to 70.4% for 2011. The decrease is due to a change in product mix, which includes lower margins associated with some of our new online service offerings, such as websites, SEO and SEM. General and administrative expenses decreased by $57.8 million to $198.4 million during 2012 compared with $256.2 million for 2011. The migration of Canpages within YPG resulted in a cost reduction of $14 million for the year ended December 31, 2012. The decrease for the year ended December 31, 2012 is also attributable to lower bad debts of approximately $21.1 million as well as general cost containment measures including changes to our employees’ pension and post-retirement benefits which included a non-cash benefit of $13.3 million. 1 Renewing advertisers exclude Mediative, Canpages and Wall2Wall. 2 Source: comScore Media Metrix Canada. 3 Revenue Generating Units measures the number of product groups selected by advertisers. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 9 management’s discussion and analysis. Depreciation and amortization Depreciation and amortization decreased from $160.9 million to $104.3 million during 2012. The decrease is mainly attributable to lower amortization of certain intangible assets related to the acquisition of Canpages in 2010. These intangible assets resulted in a higher amortization expense in 2011. Impairment of goodwill, intangible assets and property, plant and equipment During the first quarter of 2012, management concluded that indicators that the Company’s assets may have been impaired existed, requiring the Company to perform an impairment test. Also, as a result of the closing of the Recapitalization during the fourth quarter of 2012, (refer to Section 3 – Liquidity and Capital Resources), and the issuance of new debt, shares and warrants, pursuant to the Recapitalization, and in the context of its annual impairment testing, the Company determined that the recoverability of certain of its assets had to be reviewed for impairment purposes. Consequently, we recorded charges of $3,267.8 million in 2012, related to the impairment of goodwill and certain of our intangible assets and property, plant and equipment. The newly established fair value is now consistent with the valuation of the new debt instruments and share price as of December 31, 2012. During 2011, we recorded a charge of $2,900 million related to the impairment of goodwill and intangible assets. The impairment charges did not affect the Company’s operations, its liquidity, its cash flows from operating activities, or its note indentures. Acquisition-related costs We incurred costs of $7.7 million in 2011, associated with potential investments. No such costs were incurred in 2012. Restructuring and special charges In 2012, we incurred costs of $44.9 million associated with a workforce reduction, a relocation of certain centres of excellence, as well as, the termination and renegotiation of certain contractual obligations. In 2011, we incurred costs of $26.1 million associated with a workforce reduction and the termination of certain contractual obligations resulting from the creation of centers of excellence and the elimination of print publications from the Canpages division. Financial charges Financial charges increased by $15.7 million to $146.3 million during 2012 compared with $130.6 million for 2011. This increase is mainly attributable to a gain recorded on the repurchase of preferred shares, Series 1 and 2 and Medium Term Notes of $38.8 million for the year ended December 31, 2011. Excluding this gain, financial charges decreased by $23.1 million for the year ended December 31, 2012 compared to the same period last year. The decrease for the year is mainly attributable to lower interest expense and a decrease of the amortization of deferred financing costs. The lower interest expense is attributable to a lower level of indebtedness as a result of buyback activities of Medium Term Notes and repayment of commercial paper borrowings as well as repayments under the Credit Facility in 2011 and 2012. The positive impact of lower levels of indebtedness on interest expense was partly offset by higher borrowing costs resulting from our credit ratings downgrades. The decrease in interest was partly offset by higher charges related to derivative financial instruments of $18.5 million in 2012 compared to $12.5 million in 2011. The charge in 2012 relates to an option associated with our investment in an associate while the charge in 2011 relates mainly to the settlement of a total return swap. As at December 31, 2012, the effective average interest rate on our debt portfolio was 9.1% following the implementation of the Recapitalization compared to 6.2% as at December 31, 2011. Gain on settlement of debt We recorded a gain of $978.6 million on the settlement of debt pursuant to the Recapitalization, net of related fees of $69.5 million, write-off of deferred financing costs of $16.3 million, deferred gains of $5.5 million, an equity component of $7.2 million and a derivative component of $0.6 million, associated with our previous debt instruments. Upon closing of the Recapitalization in the fourth quarter of 2012, $16.3 million of recapitalization costs recorded in the second and third quarters of 2012 were reclassified to gain on settlement of debt. Dividends on preferred shares, Series 1 and 2 Dividends on the two series of redeemable preferred shares amounted to $17.7 million for 2012 compared to $19.2 million for the same period last year. The decrease for the year is due to a lower level of preferred shares resulting from our share buyback activity under our normal course issuer bid which took place in 2011. On February 9, 2012, the Company announced that it suspended the dividend payment on preferred shares, Series 1 and Series 2. Due to the nature of the underlying instrument, the Company continued to accrue for the unpaid dividends on preferred shares, Series 1 and Series 2. Provision for income taxes The combined statutory provincial and federal tax rate was 26.3% and 27.9% for the years ended December 31, 2012 and 2011, respectively. The Company recorded a recovery of $75.9 million for the year compared with an expense of $87.1 million in 2011. The Company recorded a recovery of 3.7% of the loss for the year ended December 31, 2012. The difference between the effective and the statutory rates in 2012 is due to a gain on settlement of debt offset by the unrecognized capital losses on investment of subsidiaries and to an impairment charge of $3,267.8 million which is not fully deductible for tax purposes. Excluding these items, the effective tax rate in 2012 would have been in line with the statutory rate. 10 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. The Company recorded an expense of 3.4% of the loss for the year ended December 31, 2011. The difference between the effective and the statutory rates in 2011 is due to the impairment of goodwill and intangible assets charge of $2,900 million which is not fully deductible for tax purposes as well as the non-deductibility of certain expenses for tax purposes such as the impairment of our investment in Ziplocal, LP (Ziplocal). Impairment of investment in associate During 2011, Ziplocal was in default of its debt obligations and had undertaken important restructuring initiatives. As a result, the Company determined that its investment in Ziplocal was impaired and a net loss of $50.3 million was recorded in the second quarter of 2011 to reduce its net investment in Ziplocal to $nil. (Earnings) losses from investments in associates During 2012, we recorded earnings from our investment in an associate in the amount of $1.9 million which includes a gain of $2.1 million related to the revaluation of our investment in Acquisio. Effective January 1, 2012, we no longer account for the Acquisio investment using the equity method. Our (earnings) losses from investments in associates include the amortization of intangible assets in connection with these equity investments. During 2011, we recorded our share of losses from our investments in associates in the amount of $12.1 million, which included our share of losses from Ziplocal of $10.6 million. No share of losses was recorded from our investment in Ziplocal in 2012 as this investment was written-off as described above. Net loss from discontinued operations On March 25, 2011, Yellow Media announced that it had reached a definitive agreement to sell Trader Corporation. The transaction closed on July 28, 2011. The real estate and LesPAC businesses were excluded from the divestiture. As a result, we reclassified the results of the automotive and generalist verticals as discontinued operations. Included in the results from discontinued operations of the automotive and generalist business are revenues of $148.1 million for the year ended December 31, 2011. EBITDA from the operations of the automotive and generalist business was $34.7 million for the year ended December 31, 2011. The net loss from discontinued operations amounted to $120.9 million for 2011. This included a loss on disposal of $134.3 million (net of income taxes) for the year ended December 31, 2011, which represented the difference between the fair value net of selling costs and the carrying value of net assets sold. Net loss The net loss decreased to $1,954 million in 2012 compared with $2,829 million in 2011. The decrease in the net loss of $875 million for the year ended December 31, 2012 is mainly due to the gain on settlement of debt of $978.6 million recorded pursuant to the Recapitalization, a decrease in depreciation and amortization of $56.6 million, a decrease in the provision for income taxes of $163.1 million, the impairment of our Ziplocal investment of $50.3 million and the loss from our divestiture of Trader Corporation of $120.9 million in 2011, offset by lower EBITDA of $109.1 million, a higher impairment charge of goodwill, intangible assets and certain property, plant and equipment of $367.8 million, restructuring and special charges of $18.8 million and financial charges of $15.7 million. Fiscal 2011 versus 2010 Revenues Revenues decreased to $1,328.9 million during 2011 compared with $1,401.1 million for 2010. The decrease for the year ended December 31, 2011 was due to lower print revenues in our traditional markets, partly offset by increased online revenues. Canpages’ contribution offset lower print revenues in our traditional markets for the first half of 2011 as it was acquired in May 2010. As at December 31, 2011, the number of advertisers, excluding Canpages, was 340,000 compared to 365,000 as at December 31, 2010 reflecting a decrease of 7%. Advertiser renewal dropped slightly to 87% as at December 31, 2011 compared to 88% as at December 31, 2010. During 2011, YPG acquired approximately 23,000 new advertisers. Although there was a reduction in the number of advertisers, the ARPA remained stable at approximately $3,400 compared to the same period last year. As at December 31, 2011, our RGUs per advertiser was relatively unchanged at 1.68 compared to 1.70 for the same period last year. As at December 31, 2011, the number of advertisers excluding Canpages, choosing to advertise both in print and online was 63.4% across Canada compared to 65.2% for the corresponding period last year. Online revenues reached $346.1 million in 2011, representing a growth of 29.6% for 2011. In addition to the introduction of new products, online revenue growth in 2011 was attributable to revenues from Canpages acquired in May of 2010, and Mediative, our digital and marketing solutions provider for national agencies and advertisers launched in October 2010. Our network of web sites in Directories attracted 9 million unduplicated unique visitors1 on average during the fourth quarter of 2011, representing a reach of 36%1 of the Canadian internet population. 1 Source: comScore Media Metrix Canada. (excluding LesPAC). YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 11 management’s discussion and analysis. EBITDA EBITDA decreased by $77.4 million to $679.7 million during 2011 compared with $757.1 million in 2010. While most of the new online placement products contributed margins similar to those of our print products in our local markets, lower print revenues resulted in decreases in EBITDA. Cost of sales increased by $28 million to $393 million during 2011 compared with $365 million in 2010. The increase for the year ended December 31, 2011 resulted mainly from the increased costs associated with Canpages and our Mediative division acquired during 2010, offset by lower manufacturing costs associated with lower print revenues. Gross profit margin decreased to 70.4% for 2011 compared with 74% for 2010. The decrease for the year is due to lower margins associated with Canpages, Wall2Wall and our Mediative division. General and administrative expenses decreased by $22.9 million to $256.2 million for 2011 compared with $279.1 million in 2010. In 2010, we incurred costs related to our conversion and rebranding from an income fund to a corporation. Depreciation and amortization Depreciation and amortization decreased to $160.9 million from $180.3 million during 2011. The decrease for the year ended December 31, 2011 was mainly attributable to lower amortization of certain intangible assets related to the acquisition of Canpages. Impairment of goodwill, intangible assets and property, plant and equipment Following a comprehensive review of its strategic and operating plans completed during the third quarter of 2011, Yellow Media determined that the recoverability of the carrying value of certain of its assets had to be reviewed for impairment purposes. Consequently, as announced on September 28, 2011, we recorded a charge of $2,900 million related to the impairment of goodwill and intangible assets. This impairment charge did not affect the Company’s operations, its liquidity, its cash flows from operating activities, its bank credit agreement or its note indentures. Acquisition-related costs We incurred costs of $7.7 million during the year ended December 31, 2011, associated with potential investments. In 2010, we incurred costs of $30.6 million, mainly in association with our acquisition of Canpages, RedFlagDeals.com, Restaurantica, Enquiro Search Solutions (Enquiro), UpTrend Media, AdSplash Inc. (Adsplash), and 411.ca. Restructuring and special charges For the year ended December 31, 2011, we incurred restructuring and special charges of $26.1 million as a result of the creation of centres of excellence and internal reorganizations compared to $31.4 million for the same period last year. The costs incurred in 2010 were associated with a workforce reduction, elimination of duplicate activities and the termination of certain contractual obligations. In addition, in 2011, we undertook a complete review of our Canpages print directories and, as a result thereof, we have since eliminated the publication of certain overlapping directories and have integrated the Canpages business within YPG in 2012. Financial charges Financial charges decreased by $17.9 million to $130.6 million during 2011. The decrease for the year ended December 31, 2011 was due to an increased gain on the repurchase of debt instruments partly offset by a redemption premium in connection with a total return swap and higher amortization and write-off of deferred financing costs. The increase in the effective interest rate reflected the suspension of the commercial paper program and the increased cost under the credit facility following our credit ratings downgrade. Gain on disposal of subsidiary During 2011, the Company sold the assets of LesPAC to Mediagrif Interactive Technologies Inc. for a net purchase price consideration of $70.9 million. The transaction closed on November 14, 2011, which resulted in a gain on sale of $6.2 million. 12 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. Dividends on preferred shares, Series 1 and 2 Dividends on the two series of redeemable preferred shares amounted to $19.2 million for 2011 compared to $21.2 million for the same period last year. The decrease is due to a lower level of preferred shares resulting from our share buyback under our normal course issuer bid. Provision for income taxes The combined statutory provincial and federal tax rate was 27.9% and 29.9% for the years ended December 31, 2011 and 2010, respectively. The Company recorded an expense of 3.4% of the loss and an expense of 27.1% of earnings for the years ended December 31, 2011 and 2010, respectively. As the impairment of goodwill and our investment in Ziplocal recorded in 2011 are not fully deductible for tax purposes, the Company recorded an expense of $87.1 million for the year, compared with an expense of $93.6 million in 2010. Excluding these items, the effective tax rate in 2011 would have been in line with the statutory rates. Impairment of investment in associate During 2011, Yellow Media determined that its investment in Ziplocal was impaired and as a result, a net loss of $50.3 million was recorded to reduce its net investment in Ziplocal to $nil. Ziplocal was in default of its debt obligations and had undertaken important restructuring initiatives. Share of losses from investments in associates During 2011, we recorded our share of losses from our investments in associates in the amount of $12.1 million compared with $19.9 million for the same period last year. The decrease for the year is due to the fact that no share of losses was recorded from our investment in Ziplocal, as this investment was written-off during the second quarter of 2011. These losses include the amortization of intangible assets in connection with these equity investments. Loss from discontinued operations On March 25, 2011, Yellow Media announced that it had reached a definitive agreement to sell Trader Corporation. The transaction closed on July 28, 2011. The real estate and LesPAC businesses were excluded from the divestiture. The Company sold the assets of LesPAC on November 14, 2011. The real estate business continues to be owned and managed by YPG. As a result, we reclassified the results of the automotive and generalist verticals as discontinued operations. Included in the results from discontinued operations of the automotive and generalist business are revenues of $148.1 million for the year ended December 31, 2011 compared with $254 million for the same period last year. The results are not comparable as we completed the sale of Trader Corporation on July 28, 2011. EBITDA from the operations of the automotive and generalist business decreased to $34.7 million for 2011 compared with $74.9 million for the same period last year. The results are not comparable as we completed the sale of Trader Corporation on July 28, 2011. The net loss from discontinued operations amounted to $120.9 million for 2011. This includes a loss on disposal of $134.3 million (net of income taxes) for the year ended December 31, 2011, which represents the difference between the fair value net of selling costs and the carrying value of net assets sold. In addition to the above, as a result of the adoption of IFRS, the disposal of YPG Directories, LLC, a US subsidiary, on April 15, 2010 is also presented as a discontinued operation for the year ended December 31, 2010. Net (loss) earnings Net earnings decreased by $3,058.4 million to a net loss of $2,829 million for the year ended December 31, 2011. The decrease for the year was mainly due to the impairment of goodwill and intangible assets of $2,900 million discussed above. In addition to these elements, the decrease for the year is also due to the impairment of our investment in Ziplocal of $50.3 million and to the loss on disposal associated with our divestiture of Trader Corporation in the amount of $134.3 million (net of income taxes). YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 13 management’s discussion and analysis. Summary of Consolidated Quarterly Results Quarterly Results (in thousands of Canadian dollars – except share and per share information) Revenues Operating costs Income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition-related costs and restructuring and special charges (EBITDA) EBITDA margin Depreciation and amortization Impairment of goodwill, intangible assets and property, plant and equipment Acquisition-related costs Restructuring and special charges (Loss) income from operations Gain on settlement of debt2 Net earnings (loss) Basic earnings (loss) per share attributable to common shareholders from continuing operations1 Diluted earnings (loss) per share attributable to common shareholders from continuing operations1 Q4 Q3 Q2 2012 Q1 Q4 Q3 Q2 2011 Q1 $ 264,447 $ 267,711 $ 286,484 $ 289,073 $ 313,315 $ 323,441 $ 342,738 $ 349,372 122,883 129,936 141,240 143,056 166,117 157,443 166,262 159,337 141,564 137,775 145,244 146,017 147,198 165,998 176,476 190,035 53.5% 51.5% 50.7% 50.5% 47% 51.3% 51.5% 54.4% 23,395 26,597 24,220 30,081 23,003 37,800 47,735 52,368 300,000 (cid:2) (cid:2) (cid:2) (cid:2) 2,967,847 (cid:2) (cid:2) (cid:2) 210 2,900,000 497 (cid:2) 6,233 18,111 26,812 (cid:2) (cid:2) 14,254 (cid:2) 11,888 (cid:2) 803 (cid:2) (199,942) 84,366 121,024 (2,851,911) 109,731 (2,772,299) 110,620 136,864 (994,894) 823,536 10,818 24,017 5,487 67,694 (cid:2) (2,869,252) (cid:2) 45,292 (cid:2) (2,825,452) (cid:2) (14,250) (cid:2) (34,589) $ 29.30 $ 0.66 $ 2.22 $ (102.84) $ 1.53 $ (100.58) $ (0.94) $ 2.32 $ 28.56 $ 0.66 $ 2.22 $ (102.84) $ 1.53 $ (100.58) $ (0.94) $ 2.32 1 As previously described, pursuant to the closing of the Recapitalization approved by the Court, the common shares of the Company were exchanged for New Common Shares of the Company. As a result, the weighted average number of shares outstanding during the period and for prior periods has been adjusted to reflect the Recapitalization. 2 Upon closing of the Recapitalization in the fourth quarter of 2012, $5.5 million and $10.8 million of recapitalization costs recorded in the second and third quarters of 2012, respectively, have been reclassified to gain on settlement of debt. The change in presentation of recapitalization costs and income from operations were made in the prior periods to conform to the current period’s presentation. Revenues decreased throughout the quarters, as the revenues associated with our print products continue to decline partly offset by increases in our online products. Our EBITDA margin decreased progressively throughout the quarters of 2011, reflecting the decline in print revenues and lower margins associated with Canpages and Mediative. During the fourth quarter of 2011, we incurred a non-recurring expense of approximately $6 million as a result of a sales tax assessment. Our EBITDA margin in the first and second quarters of 2012 remained relatively flat but increased in the third quarter as we benefited from reduced rates from our supply chain contracts which were renegotiated in July 2012. In the fourth quarter of 2012, we recorded a non-cash benefit of $13.3 million related to the amendments in our pension and post-retirement benefit plans. 14 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. Internal reorganizations and cost containment initiatives resulted in restructuring and special charges impacting some of our quarterly results in 2011 and 2012. Net earnings for 2011 were affected by depreciation and amortization of intangible assets related to the acquisition of Canpages. We recorded a loss related to our disposal of Trader Corporation and an impairment of our investment in Ziplocal in the first and second quarters of 2011, respectively. In addition, during the third quarter of 2011, the first quarter of 2012 and the fourth quarter of 2012, we recorded impairment charges of $2,900 million, $2,967.8 million and $300 million, respectively, related to the impairment of goodwill, certain of our intangible assets and property, plant and equipment. Upon closing of the Recapitalization in the fourth quarter of 2012, $5.5 million and $10.8 million of recapitalization costs recorded in the second and third quarters of 2012, respectively, were reclassified to gain on settlement of debt. The change in presentation of recapitalization costs and income from operations were made in the prior periods to conform to the current period’s presentation. Analysis of fourth quarter 2012 results Revenues Revenues decreased to $264.5 million during the fourth quarter of 2012 compared with $313.3 million for the same period last year. The decrease for the quarter is due to lower print revenues in our traditional markets, partly offset by increased online revenues. EBITDA EBITDA decreased by $5.6 million to $141.6 million during the fourth quarter of 2012 compared with $147.2 million the same period last year, due principally to overall revenue pressure net of associated costs partly offset by lower general and administrative expenses. Cost of sales decreased by $19.8 million to $84.6 million during the fourth quarter of 2012 compared with $104.4 million for the same period last year. The decrease for the quarter is attributable to lower manufacturing costs due to lower print volumes and reduced rates following our renegotiation of supply chain contracts in the third quarter of 2012. We also incurred lower selling expenses due to lower revenues. Gross profit margin increased to 68% for the fourth quarter of 2012 compared to 66.7% for the fourth quarter of 2011. The increase is due to the reduced rates from our supply chain contracts offset by lower margins associated with some of our new online service offerings such as websites, SEO and SEM. General and administrative expenses decreased by $23.4 million to $38.3 million for the three-month period ended December 31, 2012 compared with $61.7 million for the same period last year. During the quarter, we announced amendments to our employees’ pension and post-retirement benefits which resulted in a non-cash benefit of approximately $13.3 million recorded in the quarter. The decrease for the quarter is also attributable to lower bad debts as well as general costs containment measures. Lastly, during the fourth quarter of 2011, we incurred a non-recurring expense of approximately $6 million in connection with a sales tax assessment. Depreciation and amortization Depreciation and amortization remained stable at $23.4 million during the fourth quarter of 2012 compared with $23 million the same period last year. Impairment of goodwill, intangible assets and property, plant and equipment Following the closing of the Recapitalization during the fourth quarter of 2012, and the issuance of new debt, shares and warrants, pursuant to the Recapitalization, and in the context of its annual impairment testing, the Company determined that the recoverability of certain of its assets had to be reviewed for impairment purposes. As a result of the impairment test, we recorded an impairment charge of $300 million in the fourth quarter of 2012 related to certain of our intangible assets and property, plant and equipment. The newly established fair value is now consistent with the valuation of the new debt instruments and share price as at December 31, 2012. Acquisition-related costs During the fourth quarter of 2011, we incurred costs of $0.2 million associated with potential investments. No such costs were incurred during the same period in 2012. Restructuring and special charges We incurred $18.1 million of restructuring and special charges during the fourth quarter of 2012 compared with $14.3 million for the same period last year. The costs incurred during the fourth quarter of 2012 were associated with a workforce relocation, a workforce reduction and the termination and renegotiation of certain contractual obligations. The costs incurred during the fourth quarter of 2011 were associated with a workforce reduction and the termination of contractual obligations as a result of the elimination of the publication of certain overlapping directories and the integration of our Canpages operations into YPG. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 15 management’s discussion and analysis. Financial charges Financial charges increased by $12.8 million to $48.4 million for the three-month period ended December 31, 2012 compared with $35.6 million for the same period last year. The increase is mainly due to a derivative charge of $18.5 million related to an option associated with our investment in an associate, offset by lower interest expense. Gain on settlement of debt We recorded a gain of $994.9 million on the settlement of debt pursuant to the Recapitalization, net of related fees of $53.2 million, a write-off of deferred financing costs of $16.3 million, deferred gains of $5.5 million, an equity component of $7.2 million and a derivative component of $0.6 million, associated with our previous debt instruments. Upon closing of the Recapitalization in the fourth quarter of 2012, $16.3 million of recapitalization costs recorded in the second and third quarters of 2012, were reclassified to gain on settlement of debt. Dividends on preferred shares, Series 1 and Series 2 Dividends on the two series of redeemable preferred shares amounted to $4 million for the fourth quarter of 2012 compared to $4.6 million for the same period last year. As announced on February 9, 2012, the Company suspended the dividend payment on preferred shares, Series 1 and Series 2. Due to the nature of the underlying instrument, the Company continued to accrue for the unpaid dividends on preferred shares, Series 1 and Series 2, up to December 20, 2012. Provision for income taxes The combined statutory provincial and federal tax rate was 26.3% and 27.9% for the three-month periods ended December 31 2012 and 2011 respectively. The Company recorded a recovery of 11% of earnings for the three-month period ended December 31, 2012 compared to an expense of 20.6% of earnings for the three-month period ended December 31, 2011. The difference between the effective and the statutory rates for 2012 is due to a gain on settlement of debt which is offset by the unrecognized capital losses on investment of subsidiaries. For the three-month period ended December 31, 2011, the difference between the effective and the statutory rates is due to the derecognition of previously recognized tax attributes on assets of our foreign subsidiaries. (Earnings) losses from investments in associates During the fourth quarter of 2012, we recorded our share of earnings from our investment in an associate in the amount of $0.1 million compared to $0.4 million loss for the same period last year. These earnings/losses include the amortization of intangible assets in connection with these equity investments. Net earnings Net earnings increased by $778.2 million to $823.5 million during the fourth quarter of 2012 compared with $45.3 million for the same period last year. The increase for the quarter is mainly due to the gain on the settlement of debt of $994.9 million, a decrease in the provision for income taxes of $108.7 million, offset by the impairment charge related to certain of our intangible assets and property, plant and equipment of $300 million recorded in the fourth quarter of 2012. 16 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. 3.(cid:2) Liquidity and Capital Resources / This section examines the Company’s capital structure, sources of liquidity and various financial instruments including its debt instruments. Financial Position Capital Structure (in thousands of Canadian dollars) Cash Senior Secured Notes Medium Term Notes Credit Facility Obligations under finance leases Exchangeable Debentures Convertible debentures Net debt (net of cash) Preferred shares, series 1 and 2 Equity attributable to the shareholders Non-controlling interests Total capitalization Net debt to total capitalization As at December 31, 2012 As at December 31, 2011 $ $ 106,807 800,000 (cid:2) (cid:2) 1,831 86,667 (cid:2) 781,691 (cid:2) 285,749 411 $ 1,067,851 73.2% $ 84,186 (cid:2) 1,404,083 205,000 4,148 (cid:2) 184,214 $ 1,713,259 398,886 2,084,225 802 $ 4,197,172 40.8% Net Debt to Latest Twelve Months EBITDA Ratio1 Capital Structure (cid:2)(cid:7)(cid:8)(cid:11)(cid:12)(cid:7)(cid:13)(cid:13)(cid:7)(cid:14)(cid:8)(cid:15)(cid:11)(cid:14)(cid:16)(cid:11)(cid:3)(cid:14)(cid:13)(cid:13)(cid:17)(cid:18)(cid:15)(cid:10) 2,085 1,713 399 2011 2012 2.5x 1.4x 2011 2012 286 782 Preferred Shares Net Debt Total Equity (cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)(cid:4)(cid:8)(cid:6)(cid:9)(cid:10) 1 Latest twelve month income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition-related costs and restructuring and special charges, giving effect to the divestitures (Latest Twelve Month EBITDA). Latest twelve month EBITDA is a non-IFRS measure and may not be comparable with similar measures used by other publicly traded companies. Please refer to page (cid:2) for a definition of EBITDA. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 17 management’s discussion and analysis. As at December 31, 2012, Yellow Media had approximately $781.7 million of net debt. This compares to $1,713.3 million of net debt and $2,112.1 million of net debt and preferred shares, series 1 and 2 at December 31, 2011. The net debt to Latest Twelve Month EBITDA1 ratio as at December 31, 2012 was 1.4 times compared to 2.5 times as at December 31, 2011. The improvement is due to a lower level of indebtedness following the implementation of the Recapitalization partially offset by lower EBITDA. Recapitalization On July 23, 2012, the Company announced the Recapitalization aimed at significantly reducing the Company’s debt and improving its maturity profile, with debt first maturing in 2018. On September 6, 2012, the Company held debtholder and shareholder meetings to obtain support for the plan of arrangement under the Canada Business Corporations Act (CBCA) implementing the Recapitalization. The Recapitalization was approved by the requisite majority of its debtholders and shareholders at their respective meetings, with 70.39% of support received from the debtholders and 77.26% of support received from the shareholders. The hearing on the final order (the Final Order) of the Québec Superior Court (the Court) approving the Recapitalization concluded on October 23, 2012. On December 10, 2012, the Company announced that it reached a settlement with the lenders under the Credit Facility. The Court issued its Final Order and approved the Recapitalization on December 14, 2012. The Recapitalization was implemented on December 20, 2012 and became effective on that date. The Recapitalization included the adoption of a new stock option plan (the New Stock Option Plan), which was implemented upon the closing of the Recapitalization. The New Stock Option Plan will allow the Board of Directors of Yellow Media Limited (the Board) or a committee thereof, to select eligible employees to whom awards can be made, to specify the number of options which in each case are awarded, to determine the New Option Period applicable to each award and to impose any other conditions relating to the awards that the Board or a committee thereof deems appropriate. The New Stock Option Plan will result in the issuance of up to 1,290,612 New Common Shares, representing 4.6% of the issued and outstanding New Common Shares. As at the date hereof, no options have been granted under the New Stock Option Plan. For a detailed description of the new securities issued in connection with the Recapitalization, please refer to the indentures governing the Senior Secured Notes, the Exchangeable Debentures and the Warrants dated December 20, 2012, which are available on SEDAR at www.sedar.com. Medium Term Notes Immediately prior to the Recapitalization, YPG Financing Inc. (formerly Yellow Media Inc.) had a total of $1,404.1 million of Medium Term Notes outstanding under its Medium Term Note program with varying maturity dates between 2013 and 2036. Pursuant to the Recapitalization, the Medium Term Notes were exchanged for, in the aggregate, $634.6 million of Senior Secured Notes, $81.9 million of Exchangeable Debentures, 18,884,350 of New Common Shares of Yellow Media (representing 67.55% of the issued and outstanding New Common Shares) and $204.7 million of cash. In addition, the Company agreed to pay all accrued interest up to and excluding December 20, 2012, to holders of the Company’s Medium Term Notes. All of the outstanding Medium Term Notes were cancelled on the Effective Date. Credit facility Prior to the Recapitalization, YPG Financing Inc. (formerly Yellow Media Inc.) had in place a senior unsecured credit facility (Credit Facility) consisting of: (cid:2)(cid:2) (cid:2)(cid:2) a $250 million revolving tranche maturing in February 2013; and a $130 million non-revolving tranche maturing in February 2013. Pursuant to the Recapitalization, the Company’s Credit Facility, of which $369 million was drawn, was exchanged for, in the aggregate, $165.4 million of Senior Secured Notes, $18.1 million of Exchangeable Debentures, 4,178,593 of New Common Shares (representing 14.95% of the issued and outstanding New Common Shares) and $70.3 million of cash, which included the $25 million mandatory repayment of October 1, 2012. In addition, the Company agreed to pay all accrued interest up to and excluding December 20, 2012, on the Credit Facility. The Credit Facility was cancelled on the Effective Date. 1 Latest twelve month income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition-related costs and restructuring and special charges, giving effect to the divestitures (Latest Twelve Month EBITDA). Latest twelve month EBITDA is a non-IFRS measure and may not be comparable with similar measures used by other publicly traded companies. Please refer to page (cid:2) for a definition of EBITDA. 18 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. Convertible Debentures During the third quarter of 2012, $0.9 million of convertible debentures were exchanged into 116,250 common shares. Immediately prior to the Recapitalization, YPG Financing Inc. (formerly Yellow Media Inc.) had a total of $199.1 million principal amount outstanding of 6.25% convertible unsecured subordinated debentures (Convertible Debentures). The Convertible Debentures had a maturity date of October 1, 2017 and were convertible, at the option of the holder, for common shares of the Company at an exchange price of $8.00 per common share. An amount of $7.4 million (net of income taxes of $2.7 million) was classified as a separate component of equity attributable to owners of the Company. Pursuant to the Recapitalization, the Company’s Convertible Debentures were exchanged for, in the aggregate, $7.5 million of Exchangeable Debentures, 497,852 New Common Shares (representing 1.8% of the issued and outstanding New Common Shares) and 484,487 Warrants. The Company agreed to pay all interest accruing up to and excluding December 20, 2012 on the Convertible Debentures. All of the outstanding Convertible Debentures were cancelled on the Effective Date. Cumulative Redeemable Preferred Shares Immediately prior to the Recapitalization, YPG Financing Inc. (formerly Yellow Media Inc.) had two series of cumulative redeemable preferred shares outstanding. The principal amounts were: (cid:2)(cid:2) (cid:2)(cid:2) $251.1 million preferred shares, Series 1 and; $151.6 million preferred shares, Series 2. Pursuant to the Recapitalization, the preferred shares, Series 1, were exchanged for, in the aggregate, 628,090 New Common Shares (representing 2.2% of the issued and outstanding New Common Shares) and 358,909 Warrants. The preferred shares, Series 2 were exchanged for, in the aggregate, 379,016 New Common Shares (representing 1.4% of the issued and outstanding New Common Shares) and 216,581 Warrants. The Recapitalization provided that no cumulative or unpaid dividends would be paid in respect of the preferred shares, Series 1 and Series 2. The preferred shares, Series 1 and 2 were cancelled on the Effective Date. Rate Reset Preferred Shares Immediately prior to the Recapitalization, YPG Financing Inc. (formerly Yellow Media Inc.) had two series of cumulative rate reset preferred shares outstanding. The principal amounts were: (cid:2)(cid:2) (cid:2)(cid:2) $203 million preferred shares, Series 3 and; $123 million preferred shares, Series 5. Pursuant to the Recapitalization, the preferred shares, Series 3 were exchanged for, in the aggregate, 507,737 New Common Shares (representing 1.8% of the issued and outstanding New Common Shares) and 290,135 Warrants. The preferred shares, Series 5 were exchanged for, in the aggregate, 307,604 New Common Shares (representing 1.1% of the issued and outstanding New Common Shares) and 175,774 Warrants. The Recapitalization provided that no cumulative or unpaid dividends would be paid in respect of the preferred shares, Series 3 and Series 5. The preferred shares, Series 3 and Series 5 were cancelled on the Effective Date. Cumulative Exchangeable Preferred Shares Immediately prior to the Recapitalization, the Company, had $2.9 million cumulative exchangeable preferred shares, Series 7 outstanding. Pursuant to the Recapitalization, the preferred shares, Series 7 were exchanged for, in the aggregate, 7,188 New Common Shares (representing 0.03% of the issued and outstanding New Common Shares) and 4,107 Warrants. The Recapitalization provided that no cumulative or unpaid dividends be paid in respect of the preferred shares, Series 7. The preferred shares, Series 7 were cancelled on the Effective Date. Financial Instruments Issued upon Implementation of the Recapitalization Senior Secured Notes On December 20, 2012, the Company, through its subsidiary YPG Financing Inc., issued $800 million of 9.25% Senior Secured Notes maturing November 30, 2018. Interest on the Senior Secured Notes is payable in cash quarterly in arrears in equal instalments at 9.25% per annum on the last day of February, May, August and November of each year. The initial interest payment will be payable on February 28, 2013, and will represent interest accrued from and including December 20, 2012, to, but excluding,February 28, 2013. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 19 management’s discussion and analysis. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by Yellow Media and all of its Restricted Subsidiaries (as such term is defined in the indenture governing the Senior Secured Notes). The Senior Secured Notes and each Senior Secured Note guarantee are secured by a first priority lien, subject to certain permitted liens, in the collateral, which consists of all of the property of Yellow Media and the Restricted Subsidiaries, whether owned on the Effective Date or thereafter acquired, other than certain excluded property. The indenture governing the Senior Secured Notes contains restrictive covenants, including restrictions on the incurrence of additional indebtedness, the payment of dividends and other payment restrictions, investments, the creation of liens, sale and leaseback transactions, mergers, consolidations and sales of assets, certain transactions with affiliates and its business activities. The indenture does not contain the obligation to maintain financial ratios. Financial ratio restrictions only apply upon incurrence of indebtedness and other transactions. As at December 31, 2012, the Company was in compliance with all covenants under the indenture governing the Senior Secured Notes. Mandatory Redemption Pursuant to the indenture governing the Senior Secured Notes, the Company is required to use an amount equal to 75% of its consolidated Excess Cash Flow for the immediately preceding six-month period ending March 31 or September 30, as applicable, to redeem on a semi-annual basis on the last day of May and November of each year, commencing on May 31, 2013, the Senior Secured Notes at a redemption price equal to 100% of the principal amount thereof from holders on a pro rata basis, subject to the Company maintaining a minimum cash balance of $75 million immediately following the mandatory redemption payment. Excess Cash Flow, as defined in the indenture governing the Senior Secured Notes, means the aggregate cash flow from operating activities adjusted for, among other things, payments relating to interest, taxes, long-term employee compensation plans, certain pension plan contribution payments and the acquisitions of property, plant, equipment and intangible assets. The Company is required to make minimum annual aggregate mandatory redemption payments of (i) $100 million for the combined payments due on May 31, 2013 and November 30, 2013, (ii) $75 million for the combined payments due on May 31, 2014 and November 30, 2014, and (iii) $50 million for the combined payments due on May 31, 2015 and November 30, 2015. For purposes of determining the consolidated Excess Cash Flow, deductions for capital expenditures and information systems/information technology expenses are each subject to an annual deduction limit of $50 million. Under other circumstances, the Company may also have to make additional repayments on the Senior Secured Notes (refer to the indenture governing the Senior Secured Notes). Optional Redemption The Company may redeem all or part of the Senior Secured Notes at its option, upon not less than 30 nor more than 60 days prior notice, at a redemption price equal to: (cid:2)(cid:2) (cid:2)(cid:2) In the case of a redemption occurring prior to May 31, 2017, 105% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date; or In the case of a redemption occurring after May 31, 2017, 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. Exchangeable Debentures On December 20, 2012, the Company, through its subsidiary YPG Financing Inc., issued $107.5 million of Exchangeable Debentures due November 30, 2022. Interest on the Exchangeable Debentures accrues at a rate of 8% per annum if, for the applicable interest period, it is paid in cash or 12% per annum if the Company makes a Payment in Kind (PIK) election to pay interest in respect of all or any part of the then outstanding Exchangeable Debentures in additional Exchangeable Debentures. Interest on the Exchangeable Debentures is payable semi-annually in arrears in equal instalments on the last day of May and November of each year. The initial interest payment is payable on May 31, 2013, and will represent interest accrued from and including December 20, 2012, to, but excluding, May 31, 2013. The Exchangeable Debentures are senior subordinated and unsecured obligations of YPG Financing Inc. The Exchangeable Debentures are unconditionally guaranteed on a subordinated unsecured basis by Yellow Media and all of its Restricted Subsidiaries (as such term is defined in the indenture governing the Exchangeable Debentures). The indenture governing the Exchangeable Debentures contains restrictive covenants, including restrictions on the incurrence of additional indebtedness, the payment of dividends and other payment restrictions, investments, the creation of liens, sale and leaseback transactions, mergers, consolidations and sales of assets and certain transactions with affiliates. The indenture does not contain the obligation to maintain financial ratios. Financial ratio restrictions only apply upon incurrence of indebtedness and other transactions. As at December 31, 2012, the Company was in compliance with all covenants under the indenture governing the Exchangeable Debentures. 20 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. Exchange Option The Exchangeable Debentures are exchangeable, at the holder’s option, into New Common Shares at any time at an exchange price per New Common Share equal to $19.04, subject to adjustment for specified capital transactions. Optional Redemption The Company may, at any time on or after the date on which all of the Senior Secured Notes have been paid in full, redeem all or part of the Exchangeable Debentures at its option, upon, not less than 30 nor more than 60 days’ prior notice, at a redemption price equal to: In the case of a redemption occurring prior to May 31, 2021, 110% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date; or In the case of a redemption occurring on or after May 31, 2021, 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. (cid:2)(cid:2) (cid:2)(cid:2) Liquidity The Company’s principal source of liquidity is cash generated from operations and cash on hand. The Company expects to generate sufficient liquidity to fund capital expenditures, working capital requirements and current obligations, including the mandatory repayments on the Senior Secured Notes. The Company had approximately $134 million of cash as at February 4, 2013. Share data As at February 5, 2013, outstanding share data was as follows: Outstanding Share Data New Common Shares outstanding Common shares outstanding Warrants outstanding Preferred shares Series 3, 5 and 7 outstanding Options outstanding and exercisable 1 These figures do not reflect the Recapitalization. Shares As at February 5, 2013 As at December 31, 2012 27,955,077 (cid:2) 2,995,506 (cid:2) (cid:2) 27,955,077 (cid:2) 2,995,506 (cid:2) (cid:2) As at December 31, 2011 1 (cid:2) 520,402,094 (cid:2) 13,424,153 380,882 Pursuant to the Recapitalization, the existing common shares of YPG Financing Inc. were cancelled and exchanged for 2,564,647 New Common Shares and 1,465,513 Warrants. Warrants On December 20, 2012, the Company issued a total of 2,995,506 Warrants. Each Warrant is transferable and entitles the holder to purchase one New Common Share at an exercise price of $28.16 per Warrant payable in cash at any time on or prior to December 20, 2022. Exchangeable Debentures As at December 31, 2012, the Company had a total of $107.5 million of Exchangeable Debentures outstanding. Contractual Obligations and Other Commitments Contractual obligations (in thousands of Canadian dollars) Long-term debt1,2 Obligations under finance leases1 Exchangeable and convertible debentures1 Operating leases Other Total contractual obligations Payments due for the periods ending December 31 (cid:2)(cid:3)(cid:4)(cid:5)(cid:6) 800,000 1,831 107,500 106,388 52,068 1,067,787 $ $ $ $ $ $ Less than 1 year 2 – 3 years 4 – 5 years After 5 years $ $ $ $ $ $ 100,000 939 (cid:19) 20,101 48,859 169,899 $ $ $ $ $ $ 125,000 759 (cid:19) 40,610 331 166,700 $ $ $ $ $ $ (cid:19) 133 (cid:19) 35,792 253 $ 575,000 $ (cid:19) $ 107,500 $ $ 9,885 2,625 36,178 $ 695,010 1(cid:2)Principal amount. 2(cid:2)The repayment of Senior Secured Notes may increase subject to the Excess Cash Flow clause. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 21 management’s discussion and analysis. Obligations under finance leases We enter into finance lease agreements for office equipment and software. As at December 31, 2012, minimum payments under these finance leases up to 2016 totalled $1.8 million. Operating leases We rent our premises and office equipment under various operating leases. As at December 31, 2012, minimum payments under these operating leases up to 2021 totalled $106.4 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 2013 and 2038. As at December 31, 2012, we have an obligation to purchase services for $52 million over the next five years and thereafter. Cash from operations will be used to meet these purchase obligations. Pension Obligations YPG sponsors a pension plan registered with the Canada Revenue Agency and the Financial Services Commission of Ontario with a defined benefit component (the YPG Defined Benefit Plan) and a defined contribution component covering substantially all employees of the Company. As at December 31, 2012, the YPG Defined Benefit Plan assets totalled $405.5 million and were invested in a diversified portfolio of Canadian fixed income securities and Canadian and international equity securities. The YPG Defined Benefit Plan’s rate of return on assets was 9.7% for 2012, 2% ahead of our benchmark portfolio. The most recent actuarial valuation of the YPG Defined Benefit Plan for funding purpose was performed as at April 30, 2011. The April 2011 valuation resulted in a going concern deficit of $59 million and a solvency deficit of $61 million. This valuation also established the amount of contributions the Company is required to make under the YPG Defined Benefit Plan from April 30, 2011 until the next valuation, which is due no later than April 30, 2014. In 2012, the Company made annual contributions equivalent to the current service cost (the Annual Employer Cost) of approximately $8.5 million to the YPG Defined Benefit Plan. In 2013, the Company will continue to fund the Annual Employer Cost. In addition to the Annual Employer Cost, the Company also funds the deficit with annual contributions of $13.4 million over a five-year period. Both the Annual Employer Cost and the Annual Amortization Payments were effective as at April 30, 2011 and the retroactive adjustment payments were made in the first quarter of 2012. 22 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. Sources and Uses of Cash Consistent with other directories and media companies, the Company has relatively minimal capital spending requirements combined with relatively low operating costs. Sources and Uses of Cash (in thousands of Canadian dollars) Cash flows from operating activities from continuing operations Cash flows from operations from continuing operations Change in operating assets and liabilities Cash flows (used in) from investing activities from continuing operations Acquisition of intangible assets Acquisition of property, plant and equipment Proceeds from sale of assets Disposal of Trader Corporation Disposal of cash related to the sale of Trader Corporation Disposal of subsidiary Other Cash flows used in financing activities from continuing operations Issuance of long-term debt and commercial paper Repayment of long-term debt and commercial paper Redemption of exchangeable and convertible instruments Dividends to shareholders Repurchase of Preferred Shares, Series 1 and 2 and medium term notes Repurchase of common shares and Preferred shares, Series 3 and 5 Recapitalization costs Other $ $ $ $ $ Years ended December 31, 2012 2011 265,930 (27,357) 238,573 (35,281) (5,137) 1,650 (cid:2) (cid:2) (cid:2) 183 (38,585) 239,000 (351,426) (cid:2) (cid:2) (cid:2) (cid:2) (63,025) (1,916) $ $ $ $ $ 379,210 (42,637) 336,573 (46,686) (15,565) (cid:2) 690,230 (24,517) 70,938 (435) 673,965 1,062,000 (1,403,585) (106,172) (209,134) (266,183) (50,432) (cid:2) (28,244) $ (177,367) $ (1,001,750) Cash flows from operating activities from continuing operations Cash flows from operating activities from continuing operations decreased by $98 million to $238.6 million from $336.6 million for the year ended December 31, 2011, due to lower EBITDA resulting mainly from lower revenues from our traditional print products. The change in operating assets and liabilities for the year ended December 31, 2012 was $27.4 million compared with $42.6 million in the same period last year. The improvement is due to a decrease in deferred publication costs resulting from lower revenues. Also during 2012, the net change in deferred revenues was lower relative to 2011 which impacted our cash flows positively. Cash flows (used in) from investing activities from continuing operations Cash used in investing activities from continuing operations amounted to $38.6 million during the year ended December 31, 2012 while $674 million of cash was generated from investing activities during 2011. In July of 2011, we sold Trader Corporation for proceeds of $690.2 million and in November 2011 we sold LesPAC for $70.9 million. During 2012, we invested in software and equipment for $35.3 million and $5.1 million, respectively, which in total, was less than the corresponding amounts of $46.7 million and $15.6 million spent in 2011. Acquisition of property, plant, equipment and intangible assets, net of lease inducements (in thousands of Canadian dollars) Years ended December 31, Sustaining Transition Growth Total Adjustment to reflect expenditures on a cash basis Acquisition of property, plant, equipment and intangible assets, net of lease inducements 2012 20,437 (cid:2) 22,022 42,459 (2,224) 40,235 $ $ $ $ $ $ YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 2011 29,619 5,004 34,260 68,883 (7,484) 61,399 23 management’s discussion and analysis. Sustaining capital expenditures amounted to $20.4 million for the year ended December 31, 2012, compared to $29.6 million for the previous year. The decrease for the year ended December 31, 2012, is due to a decrease in leasehold improvements. In 2011, we invested in our new Mediative division’s offices in Toronto, Montréal and Vancouver. Given there was no recent business acquisition, no investments were made in transition capital expenditures during the year ended December 31, 2012 compared to $5 million for the previous year. Growth capital expenditures relate to the development and implementation of new technology and software aimed at new initiatives as we continue our transformation to a leading technology and digital company offering media and marketing solutions to SMEs across Canada. During the year ended December 31, 2012, these amounted to $22 million compared to $34.3 million for the previous year. We spent less in 2012 compared to 2011 as we focused on developing an updated technological plan to ensure our successful transformation. Total capital expenditures for 2012 amounted to $42.5 million. We expect to increase the level of capital expenditure in the coming quarters as we focus on our critical initiatives to accelerate our transformation. Cash flows used in financing activities from continuing operations Cash used in financing activities from continuing operations amounted to $177.4 million during the year ended December 31, 2012 compared to $1,001.8 million for the same period last year. We drew $239 million on the revolving tranche of the Credit Facility in January 2012, made the three quarterly payments of $25 million on the non-revolving tranche of our Credit Facility. In addition, we paid $275 million in connection with the Recapitalization in 2012. During 2011, we had a net repayment of long-term debt and commercial paper of $341.6 million. No dividends were paid during 2012, as a result of the elimination of dividends on common shares and suspension of dividends on the preferred shares, Series 3, 5, and 7. During 2011, we also repurchased preferred shares, Series 1 and 2 and Medium Term Notes of $266.2 million, repurchased common shares and preferred shares, Series 3 and 5 of $50.4 million, and redeemed $106.2 million of exchangeable notes. We did not repurchase any debt instruments or shares in 2012 and we did not pay any dividends to shareholders in 2012. Financial and Other Instruments (See Note 24 of the Consolidated Financial Statements of the Company for the year ended December 31, 2012). The Company’s financial instruments consist of cash, trade receivables, investments, trade and other payables, short-term and long-term debt and exchangeable debentures. Derivative Instruments In August 2009, the Company entered into three interest rate swaps totalling $130 million to hedge the Series 9 Medium Term Notes. The Company received interest on these swaps at 6.5% and paid a floating rate equal to the three-month Banker’s Acceptance plus a spread of 4.3%. The swaps were to mature July 10, 2013, matching the maturity date of the underlying debt. In February 2010, the Company also entered into two interest rate swaps totalling $125 million to hedge the Series 8 Medium Term Notes. The Company received interest on these swaps at 6.85% and paid a floating rate equal to the three-month Banker’s Acceptance plus a spread of 4.3%. The swaps were to mature December 3, 2013, matching the maturity date of the underlying debt. On June 27, 2011, the Company terminated the five interest rate swaps mentioned above with a notional amount of $255 million, for gross proceeds of $3.8 million. The $3.8 million was to be amortized over the term of the underlying debt. Following the implementation of the Recapitalization, the derivative amortized gain was written-off. Taking into consideration the debt instruments outstanding, our fixed-to-floating ratio was 100% fixed rate as at December 31, 2012, on a gross debt basis. As at December 31, 2012, the Company had no hedging obligations outstanding. As at December 31, 2012, there is no fair value adjustment of hedged items to be amortized over the term of the existing underlying debt. The terms and conditions of the preferred shares, Series 1 and 2 provided for redemption at the option of the Company under certain circumstances. These options met the definition of an embedded derivative. They were recorded at their fair value on the consolidated statement of financial position with changes in fair value recognized in financial charges. With the implementation of the Recapitalization, the preferred shares, Series 1 and 2 were cancelled. We currently have an agreement to purchase the remaining shares of an investment in an associate at a pre-determined multiple. This option qualifies as a derivative liability. Because the option value is greater than the fair value of the remaining shares, we reported a charge of $18.5 million for the year ended December 31, 2012. In 2011, we reported a charge of $3.5 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. In addition, we reported an adjustment amount of $4.2 million and a redemption premium stipulated under a Total Return Swap of $5.3 million for 2011. There is no carrying value of embedded derivatives as at December 31, 2012. The carrying value is calculated, as is customary in the industry, using discounted cash flows with quarter-end market rates. 24 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. 4.(cid:2) Free cash flow / (cid:2)(cid:3)(cid:4)(cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:5)(cid:10)(cid:11)(cid:12)(cid:13)(cid:5)(cid:10)(cid:3)(cid:12)(cid:14)(cid:5)(cid:6)(cid:12)(cid:15)(cid:16)(cid:17)(cid:15)(cid:18)(cid:17)(cid:15)(cid:19)(cid:5)(cid:12)(cid:20)(cid:4)(cid:3)(cid:7)(cid:16)(cid:17)(cid:12)(cid:15)(cid:8)(cid:5) Free cash flow from continuing operations (in thousands of Canadian dollars) Cash flow from operating activities from continuing operations Capital expenditures, net of lease inducements Free cash flow from continuing operations (cid:21)(cid:17)(cid:22)(cid:17)(cid:23)(cid:4)(cid:15)(cid:23)(cid:8)(cid:5)(cid:12)(cid:15)(cid:5)(cid:24)(cid:12)(cid:14)(cid:14)(cid:12)(cid:15)(cid:5)(cid:25)(cid:9)(cid:7)(cid:3)(cid:4)(cid:8)(cid:5) Three-month periods ended December 31, Years ended December 31, 2012 2011 2012 2011 $ $ 61,749 13,771 47,978 $ 92,964 $ 238,573 $ 336,573 14,741 40,235 61,399 $ 78,223 $ 198,338 $ 275,174 On September 28, 2011, the Board determined that it was in the best interest of the Company to eliminate future dividends on its common shares. This decision was in compliance with the amendments that the Company agreed to make to its principal credit agreement and that was announced on September 28, 2011. The indentures governing the Senior Secured Notes and the Exchangeable Debentures prohibit the payment of dividends, subject to certain exceptions contained in such indentures. 5.(cid:2) Critical Assumptions / When we prepare our financial statements in accordance with IFRS, 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. (cid:26)(cid:15)(cid:16)(cid:7)(cid:15)(cid:19)(cid:17)(cid:27)(cid:11)(cid:4)(cid:5)(cid:7)(cid:8)(cid:8)(cid:4)(cid:16)(cid:8)(cid:28)(cid:5)(cid:19)(cid:12)(cid:12)(cid:23)(cid:13)(cid:17)(cid:11)(cid:11)(cid:5)(cid:7)(cid:15)(cid:23)(cid:5)(cid:20)(cid:3)(cid:12)(cid:20)(cid:4)(cid:3)(cid:16)(cid:29)(cid:28)(cid:5)(cid:20)(cid:11)(cid:7)(cid:15)(cid:16)(cid:5)(cid:7)(cid:15)(cid:23)(cid:5)(cid:4)(cid:30)(cid:18)(cid:17)(cid:20)(cid:14)(cid:4)(cid:15)(cid:16)(cid:5) The values associated with identifiable intangible assets and goodwill involve significant estimates and assumptions, including those with respect to future cash inflows and outflows, discount rates and asset lives. These significant estimates require considerable judgment which could affect Yellow Media’s future results if the current estimates of future performance and fair value changes. These determinations affect the amount of amortization expense on identifiable intangible assets recognized in future periods and impairment of goodwill, intangible assets and property, plant and equipment. Yellow Media assesses impairment by comparing the recoverable amount of an identifiable intangible asset or goodwill with its carrying value. The determination of the recoverable amount involves significant management judgment. During 2012, it was determined that the recoverable amount of goodwill was $nil. As such, its carrying value was written-off completely. Yellow Media performed its annual test for impairment of indefinite life intangible assets and goodwill in accordance with the policy described in Note 3.13 of the Consolidated Financial Statements. Goodwill was tested at the operating segment level since this represents the lowest level within Yellow Media at which the goodwill is monitored for internal management purposes. The recoverable amount of the cash generating units (CGUs) was determined based on the value-in-use approach using a discounted cash flow model that relies on significant key assumptions, including after-tax cash flows forecasted over an extended period of years, terminal growth rates and discount rates. We use published statistics or seek advice where possible when determining the assumptions we use. Details of Yellow Media’s impairment reviews are disclosed in Note 4 of the Consolidated Financial Statements. (cid:31)(cid:14)(cid:20)(cid:11)(cid:12)(cid:29)(cid:4)(cid:4)(cid:5)(cid:10)(cid:18)(cid:16)(cid:18)(cid:3)(cid:4)(cid:5)(cid:27)(cid:4)(cid:15)(cid:4)(cid:10)(cid:17)(cid:16)(cid:8)(cid:5) The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Determination of benefit expense requires assumptions such as the expected return on assets available to fund pension obligations, the discount rate to measure obligations, the projected age of employees upon retirement, the expected rate of future compensation and the expected healthcare cost trend rate. For the purpose of calculating the expected return on plan assets, the assets are valued at fair value. Actual results will differ from results which are estimated based on assumptions. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 25 management’s discussion and analysis. Income taxes Estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of Yellow Media’s ability to utilize the underlying future tax deductions against future taxable income before they expire. Yellow Media’s assessment is based upon existing tax laws and estimates of future taxable income. If the assessment of Yellow Media’s ability to utilize the underlying future tax deductions changes, Yellow Media would be required to recognize more or fewer of the tax deductions as assets, which would decrease or increase the income tax expense in the period in which this is determined. Yellow Media is subject to taxation in numerous jurisdictions. Significant judgement is required in determining the consolidated provision for taxation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Yellow Media maintains provisions for uncertain tax positions that it believes appropriately reflect its risk with respect to tax matters under active discussion, audit, dispute or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions for uncertain tax positions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. Yellow Media reviews the adequacy of these provisions at each balance sheet date. However, it is possible that at some future date an additional liability could result from audits by tax authorities. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. New Accounting Standards IAS 1 (Revised) — Presentation of Financial Statements On June 16, 2011, the IASB issued amendments to IAS 1, Presentation of Financial Statements, which require entities to group together items within Other Comprehensive Income (OCI) that may be reclassified to the profit or loss section of the income statement and to separately group together items that will not be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that profit or loss and OCI should be presented as either a single statement or two consecutive statements. The amendments are effective for financial years commencing on or after July 1, 2012. In May 2012, the IASB issued further amendments to IAS 1, Presentation of Financial Statements which are effective for annual periods beginning on or after January 1, 2013 with early application permitted. IAS 1 requires an entity that changes accounting policies retrospectively, or makes a retrospective restatement or reclassification to present a statement of financial position as at the beginning of the preceding period. The amendments to IAS 1 clarify that an entity is required to present a third statement of financial position only when the retrospective application, restatement or reclassification has a material effect on the information in the third statement of financial position and that related notes are not required to accompany the third statement of financial position. Yellow Media Limited has applied the amendments to IAS 1, on January 1, 2011, in advance of the effective date, as permitted. The amendments have been applied retrospectively, and hence the presentation of items of other comprehensive income has been modified to reflect the changes. Other than the above mentioned presentation changes, the application of the amendments to IAS 1 did not result in any impact on profit or loss, other comprehensive income and total comprehensive income. IFRS 7 (Revised) — Financial Instruments: Disclosures (Amendments) — Transfer of financial assets Other amendments to IFRS 7 allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. The IFRS 7 amendments are effective for annual periods beginning on or after July 1, 2011. The Standard has been adopted and its adoption has not had any impact on the amounts reported in these financial statements. IAS 12 (Revised) — Deferred Tax: Recovery of Underlying Assets and SIC-21 (amendments), Income Taxes — Recovery of Revalued Non-Depreciable Assets The amendment introduces a rebuttable presumption that an investment property measured using the fair value model is recovered entirely through sale unless the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits over time. As a result of the amendments, SIC-21 would no longer apply to investment properties carried at fair value. The IAS 12 amendments are effective for annual reporting periods beginning on or after January 1, 2012. The Standard has been adopted and its adoption has not had any impact on the amounts reported in these financial statements. IFRS 7 (Revised) — Financial Instruments: Disclosures and IAS 32 – Financial Instruments: Presentation in respect of Offsetting On December 16, 2011, the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) issued common disclosure requirements that are intended to help investors and other users to better assess the effect or potential effect of offsetting arrangements on a company's financial position. The new requirements are set out in Disclosures- Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). The IFRS 7 amendments are effective for annual reporting periods beginning on or after January 1, 2013. The new requirements may result in additional disclosures being made with regard to offsetting financial assets and financial liabilities in the future 26 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. As part of this project, the IASB also clarified aspects of IAS 32, Financial Instruments: Presentation. The amendments to IAS 32 address inconsistencies in current practice when applying the requirements. The amendments are effective for annual periods beginning on or after January 1, 2014 and are required to be applied retrospectively. Yellow Media has not early adopted this standard and has not fully assessed the impact of adopting IAS 32. IFRS 9 — Financial Instruments IFRS 9 is the first phase of the IASB’s three phase project to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 issued in November 2009 introduces new requirements for the classification and measurement of financial assets. IFRS 9, amended in October 2010, includes the requirements for the classification and measurement of financial liabilities and for derecognition. Key requirements of IFRS 9 are described as follows: (cid:2)(cid:2) (cid:2)(cid:2) IFRS 9 requires all recognized financial assets that are within the scope of IAS 39, Financial Instruments: Recognition and Measurement to be subsequently measured at amortized cost or fair value. The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in the fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability and the elimination of the cost exemption for derivative liabilities to be settled by delivery of unquoted equity instruments. IFRS 9 is applied prospectively with transitional arrangements depending on the date of application. The Standard is not applicable until annual periods beginning on or after January 1, 2015, however is available for early adoption. Yellow Media has not early adopted this standard and has not fully assessed the impact of adopting IFRS 9. IFRS 10 — Consolidated Financial Statements IFRS 10 replaces the consolidation requirements in IAS 27, Consolidated and Separate Financial Statements, and SIC-12, Consolidation - Special Purpose Entities. IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. It is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted provided IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interests in Other Entities and the related amendments to IAS 27, Consolidated and Separate Statements and IAS 28, Investments in Associates (the “package of five”) are adopted at the same time. Based on a preliminary assessment, Yellow Media does not expect any significant impact on the financial statements upon adoption. IFRS 11 — Joint Arrangements IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities - Non-Monetary Contributions by Venturer. IFRS 11 requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved by assessing its rights and obligations arising from the arrangement. The standard also requires the use of a single method to account for interests in joint ventures, namely the equity method. IFRS 11 is applicable at the same time as IFRS 10. Based on a preliminary assessment, Yellow Media does not expect any significant impact on the financial statements upon adoption. IFRS 12 — Disclosure of Interests in Other Entities IFRS 12 is a new standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is applicable at the same time as IFRS 10. In June 2012, the IASB issued amendments to IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interests in Other Entities which will also be effective for the Company at the time of adoption of these standards for the fiscal year beginning on January 1, 2013. Based on a preliminary assessment, Yellow Media expects to disclose additional information related to its consolidated subsidiaries and interests in associates upon adoption. IFRS 13 — Fair Value Measurement IFRS 13 is a new standard that defines fair value and requires disclosures about fair value measurements. IFRS 13 is effective for fiscal years beginning on or after January 1, 2013. Earlier application is permitted. It applies prospectively from the beginning of the annual period in which it is adopted. The new requirements will result in additional disclosures about all assets and liabilities measured at fair value on the financial statements upon adoption. IAS 19 (Revised) — Employee Benefits A revised version of IAS 19 was issued in June 2011 and is effective for financial years beginning on or after January 1, 2013. Early application is permitted. The main change of this revised version is the elimination of the corridor approach, with all changes to the defined benefit obligation and plan assets recognized when they occur. Furthermore, the interest cost and expected return on plan assets are replaced with the net interest amount which is calculated by applying the discount rate to the net defined benefit liability or asset. The amendments require retroactive application. Based on the preliminary assessment, when Yellow Media will apply the amendments for the first time for the periods in the year ending December 31, 2013, the net financial charges for the year ended December 31, 2012 will increase by $10.9 million with the corresponding adjustment being recognized in the post-employment benefits obligation. The amendments will also enhance disclosure requirements for the Company’s defined benefit plans. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 27 management’s discussion and analysis. IAS 16 — Property Plant and Equipment, IAS 32 – Financial Instruments and IAS 34 – Interim Financial Reporting In May 2012, the IASB also issued amendments to IAS 16, Property, Plant and Equipment, IAS 32, Financial Instruments: Presentation and IAS 34, Interim Financial Reporting which are effective for annual periods beginning on or after January 1, 2013 with early application permitted. These amendments clarify various requirements. Based on a preliminary assessment, Yellow Media does not expect any significant impact on the financial statements upon application of these amendments. 6.(cid:2) Risks and Uncertainties / The following section examines the major risks and uncertainties that could materially affect YPG’s future business results. 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.(cid:2) Strategic risks - which are primarily external to the business; 2.(cid: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.(cid:2) Operational risks - related principally to risks across key functional areas of the organization. YPG has put in place certain guidelines in order to seek to manage the risks to which it may be exposed. Please refer to the AIF for a complete description of these risk factors. Despite these guidelines, the Company cannot provide assurances that any such efforts will be successful. Substantial competition could reduce the market share of the Corporation and could have a material adverse effect on the Corporation, its business, results from operations and financial condition The Corporation competes with other directory, advertising media and classified advertising businesses and across various media and platforms. This includes the internet, newspapers, television, radio, mobile telecommunication devices, magazines, billboards and direct mail advertising. In particular, the directories business faces substantial competition due to increased online penetration, through the use of online search engines and social networking organizations. The Corporation may not be able to compete effectively with these online competitors, some of which may have greater resources. The Corporation’s internet strategy and its directories business may be adversely affected if major search engines build local sales forces or otherwise begin to more effectively reach local businesses for local commercial search services. These competitors may reduce their prices to increase their market share or may be able to offer their services at lower costs than the Corporation can. The Corporation may be forced to reduce its prices or offer and perform other services in order to remain competitive. The Corporation’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 the Corporation, its business, results from operations and financial condition. 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 with initiatives targeting the following objectives: (cid:2)(cid:2) (cid:2)(cid:2) Enhancement of our product offerings and extension of our services to customers; Improvement of user experience; and (cid:2)(cid:2) 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 our segments offer. A higher than anticipated rate of decline in print revenue resulting from changes in preferences and consumer habits could have a material adverse effect on the Corporation, its business, results from operations and financial condition The Corporation could be materially adversely affected if the usage of print telephone directories declines at a rate higher than anticipated. The development of new technologies and the widespread use of internet is causing changes in preferences and consumer habits. The usage of internet-based directory products has increased rapidly. The internet has become increasingly accessible as an advertising medium for businesses of all sizes. Further, the use of the internet, including as a means to transact commerce through wireless devices, has resulted in new technologies and services that compete with traditional advertising mediums. In particular, this has a significant influence on print products, and the decrease in usage gradually leads to lower advertising revenues. References to print business directories may continue to decline as users increasingly turn to digital and interactive media delivery devices for local commercial search information. 28 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. The inability of the Corporation to successfully enhance and expand its offering of digital and new media products could have a material adverse effect on the Corporation, its business, results from operations and financial condition The transition from print to digital causes uncertainties surrounding whether and when new product introductions will compensate for the declining trend in print revenues. If revenue from the Corporation’s digital products does not increase significantly, the Corporation’s cash flow, results of operations and financial condition will be materially adversely affected. The Corporation expects to derive a greater portion of its total revenue from its digital and other new media products, as directory usage continues to shift from print directories to digital and other new media products. The Corporation’s transformational expansion towards digital and new media products is subject to a variety of challenges and risks, including the following: (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) the Corporation may not continue to grow internet usage on its own sites at the same rate as other providers or may grow at a slower rate than currently anticipated; internet usage as a source of information and a medium for advertising may not continue to grow, or may grow at a slower rate than currently anticipated, as a result of factors that the Corporation cannot predict or control; the Corporation may incur substantial additional costs and expenses related to investments in its information technology, modifications to existing products and development of new products and this may reduce profit margins in the future; the Corporation may be unable to develop and market new products in a timely and efficient manner, as the Corporation’s markets are characterised by rapidly changing technology, introductions and enhancements to existing products and shifting advertising customer and end-user demands, including technology preferences; the Corporation may be unable to improve its information technology systems so as to efficiently manage increased levels of traffic on the Corporation’s websites and provide new services and products; the Corporation’s focus on its digital and new media products may distract or deter advertising customers from pursuing advertising opportunities in the Corporation’s print products; the Corporation may be unable to keep apprised of changes to search engines’ terms of service or algorithms, which could cause the Corporation’s websites, or its advertising customers’ websites, to be excluded from or ranked lower in search results or make it more difficult or more expensive for the Corporation to provide search engine marketing and search engine optimisation solutions to its advertising customers; the Corporation’s advertising customers may be unwilling to pay for digital advertising at the same rates as they had paid for printed directory advertising; and the Corporation may be unable to increase the prices of its products and services in the future. If any of the above-mentioned risks were to occur, the Corporation’s digital revenue, as well as its business, results from operations and financial condition could be materially adversely affected. The continuing transition in the media and publishing industries towards more digital 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. Furthermore, given this transition from print to digital and uncertainties surrounding whether and when new product introductions will compensate for the declining trend in print revenues, if revenue from our digital products does not increase significantly, our cash flow, results of operations and financial condition may be adversely affected. The inability of the Corporation to generate sufficient funds from operations, debt financings, equity financings or refinancing transactions could have a material adverse effect on the Corporation, its business, results from operations and financial condition The ability of the Corporation to make scheduled payments under its indebtedness will depend on, among other things, its future operating performance. There can be no assurance that the Corporation will be able to generate sufficient cash from its operations to pay its debt obligations. Each of these factors is, to a large extent, subject to economic, financial, competitive, operational and other factors, many of which are beyond the Corporation’s control. There can be no assurance that the Corporation will continue to be able to obtain on a timely basis sufficient funds on terms acceptable to the Corporation to provide adequate liquidity and to finance the operating and capital expenditures necessary to overcome the challenges associated with the transformation of its business and support its business strategy if cash flows from operations and cash on hand are insufficient. Failure to generate sufficient funds, whether from operations or debt or equity financings or refinancing transactions, could require the Corporation to delay or abandon some of its anticipated expenditures or to modify its business strategy and could have a material adverse effect on the Corporation, its business, results from operations and financial condition. Furthermore, competitors with greater liquidity or their ability to raise money more easily and on less onerous terms could create a competitive disadvantage for the Corporation. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 29 management’s discussion and analysis. The Corporation’s substantial indebtedness could adversely affect its efforts to refinance or reduce its indebtedness and could have a material adverse effect on the Corporation, its business, results from operations and financial condition The Corporation’s substantial amount of debt could have material adverse effects on the Corporation, its business, results from operations and financial condition. For example, it could: (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) increase the Corporation’s vulnerability to adverse economic and industry conditions; require the Corporation to dedicate a substantial portion of its cash flows from operations to make payments on its debt, thereby reducing funds available for operations, future business opportunities or other purposes; limit the Corporation’s flexibility in planning for, or reacting to, changes in its business and its industry; place the Corporation at a competitive disadvantage compared to its competitors that have less debt; and limit the Corporation’s ability to obtain additional financing, if needed, for working capital, capital expenditures, acquisitions, debt service requirements or other purposes. In addition, the indenture governing the Senior Secured Note and the indenture governing the Exchangeable Debentures contain a number of financial and other restrictive covenants, including restrictions on the incurrence of additional indebtedness, the payment of dividends and other payment restrictions, investments, the creation of liens, sale and leaseback transactions, mergers, consolidations and sales of assets and certain transactions with affiliates. A failure to comply with such obligations could result in a default which, if not cured or waived, could permit acceleration of the relevant indebtedness. If the indebtedness under the indenture governing the Senior Secured Notes or the indenture governing the Exchangeable Debentures, as the case may be, were to be accelerated, there can be no assurance that the Corporation would have sufficient liquidity to repay in full that indebtedness. Incremental contributions by the Corporation to its pension plans could have a material adverse effect on the Corporation, its business, results from operations and financial condition The Corporation is currently and may be required to make incremental contributions to its 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 the Corporation’s liquidity and results from operations. The Corporation is currently making incremental contributions to its pensions plans to reduce their actuarial solvency deficits. The funding requirements of the Corporation’s pension plans, resulting from valuations of its 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 the Corporation’s current estimates and could require the Corporation to make incremental contributions to its pension plans in the future and, therefore, could have a negative effect on the Corporation’s liquidity, business, results from operations and financial condition. There is no assurance that the Corporation’s pension plans will be able to earn their assumed rate of return. A material portion of the Corporation’s pension plans’ assets is invested in public equity securities. As a result, the ability of the Corporation’s pension plans to earn the rate of return that the management has assumed depends significantly on the performance of capital markets. The market conditions also impact the discount rate used to calculate the Corporation’s solvency obligations and thereby could also significantly affect the Corporation’s cash funding requirements. Failure by either the Corporation or the Telco Partners to fulfill the obligations set forth in the agreements between the Corporation and the Telco Partners could result in a material adverse effect on the Corporation, its business, results from operations and financial condition We have a Billing and Collection Services Agreement with Bell Canada (up to 2016), with Telus (up to 2031), with MTS Allstream (up to 2036) and with Bell Aliant (up to 2037). 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 (including in the event that any of them seek protection under Canadian bankruptcy laws), 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. 30 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s discussion and analysis. Failure by the Corporation to adequately protect and maintain its brands and trade-marks, as well as third party infringement of such, could have a material adverse effect on the Corporation, its business, results from operations and financial condition 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. Work stoppages and other labor disturbances could have a material adverse effect on the Corporation, its business, results from operations and financial condition Certain non-management employees of YPG are unionized. Current union agreements range between one to five 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. Additionally, if a greater percentage of the Corporation’s workforce becomes unionized, this could have a material adverse effect on its business, results from operations and financial condition. 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. Challenge by tax authorities of the Corporation’s position on certain income tax matters could have a material adverse effect on the Corporation, its business, results from operations and financial condition In the normal course of the Company's activities, the tax authorities are carrying out ongoing reviews. In that respect, the Corporation 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 shareholders. The loss of key relationships or changes in the level or service provided by internet portals, search engines and individual websites could have a material adverse effect on the Corporation, its business, results from operations and financial condition The Corporation has entered into agreements with several internet portals, search engines and individual websites to promote its online directories. These agreements make the Corporation’s content and customer advertising more easily accessible by these portals, search engines and individual websites. These agreements allow the Corporation to generate a higher volume of traffic than it would on its own as well as generate business leads for its advertisers, while retaining the client relationship. In return, the portals, search engines and individual websites obtain business through the Corporation from advertisers who would not otherwise transact with them. Loss of key relationships or changes in the level of service provided by these internet portals, search engines and individual websites could impact performance of the Corporation’s internet marketing solutions. In addition, internet marketing services are provided by many other competitors within the markets the Corporation serves and its clients could choose to work with other, sometimes larger providers of these services, or with other search engines directly. The failure of the Corporation’s computers and communications systems could have a material adverse effect on the Corporation, its business, results from operations and financial condition The Corporation’s business activities rely significantly on the efficient and uninterrupted operation of computers and communications systems as well as those of third parties. The Corporation’s sales and advertising processing, data storage, production, billing, collection and day-to-day operations could be adversely impaired by the failure of such technology, which could in turn have a material adverse effect on the Corporation, its business, results from operations and financial condition. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 31 management’s discussion and analysis. In addition, the Corporation’s computer and IT systems are vulnerable to damage or interruption from a variety of sources and its disaster recovery systems may be deemed ineffective. Any failure of these systems could impair the Corporation’s business. This could have a material adverse effect on the Corporation, its business, results from operations and financial condition. The Corporation might be required to record additional impairment charges In the third quarter of 2011, the Corporation recorded a $2,900 million goodwill and intangible assets impairment charge. In the first quarter of 2012, the Corporation recorded an additional $2,967.8 million goodwill and intangible assets impairment charge. In the fourth quarter of 2012, the Corporation recorded an additional $300 million impairment charge related to certain of its intangible assets and property, plant and equipment. The Corporation may be subject to impairment losses that would reduce its reported assets and earnings. Economic, legal, regulatory, competitive, contractual and other factors may affect the value of identifiable intangible assets. If any of these factors impair the value of these assets, accounting rules would require the Corporation to reduce their carrying value and recognize an additional charge, which would reduce the reported assets and earnings of the Corporation in the year the impairment charge is recognized. 7.(cid:2) 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 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 design and 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 Chief Financial Officer. They concluded that The Company’s DC&P were effective, as at December 31, 2012. Internal Control over Financial Reporting (ICFR) The design and effectiveness of ICFR (as defined in National Instruments 52-109) were evaluated under the supervision of the President and Chief Executive Officer and Chief Financial Officer. Based on the evaluations, they concluded that the Company’s ICFR was effective, as at December 31, 2012. Management also concluded that during the quarter beginning on October 1, 2012 and ended on December 31, 2012, no changes were made to the Company’s ICFR that has materially affected, or is reasonably likely to materially affect the Company’s ICFR. 32 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 management’s report. The accompanying financial statements of Yellow Media Limited 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 International Financial Reporting Standards. 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 work 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. Ginette Maillé G Chief Financial Officer Daniel Verret Daniel Verret Vice President and Principal Accounting Officer YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 33 independent auditor’s report. To the Shareholders of Yellow Media Limited, We have audited the accompanying consolidated financial statements of Yellow Media Limited, successor of Yellow Media Inc., which comprise the consolidated statements of financial position as at December 31, 2012 and December 31, 2011, and the consolidated income statements, statements of comprehensive (loss) income, statements of changes in equity and statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Yellow Media Limited as at December 31, 2012 and December 31, 2011, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. February 5, 2013 Montréal, Québec ____________________ 1 CPA auditor, CA , public accountancy permit No. A120501 34 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Consolidated Statements of Financial Position (in thousands of Canadian dollars) As at December 31, 2012 As at December 31, 2011 ASSETS CURRENT ASSETS Cash Trade and other receivables (Note 24) Prepaid expenses Deferred publication costs TOTAL CURRENT ASSETS DEFERRED PUBLICATION COSTS FINANCIAL AND OTHER ASSETS INVESTMENTS IN ASSOCIATES (Note 7) PROPERTY, PLANT AND EQUIPMENT (Note 8) INTANGIBLE ASSETS (Note 9) GOODWILL (Note 9) DEFERRED INCOME TAXES (Note 16) TOTAL NON-CURRENT ASSETS TOTAL ASSETS LIABILITIES AND EQUITY CURRENT LIABILITIES Trade and other payables (Note 10) Current income tax liabilities Provisions (Note 11) Financial liabilities Deferred revenues Current portion of long-term debt (Note 13) Preferred shares Series 1 (Note 15) TOTAL CURRENT LIABILITIES DEFERRED CREDITS DEFERRED INCOME TAXES (Note 16) INCOME TAX LIABILITIES POST-EMPLOYMENT BENEFITS (Note 12) DEFERRED CONSIDERATION LONG-TERM DEBT (Note 13) EXCHANGEABLE AND CONVERTIBLE DEBENTURES (Note 14) PREFERRED SHARES SERIES 2 (Note 15) TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES CAPITAL AND RESERVES DEFICIT EQUITY ATTRIBUTABLE TO SHAREHOLDERS NON-CONTROLLING INTERESTS TOTAL EQUITY TOTAL LIABILITIES AND EQUITY $ $ $ 106,807 175,783 8,693 78,078 369,361 6,816 14,928 2,082 27,414 1,312,148 – 23,727 1,387,115 1,756,476 87,935 13,585 60,212 22,033 42,219 100,939 – 326,923 14,197 10,341 34,382 296,914 – 700,892 86,667 – 1,143,393 1,470,316 6,607,114 (6,321,365) 285,749 411 286,160 $ 84,186 166,586 5,017 94,770 350,559 7,484 14,879 3,616 46,496 1,658,051 2,967,847 – 4,698,373 $ 5,048,932 $ 156,482 22,974 48,300 – 54,805 102,339 249,713 634,613 16,536 119,305 43,806 298,796 6,570 1,510,892 184,214 149,173 2,329,292 2,963,905 6,398,132 (4,313,907) 2,084,225 802 2,085,027 $ 1,756,476 $ 5,048,932 The accompanying notes are an integral part of these consolidated financial statements. f Approved on behalf of Approved on behalf of Yellow Media Limited by Media L Yellow f Robert MacLellan, Director Robert MacLellan, Director David A. Lazzarato, Director David A. Lazzarato, Dire YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 35 Consolidated Income Statements For the years ended December 31, (in thousands of Canadian dollars, except share and per share information) Revenues Operating costs (Note 20) Income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition- related costs and restructuring and special charges Depreciation and amortization (Notes 8 and 9) Impairment of goodwill, intangible assets and property, plant and equipment (Note 4) Acquisition-related costs Restructuring and special charges (Note 11) Loss from operations Financial charges, net (Note 21) Gain on settlement of debt (Note 1) Gain on disposal of subsidiary (Note 5) Loss before dividends on Preferred shares, series 1 and 2, income taxes, and impairment and (earnings) losses from investments in associates Dividends on Preferred shares, series 1 and 2 Loss before income taxes and impairment and (earnings) losses from investments in associates (Recovery of) provision for income taxes (Note 16) Impairment of investment in associate (net of income taxes) (Note 7) (Earnings) losses from investments in associates Net loss from continuing operations Net loss from discontinued operations, net of income taxes (Note 6) Net loss Net (loss) earnings attributable to: 2012 2011 $ 1,107,715 $ 1,328,866 537,115 570,600 104,293 3,267,847 – 44,923 (2,846,463) 146,265 (978,589) – (2,014,139) 17,694 (2,031,833) (75,935) – (1,893) (1,954,005) – 649,159 679,707 160,906 2,900,000 7,743 26,142 (2,415,084) 130,582 – (6,211) (2,539,455) 19,187 (2,558,642) 87,149 50,271 12,060 (2,708,122) (120,877) $ (1,954,005) $ (2,828,999) Common shareholders of Yellow Media Limited1 $ (1,953,614) $ (2,832,649) Non-controlling interests2 (391) 3,650 $ (1,954,005) $ (2,828,999) Basic loss per share attributable to common shareholders From continuing operations Total Weighted average shares outstanding – basic loss per share (Note 18) Diluted loss per share attributable to common shareholders From continuing operations Total Weighted average shares outstanding – diluted loss per share (Note 18) $ $ $ $ (70.66) (70.66) 27,955,077 (70.66) (70.66) $ $ $ $ (97.66) (102.14) 27,955,077 (97.66) (102.14) 27,955,077 27,955,077 1 Included in net loss attributable to shareholders of Yellow Media Limited for the year ended December 31, 2012 are net losses attributable to shareholders of Yellow Media Inc. for the period of January 1 until December 19, 2012. 2 Included in the net earnings (loss) attributable to non-controlling interests for the year ended December 31, 2012 is $nil (2011 (cid:2) earnings of $4.1 million) related to discontinued operations. The accompanying notes are an integral part of these consolidated financial statements. 36 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Consolidated Statements of Comprehensive (Loss) Income For the years ended December 31, (in thousands of Canadian dollars) Net loss Other comprehensive (loss) income: Items that may be subsequently reclassified to net loss Reclassification adjustment on derivatives designated as cash flow hedges Unrealized loss on available–for–sale investment Unrealized loss on available–for–sale investment transferred to net loss Change in unrealized loss on available–for–sale investment Unrealized exchange differences on translating financial statements of foreign operations and foreign associates2 Reclassification adjustment of cumulative translation loss realized upon disposition of foreign operations Change in unrealized exchange differences on translating financial statements of foreign operations and foreign associates Income taxes relating to items that may be reclassified subsequently Items that will not be reclassified subsequently to net loss Actuarial losses (Note 12) Income taxes relating to items that will not be reclassified subsequently Other comprehensive loss Total comprehensive loss Total comprehensive (loss) income attributable to: 2012 2011 $ (1,954,005) $ (2,828,999) (1,395) (372) 228 (144) – – – 406 (1,133) (22,157) 5,830 (16,327) (17,460) (116) (81) – (81) (5,410) 4,590 (820) 28 (989) (104,705) 27,053 (77,652) (78,641) $ (1,971,465) $ (2,907,640) Common shareholders of Yellow Media Limited1 $ (1,971,074) $ (2,909,695) Non-controlling interests (391) 2,055 $ (1,971,465) $ (2,907,640) 1 Included in the total comprehensive loss attributable to shareholders of Yellow Media Limited for the year ended December 31, 2012 is total comprehensive loss attributable to shareholders of Yellow Media Inc. for the period of January 1 until December 19, 2012. 2 Unrealized exchange differences on translating financial statements of foreign operations and foreign associates include $nil (2011 (cid:2) $3.9 million loss) for discontinued operations and $nil for continuing operations (2011 - $1.5 million loss). The accompanying notes are an integral part of these consolidated financial statements. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 37 Consolidated Statements of Changes in Equity For the years ended December 31, (in thousands of Canadian dollars) Balance, December 31, 2011 $ 3,554,715 $ (54,974) $ 320,687 $ Shareholders’ Capital Restricted Shares Preferred Shares Other comprehensive loss Net loss for the year Total comprehensive loss Issuance of new common shares and warrants2 (Note 17) Exchange of preferred shares for new common shares2 (Note 17) Stock options (Note 19) Exchange of convertible debentures (Note 14) Exchange of convertible debentures2 Option on exchangeable debentures2 (Note 14) Restricted shares (Note 19) Cancellation of Restricted Shares2 Deferred consideration (cid:2) (cid:2) (cid:2) 153,568 320,687 (cid:2) 899 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Balance, December 31, 2012 $ 4,029,869 $ (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (320,687) (cid:2) (cid:2) (cid:2) Warrants (cid:2) (cid:2) (cid:2) (cid:2) 1,456 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 54,974 (cid:2) (cid:2) $ (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) $ (cid:2) (cid:2) (cid:2) (cid:2) 1,456 $ Balance, December 31, 2010 Other comprehensive loss Net loss for the year Total comprehensive loss Issuance (exchange of shares) Shareholders’ Capital $ 4,079,838 (cid:2) (cid:2) (cid:2) $ Restricted Shares (78,135) $ (cid:2) (cid:2) (cid:2) Preferred Shares 328,880 (cid:2) (cid:2) (cid:2) (Note 17) 63,296 Reduction of capital (Note 17) (500,000) Repurchase of shares (Note 17) Stock options (Note 19) Restricted shares (Note 19) Restricted shares vested (Note Sale of Trader Corporation Dividends Dividends on Preferred shares, Series 3, 5 and 7 (88,419) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (2,899) 26,060 (cid:2) (cid:2) (cid:2) (1,875) (cid:2) (6,318) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Compound financial instruments1 Stock-based compensation and other reserves $ $ 7,423 (cid:2) (cid:2) (cid:2) 113,693 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 1,189 (cid:2) (cid:2) (cid:2) 4,295 (cid:2) (2,476) $ 116,701 (cid:2) (cid:2) (cid:2) (35) (7,388) 3,633 (cid:2) (cid:2) (cid:2) 3,633 Stock-based compensation and other reserves $ 139,976 (cid:2) (cid:2) (cid:2) Compound financial instruments1 $ 7,423 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 245 (468) (26,060) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Reduction of capital reserve $ 2,457,053 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) $ 2,457,053 Reduction of capital reserve $ 2,000,000 (cid:2) (cid:2) (cid:2) (cid:2) 500,000 (42,947) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Balance, December 31, 2011 $ 3,554,715 $ (54,974) $ 320,687 $ 7,423 $ 113,693 $ 2,457,053 1 The equity component of the exchangeable and convertible debentures presented above is net of income taxes of $1.3 million (2011 - $2.7 million). 2 Pursuant to the recapitalization transaction described in Note 1. The accompanying notes are an integral part of these consolidated financial statements. 38 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 (cid:2) (cid:2) Available for sale investment Cash flow hedges Foreign currency translation Capital and Reserves Equity attributable to shareholders Deficit Non-controlling interests Total Equity 2012 $ 989 $ (1,598) $ 6,398,132 $ (4,313,907) $ 2,084,225 $ 802 $ 2,085,027 $ 144 (144) (cid:2) (144) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) $ $ (989) (cid:2) (989) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) $ (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (1,133) (cid:2) (1,133) (16,327) (1,953,614) (1,969,941) 155,024 (cid:2) 1,189 864 (cid:2) (cid:2) (cid:2) (cid:2) (7,388) 7,388 3,633 4,295 54,974 (2,476) (cid:2) (539) (44,366) (cid:2) (6,321,365) (1,598) $ 6,607,114 $ (17,460) (1,953,614) (1,971,074) 155,024 (cid:2) 1,189 864 (cid:2) 3,633 3,756 10,608 (2,476) $ 285,749 $ (cid:2) (391) (17,460) (1,954,005) (391) (1,971,465) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 155,024 (cid:2) 1,189 864 (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 411 $ 3,633 3,756 10,608 (2,476) 286,160 2011 Available for sale investment Cash flow hedges Foreign currency translation Capital and Reserves Equity attributable to shareholders Deficit Non-controlling interests Total Equity $ 225 $ 1,077 $ (2,373) $ 6,476,911 $ (1,260,974) $ 5,215,937 $ 52,568 $ 5,268,505 (81) (cid:2) (81) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (88) (cid:2) (88) 775 (cid:2) 775 606 (cid:2) 606 (77,652) (2,832,649) (2,910,301) (77,046) (1,595) (78,641) (2,832,649) (2,909,695) 3,650 2,055 (2,828,999) (2,907,640) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 61,421 (cid:2) (137,684) 245 (3,367) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 87,252 (cid:2) (cid:2) (cid:2) (cid:2) 61,421 (cid:2) (50,432) 245 (3,367) (cid:2) (cid:2) (207,345) (207,345) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 61,421 (cid:2) (50,432) 245 (3,367) (cid:2) (53,821) (cid:2) (53,821) (207,345) (cid:2) (22,539) (22,539) (cid:2) (22,539) $ 144 $ 989 $ (1,598) $ 6,398,132 $ (4,313,907) $ 2,084,225 $ 802 $ 2,085,027 YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 39 Consolidated Statements of Cash Flows For the years ended December 31, (in thousands of Canadian dollars) OPERATING ACTIVITIES Net loss from continuing operations Adjusting items Depreciation and amortization Impairment of goodwill, intangible assets and property, plant and equipment Gain on disposal of subsidiary Gain on settlement of debt Past service costs Stock-based compensation expense (reversal) Impairment of investment in associate (Earnings) losses from investments in associates Other non-cash items (Recovery) income taxes recognized in net loss Financial charges recognized in net loss Change in operating assets and liabilities Funding of post-employment benefit plans in excess of costs Income taxes paid Interest paid INVESTING ACTIVITIES Acquisition of intangible assets Acquisition of property, plant and equipment Proceeds from sale of assets Disposal of Trader Corporation Disposal of cash related to the sale of Trader Corporation Disposal of subsidiary Other FINANCING ACTIVITIES Issuance of long-term debt and commercial paper Repayment and settlement of long-term debt and commercial paper Redemption of exchangeable and convertible instruments Dividends to shareholders Repurchase of Preferred shares, Series 1 and 2 and medium term notes Repurchase of common shares and Preferred shares, Series 3 and 5 Dividends on Preferred shares, Series 3, 5 and 7 Stock-based compensation Deferred consideration Proceeds on settlement of derivative financial instruments Recapitalization costs Other Effect of exchange rate changes on cash denominated in foreign currencies NET INCREASE IN CASH CASH FLOWS FROM DISCONTINUED OPERATIONS (Note 6) CASH, BEGINNING OF YEAR CASH, END OF YEAR Supplemental disclosure of cash flow information (Note 22) 2012 2011 $ (1,954,005) $ (2,708,122) 104,293 3,267,847 (cid:2) (978,589) (13,318) 626 (cid:2) (1,893) (1,955) (75,935) 146,265 (27,357) (14,529) (63,456) (149,421) 238,573 (35,281) (5,137) 1,650 (cid:2) (cid:2) (cid:2) 183 (38,585) 239,000 (351,426) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (1,800) (cid:2) (63,025) (116) (177,367) (cid:2) 22,621 (cid:2) 84,186 $ 106,807 $ 160,906 2,900,000 (6,211) (cid:2) (cid:2) (565) 50,271 12,060 (102) 87,149 130,582 (42,637) (cid:2) (105,203) (141,555) 336,573 (46,686) (15,565) (cid:2) 690,230 (24,517) 70,938 (435) 673,965 1,062,000 (1,403,585) (106,172) (209,134) (266,183) (50,432) (22,539) (2,899) (4,502) 3,819 (cid:2) (2,123) (1,001,750) (1,862) 6,926 7,935 69,325 84,186 The accompanying notes are an integral part of these consolidated financial statements. 40 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:2)(cid:3)(cid:2) (cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:9)(cid:10)(cid:11)(cid:9)(cid:12)(cid:13)(cid:14)(cid:15)(cid:14) Yellow Media Limited, successor of Yellow Media Inc., through its subsidiaries, operates print and digital media and offers marketing solutions in all the Provinces of Canada. References herein to Yellow Media Limited (or the “Company”) represent the financial position, results of operations, cash flows and disclosures of Yellow Media Limited and its subsidiaries on a consolidated basis. Yellow Media Limited’s registered head office is located at 16, Place du Commerce, Montréal, Québec, Canada, H3E 2A5 and is listed on the Toronto Stock Exchange (“TSX”) under the symbol “Y”. On July 23, 2012, the Company announced a recapitalization transaction (“Recapitalization”) aimed at significantly reducing the Company’s debt and improving its maturity profile, with the new debt first maturing in 2018. On September 6, 2012, the Company held debtholder and shareholder meetings to obtain support for the plan of arrangement under the Canada Business Corporations Act (“CBCA”) implementing the Recapitalization. The Recapitalization was approved by the requisite majority of its debtholders and shareholders at their respective meetings, with 70.39% of support received from the debtholders and 77.26% of support received from the shareholders. The hearing on the final order (the “Final Order”) of the Québec Superior Court (the “Court”) approving the Recapitalization began on October 15, 2012 and concluded on October 23, 2012. On December 10, 2012, the Company announced that it reached a settlement with the lenders under the Credit Facility. The Court issued its Final Order and approved the Recapitalization on December 14, 2012. On December 20, 2012 (the “Effective Date”), the Recapitalization transaction was implemented. A new corporation, Yellow Media Limited, was formed for the purpose of effecting the Recapitalization. Pursuant to the Recapitalization, Yellow Media Limited issued new common shares (“New Common Shares”) and warrants (“Warrants”) on behalf of Yellow Media Inc. and became the parent company of Yellow Media Inc. Yellow Media Inc. changed its name to YPG Financing Inc. The key components of the Recapitalization were as follows: (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) The exchange of the Company’s credit facility (“Credit Facility”) and medium term notes (the “Medium Term Notes”), (collectively the “Senior Unsecured Debt”) representing $1,772.7 million of the Company’s debt, for a combination of: (cid:2)(cid:2) $800 million of 9.25% senior secured notes maturing in 2018 (“Senior Secured Notes”) (Note 13); (cid:2)(cid:2) $100 million of senior subordinated unsecured exchangeable debentures due in 2022, with interest payable in cash at 8.0% or in additional debentures at 12.0% (“Exchangeable Debentures”) (Note 14); (cid:2)(cid:2) 23,062,943 New Common Shares, representing 82.5% of the issued and outstanding New Common Shares; and (cid:2)(cid:2) $275 million of cash. The exchange of the existing 6.25% convertible unsecured subordinated debentures (“Convertible Debentures”) for a combination of: (cid:2)(cid:2) $7.5 million of Exchangeable Debentures (Note 14); (cid:2)(cid:2) 497,852 of New Common Shares representing 1.8% of New Common Shares; and (cid:2)(cid:2) 484,487 10-year Warrants to purchase New Common Shares at the exercise price of $28.16 (Note 17). The exchange of the existing preferred shares and common shares of the Company for a combination of: (cid:2)(cid:2) 4,394,282 of New Common Shares representing 15.7% of New Common Shares; and (cid:2)(cid:2) 2,511,019 10-year Warrants to purchase New Common Shares at the exercise price of $28.16 (Note 17). Yellow Media Limited recorded a gain on settlement of debt of $978.6 million (before related recovery of income taxes of $25.9 million), net of related fees of $69.5 million pursuant to the Recapitalization. The gain on settlement of debt was measured as the difference between the carrying value of the Medium Term Notes, Credit Facility, Convertible Debentures, and Preferred Shares, Series 1 and 2 (collectively the “Previous Debtholders”) and the fair value of the consideration issued to the Previous Debtholders at the Effective Date. The equity component related to the Convertible Debentures of $7.4 million, net of income taxes, was credited to deficit. The fair values of the Senior Secured Notes, Exchangeable Debentures and New Common Shares which formed part of the consideration issued to the Previous Debtholders were $800 million, $86.7 million and $153.6 million, respectively. The fair values of the Senior Secured Notes and Exchangeable Debentures were determined using a discounted cash flow approach where the interest rate utilized for discounting purposes is determined according to an analysis of the yield to maturity of comparable instruments of a peer group of issuers. The fair value of the conversion option relating to the Exchangeable Debentures was $3.6 million (net of income taxes of $1.3 million) at the date of issuance and is included in Equity. The fair value of the Warrants of $1.5 million was calculated using the present value of the cash flows resulting from the exercise of the Warrants under various probable levels of the stock price determined utilizing a binomial tree of the stock price. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 41 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) In addition, Yellow Media Limited agreed to pay all accrued interest up to (and excluding) the Effective Date of the Recapitalization to holders of the Company’s Medium Term Notes, Convertible Debentures and to the lenders under the Credit Facility in the aggregate amount of $34.7 million. The Recapitalization provided that no cumulative or unpaid dividends would be paid in respect of the Preferred Shares, Series 1 and 2. The carrying amount of the Preferred Shares, Series 3, 5 and 7 of $320.7 million was reclassified to shareholder’s capital upon exchange for New Common Shares. Pursuant to the Recapitalization, the restricted shares were cancelled and the balance of $55 million was reclassified from the Restricted Shares balance in equity to Deficit (net of income taxes of $10.6 million). The Medium Term Notes, Credit Facility, Convertible Debentures and Preferred Shares, Series 1, 2, 3, 5 and 7 and the existing common shares were cancelled on the Effective Date. For a detailed description of the new securities issued in connection with the Recapitalization, please refer to the indentures governing the Senior Secured Notes, the Exchangeable Debentures and the Warrants dated December 20, 2012, which are available on SEDAR at www.sedar.com. The Board of Directors (the “Board”) approved the consolidated financial statements for the year ended December 31, 2012 and 2011 and authorized their publication on February 5, 2013. (cid:16)(cid:3)(cid:2) (cid:17)(cid:5)(cid:18)(cid:9)(cid:6)(cid:5)(cid:19)(cid:14)(cid:6)(cid:11)(cid:20)(cid:13)(cid:19)(cid:20)(cid:8)(cid:19)(cid:6)(cid:14)(cid:15)(cid:14) 2.1.(cid:2)Revised International Financial Reporting Standards (“IFRS”) interpretations and amendments adopted with effect on the financial statements IAS 1 (Revised) — Presentation of Financial Statements On June 16, 2011, the International Accounting Standards Board (“IASB”) issued amendments to IAS 1, Presentation of Financial Statements, which require entities to group together items within Other Comprehensive Income (“OCI”) that may be reclassified to the profit or loss section of the income statement and to separately group together items that will not be reclassified to the profit or loss section of the income statement. The amendments also reaffirm existing requirements that profit or loss and OCI should be presented as either a single statement or two consecutive statements. The amendments are effective for financial years commencing on or after July 1, 2012. In May 2012, the IASB issued further amendments to IAS 1, Presentation of Financial Statements which are effective for annual periods beginning on or after January 1, 2013 with early application permitted. IAS 1 requires an entity that changes accounting policies retrospectively, or makes a retrospective restatement or reclassification to present a statement of financial position as at the beginning of the preceding period. The amendments to IAS 1 clarify that an entity is required to present a third statement of financial position only when the retrospective application, restatement or reclassification has a material effect on the information in the third statement of financial position and that related notes are not required to accompany the third statement of financial position. Yellow Media Limited has applied the amendments to IAS 1, on January 1, 2011, in advance of the effective date, as permitted. The amendments have been applied retrospectively, and hence the presentation of items of other comprehensive income has been modified to reflect the changes. Other than the above mentioned presentation changes, the application of the amendments to IAS 1 did not result in any impact on profit or loss, other comprehensive income and total comprehensive income. 2.2.(cid:2)Revised IFRS, interpretations and amendments adopted with no effect on the financial statements The following revised standards have been adopted and their adoption has not had any impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements: IFRS 7 (Revised) — Financial Instruments: Disclosures (Amendments) — Transfer of financial assets Other amendments to IFRS 7 allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period. The IFRS 7 Amendments are effective for annual periods beginning on or after July 1, 2011. IAS 12 (Revised) — Deferred Tax: Recovery of Underlying Assets and SIC-21 (amendments), Income Taxes — Recovery of Revalued Non-Depreciable Assets The amendment introduces a rebuttable presumption that an investment property measured using the fair value model is recovered entirely through sale unless the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits over time. As a result of the amendments, SIC-21 would no longer apply to investment properties carried at fair value. The IAS 12 amendments are effective for annual reporting periods beginning on or after January 1, 2012. 42 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) 2.3.(cid:7)Standards, interpretations and amendments to published standards that are issued but not yet effective Certain new standards, interpretations and amendments to existing standards have been published and are mandatory for Yellow Media Limited’s accounting periods beginning on or after January 1, 2013. Those which are considered to be relevant to Yellow Media Limited’s operations are as follows: IFRS 7 (Revised) — Financial Instruments: Disclosures and IAS 32 – Financial Instruments: Presentation in respect of Offsetting On December 16, 2011, the IASB and Financial Accounting Standards Board (“FASB”) issued common disclosure requirements that are intended to help investors and other users to better assess the effect or potential effect of offsetting arrangements on a company's financial position. The new requirements are set out in Disclosures-Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7). The IFRS 7 amendments are effective for annual reporting periods beginning on or after January 1, 2013. The new requirements may result in additional disclosures being made with regard to offsetting financial assets and financial liabilities in the future. As part of this project, the IASB also clarified aspects of IAS 32, Financial Instruments: Presentation. The amendments to IAS 32 address inconsistencies in current practice when applying the requirements. The amendments are effective for annual periods beginning on or after January 1, 2014 and are required to be applied retrospectively. Yellow Media Limited has not early adopted this standard and has not fully assessed the impact of adopting IAS 32. IFRS 9 — Financial Instruments IFRS 9 is the first phase of the IASB’s three phase project to replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 issued in November 2009 introduces new requirements for the classification and measurement of financial assets. IFRS 9, amended in October 2010, includes the requirements for the classification and measurement of financial liabilities and for derecognition. Key requirements of IFRS 9 are described as follows: (cid:2)(cid:2) (cid:2)(cid:2) IFRS 9 requires all recognized financial assets that are within the scope of IAS 39, Financial Instruments: Recognition and Measurement to be subsequently measured at amortized cost or fair value. The most significant effect of IFRS 9 regarding the classification and measurement of financial liabilities relates to the accounting for changes in the fair value of a financial liability (designated as at fair value through profit or loss) attributable to changes in the credit risk of that liability and the elimination of the cost exemption for derivative liabilities to be settled by delivery of unquoted equity instruments. IFRS 9 is applied prospectively with transitional arrangements depending on the date of application. The Standard is not applicable until annual periods beginning on or after January 1, 2015, however is available for early adoption. Yellow Media Limited has not early adopted this standard and has not fully assessed the impact of adopting IFRS 9. IFRS 10 — Consolidated Financial Statements IFRS 10 replaces the consolidation requirements in IAS 27, Consolidated and Separate Financial Statements, and SIC-12, Consolidation - Special Purpose Entities. IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. It is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted provided IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interests in Other Entities and the related amendments to IAS 27, Consolidated and Separate Statements and IAS 28, Investments in Associates (the “package of five”) are adopted at the same time. Based on a preliminary assessment, Yellow Media Limited does not expect any significant impact on the financial statements upon adoption. IFRS 11 — Joint Arrangements IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC-13, Jointly Controlled Entities - Non-Monetary Contributions by Venturer. IFRS 11 requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved by assessing its rights and obligations arising from the arrangement. The standard also requires the use of a single method to account for interests in joint ventures , namely the equity method. IFRS 11 is applicable at the same time as IFRS 10. Based on a preliminary assessment, Yellow Media Limited does not expect any significant impact on the financial statements upon adoption. IFRS 12 — Disclosure of Interests in Other Entities IFRS 12 is a new standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. IFRS 12 is applicable at the same time as IFRS 10. In June 2012, the IASB issued amendments to IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interests in Other Entities which will also be effective for the Company at the time of adoption of these standards for the fiscal year beginning on January 1, 2013. Based on a preliminary assessment, Yellow Media Limited expects to disclose additional information related to its consolidated subsidiaries and interests in associates upon adoption. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 43 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) IFRS 13 — Fair Value Measurement IFRS 13 is a new standard that defines fair value and requires disclosures about fair value measurements. IFRS 13 is effective for fiscal years beginning on or after January 1, 2013. Earlier application is permitted. It applies prospectively from the beginning of the annual period in which it is adopted. The new requirements will result in additional disclosures about all assets and liabilities measured at fair value on the financial statements upon adoption. IAS 19 (Revised) — Employee Benefits A revised version of IAS 19 was issued in June 2011 and is effective for financial years beginning on or after January 1, 2013. Early application is permitted. The main change of this revised version is the elimination of the corridor approach, with all changes to the defined benefit obligation and plan assets recognized when they occur. Furthermore, the interest cost and expected return on plan assets are replaced with the net interest amount which is calculated by applying the discount rate to the net defined benefit liability or asset. The amendments require retroactive application. Based on the preliminary assessment, when Yellow Media Limited will apply the amendments for the first time for the periods in the year ending December 31, 2013, the net financial charges for the year ended December 31, 2012 will increase by $10.9 million with the corresponding adjustment being recognized in the post-employment benefits obligation. The amendments will also enhance disclosure requirements for the Company’s defined benefit plans. IAS 16 — Property Plant and Equipment, IAS 32 – Financial Instruments and IAS 34 – Interim Financial Reporting In May 2012, the IASB also issued amendments to IAS 16, Property, Plant and Equipment, IAS 32, Financial Instruments: Presentation and IAS 34, Interim Financial Reporting which are effective for annual periods beginning on or after January 1, 2013 with early application permitted. These amendments clarify various requirements. Based on a preliminary assessment, Yellow Media Limited does not expect any significant impact on the financial statements upon application of these amendments. (cid:21)(cid:3)(cid:2) (cid:22)(cid:20)(cid:6)(cid:9)(cid:6)(cid:14)(cid:12)(cid:23)(cid:14)(cid:10)(cid:8)(cid:5)(cid:6)(cid:5)(cid:13)(cid:11)(cid:20)(cid:11)(cid:9)(cid:12)(cid:13)(cid:14)(cid:20)(cid:13)(cid:19)(cid:14)(cid:6)(cid:9)(cid:24)(cid:13)(cid:9)(cid:23)(cid:9)(cid:7)(cid:20)(cid:13)(cid:11)(cid:14)(cid:20)(cid:7)(cid:7)(cid:12)(cid:25)(cid:13)(cid:11)(cid:9)(cid:13)(cid:24)(cid:14)(cid:10)(cid:12)(cid:26)(cid:9)(cid:7)(cid:9)(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) 3.1 Statement of compliance These consolidated financial statements of Yellow Media Limited and its subsidiaries were prepared by management in accordance with IFRS. These financial statements have been prepared in accordance with the following significant accounting policies which have been applied consistently to all periods presented throughout the consolidated entities. 3.2 Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the revaluation of certain assets and liabilities (including derivative instruments) at fair value as explained in the policies below. 3.3 Functional and presentation currency The consolidated financial statements are presented in Canadian dollars, which is the functional and presentation currency of Yellow Media Limited. 3.4 Basis of consolidation 3.4.1 Subsidiaries Subsidiaries that are directly controlled by Yellow Media Limited or indirectly controlled by other consolidated subsidiaries are fully consolidated. Subsidiaries are all entities over which Yellow Media Limited exercises control. Subsidiaries are fully consolidated from the effective date of acquisition up to the effective date of disposal. Inter-company assets and liabilities and transactions between fully consolidated companies are eliminated. Gains and losses on internal transactions with controlled companies are fully eliminated. Accounting policies and methods are modified where necessary to ensure consistency of accounting treatment at the Yellow Media Limited level. When Yellow Media Limited loses control of a subsidiary, the gain or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets, liabilities of the subsidiary and any non-controlling interests. Amounts previously recognized in other comprehensive income in relation to the subsidiary are accounted for (i.e. reclassified to net earnings (loss) or transferred directly to deficit) in the same manner as would be required if the relevant assets or liabilities were disposed of. 44 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) 3.4.2 Associates Associates are all entities in which Yellow Media Limited exercises a significant influence over the entity’s management and operating and financial policy, without exercising control, and generally implies holding 20% to 50% of the voting rights. Investments in associates are accounted for using the equity method and are initially measured at cost. Subsequently, the share in profits or losses of the associate attributable to equity holders of Yellow Media Limited is recognized in net earnings. Included in the recognized share of net loss is the amortization of the amortizable assets based on their fair values at the acquisition date. When Yellow Media Limited’s share of losses exceed its interest in an equity-accounted investee, the carrying amount of the investment including any long-term interests that form part thereof, is reduced to zero and the recognition of further losses is discontinued except to the extent that Yellow Media Limited has an obligation or has made payments on behalf of the investee. 3.4.3 Business combinations Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by Yellow Media Limited in exchange for control of the acquiree. Acquisition-related costs are recognized in the income statement as incurred. Where appropriate, the cost of acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRSs and reflected through net earnings. Changes in the fair value of contingent consideration classified as equity are not recognized. Where a business combination is achieved in stages, Yellow Media Limited’s previously-held interests in the acquired entity are remeasured to fair value at the acquisition date (i.e. the date Yellow Media Limited attains control) and the resulting gain or loss, if any, is recognized in the income statement. 3.4.4 Discontinued operations Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale. When an operation which is deemed to be a separate major line of business or separate geographical area is classified as a discontinued operation, the comparative income statement and statement of comprehensive income are re-presented as if the operation had been discontinued from the start of the comparative year. 3.5 Cash Cash consists of funds on deposit and, from time to time, highly liquid investments with a purchased maturity of three months or less. 3.6 Trade receivables Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less a provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that Yellow Media Limited will not be able to collect all amounts due according to the original terms of the receivables. 3.7 Financial assets Financial assets are classified into the following specified categories: financial assets “at fair value through profit and loss” (“FVTPL”), “held-to-maturity” investments, “available-for-sale” (“AFS”) financial assets and “loans and receivables”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. A financial asset is derecognized if the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for derecognition. The Company has a note receivable from the sale of Trader Corporation which is classified as loans and receivables and included in the caption financial and other assets. This asset was initially recognized at fair value and subsequently measured at amortized cost using the effective interest method. Cash and trade receivables are included in this category as well. 3.7.1 Effective interest method The effective interest method is a method of calculating the amortized cost of a financial asset/liability and of allocating interest income/expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash flows (including all fees that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset/liability, or, where appropriate, a shorter period. 3.7.2 Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each statement of financial position date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually, are subsequently assessed for impairment on a collective basis. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 45 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) 3.8 Deferred publication costs An intangible asset is recognized for direct and incremental publication costs incurred during the sale, manufacturing and distribution of telephone print directories. The intangible asset represents costs that will be recovered in future periods, when the related directories revenues are recognized. An intangible asset is capitalized when the following conditions are met: (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) Yellow Media Limited has control over the contract for which the costs were incurred; the control results from past events; future economic benefits are expected to flow to Yellow Media Limited; and the asset is identifiable, non-monetary and without physical substance. Deferred publication costs are initially measured at cost and are amortized over the same period in which the related revenues are recognized. 3.9 Property, plant and equipment Property, plant and equipment are recognized at cost less accumulated depreciation and impairment losses. The various components of property, plant and equipment are recognized separately when their estimated useful lives and, therefore, their depreciation periods are significantly different. The cost of an asset includes the expenses that are directly attributable to its acquisition. All other borrowing costs are recognized in profit or loss in the period in which they are incurred. Yellow Media Limited has not capitalized any borrowing costs during the periods presented. Subsequent costs are included in the carrying amount of the asset or recognized as a separate component, where necessary, if it is probable that future economic benefits will flow to Yellow Media Limited and the cost of the asset can be reliably measured. All other repair and maintenance costs are expensed in the year they are incurred. Depreciation is calculated using the straight-line method, based on the capitalized costs, less any residual value over a period corresponding to the useful life of each asset. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. As at December 31, 2012, the expected useful lives are as follows: Office equipment Computer equipment Other equipment Leasehold improvements 10 years 3 years 3 – 12 years Shorter of term of lease or useful life The residual value, the depreciation method and the useful life of an asset are reviewed at a minimum, annually. Property, plant and equipment are tested for impairment when an indication of impairment loss exists. When the asset’s recoverable amount is less than its net carrying amount, an impairment loss is recognized. Where the recoverable amount of an individual asset does not generate independent cash inflows, Yellow Media Limited determines the recoverable amount of the cash generating units (“CGU”) or group of CGUs to which the asset belongs. 3.10 Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are initially recognized as assets their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as an obligation under finance lease that is included with long-term debt. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with Yellow Media Limited’s general policy on borrowing costs. Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a deferred credit. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis. 46 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) 3.11 Intangibles assets Intangible assets acquired through a business combination are identified and recognized separately from goodwill where they arise from legal or contractual rights or are capable of being separated from the acquiree and sold, transferred, licensed or exchanged. The cost of such intangible assets is their fair value at the acquisition date. Intangible assets not acquired through a business combination are reported at cost less accumulated amortization and accumulated impairment losses. Intangible assets developed internally (consisting of software used by the Company) are recognized to the extent the criteria in IAS 38, Intangible Assets are met. Development costs for internally-generated intangible assets are capitalized at cost if, and only if, Yellow Media Limited can demonstrate: (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) 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; 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-generated intangible assets is the sum of the expenditures incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally-generated intangible asset can be recognized, development expenditures are charged to the income statement in the period in which they are incurred. Internally-generated intangible assets include the cost of software tools and licenses used in the development of Yellow Media Limited’s systems, as well as all directly attributable payroll and consulting costs. These items are not amortized until the assets are available for use. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment loss. Intangibles assets are amortized, unless their useful lives are indefinite, as follows: Non-competition agreements and logos Customer-related intangible assets Pro rata based on related revenues, not exceeding 24 months Straight-line over life of agreement Trademarks Domain names Software Indefinite or straight-line over 1-6 years Indefinite or straight-line over 18 years Straight-line over 3 years The estimated useful life and amortization method are reviewed at the end of each period or annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. An intangible asset is de-recognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from the derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is de-recognized. 3.12 Goodwill Goodwill arising on the acquisition of a subsidiary is recognized as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously-held equity interest (if any) in the entity over the net fair value of the identifiable net assets recognized. Goodwill is not amortized, but is reviewed for impairment at least annually or sooner if indicators of impairment exist. Any impairment loss is recognized immediately in profit or loss and is not subsequently reversed. 3.13 Impairment of tangible and intangible assets including goodwill At each reporting date, Yellow Media Limited determines whether there are any indications that the carrying amounts of its tangible and intangible assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, Yellow Media Limited estimates the recoverable amount of the CGU to which the asset belongs. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually, and whenever there is an indication that the asset may be impaired. A majority of the Company’s intangible assets do not have cash inflows independent of those from other assets and as such, are tested within their respective CGUs. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 47 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognized immediately in the income statement. For the purpose of impairment testing of goodwill, goodwill is tested at the operating segment level (Group of CGUs) which represents the lowest level where goodwill is monitored for internal management purposes. Goodwill is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of a CGU or group of CGUs is less than the carrying amount, the impairment loss is allocated first to reduce the carrying amount of goodwill and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. The Company does not reduce the carrying amount of an asset below the highest of its fair value less costs to sell and its value in use. 3.14 Trade and other payables Trade and other payables, including accruals, are recorded when Yellow Media Limited is required to make future payments as a result of purchases of assets or services. Trade and other payables are carried at amortized cost. 3.15 Financial liabilities The valuation of financial liabilities depends on their classification. Financial liabilities are classified as either financial liabilities “at FVTPL” or “other financial liabilities”. Excluding liability derivatives and financial liabilities accounted for at FVTPL, Yellow Media Limited recognizes all financial liabilities and particularly debts, trade payables and other liabilities initially at fair value less transaction costs and subsequently at amortized cost, using the effective interest method. Financial liabilities designated as FVTPL are carried at fair value. Changes in fair value are taken to the income statement. Transaction costs incurred in setting up these financial liabilities are recognized immediately in expenses. Yellow Media Limited de-recognizes financial liabilities when, and only when, Yellow Media Limited’s obligations are discharged, cancelled or they expire. 3.16 Provisions Provisions are recognized when Yellow Media Limited has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the statement of financial position date, taking into account the risks and uncertainties surrounding the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as a financial charge. 3.16.1 Onerous contracts Present obligations arising under onerous contracts are recognized and measured as provisions. An onerous contract is considered to exist where Yellow Media Limited has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. 3.16.2 Restructuring A restructuring provision is recognized when Yellow Media Limited has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity. 3.17 Long-term debt All long-term debts are initially stated at the fair value of consideration received after deduction of issue costs. Debts are subsequently stated at amortized cost. Issue costs are charged to the income statement together with the coupon, as finance costs, on a constant-yield basis over the term of the debt, or over a shorter period where the lender can require earlier repayment. 48 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) 3.18 Employee benefits 3.18.1 Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in the income statement when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in future payments is available. 3.18.2 Defined benefit plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. Yellow Media Limited’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefits that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. Any unrecognized past service costs and the fair value of any plan assets are deducted from the obligation. The discount rate is the yield at the reporting date on high quality corporate bonds that have terms to maturity approximating to the terms of the related pension liability adjusted for a spread to reflect any additional credit risk and that are denominated in the currency in which the benefits are expected to be paid. The calculation is performed annually by a qualified actuary using the projected unit credit method. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in the income statement. Yellow Media Limited recognizes all actuarial gains and losses arising subsequently from defined benefit plans in other comprehensive income. The interest cost and expected return on plan assets of defined benefit plans are included within net financial charges while service costs are recorded in operating expenses. 3.18.3 Other long-term employee benefits Yellow Media Limited’s net obligation in respect of long-term employee benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any related asset is deducted. The discount rate is the yield at the reporting date on high quality corporate bonds that have terms to maturity approximating the terms of the related obligation. The calculation is performed using the projected unit credit method. Any actuarial gains or losses are recognized in the period in which they arise. 3.18.4 Termination benefits Termination benefits are recognized as an expense when Yellow Media Limited is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense if Yellow Media Limited has made an offer of voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. 3.18.5 Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if Yellow Media Limited has a present legal or constructive obligation to pay this amount as a result of a past service provided by the employee and the obligation can be estimated reliably. 3.18.6 Share-based payment transactions Yellow Media Limited’s Restricted Shares and Stock Options granted to employees and others providing similar services were measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on Yellow Media Limited’s estimate of equity instruments that will eventually vest. At each statement of financial position date, Yellow Media Limited revised its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimate, if any, was recognized in the income statement, with a corresponding adjustment to the equity-settled employee benefits reserve. Pursuant to the Recapitalization approved by the Court, the holders of the Restricted Shares surrendered their restricted shares in consideration for the payment in cash of the market price of the underlying shares measured as the volume weighted average trading price (“VWAP”) of the underlying shares for the five trading days immediately preceding the day before the Effective Date. All restricted Shares were subsequently cancelled. In addition, the Stock Options Plans were cancelled pursuant to the Recapitalization. All rights under these plans were terminated, extinguished and cancelled. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 49 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) 3.19 Equity instruments issued by Yellow Media Limited An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by Yellow Media Limited are recorded at the proceeds received, net of direct issue costs. Transaction costs incurred by Yellow Media Limited in issuing, acquiring or reselling its own equity instruments are accounted for as a deduction from equity to the extent that they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. 3.20 Operating segments Disclosure of segment information is reported in a manner consistent with the internal reports regularly reviewed by Yellow Media Limited’s Chief Operating Decision Maker in order to assess each segment’s performance and to allocate resources to them. The Chief Operating Decision Maker who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the President and Chief Executive Officer. The Company currently operates under one segment. 3.21 Revenues Yellow Media Limited’s revenues are measured at the fair value of the consideration received or receivable after deduction of sales allowances and sales taxes. Print directory advertising is sold in bundles that can include several related online advertising products. Print products are not sold separately. Revenues from print directory advertising as well as revenues from related online products are recognized in the income statement rateably on a monthly basis from the point at which service is first provided over the life of the contract. Revenues from private and commercial classified advertisements and display advertisements are recognized at the time the advertisements are published either on a weekly or monthly basis. Revenues related to advertisements appearing on multiple occasions are recognized over the period the advertisements are displayed. 3.22 Derivative financial instruments Yellow Media Limited entered from time to time into a variety of derivative financial instruments to manage interest rate risk on its long-term debt. Derivatives were initially recognized at fair value at the date a derivative contract was entered into and were subsequently re- measured to their fair value at each statement of financial position date. The resulting gain or loss was recognized in the income statement immediately unless the derivative was designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depended on the nature of the hedge relationship. Yellow Media Limited designated certain derivatives as either hedges of the fair value of recognized assets or liabilities or firm commitments (fair value hedges), hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges). 3.22.1 Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognized in the income statement. 3.22.2 Hedge accounting Yellow Media Limited designated certain hedging instruments, which included derivatives and non-derivatives, as either fair value hedges or cash flow hedges. At the inception of the hedge relationship, the entity documented the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, Yellow Media Limited documented whether the hedging instrument that was used in a hedging relationship was highly effective in offsetting changes in fair values or cash flows of the hedged item. Details of the fair values of the derivative instruments used for hedging purposes were presented on an annual basis. Movements in the hedging reserve in equity were detailed in the statement of changes in equity. 3.23 Borrowing costs Borrowing costs directly attributable to the acquisition or construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognized in profit or loss in the period in which they are incurred. The Company currently has not capitalized any borrowing costs. 50 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) 3.24 Taxation Income tax expense represents the sum of the current and deferred tax. 3.24.1 Current income tax Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Yellow Media Limited’s liability for current income tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date. 3.24.2 Deferred tax Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries and associates, except where Yellow Media Limited is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the statement of financial position date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which Yellow Media Limited expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off tax assets against tax liabilities and when they relate to income taxes levied by the same taxation authority and Yellow Media Limited intends to settle its tax assets and liabilities on a net basis. 3.24.3 Current and deferred tax for the period Current and deferred tax are recognized as an expense or income in profit or loss, except when they relate to items that are recognized outside net earnings (whether in other comprehensive income or directly in equity), in which case the tax is also recognized outside net earnings, or where they arise from the initial accounting for a business combination. In the case of a business combination, the applicable tax effects are taken into account in the accounting for the business combination. 3.25 Significant estimates and judgements The preparation of consolidated financial statements requires management to make estimates and assumptions that can affect the carrying amount of certain assets and liabilities, income and expenses, and the information disclosed in the notes to the financial statements. Management reviews these estimates and assumptions on a regular basis to ensure their pertinence with respect to past experience and the current economic situation. Items in future financial statements could differ from current estimates as a result of changes in these assumptions. The impact of changes in accounting estimates is recognized during the period in which the change took place and all affected future periods. The estimates and judgements made by management that are critical to the determination of the carrying value of assets and liabilities are addressed below. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 51 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) Significant estimates Intangible assets and goodwill The values associated with identifiable intangible assets and goodwill involve significant estimates and assumptions, including those with respect to future cash inflows and outflows, discount rates, terminal growth rates and asset lives. These significant estimates could affect Yellow Media Limited’s future results if the current estimates of future performance and fair values change. These determinations will affect the amount of amortization expense on identifiable intangible assets recognized in future periods. Yellow Media Limited assesses impairment by comparing the recoverable amount of a CGU or group of CGUs to which an identifiable intangible asset or goodwill belongs, with its carrying value. The determination of the recoverable amount involves significant management estimates. Yellow Media Limited performs its annual test for impairment of indefinite life intangible assets and goodwill in the fourth quarter in accordance with the policy described in Note 3.13. Goodwill is tested at the operating segment level since this represents the lowest level within Yellow Media Limited at which the goodwill is monitored for internal management purposes. Useful lives of intangible assets and property, plant and equipment Yellow Media Limited reviews the estimated useful lives of its intangible assets and property, plant and equipment at the end of each reporting period. At the end of the current reporting period, management determined that the useful lives of its intangible assets and property, plant and equipment was adequate. Employee future benefits The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Determination of benefit expense requires assumptions such as the expected return on assets available to fund pension obligations, the discount rate to measure obligations, the projected age of employees upon retirement, the expected rate of future compensation and the expected healthcare cost trend rate. For the purpose of calculating the expected return on plan assets, the assets are valued at fair value. Actual results will differ from results which are estimated based on assumptions. Income taxes Estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an assessment of Yellow Media Limited’s ability to utilize the underlying future tax deductions against future taxable income before they expire. Yellow Media Limited’s assessment is based upon existing tax laws and estimates of future taxable income. If the assessment of Yellow Media Limited’s ability to utilize the underlying future tax deductions changes, Yellow Media Limited would be required to recognize more or fewer of the tax deductions as assets, which would decrease or increase the income tax expense in the period in which this is determined. Significant judgements Uncertain tax provisions Yellow Media Limited is subject to taxation in numerous jurisdictions. Significant judgement is required in determining the consolidated provision for taxation. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Yellow Media Limited maintains provisions for uncertain tax positions that it believes appropriately reflect its risk with respect to tax matters under active discussion, audit, dispute or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions for uncertain tax positions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. Yellow Media Limited reviews the adequacy of these provisions at each statement of financial position date. However, it is possible that at some future date an additional liability could result from audits by tax authorities. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made. 52 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:27)(cid:3)(cid:2) (cid:28)(cid:29)(cid:10)(cid:20)(cid:9)(cid:8)(cid:29)(cid:5)(cid:13)(cid:11)(cid:14)(cid:12)(cid:23)(cid:14)(cid:24)(cid:12)(cid:12)(cid:19)(cid:30)(cid:9)(cid:26)(cid:26)(cid:31)(cid:14)(cid:9)(cid:13)(cid:11)(cid:20)(cid:13)(cid:24)(cid:9)!(cid:26)(cid:5)(cid:14)(cid:20)(cid:6)(cid:6)(cid:5)(cid:11)(cid:6)(cid:14)(cid:20)(cid:13)(cid:19)(cid:14)(cid:10)(cid:8)(cid:12)(cid:10)(cid:5)(cid:8)(cid:11)"(cid:31)(cid:14)(cid:10)(cid:26)(cid:20)(cid:13)(cid:11)(cid:14)(cid:20)(cid:13)(cid:19)(cid:14)(cid:5)#(cid:25)(cid:9)(cid:10)(cid:29)(cid:5)(cid:13)(cid:11)(cid:14)(cid:15)(cid:14) 2012 First quarter During the first quarter of 2012, several new events and circumstances were identified which indicated that the Company’s assets may be impaired. This included a significant change in revenue trends impacting the Company’s long-term revenue mix, an updated five-year plan taking into account the lower than expected revenue performance, and external factors such as the sale by AT&T’s directory business. (cid:2) As a result of these internal and external sources of information, management concluded that there were indicators that the Company’s assets may have been impaired, requiring the Company to perform an impairment analysis. Following the completion of an impairment analysis during the first quarter of 2012, the Company recorded a goodwill impairment charge of $2,967.8 million. Goodwill was tested for impairment at the lowest level within the Company at which the goodwill is monitored for internal management purposes; the Directories segment (Group of CGUs), the only operating segment of the Company. A CGU is a business operation. The recoverable amount resulting in the goodwill impairment charge of $2,967.8 million was determined based on the value in use approach using a discounted cash flow model. The significant key assumptions included forecasted cash flows based on updated financial plans prepared by management covering a five-year period taking into consideration the minimum liquidity requirements of the Company. Fourth quarter During the fourth quarter of 2012, as a result of the closing of the Recapitalization and in the context of its annual impairment testing, the Company completed its impairment analysis and assessed the recoverability of its assets allocated to its CGUs. The Company calculated the recoverable amounts of its CGUs using valuation methods which were consistent with those used in prior periods. The recoverable amounts were determined based on the value in use approach using a discounted cash flow model. As a result of the impairment analysis, the Company determined that the carrying amounts of if its CGUs exceeded their recoverable amounts and accordingly, the Company recorded an impairment charge of $300 million applied, to certain intangible assets and property, plant and equipment. The recoverable amount was determined based on the value in use approach using a discounted cash flow model. The significant key assumptions included forecasted cash flows based on updated financial plans prepared by management covering a three-year period taking into consideration recent growth and product mix trends. The discounted cash flow models for the first and fourth quarter of 2012 were established using discount rates ranging from 10% to 20% (pre-tax rates ranging from 12.4% to 25.5%) and 11% to 19% (pre-tax ranging from 13.6% to 24.1%) respectively, which assumed a cost of equity between 12.5% and 13.5%, a cost of debt between 7% and 8% and terminal growth rates ranging from -15% to 3.5%. The forecasted cash flows also incorporated forecasted print revenue rate declines per annum between 14% to 26% and online revenue growth rates per annum between 10% to 27%. The impairment charges did not affect the Company’s operations, its liquidity, its cash flows from operating activities, or its Senior Note or Exchangeable Debenture indentures. As a majority of the intangible assets do not generate cash inflows that are largely independent of those from other assets or group of assets, the Company performs its impairment analysis of its intangible assets at the CGU level. The CGUs of the Company are presented as follows: Yellow Pages Group and Other (includes multiple CGUs for which the carrying value of its intangible assets with indefinite useful lives is not significant in comparison with the Company’s total carrying amount of intangible assets with indefinite useful lives). Cash flows beyond the periods of the plan were extrapolated using the terminal growth rates stated in the table below. The allocation of intangible assets as at December 31, 2012 by CGU or group of CGUs, prior to the impairment charge and the key assumptions used for value-in-use calculations for December 31, 2012 and March 31, 2012 are presented below: YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 53 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) Intangible assets by CGU Trademarks and domain names Trademarks and domain names with finite lives Non-competition agreements and logos Software Key assumptions : Terminal growth rate December 31, 2012 March 31, 2012 Discount rate – post-tax December 31, 2012 March 31, 2012 Discount rate – pre-tax December 31, 2012 March 31, 2012 Yellow Pages Group Other Total December 31, 20121 $ $ $ $ 1,060,842 3,800 435,192 68,246 $ $ $ $ 17,385 8,333 6,255 1,705 $ $ $ $ 1,078,227 12,133 441,447 69,951 -15% – 2.50% -15% – 2.50% -10% – 2.50% 3.50% -15% – 2.50% -10% – 3.50% 11% – 19% 10% – 19% 11% – 19% 16.5% – 20% 11% – 19% 10% – 20% 13.6% – 24.1% 13.6% – 24.1% 13.6% – 24.1% 12.4% – 24.1% 20.7% – 25.5% 12.4% – 25.5% 1 Prior to impairment charge of $300 million as discussed above. 2011 Following a comprehensive review of its strategic and operating plans completed during the third quarter of 2011, the Company determined that the recoverability of the carrying value of certain of its assets had to be reviewed for impairment purposes. As a result of the impairment test, the Company recorded an impairment charge of $2,900 million for the year ended December 31, 2011. This charge was mainly related to the impairment of goodwill for an amount of $2,880 million while other intangible assets arising from the acquisition of Canpages, mainly trademarks, non-compete agreements, customer contracts and software were deemed impaired by $20 million. The recoverable amount resulting in the goodwill impairment charge of $2,880 million was determined based on the value in use approach using a discounted cash flow model. The significant key assumptions included forecasted cash flows based on financial plans approved by management covering a five-year period. The discounted cash flow model was established using a discount rate of 11% (pre-tax rate of 15%), which assumed a cost of equity between 13% and 14% and an after-tax cost of debt between 7% and 8% and a terminal growth rate in line with historical inflation at 2.50%. This impairment charge was the result of a combination of factors, including the pressure on income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition-related costs and restructuring and special charges due to the accelerated transition from print to online, the uncertainties surrounding whether new product introductions would compensate for the declining trend in print revenues and the lower margins from business acquisitions. (cid:2)(cid:3)(cid:2) (cid:4)(cid:5)(cid:6)(cid:7)(cid:8)(cid:6)(cid:9)(cid:10)(cid:11)(cid:8)(cid:12)(cid:11)(cid:6)(cid:13)(cid:14)(cid:6)(cid:5)(cid:15)(cid:5)(cid:9)(cid:16)(cid:17)(cid:11)(cid:18)(cid:11) On November 14, 2011, Yellow Media Limited announced that it had sold the assets of LesPAC.com (“LesPAC”) to Mediagrif Interactive Technologies Inc. for cash proceeds of $70.9 million, net of fees and working capital adjustments. The carrying value of the net assets disposed of on November 14, 2011 was $64.7 million resulting in a gain of $6.2 million recorded in the consolidated income statements. (cid:19)(cid:3)(cid:2) (cid:4)(cid:5)(cid:6)(cid:20)(cid:8)(cid:21)(cid:22)(cid:5)(cid:21)(cid:13)(cid:23)(cid:15)(cid:11)(cid:8)(cid:7)(cid:23)(cid:16)(cid:9)(cid:22)(cid:5)(cid:8)(cid:21)(cid:6)(cid:11)(cid:18)(cid:11) Trader Corporation On March 25, 2011, a subsidiary of Yellow Media Limited announced that it had reached a definitive agreement to sell Trader Corporation (the “disposed business”) to funds advised by Apax Partners. On July 28, 2011, the divestiture of the disposed business was completed for proceeds of $702 million, net of fees, working capital and other adjustments. The purchase price consideration included a note receivable of $11 million, discounted, which is recorded in Financial and Other Assets in the statements of financial position. The note has a stated value of $15 million, matures on July 28, 2020 and carries an interest rate of 8% payable at maturity. As a result of the above, Yellow Media Limited classified the results of the disposed business, up to the date of disposal, as discontinued operations. 54 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) An analysis of net loss from discontinued operations for the year ended December 31, 2011 is as follows: Revenues Operating costs Depreciation and amortization Recovery of restructuring and special charges Other Earnings from discontinued operations before income taxes, share of losses from investment in associates and loss on disposal Provision for income taxes Share of losses from investment in associates Loss on disposal, net of income taxes recovery of $1.4 million Net loss from discontinued operations Cash flows from discontinued operations for the year ended December 31, 2011 are as follows: Cash from (used in): Operating activities Investing activities Financing activities Net increase in cash from discontinued operations $ 2011 148,051 113,339 16,065 (737) 456 18,928 5,331 128 134,346 $ (120,877) $ $ 31,598 (22,126) (1,537) 7,935 The real estate, employment and LesPAC businesses were excluded from the divestiture. Yellow Media Limited sold the assets of LesPAC on November 14, 2011. The real estate and employment business continues to be owned and managed by Yellow Media Limited. %(cid:3)(cid:2) (cid:28)(cid:13)(cid:18)(cid:5)(cid:6)(cid:11)(cid:29)(cid:5)(cid:13)(cid:11)(cid:6)(cid:14)(cid:9)(cid:13)(cid:14)(cid:20)(cid:6)(cid:6)(cid:12)(cid:7)(cid:9)(cid:20)(cid:11)(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) List of associates: As at Canada 411 Local Search USA Ziplocal, LP December 31, 2012 December 31, 2011 Consolidation % ownership Consolidation % ownership Equity method 30 Equity method Equity method 35 Equity method 30 35 Shareholders of 411 Local Search (“411”) have the ability in fiscal 2013 to exercise a put option requiring the Company to acquire the remaining 70% interest of 411 at a price based on a fixed multiple of adjusted earnings before interest, income taxes, depreciation and amortization for the most recent year end. The fair value of this derivative liability increased to $18.5 million as at December 31, 2012, resulting in a charge to the income statement. The Company may also exercise its call option to purchase the remaining interest during a specified period of time in 2013 and 2014. The fair value of this derivative is $nil as at December 31, 2012. The aggregate amounts of assets, liabilities, revenues and net loss for the investment in associates not adjusted for the percentage ownership held by Yellow Media Limited is presented below: For the periods ended Total assets Total liabilities Revenues Net loss December 31, 2012 December 31, 2011 $ $ $ $ 8,208 4,747 15,238 (202) $ $ $ $ 20,537 18,952 17,929 (3,425) In 2011, Ziplocal, LP (“Ziplocal”) was in default of its debt obligations and had undertaken important restructuring initiatives. As a result, Yellow Media Limited determined that its investment in Ziplocal was impaired and a loss of $50.3 million (net of income taxes of $0.2 million) was recorded to reduce its net investment in Ziplocal to $nil. Consequently, Yellow Media Limited no longer recognizes its share of losses in Ziplocal. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 55 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:24)(cid:3)(cid:2) (cid:25)(cid:16)(cid:8)(cid:7)(cid:23)(cid:16)(cid:22)(cid:17)(cid:26)(cid:11)(cid:7)(cid:10)(cid:9)(cid:21)(cid:22)(cid:11)(cid:9)(cid:21)(cid:15)(cid:11)(cid:23)(cid:27)(cid:13)(cid:5)(cid:7)(cid:28)(cid:23)(cid:21)(cid:22)(cid:11)(cid:18)(cid:11) Cost As at December 31, 2011 $ 33,078 $ 29,670 $ 2,694 $ 39,588 $ 105,030 Office equipment1 Computer equipment Other equipment Leasehold improvements 2012 Total Additions2 Impairment (Note 4) Disposals, write-offs and transfers As at December 31, 2012 Accumulated depreciation As at December 31, 2011 Depreciation expense2 Disposals, write-offs and transfers As at December 31, 2012 Net book value as at December 31, 2012 (cid:11) 504 (3,201) (831) 4,167 (1,177) (14,298) 356 (565) (975) 1,800 (5,447) (6,893) 6,827 (10,390) (22,997) 29,550 $ 18,362 $ 1,510 $ 29,048 $ 78,470 17,329 $ 23,450 $ 1,225 $ 16,530 $ 4,392 (755) $ $ 20,966 8,584 $ $ 3,813 (14,187) 13,076 $ 5,286 $ 240 (574) 891 $ 619 $ 4,511 (4,918) 16,123 $ 12,925 $ Office equipment1 Computer equipment Other equipment Leasehold improvements 58,534 12,956 (20,434) 51,056 27,414 2011 Total Cost As at December 31, 2010 $ 34,109 $ 50,723 $ 26,012 $ 51,234 $ 162,078 Additions2 Discontinued operations Disposals, write-offs and transfers Translation adjustments As at December 31, 2011 Accumulated depreciation As at December 31, 2010 Depreciation expense2 Discontinued operations Disposals, write-offs and transfers Translation adjustments As at December 31, 2011 Net book value as at December 31, 2011 5,144 (3,766) (2,295) (114) 2,801 (22,697) (1,157) (cid:2) 9,002 (31,162) (431) (727) 9,524 (18,151) (2,999) (20) 26,471 (75,776) (6,882) (861) 33,078 $ 29,670 $ 2,694 $ 39,588 $ 105,030 15,799 $ 37,126 $ 5,238 $ 23,172 $ 3,771 (1,061) (1,145) (35) 5,478 (19,012) (142) (cid:2) 574 (4,568) (7) (12) 4,317 (8,685) (2,269) (5) $ $ 17,329 15,749 $ $ 23,450 $ 6,220 $ 1,225 $ 1,469 $ 16,530 $ 23,058 $ 81,335 14,140 (33,326) (3,563) (52) 58,534 46,496 $ $ $ $ 1 The net book value of office equipment includes $1.1 million of assets held under finance leases (2011 - $3.5 million). 2 Included in the additions and depreciation expense is $nil (2011 - $10.2 million) and $nil (2011 - $2.3 million), respectively, for discontinued operations. 56 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) &(cid:3)(cid:2) (cid:28)(cid:13)(cid:11)(cid:20)(cid:13)(cid:24)(cid:9)!(cid:26)(cid:5)(cid:14)(cid:20)(cid:6)(cid:6)(cid:5)(cid:11)(cid:6)(cid:14)(cid:20)(cid:13)(cid:19)(cid:14)(cid:24)(cid:12)(cid:12)(cid:19)(cid:30)(cid:9)(cid:26)(cid:26)(cid:14)(cid:15)(cid:14) Trademarks and domain names1 Non- competition agreements and logos Customer- related intangible assets Software2 Total Intangible assets 2012 Goodwill 2,160,947 $ 2,967,847 (cid:2) (2,967,847) (289,610) 33,528 Cost As at December 31, 2011 $ 1,151,180 $ 617,059 $ 108,198 $ 284,510 $ Additions3 Impairment (Note 4) Disposals, write-offs and transfers (cid:2) (199,881) (cid:2) (80,957) (115) (cid:2) (cid:2) (cid:2) (cid:2) 33,528 (8,772) (174,306) As at December 31, 2012 $ 951,184 $ 536,102 $ 108,198 $ 134,960 $ Accumulated amortization As at December 31, 2011 $ 45,542 $ 149,313 $ 103,834 $ 204,207 $ Amortization expense3 Disposals, write-offs and transfers 15,163 26,299 4,364 43,163 (cid:2) (cid:2) (cid:2) (173,589) As at December 31, 2012 $ 60,705 $ 175,612 $ 108,198 $ 73,781 $ (174,421) 1,730,444 $ 502,896 $ 88,989 (173,589) 418,296 $ Net book value as at December 31, 2012 $ 890,479 $ 360,490 $ (cid:2) $ 61,179 $ 1,312,148 $ (cid:14) Cost Trademarks and domain names1 Non- competition agreements and logos Customer- related intangible assets Software2 Total Intangible assets (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 2011 Goodwill As at December 31, 2010 $ 1,466,095 $ 646,859 $ 171,433 $ 346,658 $ Additions3 Discontinued operations4 Impairment (Note 4) Disposals, write-offs and transfers Translation adjustments (cid:2) (284,135) (14,463) (15,500) (817) (cid:2) (22,357) (3,643) (3,800) (cid:2) (cid:2) (60,006) (629) (145) (2,455) 60,569 (120,520) (1,265) 1,303 (2,235) As at December 31, 2011 $ 1,151,180 $ 617,059 $ 108,198 $ 284,510 $ Accumulated amortization 2,631,045 $ 6,467,092 (cid:2) (570,966) (487,018) 60,569 (20,000) (2,880,000) (18,142) (48,079) (5,507) (200) 2,160,947 $ 2,967,847 As at December 31, 2010 $ 42,846 $ 134,204 $ 95,032 $ 206,963 $ Amortization expense3 Discontinued operations Disposals, write-offs and transfers Translation adjustments 19,296 (16,600) (cid:2) (cid:2) 26,791 (8,212) (3,470) (cid:2) 57,119 (46,211) (145) (1,961) 59,625 (60,457) (926) (998) As at December 31, 2011 $ 45,542 $ 149,313 $ 103,834 $ 204,207 $ 479,045 $ 162,831 (131,480) (4,541) (2,959) 502,896 $ (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Net book value as at December 31, 2011 $ 1,105,638 $ 467,746 $ 4,364 $ 80,303 $ 1,658,051 $ 2,967,847 1 Trademarks and domain names with indefinite useful lives amounted to $879 million (2011 - $1,090.8 million). 2 Software assets under development amounted to $25.4 million (2011 - $35 million). 3 Included in the additions and amortization expense is $nil (2011 - $9.8 million) and $nil (2011 - $13.8 million), respectively for discontinued operations. 4 Goodwill for discontinued operations is presented gross of the impairment charge of $nil (2011 - $97.4 million) recorded upon revaluation of discontinued operations to fair value less costs to sell, as required by IFRS 5. (cid:14) (cid:14) YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 57 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:2)’(cid:3)(cid:2) ((cid:8)(cid:20)(cid:19)(cid:5)(cid:14)(cid:20)(cid:13)(cid:19)(cid:14)(cid:12)(cid:11))(cid:5)(cid:8)(cid:14)(cid:10)(cid:20)"(cid:20)!(cid:26)(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) Trade Deposits Deferred consideration Payroll related accruals Publishing related accruals Accrued interest Other accrued liabilities (cid:2)(cid:2)(cid:3)(cid:2) *(cid:8)(cid:12)(cid:18)(cid:9)(cid:6)(cid:9)(cid:12)(cid:13)(cid:6)(cid:14)(cid:15)(cid:14) December 31, 2012 December 31, 2011 $ 58,271 $ 70,979 2,845 5,609 1,722 4,976 2,753 11,759 8,849 2,798 8,683 12,871 30,282 22,020 $ 87,935 $ 156,482 During the year ended December 31, 2012, Yellow Media Limited recorded restructuring and special charges of $44.9 million. These costs were associated with a workforce reduction, relocation of centers of excellence and the termination and renegotiation of certain contractual obligations. During 2011, Yellow Media Limited recorded restructuring and special charges of $26.1 million. The creation of centers of excellence and the elimination of print publications from the Canpages division resulted in a workforce reduction and the termination of contractual obligations. The provisions for restructuring and special charges represent the present value of the best estimate of the future outflow of economic benefits that will be required to settle the provisions and may vary as a result of new events affecting the severances and charges that will need to be paid. These amounts are expected to be paid mainly in 2013 as the plan is executed. Other provisions include provisions primarily for vacation and short term incentive plans. Provisions for restructuring Provisions for special charges Other provisions Total Provisions As at December 31, 2010 $ 23,493 $ 17,953 $ 18,895 $ Charge Utilized provision Surplus provision Discontinued operations As at December 31, 2011 Charge1 Utilized provision Surplus provision As at December 31, 2012 $ $ 19,830 (18,251) (6,100) (1,335) 9,938 (8,148) (73) (664) 3,227 (6,816) (1,600) (2,049) 17,637 $ 19,006 $ 11,657 $ 16,569 (21,793) (cid:2) 27,681 (23,777) (cid:2) 18,118 (3,252) (1,634) 60,341 32,995 (33,215) (7,773) (4,048) 48,300 62,368 (48,822) (1,634) 12,413 $ 22,910 $ 24,889 $ 60,212 1 Included in the restructuring and special charges are $0.7 million of other costs not affecting the provision. (cid:2)(cid:16)(cid:3)(cid:2) *(cid:12)(cid:6)(cid:11)+(cid:5)(cid:29)(cid:10)(cid:26)(cid:12)"(cid:29)(cid:5)(cid:13)(cid:11)(cid:14)!(cid:5)(cid:13)(cid:5)(cid:23)(cid:9)(cid:11)(cid:6)(cid:14)(cid:15)(cid:14) Yellow Media Limited maintains pension plans with defined benefit and defined contribution components which cover substantially all of the employees of Yellow Media Limited. Yellow Media Limited 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 of its employees. The changes in the defined 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 statements of financial position as at December 31, 2012 and 2011 were as follows: 58 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) December 31, 2012 December 31, 2011 Fair value of plan assets, beginning of year $ 389,860 $ Pension Benefits Expected return on plan assets Benefit payments Actuarial gains (losses) 1 Employer contributions Employee contributions 27,169 (48,664) 7,003 30,796 390 Fair value of plan assets, end of year $ 406,554 Accrued benefit obligation, beginning of year $ 636,292 $ $ Other Benefits – – (1,975) – 1,975 – – Pension Benefits $ 413,755 $ 28,111 (35,026) (27,664) 10,194 490 $ 389,860 $ Other Benefits – – (1,880) – 1,880 – – 52,364 $ 551,707 $ 50,925 Current service cost Past service costs Employee contributions Interest cost Actuarial losses2 Benefit payments Defined benefit obligation, end of year Net defined benefit obligation 17,201 (8,027) 390 28,618 25,428 (48,664) 651,238 1,041 (5,291) – 2,359 3,732 (1,975) 52,230 12,871 – 490 29,250 77,000 (35,026) 636,292 812 – – 2,466 41 (1,880) 52,364 $ (244,684) $ (52,230) $ (246,432) $ (52,364) 1 Actuarial gains included experience adjustments on plan assets of $7 million (2011 - $28.6 million). 2 Actuarial losses included experience adjustments on plan liabilities of $13.6 million (2011 - $23.2 million). 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 Yellow Media Limited’s pension and other benefit obligations as at December 31, 2012 and 2011 were as follows: Post-employment benefit obligation Discount rate, end of year Rate of compensation increase Net benefit plan costs Discount rate, end of preceding year Rate of compensation increase Expected long-term rate of return on plan assets Expected average remaining service life (years) December 31, 2012 December 31, 2011 Pension Benefits Other Benefits Pension Other Benefits Benefits 4.00% 3.25% 4.50% 3.25% 7.00% 12 4.00% 3.50% 4.50% 3.50% – 13 4.50% 3.25% 5.50% 3.25% 7.00% 12 4.50% 3.50% 5.50% 3.50% – 13 For measurement purposes, a 7.8% annual increase in the per capita cost of covered health care benefits (the health care cost trend rate) was assumed in 2012. The rate of increase of the cost of medication was assumed to gradually decline to 5% by 2026 and to remain at that level thereafter. A 4.5% annual increase in per capita cost of covered dental care benefits was assumed in 2012. 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: Effect on other benefits – total service and interest costs Effect on other benefits – Post-employment benefit obligation $ $ 165 2,066 $ $ (159) (2,009) One-Percentage-Point - Increase One-Percentage- Point - Decrease YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 59 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) The net benefit plan costs included in the statement of operations are the following components: Current service cost1 Interest cost (Note 21) Expected return on plan assets (Note 21) Past service costs1 Net benefit costs (recovery) recognized in income statement Actuarial losses Net benefit costs recognized in other comprehensive income Total net benefit plan costs for the Yellow Pages Group Corp. For the years ended December 31, 2012 Other Benefits Pension Benefits 2011 Other Benefits Pension Benefits $ 17,201 $ 1,041 $ 12,871 $ 812 28,618 (27,169) (8,027) 10,623 18,425 18,425 2,359 – (5,291) (1,891) 3,732 3,732 29,250 (28,111) – 14,010 104,664 104,664 2,466 – – 3,278 41 41 (“YPG Co.”) defined benefit plans $ 29,048 $ 1,841 $ 118,674 $ 3,319 Net benefit plan costs for the YPG Co. defined contribution plans1 4,288 – 3,551 – Total net benefit plan costs 1 Included in operating costs. $ 33,336 $ 1,841 $ 122,225 $ 3,319 During the year, the Company amended the retirement and post-employment benefit plans. These amendments include among other items, the elimination of post-retirement benefits for all current eligible employees, the elimination of indexing for future contributions, the introduction of employee contributions and the reduction of short-term disability coverage. Certain of these amendments resulted in negative past service costs in the amount of $13.3 million. 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, 2012 and 2011: (in percentages - %) Asset categories in the Master Trust: Cash and other short-term investments Publicly traded equity securities Publicly traded fixed income securities December 31, 2012 December 31, 2011 2 61 37 3 62 35 As at December 31, 2012 and 2011, the publicly traded equity securities did not directly include any shares of Yellow Media Limited. 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 pension and other benefit plans made by Yellow Media Limited amounted to $37.1 million for 2012 (2011 – $15.6 million). Total cash payments for pension and other benefit plans expected in 2013 amount to approximately $32.6 million. Yellow Media Limited’s funding policy is to make contributions to its pension plans based on various actuarial cost methods as permitted by pension regulatory bodies. Yellow Media Limited is responsible to adequately fund the plans. Contributions reflect actuarial assumptions concerning future investment returns, salary projections and future service benefits. Yellow Media Limited’s expense for provincial, federal and state pension plans was $6.7 million for the year ended December 31, 2012 (2011 – $7.6 million). As at December 31, 2012, Yellow Media Limited had recognized an accumulated balance of $150.2 million, net of income taxes of $52.4 million in actuarial losses in Other Comprehensive Income. 60 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:2)(cid:21)(cid:3)(cid:2) -(cid:12)(cid:13)(cid:24)+(cid:11)(cid:5)(cid:8)(cid:29)(cid:14)(cid:19)(cid:5)!(cid:11)(cid:14)(cid:15)(cid:14) The long-term debt is comprised of the following: Senior Secured Notes Obligations under finance leases Less current portion of long-term debt1 1 The current portion of the repayment of Senior Secured Notes may increase subject to the Excess Cash Flow clause. December 31, 2012 Total $ 800,000 1,831 801,831 100,939 $ 700,892 December 31, 2011 Medium Term Notes Credit facilities Obligations under finance leases Less current portion of long-term debt Senior Secured Notes Principal amount Fair value adjustment of hedged item Deferred financing costs Total $ 1,405,505 $ 7,964 $ (9,386) $ 1,404,083 205,000 4,148 1,614,653 102,339 – – 7,964 – – – 205,000 4,148 (9,386) 1,613,231 – 102,339 $ 1,512,314 $ 7,964 $ (9,386) $ 1,510,892 On December 20, 2012, the Company through its subsidiary, YPG Financing Inc., issued $800 million of 9.25% Senior Secured Notes maturing November 30, 2018. Interest on the Senior Secured Notes is payable in cash, quarterly in arrears and in equal instalments at 9.25% per annum on the last day of February, May, August and November of each year. The initial interest payment will be payable on February 28, 2013 and will represent interest accrued from and including December 20, 2012, to, but excluding, February 28, 2013. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by Yellow Media Limited and all of its Restricted Subsidiaries (as such term is defined in the indenture governing the Senior Secured Notes). The Senior Secured Notes and each Senior Secured Note guarantee are secured by a first priority lien, subject to certain permitted liens, in the collateral, which consists of all of the property of Yellow Media Limited and the Restricted Subsidiaries, whether owned on the Effective Date or thereafter acquired, other than certain excluded property. The indenture governing the Senior Secured Notes contains restrictive covenants, including restrictions on the incurrence of additional indebtedness, the payment of dividends and other payment restrictions, investments, the creation of liens, sale and leaseback transactions, mergers, consolidations and sales of assets, certain transactions with affiliates and its business activities. The indenture does not contain the obligation to maintain financial ratios. Financial ratio restrictions only apply upon incurrence of indebtedness and other transactions. As at December 31, 2012, the Company was in compliance with all covenants under the indenture governing the Senior Secured Notes. Mandatory Redemption Pursuant to the indenture governing the Senior Secured Notes, the Company is required to use an amount equal to 75% of its consolidated Excess Cash Flow for the immediately preceding six-month period ending March 31 or September 30, as applicable, to redeem on a semi-annual basis on the last day of May and November of each year, commencing on May 31, 2013, the Senior Secured Notes at a redemption price equal to 100% of the principal amount thereof from holders on a pro rata basis, subject to the Company maintaining a minimum cash balance of $75 million immediately following the mandatory redemption payment. Excess Cash Flow, as defined in the indenture governing the Senior Secured Notes, means the aggregate cash flow from operating activities adjusted for, among other things, payments relating to interest, taxes, long-term employee compensation plans, certain pension plan contribution payments and the acquisitions of property, plant, equipment and intangible assets.(cid:2) The Company is required to make minimum annual aggregate mandatory redemption payments of $100 million for the combined payments due on May 31, 2013 and November 30, 2013, $75 million for the combined payments due on May 31, 2014 and November 30, 2014 and $50 million for the combined payments due on May 31, 2015 and November 30, 2015. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 61 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) For purposes of determining the consolidated Excess Cash Flow, deductions for capital expenditures and information systems/ information technology expenses are each subject to an annual deduction limit of $50 million. Under other circumstances, the Company may also have to make additional repayments on the Senior Secured Notes (refer to the indenture governing the Senior Secured Notes). Optional Redemption The Company may redeem all or part of the Senior Secured Notes at its option at any date, upon not less than 30 nor more than 60 days prior notice, at a redemption price equal to: (cid:2)(cid:2) (cid:2)(cid:2) In the case of a redemption occurring prior to May 31, 2017, 105% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date; or In the case of a redemption occurring on or after May 31, 2017, 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. Medium Term Notes During 2011, the Company repurchased for cancellation an amount of $42.8 million of the Series 2 Medium Term Notes, $67.5 million of the Series 4 Medium Term Notes, $23.9 million of the Series 5 Medium Term Notes and $121.9 million of the Series 7 Medium Term Notes for a total cash consideration of $229.3 million. The difference between the purchase price and the carrying value of the Medium Term Notes of $26 million was recorded as a gain in financial charges. Pursuant to the Recapitalization, all of the outstanding Medium Term Notes were cancelled on the Effective Date. Please refer to the description of the Recapitalization in Note 1 – Description. Credit facilities The Company had in place a senior unsecured credit facility consisting of: A $380 million facility (the “Credit Facility”) which was comprised of: (cid:2)(cid:2) (cid:2)(cid:2) a $250 million revolving tranche maturing in February 2013; and a $130 million non-revolving tranche maturing in February 2013. During the year, the Company was required to make quarterly repayments of $25 million on the outstanding balance of the non- revolving tranche of the Credit Facility, commencing in January 2012 through the Effective Date of the Recapitalization; $75 million of repayments were made. The maturity date for the repayment of the remainder of the outstanding borrowings under the credit facilities was February 18, 2013. Immediately prior to the Recapitalization, an amount of $369 million was drawn on the Credit Facility. Pursuant to the Recapitalization and the Termination and Settlement Agreement entered into with the lenders under the Company’s Credit Facility, the Credit Facility was cancelled on the Effective Date. Please refer to the description of the Recapitalization in Note 1 – Description. Obligations under finance leases The Company entered into several lease agreements with third parties for office equipment and for software. The obligations under finance leases are secured by a moveable hypothec on the office equipment leased. Finance lease liabilities payable as at December 31, 2012 are as follows: Less than one year Between one and five years Future minimum lease payments $ $ 1,017 933 1,950 Interest 78 41 119 $ $ Present value of minimum lease payments $ $ 939 892 1,831 62 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:2)(cid:27)(cid:3)(cid:2) 89(cid:7))(cid:20)(cid:13)(cid:24)(cid:5)(cid:20)!(cid:26)(cid:5)(cid:14)(cid:20)(cid:13)(cid:19)(cid:14)(cid:7)(cid:12)(cid:13)(cid:18)(cid:5)(cid:8)(cid:11)(cid:9)!(cid:26)(cid:5)(cid:14)(cid:19)(cid:5)!(cid:5)(cid:13)(cid:11)(cid:25)(cid:8)(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) Liability component Equity component Accretion Deferred financing costs Exchangeable Debentures December 31, 2012 December 31, 2011 $ 91,635 $ 200,000 (4,968) – – (10,139) 1,685 (7,332) $ 86,667 $ 184,214 On December 20, 2012, the Company through its subsidiary YPG Financing Inc., issued $107.5 million of senior subordinated Exchangeable Debentures due November 30, 2022. Interest on the Exchangeable Debentures accrues at a rate of 8% per annum if for the applicable interest period, it is paid in cash, or 12% per annum if the Company makes a Payment in Kind (“PIK”) election to pay interest in respect of all or any part of the then outstanding Exchangeable Debentures in additional Exchangeable Debentures. Interest on the Exchangeable Debentures is payable semi-annually in arrears, and in equal instalments on the last day of May and November of each year. The initial interest payment is payable on May 31, 2013 and will represent interest accrued from and including December 20, 2012 to, but excluding, May 31, 2013. The initial fair value on December 20, 2012 of the Exchangeable Debentures was $91.6 million. The Exchangeable Debentures are senior subordinated and unsecured obligations of YPG Financing Inc. The Exchangeable Debentures are unconditionally guaranteed on a subordinated unsecured basis by Yellow Media Limited and all of its Restricted Subsidiaries (as such term is defined in the indenture governing the Exchangeable Debentures). The indenture governing the Exchangeable Debentures contains restrictive covenants, including restrictions on the incurrence of additional indebtedness, the payment of dividends and other payment restrictions, investments, the creation of liens, sale and leaseback transactions, mergers, consolidations and sales of assets and certain transactions with affiliates. The indenture does not contain the obligation to maintain financial ratios. Financial ratio restrictions only apply upon incurrence of indebtedness and other transactions. As at December 31, 2012, the Company was in compliance with all covenants under the indenture governing the Exchangeable Debentures. Exchange Option The Exchangeable Debentures are exchangeable at the holder’s option into New Common Shares at any time at an exchange price per New Common Share equal to $19.04, subject to adjustment for specified capital transactions. The conversion option was valued at $3.6 million (net of income taxes of $1.3 million) at the date of issuance and is included in Equity. The liability portion will be accreted such that the liability at maturity equals the principal amount less exchanges. Optional Redemption The Company may, at any time on or after the date on which all of the Senior Secured Notes have been paid in full, redeem all or part of the Exchangeable Debentures at its option at a redemption price equal to: (cid:2)(cid:2) (cid:2)(cid:2) in the case of a redemption occurring prior to May 31, 2021, 110% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date; or in the case of a redemption occurring on or after May 31, 2021, 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. The redemption option for cash is an embedded derivative and is recorded at fair value on the consolidated statements of financial position with changes in fair value recognized in financial charges. Please refer to the description of the Recapitalization in Note 1 – Description. Convertible Debentures During the third quarter of 2012, $0.9 million of Convertible Debentures were exchanged into 116,250 common shares (Note 17). The carrying amount of the Convertible Debentures exchanged was recorded in shareholder’s capital along with the pro rata share of the equity component carrying value. No gain was recognized in the income statement on conversion. Pursuant to the Recapitalization, all of the Convertible Debentures were cancelled on the Effective Date. Please refer to the description of the Recapitalization in Note 1 – Description. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 63 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:2):(cid:3)(cid:2) *(cid:8)(cid:5)(cid:23)(cid:5)(cid:8)(cid:8)(cid:5)(cid:19)(cid:14)(cid:6))(cid:20)(cid:8)(cid:5)(cid:6)(cid:31)(cid:14);(cid:5)(cid:8)(cid:9)(cid:5)(cid:6)(cid:14)(cid:2)(cid:14)(cid:20)(cid:13)(cid:19)(cid:14)(cid:16)(cid:14)(cid:15)(cid:14) Preferred shares, Series 1 and Series 2 Derivative component Deferred financing costs Less current portion 1 1 Relating entirely to Preferred Shares, Series 1. December 31, 2012 December 31, 2011 $ $ – – – – – – $ 402,700 741 (4,555) 398,886 249,713 $ 149,173 During 2011, the Company purchased for cancellation, under the prior normal course issuer bids, 1,232,948 Preferred Shares, Series 1 of the Company for a total cash consideration of $25.5 million including brokerage fees and 778,156 Preferred Shares, Series 2 of the Company for a total cash consideration of $11.3 million including brokerage fees. The carrying value of these Preferred Shares, Series 1 and Series 2 was $30.6 million and $19.1 million, respectively. The difference between the purchase price and the carrying value of the Preferred Shares, Series 1 and Series 2 of $12.8 million was recorded as a gain and included in financial charges. Pursuant to the Recapitalization, all of the outstanding Preferred Shares, Series 1 and 2 were cancelled on the Effective Date. Please refer to the description of the Recapitalization in Note 1 – Description. (cid:2)<(cid:3)(cid:2) (cid:28)(cid:13)(cid:7)(cid:12)(cid:29)(cid:5)(cid:14)(cid:11)(cid:20)9(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) A reconciliation of income taxes at Canadian statutory rates with reported income taxes is as follows: Loss before income taxes and impairment and share of (earnings) losses from investments in associates Combined Canadian federal and provincial tax rates1 Income tax recovery at statutory rates Increase (decrease) resulting from: Gain on settlement of debt Impairment of goodwill, intangible assets and property, plant and equipment Non-deductible dividend expense Derivative financial instruments Other Unrecognized tax attributes of the current year Recognition of previously unrecognized tax attributes Writedown of deferred tax assets Difference in the statutory rate applicable to foreign operations Rate differential on temporary differences (Recovery of) provision for income taxes $ For the years ended December 31, 2012 2011 $ $ (2,031,833) 26.31% (534,575) $ (2,558,642) 27.90% $ (713,861) (282,848) 738,925 4,655 4,274 2,161 7,850 (15,393) – (2,922) 1,938 (75,935) – 745,102 7,921 – 6,255 32,526 – 8,081 (3,676) 4,801 $ 87,149 1 The combined applicable statutory tax rate has decreased by 1.59% resulting mainly from the reduction in the Canadian Federal statutory tax rate. (Recovery of) provision for income taxes includes the following amounts for the years ended: Current (cid:2) continuing operations Deferred (cid:2) continuing operations Current (cid:2) discontinued operations Deferred (cid:2) discontinued operations December 31, 2012 December 31, 2011 $ $ $ $ $ 48,603 (124,538) (75,935) – – – (75,935) $ $ $ $ $ 9,508 77,641 87,149 6,162 (2,275) 3,887 91,036 64 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) Deferred income tax (assets) liabilities are attributable to the following items: Deferred financing costs Non-capital losses carry forward Deferred revenues Post- employ- ment benefits Fair value adjustment of hedge item Accrued liabilities Property, plant and equipment and lease induce- ments Exchang- eable and Conver- tible Deben- tures Deferred income tax (assets) liabilities, net Intangible assets December 31, 2011 $ 8,366 $ (9,415) $ (14,774) $ (78,658) $ (2,146) $ (8,467) $ 5,041 $ 2,265 $ 217,093 $ 119,305 (Benefit) expense to income statement Charge to equity Benefit to other compre- hensive income Other December (19,478) 5,461 3,048 7,126 2,552 (1,474) (5,961) 1,999 (117,811) (124,538) – – – – – – – – – – – (5,830) (406) – – – – – – 1,335 – 1,335 – – – – – (3,252) (6,236) (3,252) 31, 2012 $ (11,112) $ (3,954) $ (11,726) $ (77,362) $ – $ (9,941) $ (920) $ 5,599 $ 96,030 $ (13,386) Deferred financing costs Non-capital losses carry forward Deferred revenues Post- employ- ment benefits Fair value adjustment of hedge item Accrued liabilities Property, plant and equipment and lease induce- ments Exchang- eable and Conver- tible Deben- tures Deferred income tax liabilities, net Intangible assets December 31, 2010 $ 5,555 $ (9,627) $ (20,986) $ (50,526) $ (900) $ (10,704) $ (1,951) $ 2,716 $ 254,279 $ 167,856 (Benefit) expense to income statement Benefit to other compre- hensive income Discontinued operations Translation and other December 2,810 (4,241) 5,951 (1,249) (1,246) 311 8,444 (451) 65,037 75,366 – – 1 – – (27,053) 4,453 261 170 – – – – – – – – – (28) (27,081) 1,926 (1,544) – (100,662) (95,396) – 92 – (1,533) (1,440) 31, 2011 $ 8,366 $ (9,415) $ (14,774) $ (78,658) $ (2,146) $ (8,467) $ 5,041 $ 2,265 $ 217,093 $ 119,305 As at December 31, 2012, the Company has not recognized deferred income tax assets with respect to Canadian operating losses of $71.6 million expiring from 2026 to 2030, foreign operating losses of $59.7 million which expire from 2028 to 2032, Canadian capital losses of $42.5 million which can be utilized indefinitely, and deductible temporary differences of $291.1 million. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 65 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:2)%(cid:3)(cid:2) ;)(cid:20)(cid:8)(cid:5))(cid:12)(cid:26)(cid:19)(cid:5)(cid:8)(cid:6)=(cid:14)(cid:7)(cid:20)(cid:10)(cid:9)(cid:11)(cid:20)(cid:26)(cid:14)(cid:15)(cid:14) Common shares An unlimited number of New Common Shares are authorized to be issued and an unlimited number of preferred shares issuable in series are also authorized. Balance, December 31, 2011 Exercise of conversion option on Convertible Debentures prior to the Recapitalization (Note 14) Exchange of Convertible Debentures1 Cancellation of common shares1 Issuance of New Common Shares to settle prior debt1 Issuance of New Common Shares to prior common shareholders1 Exchange of preferred shares series 3, 5 and 7 for New Common Shares1 Balance, December 31, 2012 Balance, December 31, 2010 Shares issued pursuant to the dividend reinvestment plan Repurchase of common shares Reduction in capital Exchange of Preferred Shares, Series 7 Conversion of mandatory exchangeable promissory notes (“Exchangeable Notes”) Balance, December 31, 20112 1. Pursuant to the Recapitalization. 2 Includes nil Restricted Shares (2011 – 7,806,780) pursuant to the Restricted Share Plan. December 31 , 2012 Number of Shares Amount 520,402,094 $ 3,554,715 116,250 99,535,000 (620,053,344) 24,567,901 2,564,647 822,529 27,955,077 899 – – 153,568 – 320,687 $ 4,029,869 Number of shares 516,017,984 9,131,968 (11,252,884) – 250,000 6,255,026 December 31, 2011 Amount $ 4,079,838 26,031 (88,419) (500,000) 1,875 35,390 520,402,094 $ 3,554,715 During the year ended December 31, 2012, Yellow Media Limited declared total dividends to common shareholders of $nil ($207.3 million or $0.40 per share in 2011). Pursuant to the Recapitalization the existing common shares of YPG Financing Inc. were cancelled. Please refer to the description of the Recapitalization in Note 1 – Description. Warrants Pursuant to the Recapitalization approved by the Court, the Company issued a total of 2,995,506 Warrants. Each Warrant is transferable and entitles the holder to purchase one New Common Share at an exercise price of $28.16 per Warrant payable in cash at any time on or prior to December 20, 2022. The fair value of the Warrants on the Effective Date was $1.5 million. The fair value of the Warrants was calculated using a binomial option pricing model with the following assumptions: Risk free interest rate Expected life Expiry date Expected volatility 2.27% 10 years December 20, 2022 33.5% 66 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) Preferred shares Balance, December 31, 2011 Exchange of Preferred Shares series, 3, 5 and 7 pursuant to the Recapitalization Balance, December 31, 2012 Balance December 31, 2010 Repurchase of preferred shares Exchange of Preferred Shares, Series 7 Balance, December 31, 2011 December 31, 2012 Number of Shares Amount 13,424,153 $ 320,687 (13,424,153) (320,687) – $ – December 31, 2011 Number of Shares Amount 13,933,333 $ 328,880 (259,180) (250,000) (6,318) (1,875) 13,424,153 $ 320,687 During 2011, the stated capital of the Company in respect of common shares was reduced by $500 million and the Reduction of Capital Reserve was increased by the same amount. During the year ended December 31, 2011, the Company purchased for cancellation 11,252,884 common shares of YPG Financing Inc. for a total cash consideration of $46.5 million including brokerage fees. The average carrying value of the common shares was $7.86 per share. The difference between the purchase price and the carrying value of the common shares of $41.9 million was credited to Deficit. In addition, a portion of the reserve related to the share capital reduction recorded in November 2010 under the plan of arrangement in the amount of $42.9 million was also credited to Deficit. During the year ended December 31, 2011, the Company also purchased for cancellation 179,100 Preferred Shares, Series 3 of YPG Financing Inc. for a total cash consideration of $2.7 million including brokerage fees and 80,080 Preferred Shares, Series 5 of YPG Financing Inc. for a total cash consideration of $1.2 million including brokerage fees. The carrying value of these Preferred Shares, Series 3 and 5 was $4.4 million and $1.9 million, respectively. The difference between the purchase price and the carrying value was credited to Deficit. Pursuant to the Recapitalization all of the outstanding Preferred Shares, Series 3, 5 and 7 were cancelled on the Effective Date. Please refer to the description of the Recapitalization in Note 1 – Description. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 67 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:29)(cid:24)(cid:3)(cid:2) (cid:30)(cid:8)(cid:6)(cid:6)(cid:11)(cid:7)(cid:23)(cid:16)(cid:11)(cid:6)(cid:31)(cid:9)(cid:16)(cid:23)(cid:11)(cid:18)(cid:11) The following table reconciles the net loss attributable to common shareholders and the weighted average number of shares outstanding used in computing basic loss per share to weighted average number of shares outstanding used in computing diluted loss per share: Weighted average number of shares outstanding used in computing basic loss per share Dilutive effect of Warrants Dilutive effect of Exchangeable Debentures For the years ended December 31, 2012 27,955,077 – – 2011 27,955,077 – – Weighted average number of shares outstanding used in computing diluted loss per share 27,955,077 27,955,077 As described in Note 1, pursuant to the closing of the Recapitalization approved by the Court, the common shares of the Company were exchanged for New Common Shares of the Company. As a result, the weighted average number of shares outstanding during the period and for prior periods has been adjusted to reflect the Recapitalization. Net loss from continuing operations Attributable to non-controlling interest Dividends to preferred shares, Series 3, 5 and 7 shareholders For the years ended December 31, 2012 2011 $ (1,954,005) $ (2,708,122) 391 490 (21,606) (22,539) Net loss from continuing operations available to common shareholders of Yellow Media Limited used in the computation of basic and diluted loss per share $ (1,975,220) $ (2,730,171) Net loss attributable to common shareholders of Yellow Media Limited Dividends to preferred shares, Series 3, 5 and 7 shareholders Net loss attributable to common shareholders of Yellow Media Limited used in the computation of basic and diluted loss per share For the years ended December 31, 2012 2011 $ (1,953,614) $ (2,832,649) (21,606) (22,539) $ (1,975,220) $ (2,855,188) Yellow Media Limited did not calculate the diluted loss per share for the years ended December 31, 2012 and 2011 as the conversion of the dilutive instruments listed above would be anti-dilutive to the loss. Net loss from discontinued operations Earnings attributable to non-controlling interest Net loss from discontinued operations available to common shareholders of Yellow Media Limited used in the computation of basic and diluted loss per share Basic loss per share attributable to common shareholders from discontinued operations Diluted loss per share attributable to common shareholders from discontinued operations For the years ended December 31, $ $ 2012 2011 – $ (120,877) – (4,140) – $ (125,017) For the years ended December 31, 2012 2011 $ $ – $ (4.47) – $ (4.47) The diluted loss per share from discontinued operations is not calculated for the year ended December 31, 2011 as the conversion of the dilutive instruments listed above would be anti-dilutive to the loss. 68 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:2)&(cid:3)(cid:2) ;(cid:11)(cid:12)(cid:7)>+!(cid:20)(cid:6)(cid:5)(cid:19)(cid:14)(cid:7)(cid:12)(cid:29)(cid:10)(cid:5)(cid:13)(cid:6)(cid:20)(cid:11)(cid:9)(cid:12)(cid:13)(cid:14)(cid:10)(cid:26)(cid:20)(cid:13)(cid:6)(cid:14)(cid:15)(cid:14) The Company’s stock-based compensation plans consisted of a Restricted Share Plan and Stock Option Plans. Restricted Share Unit Plan The Company had established an employee benefit plan known as the Restricted Share Unit Plan (the “RS Plan”). The RS Plan provided certain eligible employees the right to receive shares subject to the terms and conditions of the RS Plan. During the year ended December 31, 2012, no Restricted Shares were granted. During the year ended December 31, 2011, an amount of $8 million representing 1,994,552 Restricted Shares were granted at an average market price of $4.02. An amount of $nil (2011 - $2.9 million) was used to reinvest in nil (2011 – 1,246,868) Restricted Shares using the proceeds from the dividends on the Restricted Shares held in escrow. In addition, 57,239 Restricted Shares which were not allocated to any specific employee were reinvested in 2011. This included nil (2011 – 388,509) Restricted Shares associated with the portion which provided for up to a 250% payout. Pursuant to the Recapitalization approved by the Court, the holders of the Restricted Shares surrendered their Restricted Shares for the payment in cash of the VWAP of the underlying shares. As a result, $0.1 million was paid in 2013. All Restricted Shares were subsequently cancelled. The RS Plan and all rights under the RS Plan were terminated, extinguished, and cancelled. An accelerated expense of $3.8 million was included in the gain on settlement of debt. A total expense of $4.3 million was recorded for the year ended December 31, 2012 (2011 - $0.5 million recovery). The following table summarizes the status of the grants: Outstanding, beginning of year Forfeited Cancelled pursuant to the Recapitalization Outstanding, end of year Weighted average remaining life Outstanding, beginning of year Granted Vested Forfeited Cash distributions reinvested Outstanding, end of year Weighted average remaining life Stock Options (cid:2) 2003 Plan December 31, 2012 Number of Restricted Shares 2009 and 2011 Grants 4,576,481 (3,573,412) (1,003,069) – – December 31, 2011 Number of Restricted Shares 2009 and 2011 Grants 7,337,315 1,994,552 (3,740,692) (1,930,292) 915,598 4,576,481 1.09 years The following table summarizes the status of the stock option program: Outstanding and exercisable, beginning of year Cancelled pursuant to the Recapitalization Outstanding and exercisable, end of year December 31, 2012 December 31, 2011 Number of options Number of options 380,882 (380,882) – 380,882 – 380,882 Pursuant to the Recapitalization, the 2003 Plan and all outstanding options granted thereunder were cancelled for no consideration. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 69 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) Stock Options (cid:2) 2010 Plan The following table summarizes the status of the 2010 Plan. Outstanding, beginning of year Granted Forfeited Cancelled pursuant to the Recapitalization Outstanding, end of year Exercisable, end of year December 31, 2012 December 31, 2011 Number of options Number of options 12,100,000 – – (12,100,000) – – – 15,850,000 (3,750,000) – 12,100,000 – The fair value of the share options granted during 2011 was $0.14 per option. Options were valued using a binomial option pricing model. Expected volatility was based on the historical share price volatility over the average expected life of the options granted. Key inputs into the valuation model were: (cid:2)(cid:2) Grant date share price: $4.51 (cid:2)(cid:2) Exercise price: $6.35 (cid:2)(cid:2) (cid:2)(cid:2) Expected volatility: 31.00% Vesting period: 3 year (cid:2)(cid:2) Contractual life: 5 year (cid:2)(cid:2) Dividend yield: 14.4% (cid:2)(cid:2) Risk-free interest rate: 2.55% (cid:2)(cid:2) Weighted average remaining life: 4 years Pursuant to the Recapitalization, the 2010 Plan and all outstanding options granted thereunder were cancelled for no consideration. An accelerated expense of $1.1 million was included in the gain on settlement of debt. A total expense of $1.2 million was recorded for the year ended December 31, 2012 (2011 - $0.1 million recovery). !(cid:3)(cid:2) "(cid:7)(cid:23)(cid:16)(cid:9)(cid:22)(cid:5)(cid:21)#(cid:11)(cid:20)(cid:8)(cid:6)(cid:22)(cid:6)(cid:11)(cid:18)(cid:11) Salaries, commissions and benefits $ Supply chain and logistics1 Other goods and services2 Information systems Bad debt expense For the years ended December 31, 2012 273,740 110,191 91,311 43,716 18,157 2011 $ 303,756 131,186 129,564 45,255 39,398 1 Supply chain and logistics relate to external supplier costs for manufacturing and distribution of our print and online products as well as related media costs associated to our Search Engine Solutions. 2 Other goods and services include promotion and advertising costs, real estate, telecommunications, office services and equipment, consulting services including contractors and professional fees. Operating leases recognized in operating costs during the year amounted to $19.8 million (2011 - $20.9 million). $ 537,115 $ 649,159 70 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:16)(cid:2)(cid:3)(cid:2) ?(cid:9)(cid:13)(cid:20)(cid:13)(cid:7)(cid:9)(cid:20)(cid:26)(cid:14)(cid:7))(cid:20)(cid:8)(cid:24)(cid:5)(cid:6)(cid:31)(cid:14)(cid:13)(cid:5)(cid:11)(cid:14)(cid:15)(cid:14) The significant components of the financial charges are as follows: For the years ended December 31, 2012 2011 Interest on long-term debt, exchangeable and convertible instruments $ 119,329 $ 128,227 Interest on commercial paper Interest income, standby fees and other financial charges, net Other charges related to derivative financial instruments Gain on repurchase of Series 1 shares and Series 2 shares and medium term notes, net Amortization and write-off of deferred financing costs Accreted interest on long-term debt, compound financial instruments and note receivable Accreted interest on retirement benefit obligations Expected return on pension plan assets Revaluation of deferred consideration Other – (3,328) 18,479 – 8,442 717 30,977 (27,169) (874) (308) 2,273 7,239 12,502 (38,815) 15,269 1,034 31,716 (28,111) (1,252) 500 $ 146,265 $ 130,582 (cid:16)(cid:16)(cid:3)(cid:2) ;(cid:25)(cid:10)(cid:10)(cid:26)(cid:5)(cid:29)(cid:5)(cid:13)(cid:11)(cid:20)(cid:26)(cid:14)(cid:19)(cid:9)(cid:6)(cid:7)(cid:26)(cid:12)(cid:6)(cid:25)(cid:8)(cid:5)(cid:14)(cid:12)(cid:23)(cid:14)(cid:7)(cid:20)(cid:6))(cid:14)(cid:9)(cid:13)(cid:23)(cid:12)(cid:8)(cid:29)(cid:20)(cid:11)(cid:9)(cid:12)(cid:13)(cid:14)(cid:15)(cid:14) The following are non-cash transactions: Issuance of Senior Secured Notes Issuance of Exchangeable Debentures Extinguishment of Medium Term Notes Extinguishment of Credit Facility Extinguishment of Series 1 and Series 2 shares Issuance of New Common Shares pursuant to the Recapitalization Conversion of Convertible Debentures Dividends on Series 1 shares and Series 2 shares paid Issuance of note receivable Conversion of Exchangeable Notes Additions to property, plant and equipment under finance leases Additions to property, plant and equipment included in trade and other payables Additions to intangible assets included in trade and other payables (cid:16)(cid:21)(cid:3)(cid:2) @(cid:12)(cid:29)(cid:29)(cid:9)(cid:11)(cid:29)(cid:5)(cid:13)(cid:11)(cid:6)(cid:14)(cid:20)(cid:13)(cid:19)(cid:14)(cid:7)(cid:12)(cid:13)(cid:11)(cid:9)(cid:13)(cid:24)(cid:5)(cid:13)(cid:7)(cid:9)(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) For the years ended December 31, 2012 800,000 107,500 $ $ $ 1,404,127 $ $ $ $ $ $ $ $ $ $ 344,000 400,644 153,568 899 – – – 24 2,575 6,072 2011 – – – – – – – 19,208 11,046 35,390 943 909 7,825 $ $ $ $ $ $ $ $ $ $ $ $ $ a) Yellow Media Limited 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 at December 31, 2012, and in the aggregate of: 2013 2014 2015 2016 2017 Thereafter Operating leases Other $ 20,101 20,290 20,320 19,392 16,400 9,885 $ 48,859 $ 173 158 128 125 2,625 Total commitments 68,960 20,463 20,478 19,520 16,525 12,510 $ 106,388 $ 52,068 $ 158,456 YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 71 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) Under certain lease agreements, inducements for leasehold improvements exist. These lease inducements are accounted for as part of deferred credits and amount to $14.2 million. These lease inducements are recorded as a reduction of rent expense on a straight-line basis over the term of the lease. b) Yellow Media Limited 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 for two successive one-year periods thereafter unless Yellow Media Limited 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. The Company 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 the Company 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. These agreements will terminate in 2038. c) Yellow Media Limited 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. d) Yellow Media Limited 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, financial performance or cash flows of Yellow Media Limited. (cid:16)(cid:27)(cid:3)(cid:2) ?(cid:9)(cid:13)(cid:20)(cid:13)(cid:7)(cid:9)(cid:20)(cid:26)(cid:14)(cid:8)(cid:9)(cid:6)>(cid:14)(cid:29)(cid:20)(cid:13)(cid:20)(cid:24)(cid:5)(cid:29)(cid:5)(cid:13)(cid:11)(cid:14)(cid:15)(cid:14) Credit Risk Credit risk stems primarily from the potential inability of a customer or counterparty to a financial instrument to meet its contractual obligations. Yellow Media Limited is exposed to credit risk with respect to cash, trade receivable from customers and derivative financial instruments. The carrying amount of financial assets represents Yellow Media Limited’s maximum exposure. Credit risk associated with cash 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. Yellow Media Limited’s extension of credit to customers involves judgment. Yellow Media Limited 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. Yellow Media Limited considers that it has limited exposure to concentration of credit risk with respect to trade 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 trade receivables from any one individual customer and certified marketing representative that exceeds 5% of the total balance of trade receivables at any point in time during the period. Bell, TELUS, MTS Allstream Inc. and Bell Aliant provide Yellow Media Limited with customer collection services with respect to advertisers who are also their customers. As such they receive money from customers on behalf of Yellow Media Limited. Yellow Media Limited retains the ultimate collection risks on these receivables. Allowance for doubtful accounts and past due receivables are reviewed by management at each statement of financial position reporting date. Yellow Media Limited updates its estimate of the allowance for doubtful accounts based on the evaluation of the recoverability of trade receivable balances of each customer taking into account historic collection trends of past due accounts. Trade receivables are written-off once determined not to be collectable. Subsequent recoveries of amounts previously written off are credited to the income statement. 72 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) The components of trade and other receivables are as follows: Trade receivables Current Past due less than 180 days Past due over 180 days Trade receivables Other receivables 1 Trade and other receivables December 31, 2012 December 31, 2011 $ $ $ $ 76,916 58,328 5,246 140,490 35,293 175,783 $ $ $ $ 105,592 49,171 9,456 164,219 2,367 166,586 1 Other receivables is mainly comprised of sales tax receivables and interest on a note receivable. Yellow Media Limited’s trade receivables are stated after deducting an allowance for doubtful accounts of $23.8 million at December 31, 2012 (2011 - $39.8 million). The movements in the allowance for doubtful accounts were as follows: Balance, beginning of year Bad debt expense, net of recovery1 Discontinued operations and other Written-off Balance, end of year December 31, 2012 December 31, 2011 $ $ 39,839 18,157 – (34,184) $ 23,812 $ 48,919 39,285 (1,181) (47,184) 39,839 1 Included in bad debt expense is $nil (2011 - $0.1 million recovery) for discontinued operations. In addition, Yellow Media Limited is exposed to credit risk if counterparties to its derivative financial instruments fail to meet their obligations. Market Risk (i) Interest Rate Risk Yellow Media Limited is exposed to interest rate risks resulting from fluctuations in interest rates on cash equivalents and short- term investments that earn interest at market rates. Yellow Media Limited does not use derivative instruments to reduce its exposure to interest rate risk. It manages its interest rate risk by maximizing the interest income earned on excess funds while maintaining the necessary liquidity to conduct its day-to-day operations. Yellow Media Limited may also be 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. There are no upcoming maturities that will require refinancing. Changes in interest rates will also affect the fair value of future cash flows of Yellow Media Limited’s fixed rate debt. (ii) Foreign Exchange Risk Yellow Media Limited operates in the United States and is exposed to foreign exchange risk arriving from various currency transactions. Foreign exchange transaction risk arises primarily from commercial transactions that are denominated in a currency that is not the functional currency of Yellow Media Limited’s business unit that is party to the transaction. Yellow Media Limited 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. Liquidity Risk Liquidity risk is the exposure of Yellow Media Limited to the risk of not being able to meet its financial obligations as they become due. Yellow Media Limited manages this risk by maintaining detailed cash forecasts and long-term operating and strategic plans. The management of consolidated liquidity requires a constant monitoring of expected cash inflows and outflows which is achieved through a detailed forecast of the Company’s consolidated liquidity position to ensure adequacy and efficient use of cash resources. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 73 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) The following are the contractual maturities of the financial liabilities and related capital amounts: Total Less than 1 year 2 – 3 years 4 – 5 years After 5 years Payments due for the years following December 31, 2012 Non-derivative financial liabilities Deferred consideration Long-term debt1,2 Obligations under finance leases1 Exchangeable debentures1 $ 5,609 $ 5,609 $ – $ 800,000 1,831 107,500 100,000 125,000 939 – 759 – $ – – 133 – Total $ 914,940 $ 106,548 $ 125,759 $ 133 $ – 575,000 – 107,500 682,500 1(cid:2)Principal amount. 2(cid:2)The repayment of Senior Secured Notes may increase subject to the Excess Cash Flow clause. As at December 31, 2012, cash amounted to $106.8 million. 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 Yellow Media Limited could currently obtain, on the market, for loans with similar terms, conditions and maturities. The entity’s own credit risk and the credit risk of the counterparty were taken into account when determining the fair value of financial assets and financial liabilities including derivative instruments. The fair value of trade and other receivables and trade and other payables is approximately equal to their carrying values due to their short-term maturity. The fair value of the investment classified as AFS, note receivable, Senior Secured Notes and Exchangeable Debentures is evaluated based on quoted market prices at the statement of financial position date. Fair values of the derivative financial instruments are determined based on market rates prevailing at the statement of financial position date. These estimates are significantly affected by assumptions including the amount and timing of estimated future cash flows and discount rates, all of which reflect varying degrees of risk. The following schedule represents the carrying values and the fair values of other financial instruments: Other assets – investment – AFS1 Note receivable1 Deferred consideration Put options (Financial liabilities) Long-term debt due within one year Long-term debt Exchangeable debentures Carrying Value 3,520 11,408 5,609 22,033 100,939 700,892 86,667 $ $ $ $ $ $ $ December 31, 2012 Fair Value 3,520 11,408 5,609 22,033 100,939 700,892 86,667 $ $ $ $ $ $ $ 1 The aggregate of these assets of $14.9 million as at December 31, 2012 is included in Financial and other assets on the Consolidated Statements of Financial Position. Other assets – investment – AFS Note receivable Long-term debt due within one year Series 1 shares – due within one year Deferred consideration Long-term debt Convertible Debentures1 Series 2 shares Derivative financial instruments – Redemption option on Preferred shares Carrying Value 372 11,046 102,339 249,713 9,368 1,510,892 184,214 149,173 7 $ $ $ $ $ $ $ $ $ December 31, 2011 Fair Value 372 11,046 102,339 18,283 9,368 727,958 49,878 12,246 7 $ $ $ $ $ $ $ $ $ 1 The carrying value includes the liability portion of the Convertible Debentures. 74 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) Fair value hierarchy The three levels of fair value hierarchy are as follows: (cid:2)(cid:2) (cid:2)(cid:2) (cid:2)(cid:2) 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 following table summarizes the financial instruments measured at fair value in the consolidated statement of financial position as at December 31, 2012, classified using the fair value hierarchy: Financial asset or liability Investment – available for sale Put option (Derivative liability) Total Level 1 Level 2 Level 3 Total $ $ – – – $ $ – – – $ 3,520 $ 3,520 (18,479) (18,479) $ (14,959) $ (14,959) Yellow Media Limited’s AFS investment is comprised of a privately held equity security and is carried at fair value based on estimates that are based on market rates prevailing at the statement of financial position date. (cid:16):(cid:3)(cid:2) @(cid:20)(cid:10)(cid:9)(cid:11)(cid:20)(cid:26)(cid:14)(cid:19)(cid:9)(cid:6)(cid:7)(cid:26)(cid:12)(cid:6)(cid:25)(cid:8)(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) Yellow Media Limited’s objective in managing capital is to ensure sufficient liquidity to cover financial obligations and investment requirements. Reducing debt and associated interest charges is one of the Company’s primary financial goals which will improve its financial flexibility and support the implementation of its strategic objectives. Yellow Media Limited 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 and the Company’s working capital requirements. The primary measure used by Yellow Media Limited to monitor its financial leverage is its ratio of consolidated total debt to consolidated Latest Twelve Month EBITDA1. Yellow Media Limited also uses other financial metrics to monitor its financial leverage including net debt to Latest Twelve Month EBITDA1, Fixed Charges Coverage Ratio and Net Debt to Capitalization. Yellow Media Limited’s capital is comprised of Net debt, Exchangeable Debentures and equity attributable to shareholders of Yellow Media Limited as follows: Cash Senior Secured Notes Medium Term Notes Exchangeable Debentures Convertible Debentures Credit Facility Obligations under finance leases Net debt (net of cash) Series 1 shares and Series 2 shares Equity attributable to shareholders Non-controlling interests Total capitalization Net debt to total capitalization Latest Twelve Month EBITDA1 Net Debt to Latest Twelve Month EBITDA ratio1 December 31, 2012 December 31, 2011 $ 106,807 $ 84,186 800,000 – 86,667 – – 1,831 781,691 – 285,749 411 – 1,404,083 – 184,214 205,000 4,148 1,713,259 398,886 2,084,225 802 $ 1,067,851 $ 4,197,172 73.2% 40.8% For the year ended December 31, 2012 December 31, 2011 $ 570,600 $ 671,909 1.4 2.5 1 Latest twelve month income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, acquisition-related costs, and restructuring and special charges, giving effect to the acquisitions and divestitures (“Latest Twelve Month EBITDA”). Latest twelve month EBITDA is a non-IFRS measure and may not be comparable with similar measures used by other publicly traded companies. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 75 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:19)(cid:3)(cid:2) $(cid:13)(cid:9)(cid:16)(cid:9)(cid:21)(cid:22)(cid:23)(cid:23)(cid:6)(cid:11)(cid:18)(cid:11) In the normal course of operations, Yellow Media Limited has entered into agreements which are customary in the industry. Yellow Media Limited has entered into agreements which contain indemnification of its directors 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 directors 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 Yellow Media Limited. Yellow Media Limited benefits from directors’ and officers’ liability insurance which it has purchased. No amount has been accrued in the condensed consolidated statement of financial position as at December 31, 2012, with respect to this indemnity. Pursuant to the acquisitions of Aliant, YPG USA, the contribution of YPG Directories, LLC to Ziplocal in exchange for a 35% minority interest in such combined entity as well as pursuant to the Share Purchase Agreement for the sale of the shares of Trader Corporation to funds advised by Apax Partners which closed in July 2011, Yellow Media Limited had entered into agreements whereby Yellow Media Limited agreed to indemnify and hold harmless the other party from and against any and all claims, liabilities, costs and expenses arising out of, based upon or related to (i) any breach by Yellow Media Limited in the performance of its obligations under these agreements and (ii) any breach of a representation contained herein. Furthermore, agreements entered into by LesPAC, Trader Corporation and its predecessor companies prior to the acquisition and which were transferred as part of the Trader divestiture contain indemnifications similar to the ones just described. No amount has been accrued in the condensed consolidated statement of financial position as at December 31, 2012 with respect to these indemnities. The nature of these guarantees prevents Yellow Media Limited from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. %(cid:3)(cid:2) &(cid:23)#(cid:28)(cid:23)(cid:21)(cid:22)(cid:23)(cid:15)(cid:11)(cid:5)(cid:21)(cid:12)(cid:8)(cid:16)(cid:28)(cid:9)(cid:22)(cid:5)(cid:8)(cid:21)(cid:11)(cid:18)(cid:11) After the completion of the sale of Trader Corporation in July 2011, management reassessed its operating segments and concluded that the Directories segment is the only operating segment. As at December 31, 2012, Yellow Media Limited had non-current assets other than deferred tax assets held in a foreign country of $4.9 million (2011 - $30.3 million). (cid:24)(cid:3)(cid:2) (cid:30)(cid:5)(cid:6)(cid:22)(cid:11)(cid:8)(cid:12)(cid:11)(cid:6)(cid:13)(cid:14)(cid:6)(cid:5)(cid:15)(cid:5)(cid:9)(cid:16)(cid:5)(cid:23)(cid:6)(cid:11)(cid:18)(cid:11) As at Canada YPG Financing Inc. Yellow Pages Group Corp. Snap Guides Inc.1 Mediative G.P. Inc. Mediative Performance L.P. Wall2Wall Media Inc. Clear Sky Media Inc. 1 Canpages Inc. 1 7737351 Canada Inc. (formerly LesPAC s.e.n.c.) 1 USA YPG (USA) Holdings, Inc. Yellow Pages Group, LLC 1 These entities were dissolved in 2012. December 31, 2012 December 31, 2011 Consolidation % ownership Consolidation % ownership Full consolidation 100 Full consolidation Full consolidation 100 Full consolidation – – Full consolidation Full consolidation Full consolidation 60 Full consolidation 60 Full consolidation Full consolidation 100 Full consolidation – – – – Full consolidation – Full consolidation – Full consolidation Full consolidation 100 Full consolidation Full consolidation 100 Full consolidation 100 100 100 60 60 100 100 100 100 100 100 76 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 Notes to Consolidated Financial Statements – December 31, 2012 (all tabular amounts are in thousands of Canadian dollars, except share information) (cid:16)&(cid:3)(cid:2) (cid:17)(cid:5)(cid:26)(cid:20)(cid:11)(cid:5)(cid:19)(cid:14)(cid:10)(cid:20)(cid:8)(cid:11)"(cid:14)(cid:19)(cid:9)(cid:6)(cid:7)(cid:26)(cid:12)(cid:6)(cid:25)(cid:8)(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) Key management personnel compensation Remuneration paid to members of the Board and Yellow Media Limited’s key management personnel is as follows: Salary, fees and other short-term employee benefits Post-employment benefits Share-based payments For the years ended December 31 2012 $ 3,913 $ (1,147) 4 $ 2,770 $ 2011 3,111 266 1,185 4,562 Short-term employee benefits correspond to the amounts paid during the year. Post-employment benefits and share-based payments correspond to the amounts recorded as expenses. Other related party transactions For the years ended December 31, Transaction value Balance outstanding 2012 2011 2012 2011 Sales of good and services Associate1 Expenses Associate $ 6,207 $ 4,177 $ – $ – $ – $ 76 $ – $ 13 1 In 2011, $3.4 million of trade receivable was written off and included in the impairment of investment in associate of $50.3 million. All outstanding balances with these related parties are based on arm’s length prices and are to be settled in cash under standard payment conditions. None of these balances are secured. (cid:21)’(cid:3)(cid:2) @(cid:12)(cid:29)(cid:10)(cid:20)(cid:8)(cid:20)(cid:11)(cid:9)(cid:18)(cid:5)(cid:14)(cid:23)(cid:9)(cid:24)(cid:25)(cid:8)(cid:5)(cid:6)(cid:14)(cid:15)(cid:14) Changes in the presentation of reserves for stock-based compensation, reduction of capital and other were made in the comparative year in the statement of changes in equity to conform to the current year’s presentation. YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 77 notes / 78 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 notes / YELLOW M ED IA LI M IT ED | A NNUA L RE PORT 201 2 79 notes / 80 YELLOW MED IA LIM IT ED | AN NUA L REPO RT 2012 corporate information / 16 Place du Commerce Verdun, Québec H3E 2A5 www.ypg.com Investor Relations 1 877 YLO-2003 (1 877 956-2003) ir.info@ypg.com Auditors Deloitte LLP Shares and Other Securities Listed on the Toronto Stock Exchange k Y YPG.DB Common Shares Senior Subordinated Unsecured Exchangeable Debentures Warrants Y.WT Transfer Agent Canadian Stock Transfer Company Inc. 2001 University Street, Montréal, Québec H3A 2A6 A Telephone: 1 800 387-0825 inquiries@canstockta.com y Suite 1600 y Annual Report Ce rapport est t également t disponible en français. Pour obtenir la version française, veuillez communiquer avec la Société canadienne de transfert d’actions inc. à l’adresse indiquée. t 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 (cid:20)(cid:17)(cid:21)(cid:4)(cid:11)(cid:22)(cid:4)(cid:4)(cid:8)(cid:11)(cid:6)(cid:23)(cid:24)(cid:11)(cid:24)(cid:14)(cid:11)(cid:25)(cid:18)(cid:14)(cid:3)(cid:23)(cid:6)(cid:4)(cid:11)(cid:24)(cid:20)(cid:7)(cid:15)(cid:11)(cid:25)(cid:17)(cid:25)(cid:4)(cid:18)(cid:26)(cid:11)(cid:17)(cid:8)(cid:3)(cid:11)(cid:17)(cid:13)(cid:13)(cid:11)(cid:24)(cid:20)(cid:4)(cid:11)(cid:5)(cid:22)(cid:18)(cid:4) comes from recycling bins. g 

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