Yellow Pages
Annual Report 2014

Plain-text annual report

Total Debt(in millions of Canadian dollars)$888M $735M$597M2012201320142014Financial & operationalhighlightsREVENUES (in millions of Canadian dollars)DIGITAL REVENUES (in millions of Canadian dollars)% OF REVENUES SOURCED FROM DIGITAL SOLUTIONSEBITDA (in millions of Canadian dollars)EBITDA MARGINFREE CASH FLOW (in millions of Canadian dollars)CUSTOMER COUNTCUSTOMER PENETRATION - YELLOW PAGESTM 360° SOLUTIONCUSTOMER PENETRATION - DIGITALTOTAL DIGITAL VISITSREVENUES (in millions of Canadian dollars)DIGITAL REVENUES(in millions of Canadian dollars)EBITDA(in millions of Canadian dollars)NET DEBT(in millions of Canadian dollars)$971.8M$406.3M$416.1M$533.1M$877.5M (9.7%)$442.8M 9%$316M (24.1%)$494.1M$877.5M $442.8M 50.5%$316M36% $72.6M256,000 36.6% 64%424.1Mof debt repaidin 2014$140M Growing the customer base to promote revenue growth. new customers acquired in 2014A Focus on Returningto GrowthAnnual Report 201422,100YELLOW PAGES LIMITED - 2014 ANNUAL REPORTThis anual report is printed on Rolland Enviro 100, the environmentally responsible choice, because it is processed chlorine free, accredited Eco-Logo and 100% post-consumer. In other words, no new trees have been cut to produce this paper, and all the fibre comes from recycling bins.www.corporate.yp.caYellow Pages has spent the last hundred years enabling connections between businesses and Canadian consumers. Our company’s mission is small and medium-sized business support and, through their success, the growth and prosperity of Canada’s neighbourhood economies. Implemented in 2014, our Return to Growth plan is designed to ensure that this legacy continues by allowing our company to invest in gaining a leadership position within the local digital advertising industry.In its first year, we succeeded in meeting key objectives laid out in our Return to Growth plan. We strengthened brand recognition across Canada, while also delivering Canadian users richer content and experiences across our network of digital search properties. A key milestone was reached in Q3 2014, whereby our digital revenues surpassed those of print for the first time in the company’s history. Our digital revenue growth was supported by targeted strategies to accelerate customer acquisition, the launch of new digital solutions, as well as the implementation of new technologies and processes to deliver an enhanced experience to customers.Additionally, over the course of 2014, we repaid a total of $140 million in debt, returning value to shareholders while retaining our flexibility to continue the necessary investments in our transformation. I’m proud of the commitment and efforts of our employees nationwide, who work tirelessly to deliver the transformation of this company. I am also very appreciative of the ongoing trust and loyalty of our customers Canada-wide and the confidence our shareholders hold in management’s ability to execute upon our long-term strategy. We remain focused, determined and committed to execute on our digital transformation and return Yellow Pages to revenue and profitability growth by 2018. Julien BillotPresident & Chief Executive OfficerWe’re committed to to growth planexecuting our return 20132013201320132014201420142014Annual_report_YPG_2014.indd 9-162015-03-10 1:42 PMTotal Debt(in millions of Canadian dollars)$888M $735M$597M2012201320142014Financial & operationalhighlightsREVENUES (in millions of Canadian dollars)DIGITAL REVENUES (in millions of Canadian dollars)% OF REVENUES SOURCED FROM DIGITAL SOLUTIONSEBITDA (in millions of Canadian dollars)EBITDA MARGINFREE CASH FLOW (in millions of Canadian dollars)CUSTOMER COUNTCUSTOMER PENETRATION - YELLOW PAGESTM 360° SOLUTIONCUSTOMER PENETRATION - DIGITALTOTAL DIGITAL VISITSREVENUES (in millions of Canadian dollars)DIGITAL REVENUES(in millions of Canadian dollars)EBITDA(in millions of Canadian dollars)NET DEBT(in millions of Canadian dollars)$971.8M$406.3M$416.1M$533.1M$877.5M (9.7%)$442.8M 9%$316M (24.1%)$494.1M$877.5M $442.8M 50.5%$316M36% $72.6M256,000 36.6% 64%424.1Mof debt repaidin 2014$140M Growing the customer base to promote revenue growth. new customers acquired in 2014A Focus on Returningto GrowthAnnual Report 201422,100YELLOW PAGES LIMITED - 2014 ANNUAL REPORTThis anual report is printed on Rolland Enviro 100, the environmentally responsible choice, because it is processed chlorine free, accredited Eco-Logo and 100% post-consumer. In other words, no new trees have been cut to produce this paper, and all the fibre comes from recycling bins.www.corporate.yp.caYellow Pages has spent the last hundred years enabling connections between businesses and Canadian consumers. Our company’s mission is small and medium-sized business support and, through their success, the growth and prosperity of Canada’s neighbourhood economies. Implemented in 2014, our Return to Growth plan is designed to ensure that this legacy continues by allowing our company to invest in gaining a leadership position within the local digital advertising industry.In its first year, we succeeded in meeting key objectives laid out in our Return to Growth plan. We strengthened brand recognition across Canada, while also delivering Canadian users richer content and experiences across our network of digital search properties. A key milestone was reached in Q3 2014, whereby our digital revenues surpassed those of print for the first time in the company’s history. Our digital revenue growth was supported by targeted strategies to accelerate customer acquisition, the launch of new digital solutions, as well as the implementation of new technologies and processes to deliver an enhanced experience to customers.Additionally, over the course of 2014, we repaid a total of $140 million in debt, returning value to shareholders while retaining our flexibility to continue the necessary investments in our transformation. I’m proud of the commitment and efforts of our employees nationwide, who work tirelessly to deliver the transformation of this company. I am also very appreciative of the ongoing trust and loyalty of our customers Canada-wide and the confidence our shareholders hold in management’s ability to execute upon our long-term strategy. We remain focused, determined and committed to execute on our digital transformation and return Yellow Pages to revenue and profitability growth by 2018. Julien BillotPresident & Chief Executive OfficerWe’re committed to to growth planexecuting our return 20132013201320132014201420142014Annual_report_YPG_2014.indd 9-162015-03-10 1:42 PMTotal Debt(in millions of Canadian dollars)$888M $735M$597M2012201320142014Financial & operationalhighlightsREVENUES (in millions of Canadian dollars)DIGITAL REVENUES (in millions of Canadian dollars)% OF REVENUES SOURCED FROM DIGITAL SOLUTIONSEBITDA (in millions of Canadian dollars)EBITDA MARGINFREE CASH FLOW (in millions of Canadian dollars)CUSTOMER COUNTCUSTOMER PENETRATION - YELLOW PAGESTM 360° SOLUTIONCUSTOMER PENETRATION - DIGITALTOTAL DIGITAL VISITSREVENUES (in millions of Canadian dollars)DIGITAL REVENUES(in millions of Canadian dollars)EBITDA(in millions of Canadian dollars)NET DEBT(in millions of Canadian dollars)$971.8M$406.3M$416.1M$533.1M$877.5M (9.7%)$442.8M 9%$316M (24.1%)$494.1M$877.5M $442.8M 50.5%$316M36% $72.6M256,000 36.6% 64%424.1Mof debt repaidin 2014$140M Growing the customer base to promote revenue growth. new customers acquired in 2014A Focus on Returningto GrowthAnnual Report 201422,100YELLOW PAGES LIMITED - 2014 ANNUAL REPORTThis anual report is printed on Rolland Enviro 100, the environmentally responsible choice, because it is processed chlorine free, accredited Eco-Logo and 100% post-consumer. In other words, no new trees have been cut to produce this paper, and all the fibre comes from recycling bins.www.corporate.yp.caYellow Pages has spent the last hundred years enabling connections between businesses and Canadian consumers. Our company’s mission is small and medium-sized business support and, through their success, the growth and prosperity of Canada’s neighbourhood economies. Implemented in 2014, our Return to Growth plan is designed to ensure that this legacy continues by allowing our company to invest in gaining a leadership position within the local digital advertising industry.In its first year, we succeeded in meeting key objectives laid out in our Return to Growth plan. We strengthened brand recognition across Canada, while also delivering Canadian users richer content and experiences across our network of digital search properties. A key milestone was reached in Q3 2014, whereby our digital revenues surpassed those of print for the first time in the company’s history. Our digital revenue growth was supported by targeted strategies to accelerate customer acquisition, the launch of new digital solutions, as well as the implementation of new technologies and processes to deliver an enhanced experience to customers.Additionally, over the course of 2014, we repaid a total of $140 million in debt, returning value to shareholders while retaining our flexibility to continue the necessary investments in our transformation. I’m proud of the commitment and efforts of our employees nationwide, who work tirelessly to deliver the transformation of this company. I am also very appreciative of the ongoing trust and loyalty of our customers Canada-wide and the confidence our shareholders hold in management’s ability to execute upon our long-term strategy. We remain focused, determined and committed to execute on our digital transformation and return Yellow Pages to revenue and profitability growth by 2018. Julien BillotPresident & Chief Executive OfficerWe’re committed to to growth planexecuting our return 20132013201320132014201420142014Annual_report_YPG_2014.indd 9-162015-03-10 1:42 PM38%45%54%201220132014Evolution of digital revenues1(as a percentage of total revenues)1 As of the fourth quarterDigital revenues now represent of total revenuesover54%Growing portfolio of digital properties, attracting over 424 million visits annually.of customers purchase our digital solutionsApproximatelytwo-thirdsTable of contentsManagement’s Discussion and AnalysisIndependent Auditor’s ReportConsolidated Statements of Financial PositionConsolidated Income StatementsConsolidated Statements of Comprehensive Income (Loss)Consolidated Statements of Changes in EquityConsolidated Statements of Cash FlowsNotes to the Consolidated Financial Statements1323334 3536-373839-72Annual_report_YPG_2014.indd 1-82015-03-10 1:42 PM38%45%54%201220132014Evolution of digital revenues1(as a percentage of total revenues)1 As of the fourth quarterDigital revenues now represent of total revenuesover54%Growing portfolio of digital properties, attracting over 424 million visits annually.of customers purchase our digital solutionsApproximatelytwo-thirdsTable of contentsManagement’s Discussion and AnalysisIndependent Auditor’s ReportConsolidated Statements of Financial PositionConsolidated Income StatementsConsolidated Statements of Comprehensive Income (Loss)Consolidated Statements of Changes in EquityConsolidated Statements of Cash FlowsNotes to the Consolidated Financial Statements1323334 3536-373839-72Annual_report_YPG_2014.indd 1-82015-03-10 1:42 PM38%45%54%201220132014Evolution of digital revenues1(as a percentage of total revenues)1 As of the fourth quarterDigital revenues now represent of total revenuesover54%Growing portfolio of digital properties, attracting over 424 million visits annually.of customers purchase our digital solutionsApproximatelytwo-thirdsTable of contentsManagement’s Discussion and AnalysisIndependent Auditor’s ReportConsolidated Statements of Financial PositionConsolidated Income StatementsConsolidated Statements of Comprehensive Income (Loss)Consolidated Statements of Changes in EquityConsolidated Statements of Cash FlowsNotes to the Consolidated Financial Statements1323334 3536-373839-72Annual_report_YPG_2014.indd 1-82015-03-10 1:42 PM38%45%54%201220132014Evolution of digital revenues1(as a percentage of total revenues)1 As of the fourth quarterDigital revenues now represent of total revenuesover54%Growing portfolio of digital properties, attracting over 424 million visits annually.of customers purchase our digital solutionsApproximatelytwo-thirdsTable of contentsManagement’s Discussion and AnalysisIndependent Auditor’s ReportConsolidated Statements of Financial PositionConsolidated Income StatementsConsolidated Statements of Comprehensive Income (Loss)Consolidated Statements of Changes in EquityConsolidated Statements of Cash FlowsNotes to the Consolidated Financial Statements1323334 3536-373839-72Annual_report_YPG_2014.indd 1-82015-03-10 1:42 PMFinancial Review 2014 We continue to invest in our brand, our media, our customers and our workforce with the goal of returning Yellow Pages to growth by 2018. Visit our online annual report for videos and additional content on our accomplishments in 2014. http://www.corporate.yp.ca/ar2014 cover_RA_2014.indd 1 2015-03-09 10:25 78651_Lisbro_RapAnnuel MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS February 12, 2015 This management’s discussion and analysis (MD&A) is intended to help the reader understand and assess trends and significant changes in the results of operations and financial condition of Yellow Pages Limited, formerly Yellow Media Limited and its subsidiaries for the years ended December 31, 2014 and 2013 and should be read in conjunction with our Audited Consolidated Financial Statements and accompanying notes for the years ended December 31, 2014 and 2013. Quarterly reports, the annual report and Supplemental Disclosure can be found under the “Financial Reports” section of our corporate web site: http://corporate.yp.ca. 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, 2014. In this MD&A, the words “we”, “us”, “our”, the “Company”, the “Corporation”, “Yellow Pages” and “YP” refer to Yellow Pages Limited (formerly Yellow Media Limited) and its subsidiaries (including Yellow Pages Digital & Media Solutions Limited, which is the amalgamated entity resulting from the vertical short-form amalgamation of Yellow Pages Group Corp. and YPG Financing Inc., wholly-owned subsidiaries of the Company, on January 1, 2015, 411 Local Search Corp. (411), Yellow Pages Homes Limited (formerly Wall2Wall Media Inc.) (YP Next Home), YPG (USA) Holdings, Inc. and Yellow Pages Digital & Media Solutions LLC (formerly Yellow Pages Group, LLC) (the latter two collectively YP USA), and 4400348 Canada Inc. (Bookenda)). 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 YP. 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 made the following assumptions: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 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 we will be able to introduce, sell and provision new products and services; 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 we will be able to grow traffic across our owned and operated digital properties at the currently anticipated rate; that the decline in print revenues will not materially accelerate beyond what is currently anticipated; that digital growth will not be materially slower than what is currently anticipated; that we will be able to acquire new customers at the currently anticipated rate; 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. INT_RA2014_Engl.indd 1 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 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 at the date of this MD&A. The Corporation assumes no obligation to update or revise them to reflect new events or circumstances, except as may be required pursuant to securities laws. 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 and could have a material adverse effect on the Corporation, its business, results from operations and financial condition, including, but not limited to, the following risk factors discussed under the “Risks and Uncertainties” section of this MD&A, and those described in the “Risk Factors” section of our AIF: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Substantial competition could reduce the market share of the Corporation; A higher than anticipated rate of decline in print revenue resulting from changes in preferences and consumer habits; The inability of the Corporation to successfully enhance and expand its offering of digital and new media products; The inability of the Corporation to generate sufficient funds from operations, debt financings, equity financings or refinancing transactions; The Corporation’s substantial indebtedness could adversely affect its efforts to refinance ; Incremental contributions by the Corporation to its pension plans; Failure by either the Corporation or the Telco Partners (as defined herein) to fulfill the obligations set forth in the agreements between the Corporation and the Telco Partners; Failure by the Corporation to adequately protect and maintain its brands and trademarks, as well as third party infringement of such; (cid:120) Work stoppages and other labor disturbances; (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Challenge by tax authorities of the Corporation’s position on certain income tax matters; The loss of key relationships or changes in the level or service provided by digital portals, search engines, individual websites, mobile manufacturers and Operating Systems providers; The failure of the Corporation’s computers and communications systems; The Corporation’s inability to attract and retain key personnel; The inability of the Corporation to develop information and technology systems and platforms required to execute the Corporation’s Return to Growth Plan; The inability of the Corporation to realize operational efficiencies and costs savings across its operations; The Corporation might be required to record additional impairment charges; The inability of the Corporation to attract and retain customers; A higher than anticipated proportion of revenues coming from the Corporation’s digital products with lower margin, such as websites, search engine optimization (SEO) and search engine marketing (SEM); and The Corporation’s business depends on the usage of its online and mobile properties and failure to grow traffic across the Corporation’s digital properties could impair its ability to grow revenues and expand its business. 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. The Corporation assumes no obligation to update or revise them to reflect new events or circumstances, except as may be required pursuant to securities laws. 2 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 2 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS DEFINITIONS RELATIVE TO UNDERSTANDING OUR RESULTS Income from Operations before Depreciation and Amortization, Impairment of Goodwill, Intangible Assets and Property, Plant and Equipment 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 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 in the context of measuring Yellow Pages’ 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, business acquisitions, debt principal reductions and other sources and uses of cash, which are disclosed on page 21 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, as reported in accordance with IFRS, less an adjustment for capital expenditures. Free cash flow is not a standardized measure and is not comparable with that of other public companies. This MD&A is divided into the following sections: 1. 2. 3. 4. 5. 6. 7. 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 INT_RA2014_Engl.indd 3 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 3 MANAGEMENT’S DISCUSSION AND ANALYSIS 1. OUR BUSINESS, MISSION, STRATEGY AND CAPABILITY TO DELIVER RESULTS OUR BUSINESS Yellow Pages is a Canadian digital and print media company, offering businesses media solutions to meet their key marketing objectives and providing consumers with platforms to access reliable local business information. Through its sales force of 1,100 media account consultants (MACs) and sales support staff, the Company currently serves approximately 256,000 local businesses across Canada. This large and primarily face-to-face sales force is broken down into various customer segments in order to provide customers with a more targeted and specialized level of service. Yellow Pages offers small-and-medium sized businesses (SMEs) access to one of the country’s most comprehensive suites of digital and traditional marketing solutions, which include products such as online and mobile priority placement on Yellow Pages’ owned and operated media, search engine solutions, website fulfillment, social media campaign management, digital display advertising, video production and print advertising. Through its Mediative division, the Company also provides national-scale businesses with high-end, customizable digital marketing and performance media services. Yellow Pages’ database of local merchant information currently contains 1.8 million business listings, making it one of the largest in Canada. This content reaches Canadian audiences via a variety of digital and print media, which include YP.ca™, Canada411.ca™ (now C411), RedFlagDeals.com™, 411.ca, Bookenda.com and dine.TO desktop websites, the YP, YP Shopwise™, RedFlagDeals, C411 and 411.ca mobile search applications as well as the Yellow Pages™ print directories. (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) YP – Available both online and as a mobile application, YP.ca provides users access to current and comprehensive information on local Canadian businesses. YP Shopwise – Mobile application offering geo-localized deals and flyers, alongside access to a catalogue of over 7 million products and information on over 600 local and national retailers. RedFlagDeals.com – Canada’s leading provider of online and mobile deals, coupons and shopping tools. C411 – One of Canada’s most frequented and trusted online destinations for personal contact information. Bookenda.com – Online digital properties offering a leading online transaction platform for users and merchants to easily interact and manage bookings. dine.TO – Provides users in the Greater Toronto Area with an extensive database of online local restaurant listings, reviews, deals, playlists and events, as well as real-time online ordering capabilities. In addition to Yellow Pages™ print directories, Yellow Pages is the official directory publisher for Bell Canada (Bell), TELUS Communications Inc. (TELUS), Bell Aliant Regional Communications LP (Bell Aliant), MTS Allstream Inc. and a number of other incumbent telephone companies that have a leading share in their respective markets. In 2014, the Company published approximately 335 print telephone directories with a total circulation of approximately 16 million copies. MISSION We exist to champion the local neighbourhood economy by enabling Canada’s businesses and its consumers to connect, interact and build relationships. STRATEGY AND CAPABILITY TO DELIVER RESULTS Our objective is to become the leading local digital media company in Canada. We will accomplish this by fostering strong business relationships between Canadian SMEs and local consumers, and by developing an unparalleled local media presence across the country. Yellow Pages introduced the Return to Growth Plan (the Plan) in early 2014 to accelerate its digital transformation and help it gain a leadership position within Canada’s local digital advertising market. The Plan sets out to accomplish these objectives by strengthening the Company’s brand perception, media properties and customer value proposition, elements which are fundamental in promoting growth in the Company’s customer count, and ultimately, growth in revenues and profitability. The Plan is also designed to help realize operational efficiencies and costs savings across the organization, while delivering the financial flexibility required to materially deleverage the balance sheet over the next four years. Successful completion of the Plan will enhance Yellow Pages’ competitive positioning in the Canadian market, improve its relationship with Canadian SMEs and consumers, and provide the Company with a strengthened platform onto which it can develop new businesses and enter new markets. 4 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 4 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS Yellow Pages achieved numerous corporate milestones since the launch of the Plan. In its first year of implementation, the Company succeeded in meeting key operational and financial targets, which included: (cid:120) Customer Acquisition – For the twelve-month period ended December 31, 2014, the Company acquired 22,100 new customers. This compares favourably to the acquisition of 15,200 customers in 2013 and surpassed Yellow Pages’ 2014 customer acquisition target of 20,000 customers; (cid:120) Digital Visits – Total digital visits across Yellow Pages’ owned and operated properties grew 6.8% year-over-year to reach 424.1 million in 2014; (cid:120) Digital Revenues – Consolidated digital revenues grew 9% year-over-year to reach $442.8 million in 2014. A key milestone was reached in 2014, as digital revenues exceeded print revenues for the first time in the Company’s history. For the fourth quarter ended December 31, 2014, digital revenues represented 54.3% of consolidated revenues; and (cid:120) Debt Repayment – Yellow Pages repaid $139.6 million of its 9.25% senior secured notes in 2014, exceeding the minimum aggregate mandatory redemption requirement of $125 million for 2014 and 2015 combined. In 2015, Yellow Pages will leverage these achievements to properly execute upon the core pillars underlying its Return to Growth Plan. These include: Extending its Brand Promise Branding and promotion are aimed at strengthening the Company’s brand image among users and merchants, with a focus on improving digital perceptions and boosting recognition of its digital media platforms and solutions. In 2015, the Company will continue to invest in national and local mass media advertising campaigns to promote the download and use of the YP and YP Shopwise mobile applications among Canadian users. Campaigns will also be launched to support the adoption and use of Yellow Pages’ new verticals as they are rolled out over the course of the year. In an effort to raise awareness of Yellow Pages’ digital solutions and grow customer acquisition and retention, the Company will increase the frequency and visibility of its radio, digital and out-of-home advertising campaigns. We will also grow involvement in the Company’s Shop The Neighbourhood™ (STN) event, promoting local shopping and celebrating the importance of SMEs in thriving neighbourhoods. In 2014, STN attracted the participation of over 8,000 Canadian SMEs, as well as notable media, celebrities, athletes and political figures, in support of the growth of local economies. Strengthening its Media Assets Priority placement products sold on Yellow Pages’ digital owned and operated properties currently represent approximately 60% of digital revenues and remain the most profitable of the Company’s digital product suite. Deploying engaging online and mobile properties is critical to growing traffic, providing customers with improved return on investment (ROI) and promoting digital revenue growth and profitability. In 2015, the Company will deliver enhanced content and user experiences across its network of digital properties to improve overall consumer engagement. More complete and relevant content will be published, including richer merchant information, deals, ratings and reviews, as well as local editorial content in the form of playlists, business stories and recommendations. Aligned with its media verticalization strategy, Yellow Pages will also introduce online and mobile properties in the dining, home services and leisure verticals in 2015 to offer users a differentiated local shopping experience and access to new search and transactional capabilities. The Company will leverage Bookenda’s leading online booking engine to integrate transactional capabilities across its existing and upcoming digital properties. In conjunction, Yellow Pages will utilize dine.TO’s digital restaurant guides and extensive database of local restaurant listings, reviews, deals, playlists and events to fast-track the development of its new dining vertical. Enhancing its Customer Value Proposition Increasing the size of its customer base is critical in ensuring Yellow Pages achieves revenue and profitability growth. In 2015, Yellow Pages is targeting total customer acquisition of 30,000 new customers, which will be supported by the ongoing deployment of a new customer relationship management platform (Salesforce.com) to optimize lead assignment, management and conversion across sales channels. The Company will also deliver enhanced selling tools, digital product fulfillment processes and customer service levels to promote higher customer satisfaction and retention. In conjunction, new self-serve functionalities will be introduced on the Yellow Pages™ 360º Business Center (360º Business Center), providing customers with the ability to better manage their profiles and purchase digital solutions via the online portal. Yellow Pages’ digital product suite will continue to evolve to best meet the changing needs of local businesses. In 2015, the Company will introduce an entry-level content management and syndication solution to help current and prospective customers build and maintain a more complete and consistent digital presence. Through this new service, Yellow Pages will fully manage and optimize SMEs’ presence on the web by ensuring their business listing and merchant information is made available and appears in a consistent manner across a vast network of digital properties with high traffic, outside those owned and operated by YP. INT_RA2014_Engl.indd 5 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 5 MANAGEMENT’S DISCUSSION AND ANALYSIS Gaining Efficiencies Operational excellence will continue to be promoted across the organization to support long-term profitability and the efficient delivery of the Plan. To address declining print revenues, the Company is actively optimizing print manufacturing and distribution expenses. A more targeted print distribution model is currently being implemented to align directory delivery with usage and demand, while a portion of Yellow Pages’ distribution efforts have been insourced to support improved cost flexibility. Initiatives are also in place to decommission and replace Yellow Pages’ network of legacy publishing and information system and information technology (ISIT) platforms, while process improvements are being implemented to deliver costs savings across the sales, customer service and digital fulfillment functions. OUTLOOK The Company maintains its long-term financial outlook relative to the Return to Growth Plan. The Plan will serve to accelerate the Company’s digital transformation, targeting customer count growth in 2017 and consolidated revenue and EBITDA growth in 2018. (cid:120) Digital revenue growth is anticipated to be maintained in the high single-digits for 2015 and thereafter. (cid:120) (cid:120) (cid:120) As additional investments are made to accelerate the Company’s digital transformation, 2015 EBITDA will remain under pressure relative to 2014; EBITDA margins will, however, be maintained between 30% and 35% for 2015 and thereafter. Capital expenditures are projected to reach between $70 and $75 million in 2015, focusing on the development of ISIT systems and platforms to support growth in digital audiences, customer acquisition, customer retention, new product introduction and the optimization of business efficiencies. Thereafter, capital expenditures, as a percentage of consolidated revenues, will gradually decline to stabilize at approximately 5% by 2018. Yellow Pages will also maintain a strong focus on debt repayment, and continue generating sufficient cash flow from its operations to support required capital expenditures and service all future debt obligations. In 2015, the Company anticipates redeeming approximately $100 million of its 9.25% senior secured notes. As part of establishing the above guidance, the Company made a number of assumptions, including those described in the section Forward-Looking Information of this MD&A as well as the following assumptions: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Economic conditions in Canada remain stable; Exposure to foreign exchange risk arising from foreign currency transactions remains insignificant. Annual operating costs, net of revenue, denominated in U.S. dollars, are approximately $50 million; Canadian local digital advertising market experiences growth of 10% per year; Print decline rates stabilize; Investments in branding will evolve legacy perceptions and boost awareness of our digital media platforms; Investments in new content and digital experiences across our owned and operated properties will attract and grow digital audiences; The introduction of performance-based solutions will leverage the power of our owned and operated digital properties and protect profitability; The Company will be able to further accelerate customer acquisition levels and, over time, retain and upsell newly acquired customers; and The Company will be able to realize efficiency gains to support profitability and cash flow generation. The Company cautions that the assumptions used to prepare the Outlook provided above, although currently reasonable, may prove to be incorrect or inaccurate. Accordingly, our actual results may differ materially from our expectations as set forth in this section. The Outlook provided above should be read in conjunction with the section Forward-Looking Information beginning on page 1 of this MD&A. 6 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 6 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS 2. RESULTS This section provides an overview of our financial performance in 2014 compared to 2013 and 2012. We present several metrics to help investors better understand our performance. Some of these metrics are not measures recognized by IFRS. Definitions of these financial metrics are provided on page 3 of this MD&A and are important aspects which should be considered when analyzing our performance. OVERALL (cid:120) (cid:120) Revenues decreased by $94.2 million or 9.7% to $877.5 million compared to the previous year. Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) decreased by $100.1 million or 24.1% to $316 million compared to the previous year. (cid:120) Digital revenues represented 50.5% of consolidated revenues for the year ended December 31, 2014, up from 41.8% for the same period in 2013. HIGHLIGHTS (IN THOUSANDS OF CANADIAN DOLLARS– EXCEPT PER SHARE INFORMATION) Revenues Income from operations before depreciation and amortization, and restructuring and special charges (EBITDA) EBITDA margin Net earnings Basic earnings per share attributable to common shareholders Cash flows from operating activities Free cash flow1 1 Please refer to Section 4 for a reconciliation of free cash flow. Years ended December 31, 2014 877,528 315,976 36% 188,540 6.95 156,507 $ $ $ $ $ $ 72,557 2013 971,761 416,112 42.8% 176,530 6.34 340,680 274,551 $ $ $ $ $ $ (cid:639)(cid:639) REVENUES (IN MILLIONS OF DOLLARS) 2014 2013 (9.7%) $877.5 $971.8 EBITDA (IN MILLIONS OF DOLLARS) 2014 2013 (24.1%) $316 $416.1 PERFORMANCE RELATIVE TO BUSINESS STRATEGY To promote successful implementation of Yellow Pages’ Return to Growth Plan, the Company identified the following key areas of focus for 2014: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) Extend the Brand Promise – Launch targeted advertising campaigns to increase digital brand awareness and perception among consumer audiences and SMEs, as well as underscore the brand’s digital transformation; Attract Valuable Audiences – Deliver an enhanced user experience, improve the quality, completeness and relevance of content, and provide attractive digital properties for local neighbourhood discovery to promote growth in digital audiences; Respond to Customer Needs – Provide valuable digital solutions, an improved sales experience, superior execution of clients’ marketing campaigns, as well as enhanced customer service to accelerate customer acquisition and protect customer retention; Invest in Employees – Support the Company’s digital transformation by attracting and retaining the required expertise in information technology, digital media, sales and customer service, while providing the necessary training to increase digital skillsets across the organization; and Improve Efficiencies – Implement technologies that will optimize processes, streamline business operations and promote profitability. INT_RA2014_Engl.indd 7 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 7 MANAGEMENT’S DISCUSSION AND ANALYSIS Extend the Brand Promise In 2014, the Company invested in local and national branding campaigns dedicated to increasing digital brand awareness and perception among consumer audiences and SMEs, as well as underscore the brand’s digital transformation and grow traffic on its flagship YP mobile application. A television advertising campaign ran nationally from April to June 2014, introducing Canadians to the improved content and user functionalities available on the YP mobile application. This was followed by an extensive out-of-home and digital advertising campaign in Toronto, Montreal, Calgary and Vancouver in the summer and fall of 2014 to promote a more targeted adoption within Canada’s most populated urban centers. Both the national and local campaigns yielded favourable results, having contributed positively to increasing traffic on the YP mobile application and improving the Company’s digital brand recall and perception. In conjunction, Yellow Pages rebranded its “yellowpages.ca” and “ShopWise” digital properties to “YP.ca” and “YP Shopwise,” respectively. The introduction of the YP acronym is modern, digital-oriented and easier to remember, and will also be used in the branding of Yellow Pages’ upcoming digital properties to further enhance brand recognition. Following a 2013 launch in Toronto, Yellow Pages extended its corporate social responsibility campaign, STN to Montreal, Vancouver, Calgary and Ottawa in 2014. To celebrate small businesses and encourage Canadians to shop locally, STN was held during a weekend when many Canadians shop at U.S. retailers to take advantage of Black Friday and Cyber Monday deals. In 2014, STN attracted significant support from local media and celebrities, in addition to the participation of 200 Canadian business associations. Over 8,000 local SMEs also participated in the event, having uploaded 6,000 deals exclusive to YP’s digital properties for event day. Lastly, as the “Yellow Pages” brand remains highly recognized, respected and reflective of the Company’s 100-year heritage of connecting businesses and consumers nationwide, the Company officially changed its holding name to “Yellow Pages Limited” on December 31, 2014. Attract Valuable Audiences To increase traffic across its network of digital properties, attract more business to current and prospective customers, and ultimately, improve ROI, Yellow Pages remains committed to delivering users with richer content and an enhanced search experience. Total digital visits, which measures the number of visits made across the YP, RedFlagDeals, YP Shopwise and C411 desktop and mobile properties, grew to 424.1 million in 2014. This represents a year-over-year growth of 6.8% relative to 397.1 million visits in 2013. For the three-month period ended December 31, 2014, total digital visits reached 117.4 million, growing 14.2% over the same period last year. The Company aims to raise engagement and the frequency of use of its digital properties by offering shoppers more relevant and differentiated local content. In an effort to improve the accuracy of its business information, the Company has eliminated close to all stale, obsolete and duplicate business listings published across its media. In addition, Yellow Pages’ database of merchant information continues to rapidly expand. The Company’s properties now contain 1.8 million listings and over 480,000 merchant profiles containing pictures, videos, website links, mapping functionalities, deals, ratings and reviews. Editorial content is also being published to promote local neighbourhood discovery and extend users’ experience beyond business search. YP.ca now offers shoppers the ability to discover top-ranked merchants in and around their area, as well as consult a series of articles (Smart Tips) to help them make more informed decisions in such areas as health, personal finance, home renovation, travel, shopping and others. In 2014, the Company launched new versions of YP.ca and the YP mobile application, YP Shopwise and C411, providing users with an easier-to-navigate interface, more dynamic search functionalities, and quicker response times. These enhancements were well recognized by the digital community, with the YP Shopwise and C411 applications each awarded the titles of “Best New App” by the Canadian App Store. The YP mobile application was also selected as one of Apple’s “Best New Apps of 2014” and included in Google Play’s “Best of 2014” editor’s list. In December 2014, Yellow Pages completed the acquisitions of 4400438 Canada Inc., doing business as Bookenda, and the business of Candia Digital Group Inc. (dine.TO), to acquire the talent and technologies required to accelerate the development of new media properties. With a strong presence in the restaurant industry within the Greater Montreal Area, Bookenda’s digital properties offer a leading online transaction platform for users and merchants to easily interact and manage bookings. dine.TO owns and operates local digital restaurant guides for the Greater Toronto Area, providing users with an extensive database of local restaurant listings, reviews, deals, playlists and events, as well as real-time online ordering capabilities. 8 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 8 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS Responding to Customer Needs Yellow Pages must return to a growth in the customer count to ultimately deliver long-term, sustainable revenue and EBITDA growth. As at December 31, 2014, the Company’s customer count totalled 256,000, as compared to 276,000 customers for the same period last year. This represents a decrease in the customer count of 20,400 customers in 2014, relative to 33,100 customers the year prior. The acquisition of new customers continued to accelerate during the fourth quarter of 2014, fuelled by an expanding sales team, the launch of entry-level digital product offerings and the introduction of new sales incentive programs. For the twelve-month period ended December 31, 2014, YP acquired 22,100 new customers, exceeding its 2014 target of 20,000 new customers. Customer acquisition also remained stronger relative to prior periods, up from 15,200 for the same period last year and 20,200 for the twelve-month period ended September 30, 2014. For the twelve-month period ended December 31, 2014, customer renewal among YP’s customers reached 84%, down slightly when compared to 85% for the same period last year. Customer penetration of the Yellow Pages™ 360º Solution (360º), defined as customers who purchase three product categories or more, grew to 36.6% as at December 31, 2014, up from 27.1% at the same time last year, and continues to protect retention. Renewal among 360º Solution customers reached 90% for the twelve-month period ended December 31, 2014 as compared to 82% among non-360º customers. The Company continued to expand its 360º value proposition to local SMEs in 2014, having launched new Smart Digital Display and Facebook Solutions throughout 2014. Smart Digital Display helps local businesses build an online presence by exposing their digital banner ads to local online audiences, while Facebook Solutions allows SMEs to establish and maintain strong visibility across the leading social media property. Recent efforts to improve the end-to-end customer experience have also played a key role in protecting customer retention levels. In 2014, YP launched its redesigned business-to-business (B2B) online 360º Business Centre (http://businesscentre.yp.ca/), now offering SMEs self-serve functionalities such as the ability to register and claim business listings, update and add content to their merchant profiles, track the performance of their marketing campaigns and pay their invoices. Technologies are also being rolled out across the organization to offer SMEs quality digital solutions and improved customer satisfaction. In the fourth quarter of 2014, Yellow Pages implemented a new business process management system, providing its digital fulfillment teams with improved content management capabilities and a more robust order management procedure to promote the timely delivery of website solutions. The Company is also expanding its customer service teams and currently providing them with better tools to enhance the speed and quality of issue resolution. CUSTOMER RENEWAL AND ACQUISITION Customer count1 Customer renewal rate2 New customers2 1 Excludes the contribution of 411 and YP Next Home. 2 YP core only, excludes Mediative, 411 and YP Next Home. Invest in Employees For the years ended December 31, 2014 256,000 84% 22,100 2013 276,000 85% 15,200 Yellow Pages’ employees are a key success factor to its digital transformation. Over the course of 2014, the Company hired over 300 digital media and ISIT professionals to help execute upon the Plan. Employees were given access to a larger, more comprehensive catalogue of courses and training programs to foster digital literacy within the organization. In conjunction, Yellow Pages held conferences to promote mobilization across departments, offering employees an improved understanding of the objectives and initiatives underlying the Plan, as well as their roles as change agents of the Company’s digital transformation. Feedback received from these events was positive, with employees having expressed appreciation for the openness, transparency and interaction received from the executive team, as well as greater confidence in the Company’s ability to execute upon the Plan. Improve Efficiencies The Company continues to actively streamline operations to generate cost savings and protect long-term profitability and cash flow generation. Yellow Pages is currently operating under a new print directory distribution model, insourcing a portion of efforts while better aligning directory distribution with consumer usage. Cost savings will also be realized through the ongoing decommissioning and replacement of legacy print publishing systems and ISIT datacentres, and through the optimization of various customer service and digital fulfilment processes. INT_RA2014_Engl.indd 9 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 9 MANAGEMENT’S DISCUSSION AND ANALYSIS CONSOLIDATED OPERATING AND FINANCIAL RESULTS (IN THOUSANDS OF CANADIAN DOLLARS – EXCEPT PER SHARE INFORMATION) For the years ended December 31, Revenues Operating costs Income from operations before depreciation and amortization, impairment of goodwill, intangible assets and property, plant and equipment, and restructuring and special charges (EBITDA) Depreciation and amortization Impairment of goodwill, intangible assets and property, plant and equipment Restructuring and special charges Income (loss) from operations Financial charges, net Gain on settlement of debt Earnings (loss) before dividends on Preferred shares, series 1 and 2, income taxes and earnings from investments in associates Dividends on Preferred shares, series 1 and 2 (Recovery of) provision for income taxes Earnings from investments in associates Net earnings (loss) Basic earnings (loss) per share attributable to common shareholders Diluted earnings (loss) per share attributable to common shareholders Total assets Long-term debt (including current portion, excluding exchangeable debentures) Exchangeable debentures 2014 2013 $ 877,528 $ 971,761 $ 561,552 555,649 315,976 78,076 (cid:16) 18,359 219,541 72,116 (cid:16) 147,425 (cid:16) (40,937) (178) 416,112 60,164 (cid:16) 23,338 332,610 93,357 (cid:16) 239,253 (cid:16) 63,421 (698) 2012 1,107,715 538,335 569,380 104,293 3,267,847 44,923 (2,847,683) 155,968 (978,589) (2,025,062) 17,694 (78,809) (1,893) $ $ $ $ $ $ 188,540 $ 176,530 $ (1,962,054) 6.95 5.81 1,749,560 507,911 88,959 $ $ $ $ $ 6.34 5.46 1,794,034 647,468 87,934 $ $ $ $ $ (70.95) (70.95) 1,756,476 801,831 86,667 ANALYSIS OF CONSOLIDATED OPERATING AND FINANCIAL RESULTS FISCAL 2014 VERSUS 2013 Revenues Revenues decreased by 9.7% to $877.5 million during 2014 compared with $971.8 million for 2013. Revenues remain mostly impacted by the overall loss of customers. To offset existing trends and return to a growth in customer count by 2017, Yellow Pages continues to invest in accelerating the annual run-rate of customer acquisition and delivering an improved experience to current and prospective customers. Albeit declining, print revenue decline rates are stabilizing. In 2014, consolidated print revenues decreased 23.1% year-over-year to reach $434.7 million. To support print revenues, the Company launched the Print Product Simplification (PPS) initiative in 2014 in select rural markets. By increasing print advertisement sizes at little to no incremental cost to the customer, PPS protects customer renewal while preserving content and promoting usage of the print directory. PPS also simplifies the selling process for our MACs by reducing the number of print offers available to customers. Following its success in rural markets, PPS will be expanded to nearly all rural and urban markets as well as select large urban markets throughout 2015. Consolidated digital revenues reached $442.8 million in 2014 representing an increase of 9%. A key milestone was achieved during 2014 as consolidated digital revenues exceeded 50% of revenues. For the year ended December 31, 2014, consolidated digital revenues represented 50.5% of consolidated revenues, up from 41.8% for the same period last year. Digital revenues across the Company’s core YP operations, which exclude the impact of Mediative, 411 and YP Next Home, increased by 9.1% year-over-year. This growth remains driven by the ongoing migration of customers’ print spend towards digital solutions, as well as accelerated customer acquisition, as the majority of new customers only purchase digital products. As at December 31, 2014, digital-only customers grew to 37,000, compared to 23,900 as at the same date last year. Digital-only customers represented 14.5% of YP’s customer base as at December 31, 2014, up from 8.7% as at the same time last year. As at December 31, 2014, 57.3% of YP’s customers were purchasing our owned and operated online priority placement products, compared to 47.1% as at the same date last year. Adoption of our mobile priority placement products also saw growth, with customer penetration reaching 24.1% as at December 31, 2014, as compared to 14.9% for the prior year. 1 0 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 10 2015-03-06 6:38 PM Yellow Pages continues to invest in growing traffic across its network of digital solutions to promote customer adoption, retention and ROI across its owned and operated priority placement products. Further supported by the continued adoption of the YP 360º Solution across the Company’s sales channels, Revenue Generating Units1,2 (RGU) per customer also continued to experience growth, increasing from 1.81 as at December 31, 2013 to 1.87 as at December 31, 2014. MANAGEMENT’S DISCUSSION AND ANALYSIS CUSTOMER PENETRATION2 Print Owned and Operated Digital Media3 Online priority placement Mobile priority placement Legacy Digital Services4 SPENDING DYNAMICS Amongst Renewing Customers2 Increase in spending5 Customer distribution % of revenues Stable spending6 Customer distribution % of revenues Decrease in spending7 Customer distribution % of revenues As at December 31, 2014 85% 63% 57% 24% 4% 10% 2013 91% 61% 47% 15% 14% 9% For the years ended December 31, 2014 2013 31% 30% 51% 30% 18% 40% 26% 29% 55% 27% 19% 44% Average Revenue per Customer (ARPC)8 $ 3,189 $ 3,259 OPERATIONAL INDICATORS YP 360º Solution Penetration2 RGU per customer2 Digital-only customers2 Digital revenues (in thousands of Canadian dollars)9 Consolidated digital revenues as a percentage of total revenues9 1 Revenue Generating Units measures the number of product groups selected by YP customers. 2 YP core only, excludes Mediative, 411 and YP Next Home. As at December 31, 2014 36.6% 1.87 37,000 2013 27.1% 1.81 23,900 $ 442,830 $ 406,311 50.5% 41.8% 3 Percentage of YP customers purchasing at least one Online Priority Placement, Mobile Priority Placement, Virtual Business Profile, HD Video, and/or Legacy product. 4 Percentage of YP customers purchasing at least one Website, SEO, SEM, Facebook Solution, and/or Smart Digital Display product. 5 Renewing YP customers experiencing an increase in spending over 5%, on a year-over-year basis. 6 Renewing YP customers experiencing an increase in spending between 0% and 5%, on a year-over-year basis. 7 Renewing YP customers experiencing a decrease in spending on a year-over-year basis. 8 Excludes the contribution of 411 and YP Next Home. 9 For the years ended December 31. INT_RA2014_Engl.indd 11 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 1 1 MANAGEMENT’S DISCUSSION AND ANALYSIS EBITDA EBITDA decreased by $100.1 million to $316 million during 2014 compared with $416.1 million in 2013. The decrease in EBITDA is due mainly to lower revenues combined with a lower EBITDA margin. Our EBITDA margin for 2014 was 36% compared to 42.8% for 2013. Lower revenues and incremental investments related to the Return to Growth Plan were the main contributors to the decrease in EBITDA margin for 2014. Cost of sales decreased by $10.7 million to $306.9 million during 2014 compared with $317.6 million for 2013. The decrease for the year results from lower sales costs associated with lower revenues, lower print manufacturing costs and workforce reductions associated with our declining legacy business. These cost savings were partly offset by an increase in provisioning and fulfillment costs of our digital products and services as well as expenses related to 411, a company acquired in 2014. Gross profit margin decreased to 65% for 2014 compared to 67.3% for 2013. The decrease is primarily due to a decline in print revenues. General and administrative expenses increased by $16.6 million to $254.7 million during 2014 compared with $238.1 million for the same period in 2013. The increase is mainly attributable to investments related to the digital transformation, partially offset by lower bad debts as well as a non-recurring benefit associated with the positive outcome of a litigation. Depreciation and amortization Depreciation and amortization increased to $78.1 million during 2014 from $60.2 million in 2013. The increase is due to higher capital expenditures in connection with the deployment of systems and platforms as the Company executes its digital transformation. Restructuring and special charges In 2014, we recorded restructuring and special charges of $18.4 million associated primarily with internal reorganizations and workforce reductions, partially offset by a curtailment gain related to workforce reductions. In 2013, we recorded restructuring and special charges of $23.3 million associated with a workforce reduction of approximately 300 employees, the termination and renegotiation of certain contractual obligations and the departure of the former President and Chief Executive Officer. Financial charges Financial charges decreased by $21.2 million to $72.1 million during 2014 compared with $93.4 million for 2013. The decrease for the year ended December 31, 2014 is mainly attributable to a lower level of indebtedness and higher interest income on the defined benefit plan’s assets. As at December 31, 2014, the effective average interest rate on our debt portfolio was 9% compared to 9.1% for 2013. (Recovery of) provision for income taxes The combined statutory provincial and federal tax rates were 26.56% and 26.46% for the years ended December 31, 2014 and 2013, respectively. The Company recorded a recovery of $40.9 million for the year compared to an expense of $63.4 million in 2013. The difference between the effective and the statutory rates in 2014 is primarily due to a recovery of incomes taxes of $84.8 million related to the cancellation of certain income tax liabilities in the fourth quarter of 2014 following the settlement of tax assessments with the Canada Revenue Agency. The difference between the effective and the statutory rates in 2013 is due to the non-deductibility of certain expenses for tax purposes. Earnings from investments in associates On June 1, 2014, we acquired the remaining 70% interest in 411. During 2014, we recorded earnings of $0.2 million for the period from January 1, 2014 up to the acquisition date as compared to $0.7 million for the year ended December 31, 2013. Our earnings from our investments in associates for the year ended December 31, 2013 included the amortization of intangible assets in connection with this equity investment. Net earnings We recorded net earnings of $188.5 million during 2014 compared with $176.5 million for 2013. This was principally explained by lower EBITDA, more than offset by a recovery of income taxes of $84.8 million related to the cancellation of certain income tax liabilities in the fourth quarter of 2014 following the settlement of tax assessments. 1 2 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 12 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS FISCAL 2013 VERSUS 2012 Revenues Revenues decreased by 12.3% to $971.8 million during 2013 compared with $1,107.7 million for 2012. On a comparable basis, when adjusting for the discontinuation of Canpages directories in 2012, revenues decreased by 10.7% during 2013. Revenues remained adversely impacted by lower print revenues, as larger customers reduced their print advertising spend, as well as a lower customer count amongst smaller, low-spend customers. Digital revenues reached $406.3 million in 2013, representing a growth of 10.6%. On a comparable basis, when adjusting for the discontinuation of Canpages directories in 2012, digital revenues increased by 12.5% during 2013 when compared to the same period in 2012. During the fourth quarter of 2013, digital revenues represented 45.1% of total revenues, up from 37.7% during the same period in 2012. Growth in digital revenues in 2013 resulted from the ongoing migration of traditional media customers towards digital products and services and continued adoption of the YP 360º Solution across YP’s sales channels. These factors also led to an improvement in RGU per advertiser from 1.74 as at December 31, 2012 to 1.81 as at December 31, 2013. The Company had 276,000 customers as at December 31, 2013, compared to 309,000 as at December 31, 2012. Customer renewal rate decreased from 86% for the twelve-month period ended December 31, 2012 to 85% for the same in 2013. During 2013, YP acquired approximately 15,200 new customers, compared to 17,300 for 2012. For the year ended December 31, 2013, 81% of renewing customers increased or maintained their level of spending compared to 82% in 2012. Customers who experienced a decrease in spending were mainly larger customers that represented approximately 44% of YP’s revenues for the year ended December 31, 2013. EBITDA EBITDA decreased by $153.3 million to $416.1 million during 2013 compared with $569.4 million in 2012. The decrease in EBITDA was due to print revenue pressure, as revenue growth from our digital products did not compensate for the loss in print revenues, combined with a lower EBITDA margin. Our EBITDA margin for 2013 was 42.8% compared to 51.4% for 2012. In addition to lower revenues, changes in product mix, investments in the business transformation and employee related expenses were the main contributors to the decrease in EBITDA margin. During 2013, we also recorded provisions associated with sales tax assessments. Cost of sales decreased by $21.2 million to $317.6 million during 2013 compared with $338.8 million for 2012. The decrease in 2013 resulted mainly from lower sales costs associated with lower revenues and lower manufacturing costs associated with lower print revenues. These cost savings were partly offset by an increase in provisioning and fulfillment costs of our digital services. Gross profit margin decreased to 67.3% for 2013 compared to 69.4% for 2012. The decrease was mainly due to a change in product mix which includes lower margins associated with some of our digital service offerings such as websites, SEO and SEM. General and administrative expenses increased by $38.6 million to $238.1 million during 2013 compared with $199.5 million for 2012. The increase for the year ended December 31, 2013 was attributable to higher employee-related expenses, investments in branding associated with our Meet the New Neighbourhood advertising campaign, non-recurring provisions related to sales tax assessments and lower non-cash benefits resulting from the amendment to our employees’ pension and post- retirement benefit plans. This was partly offset by lower bad debts. Depreciation and amortization Depreciation and amortization decreased from $104.3 million to $60.2 million during 2013. The decrease was 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 2012 and were fully written off during the previous year. In addition, certain intangible assets and property, plant and equipment had a lower cost base in 2013 due to the impairment of $300 million recorded in the fourth quarter of 2012. Impairment of goodwill, intangible assets and property, plant and equipment During the first quarter of 2012, indicators that the Company’s assets may have been impaired were identified, requiring the Company to perform an impairment test. Also, as a result of 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. 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. No such charge was recorded during 2013. INT_RA2014_Engl.indd 13 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 1 3 MANAGEMENT’S DISCUSSION AND ANALYSIS Restructuring and special charges In 2013, we recorded restructuring and special charges of $23.3 million associated with a workforce reduction of approximately 300 employees, the termination and renegotiation of certain contractual obligations and the departure of the former President and Chief Executive Officer. In 2012, we incurred restructuring and special charges 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. Financial charges Financial charges decreased by $62.6 million to $93.4 million during 2013 compared with $156 million for 2012. The decrease for the year ended December 31, 2013 was mainly attributable to a lower level of indebtedness and lower deferred financing costs as a result of the December 2012 recapitalization transaction. During 2013, we incurred interest on long-term debt of $79 million and deferred financing costs of $0.1 million compared to interest on long-term debt of $119.3 million and deferred financing costs of $8.4 million for the preceding year. During 2013, the Company purchased on the open market $8 million of senior secured notes for a total cash consideration of $8.3 million and exercised its option to redeem $27 million of senior secured notes for a total cash consideration of $28.4 million. A total loss of $1.7 million was recorded in net earnings in financial charges. In 2012, we incurred a charge of $18.5 million related to an option associated with our investment in an associate. No such charge was recorded in 2013. As at December 31, 2013 and 2012, the effective average interest rate on our debt portfolio was 9.1%. Gain on settlement of debt During the fourth quarter of 2012, 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. Dividends on Preferred shares, series 1 and 2 Dividends on two series of redeemable preferred shares amounted to $17.7 million for the year ended December 31, 2012. Pursuant to the December 2012 recapitalization transaction, these preferred shares were cancelled. Provision for (recovery of) income taxes The combined statutory provincial and federal tax rate was 26.46% and 26.31% for the years ended December 31, 2013 and 2012, respectively. The Company recorded an expense of $63.4 million for the year compared to a recovery of $78.8 million in 2012. The Company recorded an expense of 26.51% on earnings for the year ended December 31, 2013. The Company recorded a recovery of 3.9% on the loss for the year ended December 31, 2012. The difference between the effective and the statutory rates in 2012 was due to the gain on settlement of debt offset by the unrecognized capital losses on its investment in subsidiaries and to the impairment charge of $3,267.8 million, which was not fully deductible for tax purposes. Excluding these items, the effective tax rate in 2012 would have been in line with the statutory rate. Earnings from investments in associates During 2013, we recorded earnings from our investment in an associate in the amount of $0.7 million compared with $1.9 million for the same period in 2012. Effective January 1, 2012, we no longer account for our investment in Acquisio using the equity method and we recorded a gain of $2.1 million in 2012 on the revaluation of this investment. Our earnings from our investments in associates included the amortization of intangible assets in connection with these equity investments. Net earnings (loss) During 2013, we recorded net earnings of $176.5 million compared with a net loss of $1,962.1 million in 2012. The increase in earnings was mainly due to the impairment of goodwill, certain intangible assets and property, plant and equipment of $3,267.8 million recorded in 2012, offset by the gain on settlement of debt of $978.6 million recorded in 2012, lower depreciation and amortization of $44.1 million, lower restructuring and special charges of $21.6 million, and lower financial charges of $62.6 million, partly offset by a higher provision for income taxes of $142.2 million and lower EBITDA of $153.3 million. 1 4 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 14 2015-03-06 6:38 PM SUMMARY OF CONSOLIDATED QUARTERLY RESULTS QUARTERLY RESULTS (IN THOUSANDS OF CANADIAN DOLLARS – EXCEPT PER SHARE INFORMATION) MANAGEMENT’S DISCUSSION AND ANALYSIS Q4 Q3 Q2 2014 Q1 Q4 Q3 Q2 2013 Q1 $ 215,319 $ 218,427 $ 220,579 $ 223,203 $ 237,951 $ 237,350 $ 243,183 $ 253,277 150,487 143,165 139,318 128,582 146,698 135,203 135,949 137,799 64,832 30.1% 75,262 34.5% 81,261 36.8% 94,621 42.4% 91,253 102,147 107,234 115,478 38.3% 43% 44.1% 45.6% 22,003 19,723 18,146 18,204 16,106 15,589 14,779 13,690 Revenues Operating costs Income from operations before depreciation and amortization, and restructuring and special charges (EBITDA) EBITDA margin Depreciation and amortization Restructuring and special charges 5,714 2,746 6,784 3,115 13,134 4,011 (cid:16) 6,193 Income from operations Net earnings Basic earnings per share attributable to common shareholders Diluted earnings per share attributable to common shareholders 37,115 95,225 52,793 26,542 56,331 27,551 73,302 39,222 62,013 30,964 82,547 41,775 92,455 50,326 95,595 53,465 $ 3.53 $ 0.98 $ 1.01 $ 1.43 $ 1.11 $ 1.51 $ 1.81 $ 1.91 $ 2.88 $ 0.84 $ 0.87 $ 1.22 $ 0.97 $ 1.30 $ 1.55 $ 1.64 Revenues decreased throughout the quarters due to the overall loss of customers and the reduction of print advertising spend amongst larger customers, partially offset by an increase in revenues of our digital products. Revenues for the fourth quarter of 2013 were favourably impacted by non-recurring print revenues. In the first and second quarters of 2013, operating costs were positively impacted by non-cash benefits of $2.6 million and $4.6 million, respectively, related to amendments to our pension and post-retirement benefit plans. The fourth quarter of 2013 was negatively impacted by non-recurring legal provisions and a sales tax assessment while the first quarter of 2014 was impacted by a non-recurring benefit associated with the positive outcome of a litigation. Our EBITDA margin decreased throughout 2013 and 2014, with the exception of the first quarter of 2014, primarily reflecting lower print revenues, the loss of margin from a change in product mix and investments made to support our digital transformation, partly offset by improvements in the collection experience of our trade receivables resulting from lower bad debts. Workforce reductions and cost containment initiatives resulted in restructuring and special charges impacting certain of our quarterly results presented above. The increase in depreciation and amortization quarter-over-quarter is due to increased capital expenditures in connection with the deployment of platforms as the Company continues its digital transformation. Our net earnings for the fourth quarter of 2014 were positively impacted by a recovery of income taxes of $84.8 million related to the cancellation of certain income tax liabilities following the settlement of tax assessments. ANALYSIS OF FOURTH QUARTER 2014 RESULTS Revenues Revenues decreased by 9.5% to $215.3 million during the fourth quarter of 2014 compared with $238 million for the same period last year. Revenues remain mostly impacted by the overall loss of customers. Albeit declining, print revenue decline rates are stabilizing. Print revenues decreased 24.6% year-over-year to reach $98.4 million during the fourth quarter of 2014. During the fourth quarter of 2013, print revenues were favourably impacted by non- recurring transactions, and excluding these non-recurring revenues, print revenues declined 22.4% year-over-year. INT_RA2014_Engl.indd 15 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 1 5 MANAGEMENT’S DISCUSSION AND ANALYSIS Consolidated digital revenues reached $116.9 million in the fourth quarter of 2014 representing a growth of 8.9% compared to the same period last year. For the fourth quarter ended December 31, 2014, consolidated digital revenues represented 54.3% of consolidated revenues, up from 45.1% for the same period last year. Digital revenues across the Company’s core YP operations, which exclude the impact of Mediative, 411 and YP Next Home, increased by 6.5% year-over-year for the fourth quarter of 2014. EBITDA EBITDA decreased by $26.4 million to $64.8 million during the fourth quarter of 2014 compared with $91.3 million for the same period in 2013. The decrease in EBITDA is due mainly to lower revenues combined with a lower EBITDA margin. Our EBITDA margin for the fourth quarter of 2014 was 30.1% compared to 38.3% for the same period in 2013. Lower revenues and investments related to the Return to Growth Plan were the main contributors to the decrease in EBITDA margin for the fourth quarter of 2014. The Company significantly increased spending during the fourth quarter of 2014 to promote timely and successful execution of its Return to Growth Plan. These included investments in branding and promotion, customer acquisition, and digital media development, in addition to program management expenses related to the launch of new products, delivery of enhanced customer service and realization of operational efficiencies. Cost of sales decreased by $1.2 million to $79.5 million during the fourth quarter of 2014 compared with $80.7 million for the same period in 2013. The decrease for the fourth quarter of 2014 results mainly from lower sales costs associated with lower revenues, lower print manufacturing costs and workforce reductions associated with our declining legacy business. These cost savings were partly offset by an increase in provisioning and fulfillment costs of our digital products and services as well as expenses related to the newly acquired company, 411. Gross profit margin decreased to 63.1% for the fourth quarter of 2014 compared to 66.1% for the same period in 2013. The decrease is mainly due to a decline in revenues. General and administrative expenses increased by $5 million to $71 million during the fourth quarter of 2014 compared with $66 million for the same period in 2013. The increase is primarily due to investments in our digital transformation, partially offset by lower bad debts and employee-related expenses as well as a non-recurring provision related to a legal dispute recorded in the fourth quarter of 2013. Depreciation and amortization Depreciation and amortization increased to $22 million during the fourth quarter of 2014 from $16.1 million in the fourth quarter of 2013. The increase is due to capital expenditures in connection with software development and ISIT equipment as the Company executes its digital transformation. Restructuring and special charges During the fourth quarter of 2014, we recorded restructuring and special charges of $5.7 million associated primarily with internal reorganizations and workforce reductions, partially offset by a curtailment gain related to a workforce reduction. During the fourth quarter of 2013, we recorded restructuring and special charges of $13.1 million, which was mainly composed of a workforce reduction of approximately 300 employees and the termination and renegotiation of certain contractual obligations. Financial charges Financial charges decreased by $6.7 million to $17.2 million during the fourth quarter of 2014 compared with $24 million for the same period in 2013. The decrease for the fourth quarter of 2014 is mainly attributable to a lower level of indebtedness. (Recovery of) provision for income taxes The combined statutory provincial and federal tax rates were 26.56% and 26.46% for the three-month periods ended December 31, 2014 and 2013, respectively. The Company recorded a recovery of 379.2% for the fourth quarter of 2014 compared to an expense of 19% of earnings for the same period last year. The difference between the effective and the statutory rates for the fourth quarter of 2014 is primarily due to a recovery of incomes taxes of $84.8 million related to the cancellation of certain income tax liabilities in the fourth quarter of 2014 following the settlement of tax assessments with the Canada Revenue Agency. The difference between the effective and the statutory rates for the fourth quarter in 2013 is due to the de-recognition of previously recognized tax attributes on assets of our foreign subsidiaries as well as non-taxable and non-deductible items. Earnings from investments in associates On June 1, 2014, we acquired the remaining 70% interest in 411. Consequently, as of June 1, 2014, 411’s results are consolidated within YP. During the fourth quarter of 2013, we recorded earnings in 411 of $0.2 million. 1 6 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 16 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS Net earnings We recorded net earnings of $95.2 million during the fourth quarter of 2014 compared with $31 million for the same period last year. This was principally explained by lower EBITDA, more than offset by a recovery of income taxes of $84.8 million related to the cancellation of certain income tax liabilities following the settlement of tax assessments. 3. 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 and cash equivalents Senior secured notes Exchangeable debentures Obligations under finance leases Net debt, net of cash and cash equivalents1 Equity attributable to the shareholders Total capitalization Net debt to total capitalization As at December 31, 2014 As at December 31, 2013 $ $ $ 102,776 507,014 88,959 897 494,094 684,180 $ 1,178,274 41.9% $ $ $ $ 202,287 646,577 87,934 891 533,115 544,495 1,077,610 49.5% NET DEBT TO LATEST TWELVE MONTH EBITDA RATIO1,2 CAPITAL STRUCTURE (IN MILLIONS OF DOLLARS) $684 $494 Dec. 31, 2014 Dec. 31, 2013 1.6 Dec. 31, 2014 1.3 Dec. 31, 2013 $544 $533 Total Equity Net Debt As at December 31, 2014, Yellow Pages had $494.1 million of net debt, compared to $533.1 million as at December 31, 2013. The net debt to Latest Twelve Month EBITDA1,2 ratio as at December 31, 2014 was 1.6 times compared to 1.3 times as at December 31, 2013. The increase is due to lower EBITDA. Asset-Based Loan In August 2013, the Company, through its subsidiary Yellow Pages Digital & Media Solutions Limited, entered into a five-year $50 million asset-based loan (ABL) expiring in August 2018. The ABL is used for general corporate purposes. Through the ABL, the Company has access to the funds in the form of prime rate loans, Banker’s acceptance (BA) equivalent loans or letters of credit. The ABL is secured by a first priority lien over the receivables of the Company. The ABL is subject to an availability reserve of $5 million if the Company’s trailing twelve-month fixed charge coverage ratio is below 1.1 times. As at December 31, 2014, the fixed charge coverage ratio was below 1.1 times and the Company had $4.2 million of letters of credit issued and outstanding. As such, $40.8 million of the ABL was available as at December 31, 2014. Interest is calculated based either on the BA Rate or the Canadian Prime Rate plus an applicable margin. As at December 31, 2014, the Company was in compliance with all covenants under the loan agreement governing the ABL. 1 Net debt is a non-IFRS measure defined as long-term external debt, net of cash and cash equivalents, as reported in accordance with IFRS. 2 Latest twelve month income from operations before depreciation and amortization and restructuring and special charges, (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 3 for a definition of EBITDA. INT_RA2014_Engl.indd 17 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 1 7 MANAGEMENT’S DISCUSSION AND ANALYSIS Senior Secured Notes On December 20, 2012, the Company, through its subsidiary Yellow Pages Digital & Media Solutions Limited, issued $800 million of 9.25% senior secured notes (the Senior Secured Notes) maturing November 30, 2018. Interest on the Senior Secured Notes is payable in cash, quarterly in arrears, in equal instalments on the last day of February, May, August and November of each year. To date, the Company repaid $293 million of its Senior Secured Notes, of which $153.4 million was repaid in 2013 and $139.6 million in 2014. As at December 31, 2014, 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. The $75 million minimum cash balance condition is subject to a reduction in certain cases provided in the indenture governing the Senior Secured Notes. 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 acquisition of property, plant and equipment and intangible assets. 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). The Company was required to make minimum annual aggregate mandatory redemption payments of $75 million in 2014. In 2015, the minimum annual aggregate mandatory redemption payments was set at $50 million, or if the redemption payments made in 2014 exceeded $75 million, $50 million less such excess redemption payments. The Company made mandatory redemption payments of $139.6 million in 2014 (2013 - $118.4 million), thereby exceeding the $75 million minimum aggregate mandatory redemption payment for 2014 by $64.6 million. As such, the Company completed its minimum aggregate mandatory redemption payments for 2014 and 2015 combined. The Company is also required to use an amount equal to 75% of its consolidated Excess Cash Flow to redeem on a semi-annual basis 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:120) (cid:120) 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. During the year ended December 31, 2013, the Company purchased on the open market $8 million of Senior Secured Notes for a total cash consideration of $8.3 million and exercised its option to redeem $27 million of Senior Secured Notes for a total cash consideration of $28.4 million. A loss of $1.7 million was recorded in net earnings in financial charges. Exchangeable Debentures On December 20, 2012, the Company, through its subsidiary Yellow Pages Digital & Media Solutions Limited, issued $107.5 million of senior subordinated exchangeable debentures (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, for the applicable interest period, 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. As at December 31, 2014, the Company was in compliance with all covenants under the indenture governing the Exchangeable Debentures. 1 8 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 18 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS Exchange Option The Exchangeable Debentures are exchangeable at the holder’s option into common shares at any time at an exchange price per common share equal to $19.04, subject to adjustment for specified transactions. During the year ended December 31, 2014, $0.4 million of Exchangeable Debentures at face value were exchanged for 21,584 common shares of Yellow Pages Limited with a fair value of $0.5 million (2013 –nil). Optional Redemption The Company may, at any time on or after the date on which all of the Senior Secured Notes have been repaid 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: (cid:127) (cid:127) 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. CREDIT RATINGS DBRS LIMITED B (low)/Issuer rating – positive trend B (low)/Credit rating for Senior Secured Notes STANDARD AND POOR’S RATING SERVICES B/Corporate credit rating – stable outlook BB-/Credit rating for Senior Secured Notes CCC/Credit rating for Exchangeable Debentures CCC+/Credit rating for Exchangeable Debentures On November 21, 2014, Standard & Poor’s Rating Services raised the rating on our Senior Secured Notes from B+ to BB-. On August 29, 2014, DBRS Limited raised the rating on our Senior Secured Notes from CCC (high) to B (low). All other ratings remained unchanged. 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. As at February 11, 2015, the Company had approximately $114.6 million of cash and cash equivalents and $40.8 million available under the ABL. Share data As at February 12, 2015, outstanding share data was as follows: OUTSTANDING SHARE DATA Common shares outstanding Exchangeable Debentures outstanding1 Common share purchase warrants outstanding 27,976,661 5,624,422 2,995,506 27,976,661 5,624,422 2,995,506 27,955,077 5,646,008 2,995,506 As at February 12, 2015 As at December 31, 2014 As at December 31, 2013 1 As at February 12, 2015, Yellow Pages had $107.1 million principal amount of Exchangeable Debentures outstanding, which amount is exchangeable into 5,624,422 common shares of Yellow Pages Limited at an exchange price of $19.04, subject to adjustment for specified transactions pursuant to the indenture governing the Exchangeable Debentures. Options On December 20, 2012, as part of the implementation of Yellow Pages’ recapitalization transaction, a new stock option plan (the Stock Option Plan) was adopted. The Stock Option Plan is intended to attract and retain the services of selected employees (the Participants) of Yellow Pages who are in a position to make a material contribution to the successful operation of the business, provide meaningful incentive to management to lead Yellow Pages through the transition and transformation of its business and to more closely align the interests of management with those of the shareholders of Yellow Pages Limited. A maximum of 1,290,612 options may be granted under the Stock Option Plan. On May 6, 2013, 376,000 options were granted to the Participants. The options have an exercise price of $10.12 and vest 50% in February 2015, 25% in February 2016 and 25% in February 2017. INT_RA2014_Engl.indd 19 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 1 9 MANAGEMENT’S DISCUSSION AND ANALYSIS On February 25, 2014, 183,200 options were granted to the Participants. The options have an exercise price of $24.65 and vest 50% in February 2016, 25% in February 2017 and 25% in February 2018. During the second quarter of 2014, a total of 12,600 options was granted to certain Participants. The options have a weighted average exercise price of $19.89 and vest 50% in February 2016, 25% in February 2017 and 25% in February 2018. During the year ended December 31, 2014, 91,600 options were forfeited with a weighted average exercise price per option of $14.42. These options were expected to vest between February 2015 and February 2018. The options expire seven years after the grant date and Participants are required to hold 25% of the common shares received pursuant to the exercise of the options until the Participants meet the ownership guidelines which apply to their respective levels. CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS CONTRACTUAL OBLIGATIONS (IN THOUSANDS OF CANADIAN DOLLARS) Total 1 year 2 – 3 years 4 – 5 years After 5 years Payments due for the years following December 31, 2014 Long-term debt1,2 $ 507,014 $ 102,795 $ (cid:548) $ 404,219 $ Obligations under finance leases1 Exchangeable Debentures1 Operating leases Other 897 107,089 166,434 77,057 357 (cid:548) 20,698 49,496 342 (cid:548) 38,397 20,653 198 (cid:548) 13,693 4,570 (cid:548) (cid:548) 107,089 93,646 2,338 Total contractual obligations $ 858,491 $ 173,346 $ 59,392 $ 422,680 $ 203,073 1 Principal amount. 2 The repayment of the Senior Secured Notes may vary subject to the Excess Cash Flow under the indenture governing the Senior Secured Notes. Obligations under finance leases We enter into finance lease agreements for office equipment and software. As at December 31, 2014, minimum payments under these finance leases up to 2019 totalled $0.9 million. Operating leases We rent our premises and office equipment under various operating leases. As at December 31, 2014, minimum payments under these operating leases up to 2034 totalled $166.4 million. Purchase obligations We use the services of outside suppliers to distribute and print our directories and have entered into long-term agreements with a number of these suppliers. These agreements expire between 2015 and 2038. We also have purchase obligations under service contracts for both operating and capital expenditures. As at December 31, 2014, we have an obligation to purchase services for $76.8 million over the next five years and thereafter. Cash from operations will be used to fund these purchase obligations. Pension Obligations YP sponsors a pension plan registered with the Canada Revenue Agency and the Financial Services Commission of Ontario with defined benefit (DB) for employees hired prior to January 1, 2006, and defined contribution (DC) components for the non- Québec based employees hired on or after January 1, 2006 (the YP Pension Plan) as well as a DC plan registered with the Régie des Rentes du Québec (the YP Québec Plan), for the Québec based employees hired on or after January 1, 2006. Both plans together cover substantially all employees of the Company. As at December 31, 2014, the DB component of the YP Pension Plan’s assets totalled $473.6 million and were invested in a diversified portfolio of Canadian fixed income securities and Canadian and international equity securities. Its rate of return on assets was 12.4% for 2014, 0.1% below our benchmark portfolio. The most recent actuarial valuation of the defined benefit component of the YP Pension Plan for funding purposes was performed as at May 31, 2014. The May 2014 valuation resulted in a solvency deficit of $144.6 million to be funded over a five- year period. The next actuarial valuation will be due no later than May 31, 2015. In 2014, the Company made annual contributions equivalent to the current service cost (the Annual Employer Cost) of $35.6 million, including $21.3 million to fund the deficit. Total cash payments are expected to amount to $47.4 million for 2015, of which $32 million will be to fund the deficit. 2 0 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 20 2015-03-06 6:38 PM SOURCES AND USES OF CASH (IN THOUSANDS OF CANADIAN DOLLARS) Cash flows from operating activities Cash flows from operations Change in operating assets and liabilities Cash flows used in investing activities Additions to intangible assets Acquisition of property, plant and equipment Business acquisitions, net of cash acquired Proceeds from the settlement of a note receivable Other Cash flows used in financing activities Repayment of long-term debt Purchase of restricted shares Optional redemption of long-term debt Recapitalization costs Deferred consideration Other Cash flows from operating activities Cash flows from operations MANAGEMENT’S DISCUSSION AND ANALYSIS Years ended December 31, 2014 2013 $ $ $ $ $ 151,302 5,205 156,507 (69,179) (14,771) (33,504) 14,100 (116) (103,470) (140,098) (12,450) (cid:548) (cid:548) (cid:548) (cid:548) $ $ $ $ $ 302,218 38,462 340,680 (54,584) (11,743) (3,581) (cid:548) 359 (69,549) (118,984) (6,630) (36,670) (6,641) (5,624) (1,102) $ (152,548) $ (175,651) Cash flows from operations decreased by $150.9 million from $302.2 million for the year ended December 31, 2013 to $151.3 million for the same period in 2014, mainly due to lower cash EBITDA of $102.8 million, higher income taxes paid of $35.3 million as Yellow Pages was not required to pay income tax installments in 2013 and higher restructuring and special charges payments of $10.7 million primarily related to the November 2013 workforce realignment. Change in operating assets and liabilities The change in operating assets and liabilities for the year ended December 31, 2014 generated an inflow of $5.2 million compared with $38.5 million for the same period last year. During the year ended December 31, 2013, an improved collection experience of our trade receivables contributed mainly to the inflow. During the year ended December 31, 2014, operating assets and liabilities remained relatively stable. Cash flows used in investing activities Cash used in investing activities amounted to $103.5 million for the year ended December 31, 2014 compared with $69.5 million for the same period last year. During the year ended December 31, 2014, we invested in software development and ISIT equipment in the amount of $69.2 million and $14.8 million, respectively, as compared to $54.6 million and $11.7 million, respectively, spent during the same period last year. The increase year-over-year is due to the increased level of transformation expenses associated to the Return to Growth Plan. During 2014, we acquired the remaining interest in 411 for a net consideration of $22.7 million, as well as the shares of Bookenda Inc. and the assets of dine.TO for a total cash consideration of $10.8 million. These investing activities were partly offset by cash proceeds of $14.1 million received resulting from the settlement of a note receivable which had a carrying value of $15.3 million. During 2013, we acquired the remaining 40% of Mediative G.P. Inc. and Mediative Performance L.P. in exchange for cash consideration of $3.6 million. INT_RA2014_Engl.indd 21 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 2 1 MANAGEMENT’S DISCUSSION AND ANALYSIS ACQUISITION OF PROPERTY, PLANT, EQUIPMENT AND INTANGIBLE ASSETS, NET OF LEASE INDUCEMENTS (IN THOUSANDS OF CANADIAN DOLLARS) Sustaining Growth Total Adjustment to reflect expenditures on a cash basis Acquisition of property, plant, equipment and intangible assets, net of lease inducements Years ended December 31, 2014 17,084 $ 68,489 85,573 $ (1,623) 2013 15,973 44,562 60,535 4,907 83,950 $ 65,442 $ $ $ Sustaining capital expenditures are related to the ongoing operations required to maintain the integrity of the infrastructure. It also includes investments in leasehold improvements during 2013 as we reconfigured certain premises to accommodate our growing digital fulfillment teams. Sustaining capital expenditures amounted to $17.1 million for the year ended December 31, 2014, compared to $16 million for the same period last 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 become a leading local digital company in Canada. During the year ended December 31, 2014, these amounted to $68.5 million compared to $44.6 million for the same period last year. In 2014, our capital expenditures were mainly composed of investments in our sales and media platforms, in the consolidation of our legacy print publishing platforms, in key infrastructure projects, such as our new datacentres, as well as in the automation and streamlining of our digital fulfillment operations. The total capital expenditures for 2014 amounted to $85.6 million. Total capital expenditures for 2015 are expected to range between $70 and $75 million. Cash flows used in financing activities Cash used in financing activities amounted to $152.5 million during the year ended December 31, 2014 compared to $175.7 million for the same period last year. During the year, we repaid $139.6 million of the Senior Secured Notes compared to a repayment of $119 million and a repurchase of $35 million during the same period last year. During the year ended December 31, 2014, we purchased common shares of Yellow Pages Limited on the open market to fund the Restricted Share Unit and Performance Share Unit Plan at a cost of $12.5 million compared to $6.6 million during the same period last year. During the year ended December 31, 2013, we paid $6.6 million of costs associated with our 2012 recapitalization and $5.6 million relative to earn-outs to former owners of acquired businesses. FINANCIAL AND OTHER INSTRUMENTS (See Note 22 of the audited Consolidated Financial Statements of the Company for the year ended December 31, 2014). The Company’s financial instruments consist of cash and cash equivalents, trade and other receivables, trade and other payables, long-term debt and Exchangeable Debentures. Derivative Instruments There is no carrying value of embedded derivatives as at December 31, 2014. The carrying value is calculated, as is customary in the industry, using discounted cash flows based on quarter-end market rates. 4. FREE CASH FLOW FREE CASH FLOW (IN THOUSANDS OF CANADIAN DOLLARS) Cash flow from operating activities Capital expenditures, net of lease inducements Free cash flow Three-month periods ended December 31, Years ended December 31, 2014 2013 2014 2013 $ 30,566 $ 88,444 34,435 14,294 $ (3,869) $ 74,150 $ $ 156,507 $ 340,680 83,950 66,129 72,557 $ 274,551 2 2 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 22 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS 5. CRITICAL ASSUMPTIONS When we prepare our consolidated 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. Intangible assets, goodwill and property, plant and equipment 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 Pages’ future results if the current estimates of future performance and fair values change. These determinations may 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 Pages 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 in its entirety. Yellow Pages performed its annual test for impairment of indefinite life intangible assets in accordance with the policy described in Note 3.12 of the Audited Consolidated Financial Statements of Yellow Pages Limited for the year ended December 31, 2014. The recoverable amount of the cash generating units (CGUs) was determined based on the value-in-use approach using a discounted cash flow model which relies on significant key assumptions, including after-tax cash flows forecasted over an extended period of time, terminal growth rates and discount rates. We use published statistics or seek advice where possible when determining the assumptions we use. Details of Yellow Pages’ impairment reviews are disclosed in Note 4 of the Audited Consolidated Financial Statements of Yellow Pages Limited for the years ended December 31, 2014 and 2013. 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 the 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 may 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 Pages’ ability to utilize the underlying future tax deductions against future taxable income before they expire. Yellow Pages’ assessment is based upon existing tax laws and estimates of future taxable income. If the assessment of Yellow Pages’ ability to utilize the underlying future tax deductions changes, Yellow Pages 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 Pages 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 Pages 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 Pages 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. INT_RA2014_Engl.indd 23 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 2 3 MANAGEMENT’S DISCUSSION AND ANALYSIS ACCOUNTING STANDARDS The following revised standards are effective for annual periods beginning on January 1, 2014 and their adoption has not had any impact on the amounts reported in our Audited Consolidated Financial Statements for the years ended December 31, 2014 and 2013, but may affect the accounting for future transactions or arrangements: IFRIC 21 — Levies On May 20, 2013, the International Accounting Standards Board (IASB) issued IFRIC 21 — Levies, an interpretation on the accounting for levies imposed by governments. The interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. The interpretation includes guidance illustrating how the interpretation should be applied. IFRIC 21 requires retrospective application. 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 better assess the effect or potential effect of offsetting arrangements on a company's financial position. As part of this project, the IASB clarified aspects of IAS 32 — Financial Instruments: Presentation. IAS 32 amendments require retrospective application. Amendments to IAS 36 — Impairment, Recoverable Amount Disclosures for Non-Financial Assets On May 29, 2013, the IASB issued Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36). These narrow-scope amendments to IAS 36 — Impairment of Assets, address the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. These amendments require retrospective application. Amendments to IAS 39 — Financial Instruments: Recognition and Measurement: Novation of Derivatives and Continuation of Hedge Accounting On June 27, 2013, the IASB issued Amendments to IAS 39 — Financial Instruments: Recognition and Measurement: Novation of Derivatives and Continuation of Hedge Accounting. These narrow-scope amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met (in this context, a novation indicates that parties to a contract agree to replace their original counterparty with a new one). Similar relief is included in IFRS 9 — Financial Instruments. The amendments require retrospective application. STANDARDS, INTERPRETATIONS AND AMENDMENTS TO PUBLISHED STANDARDS THAT ARE ISSUED BUT NOT YET EFFECTIVE Amendments to IAS 16 — Property, Plant and Equipment, and IAS 38 — Intangible Assets: Clarification of Acceptable Methods of Depreciation and Amortization In May 2014, the IASB issued Amendments to IAS 16 – Property, Plant and Equipment and IAS 38 – Intangible Assets: Clarification of Acceptable Methods of Depreciation and Amortization to clarify that the use of revenue-based methods to calculate depreciation is not appropriate as revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the related asset. The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption may be rebutted in certain limited circumstances. These amendments must be applied prospectively for annual periods beginning on or after January 1, 2016. The Amendments to IAS 16 and IAS 38 are not expected to have a significant impact on the consolidated financial statements of Yellow Pages Limited. 2 4 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 24 2015-03-06 6:38 PM IFRS 15 — Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 — Revenue from Contracts with Customers. This new standard outlines a single comprehensive model for companies to use when accounting for revenue arising from contracts with customers. It supersedes the IASB’s current revenue recognition standards, including IAS 18 — Revenue and related interpretations. The core principle of IFRS 15 is that revenue is recognized at an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services, applying the following five steps: MANAGEMENT’S DISCUSSION AND ANALYSIS (cid:120) (cid:120) Identify the contract with a customer; Identify the performance obligations in the contract; (cid:120) Determine the transaction price; (cid:120) (cid:120) Allocate the transaction price to the performance obligations in the contract; and Recognize revenue when (or as) the company satisfies a performance obligation. This new standard also provides guidance relating to the accounting for contract costs as well as for the measurement and recognition of gains and losses arising from the sale of certain non-financial assets. Additional disclosures will also be required under the new standard, which is effective for annual reporting periods beginning on or after January 1, 2017 with earlier adoption permitted. For comparative amounts, companies have the option of using either a full retrospective approach or a modified retrospective approach as set out in the new standard. Yellow Pages Limited continues to evaluate the impact this standard will have on its consolidated financial statements. IFRS 9 — Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 — Financial Instruments. IFRS 9 replaces the requirements in IAS 39 — Financial Instruments: Recognition and Measurement for classification and measurement of financial assets and liabilities. The new standard introduces a single classification and measurement approach for financial instruments, which is driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based requirements and results in a single impairment model being applied to all financial instruments. IFRS 9 also modified the hedge accounting model to incorporate the risk management practices of an entity. Additional disclosures will also be required under the new standard. The new standard will come into effect for annual periods beginning on or after January 1, 2018 with early adoption permitted. Yellow Pages Limited continues to evaluate the impact this standard will have on its consolidated financial statements. 6. RISKS AND UNCERTAINTIES The following section examines the major risks and uncertainties that could materially affect YP’s future business results. Understanding and managing risks are important parts of YP’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 YP, our Board and senior management analyze risks in three major categories: 1. Strategic risks - which are primarily external to the business; 2. Financial risks - generally related to matters addressed in the Financial Risk Management Policy and in the Pension Statement of Investment Policy and Procedures; and 3. Operational risks - related principally to risks across key functional areas of the organization. YP has put in place certain guidelines in order to seek to manage the risks to which it may be exposed. Please refer to the “Risk Factors” section of our AIF for a complete description of these risk factors. Despite these guidelines, the Company cannot provide assurances that any such efforts will be successful. INT_RA2014_Engl.indd 25 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 2 5 MANAGEMENT’S DISCUSSION AND ANALYSIS 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:120) (cid:120) Enhancement of our product offerings and extension of our services to customers; Improvement of user experience; and (cid:120) 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 products providing information, formerly exclusively available in print directories, 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 mobile 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 decline faster than expected as users increasingly turn to digital and interactive media delivery devices for local commercial search information. 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:120) (cid:120) (cid:120) 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; 2 6 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 26 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 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. 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. INT_RA2014_Engl.indd 27 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 2 7 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:120) (cid:120) (cid:120) (cid:120) (cid:120) 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 Notes, the indenture governing the Exchangeable Debentures and the ABL 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 and its business activities. 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, the indenture governing the Exchangeable Debentures or the ABL, 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 pension plans to reduce its 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 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. 2 8 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 28 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS 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 2017), with TELUS (up to 2031), with MTS Allstream Inc. (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. 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 YP with those customers who are also their customers. Additionally, YP has entered into publishing agreements with each Telco Partner. If YP 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. Customers who do not use the Telco Partners as their local telephone provider are billed directly by YP. Our internal billing and collection services are cost-effective and can be grown as our customer base expands. 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 YP 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 YP’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 YP takes to protect its trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce or protect YP'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 YP. Any such claims and any resulting litigation could subject YP to significant liability for damages. An adverse judgement arising from any litigation of this type could require YP 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 YP's time and resources. Any claims from third parties may also result in limitations on YP'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 YP are unionized. Current union agreements range between one to five years in duration and are subject to expiration at various dates in the future. One of these agreements has expired and is being renegotiated. If YP 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 YP to continue its day to day operations with minimal disruptions in the event of a labour dispute. INT_RA2014_Engl.indd 29 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 2 9 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 Corporation'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 media properties, 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. In addition, the Corporation’s computer and ISIT 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 has in place redundant facilities as well as a disaster recovery plan designed to restore the operability of the target system, application, or computer facility infrastructure at an alternate site after an emergency. The Corporation’s inability to attract and retain key personnel could have a material adverse effect on the Corporation, its business, results from operations and financial condition The success of the Corporation depends on the abilities, experience and personal efforts of senior management of the Corporation, including their ability to retain and attract skilled employees. The Corporation is also dependent on the number and experience of its sales representatives. The loss of the services of such key personnel could have a material adverse effect on the Corporation, its results from operations and financial condition. We continually invest in our workforce to develop a strong digital culture. We offer training programs, tools and resources to elevate digital literacy and promote change management across all facets of the organization. The Corporation might be required to record additional impairment charges 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. 3 0 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 30 2015-03-06 6:38 PM MANAGEMENT’S DISCUSSION AND ANALYSIS 7. 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 YP. 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, 2014. 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, 2014. During the quarter beginning on October 1, 2014 and ended on December 31, 2014, no changes were made to the Company’s ICFR that has materially affected, or is reasonably likely to materially affect, the Company’s ICFR. INT_RA2014_Engl.indd 31 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 3 1 Independent Auditor’s Report To the Shareholders of Yellow Pages Limited, formerly Yellow Media Limited We have audited the accompanying consolidated financial statements of Yellow Pages Limited, which comprise the consolidated statements of financial position as at December 31, 2014 and December 31, 2013, and the consolidated income statements, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated 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 Pages Limited as at December 31, 2014 and December 31, 2013, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. February 12, 2015 Montréal, Québec ____________________ 1 CPA auditor, CA, public accountancy permit No. A120501 3 2 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 32 2015-03-06 6:38 PM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (IN THOUSANDS OF CANADIAN DOLLARS) As at ASSETS CURRENT ASSETS Cash and cash equivalents Trade and other receivables (Note 22) Prepaid expenses Deferred publication costs Income taxes receivable (Note 14) TOTAL CURRENT ASSETS NON-CURRENT ASSETS Deferred publication costs Financial and other assets (Note 22) Investments in associates (Notes 5 and 6) Property, plant and equipment (Note 7) Intangible assets (Note 8) Deferred income taxes (Note 14) TOTAL NON-CURRENT ASSETS TOTAL ASSETS LIABILITIES AND EQUITY CURRENT LIABILITIES Trade and other payables (Note 9) Income taxes payable Provisions (Note 10) Financial liability (Note 22) Deferred revenues Current portion of long-term debt (Note 12) TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Provisions (Note 10) Deferred credits and other Deferred income taxes (Note 14) Income taxes payable Post-employment benefits (Note 11) Long-term debt (Note 12) Exchangeable debentures (Note 13) TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES CAPITAL AND RESERVES DEFICIT TOTAL EQUITY TOTAL LIABILITIES AND EQUITY December 31, 2014 December 31, 2013 $ $ $ 102,776 132,278 8,220 69,852 47,798 360,924 8,153 4,366 – 36,431 1,334,967 4,719 1,388,636 1,749,560 82,048 – 65,840 – 28,461 103,152 279,501 2,577 8,936 53,386 – 227,262 404,759 88,959 785,879 1,065,380 6,600,178 (5,915,998) 684,180 $ 202,287 142,446 6,835 71,018 – 422,586 7,378 19,096 2,780 29,489 1,310,494 2,211 1,371,448 $ 1,794,034 $ 78,824 25,782 70,632 18,472 34,145 89,051 316,906 6,031 14,349 31,535 55,419 178,948 558,417 87,934 932,633 1,249,539 6,604,971 (6,060,476) 544,495 $ 1,749,560 $ 1,794,034 The accompanying notes are an integral part of these consolidated financial statements. Approved on behalf of Yellow Pages Limited by Robert F. MacLellan, Director David A. Lazzarato, Director INT_RA2014_Engl.indd 33 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 3 3 YELLOW PAGES LIMITED CONSOLIDATED INCOME STATEMENTS For the years ended December 31, (IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE AND PER SHARE INFORMATION) Revenues Operating costs (Note 18) $ Income from operations before depreciation and amortization, and restructuring and special charges Depreciation and amortization (Notes 7 and 8) Restructuring and special charges (Note 10) Income from operations Financial charges, net (Note 19) Earnings before income taxes and earnings from investments in associates (Recovery of) provision for income taxes (Note 14) Earnings from investments in associates Net earnings Net earnings attributable to: Common shareholders of Yellow Pages Limited Non-controlling interests Basic earnings per share attributable to common shareholders 2014 877,528 561,552 315,976 78,076 18,359 219,541 72,116 147,425 (40,937) (178) $ 2013 971,761 555,649 416,112 60,164 23,338 332,610 93,357 239,253 63,421 (698) $ 188,540 $ 176,530 $ 188,540 – $ 188,540 $ 6.95 $ $ $ 176,360 170 176,530 6.34 Weighted average shares outstanding – basic earnings per share (Note 16) 27,128,062 27,797,170 Diluted earnings per share attributable to common shareholders $ 5.81 $ 5.46 Weighted average shares outstanding – diluted earnings per share (Note 16) 33,709,338 33,615,709 The accompanying notes are an integral part of these consolidated financial statements. 3 4 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 34 2015-03-06 6:38 PM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, (IN THOUSANDS OF CANADIAN DOLLARS) Net earnings Other comprehensive income: 2014 2013 $ 188,540 $ 176,530 Items that may be reclassified subsequently to net earnings Reclassification adjustment of accumulated foreign currency translation loss realized upon disposal of investment in associate (Note 6) 1,598 – Items that will not be reclassified subsequently to net earnings Actuarial (losses) gains (Note 11) Income taxes relating to items that will not be reclassified subsequently to net earnings Other comprehensive (loss) income Total comprehensive income Total comprehensive income attributable to: (59,997) 15,935 (44,062) (42,464) 117,633 (31,126) 86,507 86,507 $ 146,076 $ 263,037 Common shareholders of Yellow Pages Limited $ 146,076 $ 262,867 Non-controlling interests – 170 $ 146,076 $ 263,037 The accompanying notes are an integral part of these consolidated financial statements. INT_RA2014_Engl.indd 35 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 3 5 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended December 31, (IN THOUSANDS OF CANADIAN DOLLARS) Shareholders’ Capital (Note 15) Restricted Shares Warrants (Note 15) Compound financial instruments1 Stock-based compensation and other reserves Balance, December 31, 2013 $ 4,029,869 $ Other comprehensive income (loss) Net income for the year Total comprehensive income Stock options (Note 17) Restricted shares settled Restricted shares (Note 17) Exchange of exchangeable debentures (Note 13) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) 456 (6,630) $ (cid:16) (cid:16) (cid:16) (cid:16) 99 (12,450) (cid:16) $ 1,456 (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) $ 3,633 (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (14) Balance, December 31, 2014 $ 4,030,325 $ (18,981) $ 1,456 $ 3,619 $ 121,188 (cid:16) (cid:16) (cid:16) 1,174 (99) 4,443 (cid:16) 126,706 Reduction of capital reserve $ 2,457,053 (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) $ 2,457,053 Shareholders’ Capital (Note 15) $ 4,029,869 $ Restricted Shares (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (6,630) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) $ Warrants (Note 15) Compound financial instruments1 Stock-based compensation and other reserves $ 1,456 (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) $ 3,633 (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) 116,701 (cid:16) (cid:16) (cid:16) 403 1,608 (cid:16) 2,476 Reduction of capital reserve $ 2,457,053 (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) Balance, December 31, 2012 Other comprehensive income Net income for the year Total comprehensive income Stock options (Note 17) Restricted shares (Note 17) Dividend to non-controlling interest Deferred consideration Balance, December 31, 2013 $ 4,029,869 $ (6,630) $ 1,456 $ 3,633 $ 121,188 $ 2,457,053 1 The equity component of the exchangeable debentures presented above is net of income taxes of $1.3 million (2013 - $1.3 million). The accompanying notes are an integral part of these consolidated financial statements. 3 6 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 36 2015-03-06 6:38 PM Foreign currency translation (Notes 6 and 19) Capital and Reserves Deficit Equity attributable to shareholders $ (1,598) $ 6,604,971 $ (6,060,476) $ 544,495 1,598 (cid:16) 1,598 (cid:16) (cid:16) (cid:16) 1,598 (cid:16) 1,598 1,174 (cid:16) (8,007) (44,062) 188,540 144,478 (cid:16) (cid:16) (cid:16) (42,464) 188,540 146,076 1,174 (cid:16) (8,007) (cid:16) (cid:16) $ 6,600,178 $ 442 (cid:16) 442 (5,915,998) $ 684,180 $ 2014 Total Equity $ 544,495 (42,464) 188,540 146,076 1,174 (cid:16) (8,007) 442 684,180 2013 Foreign currency translation Capital and Reserves Deficit Equity attributable to shareholders Non-controlling interests Total Equity $ (1,598) $ 6,607,114 $ (6,321,365) $ 285,749 $ (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) (cid:16) 403 (5,022) (cid:16) 2,476 86,507 176,360 262,867 (cid:16) (cid:16) (cid:16) (1,978) 86,507 176,360 262,867 403 (5,022) (cid:16) 498 411 $ (cid:16) 170 170 (cid:16) (cid:16) (83) (498) 286,160 86,507 176,530 263,037 403 (5,022) (83) (cid:16) $ (1,598) $ 6,604,971 $ (6,060,476) $ 544,495 $ (cid:16) $ 544,495 INT_RA2014_Engl.indd 37 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 3 7 CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, (IN THOUSANDS OF CANADIAN DOLLARS) OPERATING ACTIVITIES Net earnings Adjusting items Depreciation and amortization Restructuring and other special charges (Note 10) Stock-based compensation expense Earnings from investments in associates (Recovery of) provision for income taxes recognized in net earnings Financial charges recognized in net earnings Past service costs (Note 11) Other non-cash items Change in operating assets and liabilities Funding of post-employment benefit plans in excess of costs Restructuring and other special charges paid (Note 10) Income taxes paid, net Interest paid INVESTING ACTIVITIES Additions to intangible assets Acquisition of property, plant and equipment Business acquisitions, net of cash acquired (Note 5) Proceeds from the settlement of a note receivable (Note 22) Other FINANCING ACTIVITIES Repayment of long-term debt Purchase of restricted shares (Note 17) Optional redemption of long-term debt (Note 17) Recapitalization costs Deferred consideration Other NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR Supplemental disclosure of cash flow information (Note 20) Cash and cash equivalents consist of: Cash Banker’s acceptances and treasury bills 2014 2013 $ 188,540 $ 176,530 78,076 18,359 6,459 (178) (40,937) 72,116 (cid:16) (8,127) 5,205 (18,453) (28,230) (51,544) (64,779) 156,507 (69,179) (14,771) (33,504) 14,100 (116) (103,470) (140,098) (12,450) (cid:16) (cid:16) (cid:16) (cid:16) (152,548) (99,511) 202,287 $ 102,776 $ 60,164 23,338 4,079 (698) 63,421 93,357 (7,392) 4,295 38,462 (4,951) (17,564) (16,231) (76,130) 340,680 (54,584) (11,743) (3,581) (cid:16) 359 (69,549) (118,984) (6,630) (36,670) (6,641) (5,624) (1,102) (175,651) 95,480 106,807 202,287 $ $ 102,776 (cid:16) 102,776 $ $ 72,287 130,000 202,287 The accompanying notes are an integral part of these consolidated financial statements. 3 8 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 38 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 1. DESCRIPTION Yellow Pages Limited, formerly Yellow Media Limited, through its subsidiaries, operates digital and print media and offers media solutions in all the Provinces of Canada. References herein to Yellow Pages Limited (or the “Company”) represent the financial position, financial performance, cash flows and disclosures of Yellow Pages Limited and its subsidiaries on a consolidated basis. Yellow Pages Limited’s registered head office is located at 16, Place du Commerce, Montreal, Québec, Canada, H3E 2A5 and the common shares of Yellow Pages Limited are listed on the Toronto Stock Exchange (“TSX”) under the symbol “Y”. On December 31, 2014, Yellow Media Limited changed its corporate name to Yellow Pages Limited. The name change was completed through the incorporation of a new, direct wholly-owned subsidiary of Yellow Media Limited in the name of Yellow Pages Limited and the vertical short-form amalgamation of Yellow Media Limited with such wholly-owned subsidiary. Except for the name change, the by-laws and the articles of the amalgamated Yellow Pages Limited are the same as the previous by-laws and articles of Yellow Media Limited. On December 31, 2014, Wall2Wall Media Inc. and Yellow Pages Group, LLC, wholly-owned subsidiaries of the Company, changed their corporate name to Yellow Pages Homes Limited and Yellow Pages Digital & Media Solutions LLC, respectively, by filing articles of amendment. On January 1, 2015, YPG Financing Inc. and Yellow Pages Group Corp., wholly-owned subsidiaries of the Company, amalgamated through a vertical short-form amalgamation, and the amalgamated entity bears the corporate name of Yellow Pages Digital & Media Solutions Limited. Except for the name change, the by-laws and the articles of Yellow Pages Digital & Media Solutions Limited are the same as the previous by-laws and articles of YPG Financing Inc. The Board of Directors (the “Board”) approved the consolidated financial statements for the years ended December 31, 2014 and 2013 and authorized their publication on February 12, 2015. 2. REVISED STANDARDS REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”), INTERPRETATIONS AND AMENDMENTS ADOPTED WITH NO EFFECT ON THE CONSOLIDATED FINANCIAL STATEMENTS The following revised standards are effective for annual periods beginning on January 1, 2014 and their adoption has not had any significant impact on the amounts or disclosures reported in these consolidated financial statements but may affect the accounting for future transactions or arrangements: IFRIC 21 — Levies On May 20, 2013, the International Accounting Standards Board (“IASB”) issued IFRIC 21 — Levies, an interpretation on the accounting for levies imposed by governments. The interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. The interpretation includes guidance illustrating how the interpretation should be applied. IFRIC 21 requires retrospective application. 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 better assess the effect or potential effect of offsetting arrangements on a company's financial position. As part of this project, the IASB clarified aspects of IAS 32 — Financial Instruments: Presentation. IAS 32 amendments require retrospective application. Amendments to IAS 36 — Impairment, Recoverable Amount Disclosures for Non-Financial Assets On May 29, 2013, the IASB issued Recoverable Amount Disclosures for Non-Financial Assets (Amendments to IAS 36). These narrow-scope amendments to IAS 36 — Impairment of Assets, address the disclosure of information about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal. These amendments require retrospective application. Amendments to IAS 39 — Financial Instruments: Recognition and Measurement: Novation of Derivatives and Continuation of Hedge Accounting On June 27, 2013, the IASB issued Amendments to IAS 39 — Financial Instruments: Recognition and Measurement: Novation of Derivatives and Continuation of Hedge Accounting. These narrow-scope amendments will allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met (in this context, a novation indicates that parties to a contract agree to replace their original counterparty with a new one). Similar relief is included in IFRS 9 — Financial Instruments. The amendments require retrospective application. INT_RA2014_Engl.indd 39 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 3 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 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 Pages Limited’s accounting periods beginning on or after January 1, 2015. Those which are considered to be relevant to Yellow Pages Limited’s operations are as follows: Amendments to IAS 16 — Property, Plant and Equipment, and IAS 38 — Intangible Assets: Clarification of Acceptable Methods of Depreciation and Amortization In May 2014, the IASB issued Amendments to IAS 16 – Property, Plant and Equipment and IAS 38 – Intangible Assets: Clarification of Acceptable Methods of Depreciation and Amortization to clarify that the use of revenue-based methods to calculate depreciation is not appropriate as revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the related asset. The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption may be rebutted in certain limited circumstances. These amendments must be applied prospectively for annual periods beginning on or after January 1, 2016. The Amendments to IAS 16 and IAS 38 are not expected to have a significant impact on the consolidated financial statements of Yellow Pages Limited. IFRS 15 — Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15 — Revenue from Contracts with Customers. This new standard outlines a single comprehensive model for companies to use when accounting for revenue arising from contracts with customers. It supersedes the IASB’s current revenue recognition standards, including IAS 18 — Revenue and related interpretations. The core principle of IFRS 15 is that revenue is recognized at an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services, applying the following five steps: (cid:120) (cid:120) Identify the contract with a customer; Identify the performance obligations in the contract; (cid:120) Determine the transaction price; (cid:120) (cid:120) Allocate the transaction price to the performance obligations in the contract; and Recognize revenue when (or as) the company satisfies a performance obligation. This new standard also provides guidance relating to the accounting for contract costs as well as for the measurement and recognition of gains and losses arising from the sale of certain non-financial assets. Additional disclosures will also be required under the new standard, which is effective for annual reporting periods beginning on or after January 1, 2017 with earlier adoption permitted. For comparative amounts, companies have the option of using either a full retrospective approach or a modified retrospective approach as set out in the new standard. Yellow Pages Limited continues to evaluate the impact this standard will have on its consolidated financial statements. IFRS 9 — Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 — Financial Instruments. IFRS 9 replaces the requirements in IAS 39 — Financial Instruments: Recognition and Measurement for classification and measurement of financial assets and liabilities. The new standard introduces a single classification and measurement approach for financial instruments, which is driven by cash flow characteristics and the business model in which an asset is held. This single, principle-based approach replaces existing rule-based requirements and results in a single impairment model being applied to all financial instruments. IFRS 9 also modified the hedge accounting model to incorporate the risk management practices of an entity. Additional disclosures will also be required under the new standard. The new standard will come into effect for annual periods beginning on or after January 1, 2018 with early adoption permitted. Yellow Pages Limited continues to evaluate the impact this standard will have on its consolidated financial statements. 4 0 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 40 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES 3.1 STATEMENT OF COMPLIANCE These consolidated financial statements of Yellow Pages 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 Pages Limited. 3.4 BASIS OF CONSOLIDATION 3.4.1 Subsidiaries Subsidiaries that are directly controlled by Yellow Pages Limited or indirectly controlled through other consolidated subsidiaries are fully consolidated. Subsidiaries are all entities over which Yellow Pages Limited exercises control. Subsidiaries are fully consolidated from the effective date of acquisition up to the effective date of disposal. Intercompany 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 Pages Limited level. 3.4.2 Associates Associates are all entities over which Yellow Pages Limited has 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 Pages Limited is recognized in net earnings. Included in the recognized share of net earnings is the amortization of the amortizable assets based on their fair value at the acquisition date. 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 Pages Limited in exchange for control of the acquiree. Acquisition-related costs are recognized in the income statement as incurred. Where a business combination is achieved in stages, Yellow Pages Limited’s previously held interests in the acquired entity are re-measured to fair value at the acquisition date (the date Yellow Pages Limited attains control) and the resulting gain or loss, if any, is recognized in the income statement. 3.5 CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of funds on deposit and, from time to time, highly liquid investments with a purchased maturity of three months or less. 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 Pages 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 or 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 de- recognized if the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for de-recognition. Cash and cash equivalents and trade and other receivables are included in the loans and receivables category. INT_RA2014_Engl.indd 41 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 4 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 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 when 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 and other receivables, assets that are assessed not to be impaired individually, are subsequently assessed for impairment on a collective basis. 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 as well as the sale, provisioning and fulfillment of digital products and services. 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:120) (cid:120) (cid:120) (cid:120) Yellow Pages 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 Pages 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 depreciated 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 the income statement in the period in which they are incurred. Yellow Pages Limited has not capitalized any borrowing costs during the periods presented. Subsequent costs are included in the carrying value of the asset or recognized as a separate component, where necessary, if it is probable that future economic benefits will flow to Yellow Pages 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, when shorter, the term of the relevant lease. As at December 31, 2014, 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 value, an impairment loss is recognized. Where the recoverable amount of an individual asset does not generate independent cash inflows, Yellow Pages Limited determines the recoverable amount of the cash generating units (“CGUs”) or group of CGUs to which the asset belongs. 4 2 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 42 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 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 at 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 Pages 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 incentives to enter into operating leases are received, 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. 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. Internally-generated intangible assets, 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 Pages Limited can demonstrate: (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) 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 Pages 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 reporting 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-recognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from the de-recognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying value of the asset, are recognized in the income statement when the asset is de-recognized. INT_RA2014_Engl.indd 43 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 4 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 3.12 IMPAIRMENT OF TANGIBLE AND INTANGIBLE ASSETS At each reporting date, Yellow Pages Limited determines whether there are any indications that the carrying values 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 Pages Limited estimates the recoverable amount of the CGU or group of CGUs to which the asset belongs. A CGU is a business operation. Intangible assets with indefinite useful lives, intangible assets not yet available for use and goodwill 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. The recoverable amount is the higher of fair value less costs of disposal 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 (or CGU) 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 value, the carrying value of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognized immediately in the income statement. If the recoverable amount of a CGU or group of CGUs is less than the carrying value, the impairment loss is allocated to the assets of the unit pro-rata on the basis of the carrying value of each asset in the unit. The Company does not reduce the carrying value of an asset below the highest of its fair value less costs of disposal and its value in use. 3.13 TRADE AND OTHER PAYABLES Trade and other payables, including accruals, are recorded when Yellow Pages 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. 3.14 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 derivative liabilities and financial liabilities accounted for at FVTPL, Yellow Pages Limited recognizes all financial liabilities, specifically debt instruments, 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 recorded in the income statement. Transaction costs incurred in setting up these financial liabilities are recognized immediately as expenses in the income statement. Yellow Pages Limited de-recognizes financial liabilities when, and only when, Yellow Pages Limited’s obligations are discharged, cancelled or expire. 3.15 PROVISIONS Provisions are recognized when Yellow Pages 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 reporting 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. 3.15.1 Onerous contracts Present obligations arising under onerous contracts are recognized and measured as provisions. An onerous contract is considered to exist where Yellow Pages 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. 3.15.2 Restructuring A restructuring provision is recognized when Yellow Pages 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. 4 4 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 44 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 3.16 LONG-TERM DEBT All long-term debt instruments are initially stated at the fair value of the consideration received after deduction of issue costs. Debt instruments 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 instrument, or over a shorter period where the lender can require earlier repayment. 3.17 EMPLOYEE BENEFITS 3.17.1 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. 3.17.2 Defined benefit plans A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. Yellow Pages 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. The fair value of any plan assets is 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 benefit method prorated on service. Yellow Pages Limited recognizes all actuarial gains and losses arising subsequently from defined benefit plans in other comprehensive income (OCI). Re-measurement, comprising actuarial gains and losses, the effects of changes to the asset ceiling, if applicable, and the return on plan assets, excluding net interest on the defined benefit obligation, is reflected immediately in the statement of financial position with a charge or credit recognized in OCI. Re-measurement recognized in OCI is reflected immediately in retained earnings and will not be classified to the income statement. Past service costs are recognized in the income statement in the period a plan amendment is announced to employees. The net interest amount, which is calculated by applying the discount rate to the net defined liability or asset of defined benefit plans, is included within net financial charges while service costs are recorded in operating expenses. 3.17.3 Other long-term employee benefits Yellow Pages 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. 3.17.4 Termination benefits Termination benefits are recognized as an expense when Yellow Pages Limited can no longer withdraw the offer of those benefits, or if earlier, when there is no realistic possibility of withdrawal from a formal detailed plan to either terminate employment before the normal retirement date, or from providing 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 Pages 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. 3.17.5 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 Pages 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. INT_RA2014_Engl.indd 45 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 4 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 3.17.6 Share-based payment transactions Yellow Pages Limited’s restricted share units, performance share units, deferred share units and stock options granted to employees and directors are measured at the fair value of the equity instruments at the grant date. The restricted share units, performance share units and deferred share units granted may be settled in cash or equity at the Company’s option. If the restricted share unit and performance share unit plan is funded, eligible employees will receive, upon vesting of the instruments, common shares. The funded portion of these plans is treated as equity-settled instruments and recorded accordingly in equity. In the event these plans are unfunded, Yellow Pages Limited will pay to the eligible employees and directors, upon vesting of the instruments, an amount in cash. The unfunded portion of these plans is treated as cash-settled instruments and recorded as a liability. At each reporting period, the liability is re-measured at fair value with any changes recorded in operating costs. The fair value determined at the grant date of the share-based instruments is expensed on a straight-line basis over the vesting period, based on Yellow Pages Limited’s estimate of share-based instruments that will eventually vest. At each reporting period, Yellow Pages Limited revises its estimate of the number of share-based instruments expected to vest. The impact of the revision of the original estimate, if any, is recognized in the income statement, with a corresponding adjustment to the reserve. 3.18 EQUITY INSTRUMENTS ISSUED BY YELLOW PAGES 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 Pages Limited are recorded at the proceeds received, net of direct issue costs. Transaction costs incurred by Yellow Pages 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. 3.19 OPERATING SEGMENTS Disclosure of segment information is reported in a manner consistent with the internal reports regularly reviewed by Yellow Pages 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. 3.20 REVENUES Yellow Pages 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. 3.21 DERIVATIVE FINANCIAL INSTRUMENTS Yellow Pages Limited enters from time to time into a variety of derivative financial instruments to manage interest rate risk on its long-term debt and to manage the risk of fluctuations in the share price of its common shares affecting its stock-based compensation plans. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each statement of financial position date. The resulting gain or loss is recognized in the income statement immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in the income statement depends on the nature of the hedge relationship. Yellow Pages Limited designates 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). 3.21.1 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. 4 6 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 46 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 3.22 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. 3.23 TAXATION Income tax expense represents the sum of the current and deferred tax. 3.23.1 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 Pages Limited’s liability for current income tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. 3.23.2 Deferred tax Deferred tax is recognized on differences between the carrying values of assets and liabilities in the consolidated 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 Pages 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 value of deferred tax assets is reviewed at each reporting 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 reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which Yellow Pages 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 Pages Limited intends to settle its tax assets and liabilities on a net basis. 3.23.3 Current and deferred tax for the period Current and deferred taxes are recognized as an expense or income in the income statement, except when they relate to items that are recognized outside net earnings (whether in OCI 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. 3.24 SIGNIFICANT ESTIMATES AND JUDGEMENTS The preparation of consolidated financial statements requires management to make estimates and assumptions that can affect the carrying value of certain assets and liabilities, income and expenses, and the information disclosed in the notes to the consolidated 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. INT_RA2014_Engl.indd 47 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 4 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Significant estimates Business acquisitions As a result of the business acquisition of 411 Local Search Corp. (“411”), Yellow Pages Limited re-measured its existing financial liability as well as the fair value of 411 (refer to Note 5 – Business acquisitions). The measurement at fair value required significant estimation and was based on a discounted cash flow model which maximized the amount of observable market inputs as well as using forecasted cash flows, projected over a five-year period. Intangible assets The valuations associated with measuring the recoverability of identifiable intangible assets for impairment analysis purposes 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 Pages Limited’s future results if the current estimates of future performance and fair values change. Yellow Pages Limited assesses impairment by comparing the recoverable amount of a CGU or group of CGUs to which an identifiable intangible asset belongs, with its carrying value. The determination of the recoverable amount involves significant management estimates. Yellow Pages Limited performs its annual test for impairment of indefinite life intangible assets in the fourth quarter in accordance with the policy described in Note 3.12. Useful lives of intangible assets and property, plant and equipment Yellow Pages 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 were 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 the net benefit costs (recovery) requires assumptions such as the discount rate to measure defined benefit obligations and expected return on plan assets, the projected age of employees upon retirement, the expected rate of future compensation and the expected healthcare cost trend rate. Actual results may 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 Pages Limited’s ability to utilize the underlying future tax deductions against future taxable income before they expire. Yellow Pages Limited’s assessment is based upon existing tax laws and estimates of future taxable income. If the assessment of Yellow Pages Limited’s ability to utilize the underlying future tax deductions changes, Yellow Pages 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 Pages 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 Pages 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 Pages 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. 4 8 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 48 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 4. IMPAIRMENT OF INTANGIBLE ASSETS 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 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 value of intangible assets with indefinite useful lives). 2014 During the fourth quarter of 2014, 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. The significant key assumptions included in the forecasted cash flows are based on the Company’s business plan taking into consideration growth and product mix trends. The cash flows are based on the 2015 budget approved by the Board of Directors and projected over a five-year period. Applicable terminal growth rates were applied. The forecasted cash flows also incorporated forecasted print revenue declines per annum between 17% and 23% and online revenue growth rates between 7% and 9% for the Yellow Pages CGU. As a result of the impairment analysis, the Company determined that the recoverable amounts of if its CGUs exceeded their carrying values and accordingly, no impairment charge was recognized. 2013 During the fourth quarter of 2013, 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. The significant key assumptions included in the forecasted cash flows were based on the Company’s business plan taking into consideration growth and product mix trends. The cash flows were based on the 2014 budget approved by the Board of Directors and projected over a five-year period. Applicable terminal growth rates were applied. The forecasted cash flows also incorporated forecasted print revenue declines per annum between 20% and 25% and online revenue growth rates between 6% and 11% for the Yellow Pages CGU. As a result of the impairment analysis, the Company determined that the recoverable amounts of its CGUs exceeded their carrying values and accordingly, no impairment charge was recognized. INT_RA2014_Engl.indd 49 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 4 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Carrying values and assumptions Cash flows beyond the five-year projections of the plan were extrapolated using the terminal growth rates stated in the table below. The allocation of the carrying value of the intangible assets as at December 31, 2014 and 2013 by CGU or group of CGUs and the key assumptions used for the value in use calculations for the December 31, 2014 and December 31, 2013 impairment analyses are presented below: Carrying value of intangible assets by CGU Trademarks and domain names Trademarks and domain names with finite lives Non-competition agreements and logos Customer-related intangible assets Software Yellow Pages Other Total December 31, 2014 $ 877,862 $ 2,618 323,541 4,830 114,096 983 8,805 16 (cid:16) 2,216 $ 878,845 11,423 323,557 4,830 116,312 Total carrying value of intangible assets by CGU $ 1,322,947 $ 12,020 $ 1,334,967 Yellow Pages Other Total December 31, 2013 Carrying value of intangible assets by CGU Trademarks and domain names Trademarks and domain names with finite lives Non-competition agreements and logos Customer-related intangible assets Software $ 876,823 $ 2,879 341,501 (cid:16) 81,036 Total carrying value of intangible assets by CGU $ 1,302,239 $ 2,022 4,167 520 442 1,104 8,255 $ 878,845 7,046 342,021 442 82,140 $ 1,310,494 Key assumptions : Terminal growth rate December 31, 2014 December 31, 2013 Discount rate – post-tax December 31, 2014 December 31, 2013 Discount rate – pre-tax December 31, 2014 December 31, 2013 Yellow Pages Other Total December 31, 2014 and 2013 -15% to 5% -15% to 4.5% 10.4% to 16.8% 10% to 20% 17.1% to 24.8% 16.6% to 26.7% 5% 5% 12.8% 13.9% 15.7% 17.3% -15% to 5% -15% to 5% 10.4% to 16.8% 10% to 20% 15.7% to 24.8% 16.6% to 26.7% Sensitivity to changes in assumptions The table below shows the percentages by which each key assumption must change in isolation in order for the estimated recoverable amount to equal to its carrying value: Key assumptions : Terminal growth rate Discount rate – post-tax Revenue decline per annum December 31, 2014 Yellow Pages -1% 1% -5% to -6% Yellow Pages Limited has accumulated impairment losses on goodwill, intangible assets and property, plant and equipment in the amounts of $5,847.8 million, $309.6 million and $10.4 million, respectively. There are no impairment charges recorded for the years ended December 31, 2014 and 2013. 5 0 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 50 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 5. BUSINESS ACQUISITIONS 2014 On June 1, 2014, Yellow Pages Limited acquired the remaining shares of 411 Local Search Corp. (“411”) as a result of the exercise of a put option by the other shareholders of 411, requiring the Company to acquire the remaining 70% interest in 411 for a purchase price of $22.7 million, net of cash acquired of $3.6 million. 411 is the operator of 411.ca, an online search engine to find people and local businesses in Canada. The acquisition was financed with cash on hand. The following table summarizes the transaction and the purchase price allocation: Cash purchase consideration for 70% ownership Previously held equity investment at fair value Settlement of financial liability (Note 22) Fair value for 100% ownership Fair value of business acquired Cash acquired Intangible assets Other assets Deferred income tax assets, net Trade and other payables Deferred revenues June 1, 2014 26,340 4,377 (16,128) 14,589 3,642 10,636 1,277 1,775 (1,151) (1,590) 14,589 $ $ $ $ The previously held equity investment in 411, which was accounted for under the equity method up to the acquisition date, was re-measured at its fair value of $4.4 million and resulted in a gain of $1.4 million. The financial liability of $18.5 million as at December 31, 2013 was also re-measured at its fair value as at the acquisition date to $16.1 million, and resulted in a gain of $2.3 million (refer to Note 22 – Financial risk management). The aggregate gain of $3.6 million, net of transaction costs of $0.1 million, was included in financial charges (refer to Note 19 – Financial charges, net). 411’s revenues of $10.6 million and net earnings of $0.7 million are included in the consolidated income statement from the date of acquisition. Yellow Pages Limited’s consolidated revenues and net earnings for the year ended December 31, 2014 would have been $882.5 million and $187.7 million, respectively, had the 411 acquisition occurred on January 1, 2014. On December 17, 2014, Yellow Pages Limited completed the acquisitions of the following: (cid:120) (cid:120) All the assets of Candia Group Inc. (“dine.TO”), which owns and operates local digital restaurant guides for the Greater Toronto Area; and All the shares of 4400348 Canada Inc. (“Bookenda Inc.”), which is a Quebec City based provider of a booking and reservation management system with a strong presence in the restaurant industry. The combined total cash consideration for the two acquisitions of $10.8 million was financed with cash on hand and paid at closing. The fair value of $10.8 million included $12.2 million of intangible assets (refer to Note 8 – Intangible assets), $0.1 million of net other assets, and $1.5 million of net deferred income tax liabilities. 2013 During the second quarter of 2013, the Company acquired the remaining 40% of Mediative G.P. Inc. and Mediative Performance L.P. in exchange for cash consideration of $3.6 million. These entities were integrated within Yellow Pages Digital & Media Solutions Limited and subsequently dissolved in 2013. INT_RA2014_Engl.indd 51 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 5 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 6. INVESTMENTS IN ASSOCIATES On March 9, 2010, Yellow Pages Limited acquired a 30% equity interest in 411, which was accounted for using the equity method. The Company acquired the remaining 70% in 411 on June 1, 2014 (refer to Note 5 – Business acquisitions). As at December 31, 2014, 411 is a wholly-owned subsidiary of Yellow Pages Limited (refer to Note 26 - List of subsidiaries) and is consolidated. The net earnings for 411 not adjusted for the percentage ownership held by Yellow Pages Limited amounted to $2.4 million for the year ended December 31, 2013. On March 29, 2010, Yellow Pages Limited entered into a definitive agreement with HM Capital whereby Yellow Pages Limited contributed its interest in YPG Directories, LLC in exchange for a 35% minority ownership in Ziplocal, LP (“Ziplocal”). The investment in Ziplocal was accounted for using the equity method. In May 2014, Yellow Pages Limited disposed of its 35% share ownership in Ziplocal for $nil consideration. The carrying value of this investment was $nil as at the date of disposal. Upon disposal, Yellow Pages Limited reclassified an accumulated foreign currency translation loss of $1.6 million from equity to financial charges (refer to Note 19 – Financial charges, net). 7. PROPERTY, PLANT AND EQUIPMENT Cost As at December 31, 2013 Business acquisitions (Note 5) Additions Disposals, write-offs and transfers As at December 31, 2014 Accumulated depreciation As at December 31, 2013 Depreciation expense Disposals, write-offs and transfers As at December 31, 2014 Net book value as at December 31, 2014 Office equipment1 Computer equipment Other equipment Leasehold improvements 2014 Total $ 30,439 $ 24,328 $ 1,669 $ 31,153 $ 87,589 137 3,557 (2,467) 349 9,765 (31) 28 211 (cid:16) 43 2,678 (1,934) 557 16,211 (4,432) 31,666 $ 34,411 $ 1,908 $ 31,940 $ 99,925 22,925 $ 15,111 $ 984 $ 19,080 $ 58,100 $ $ 1,790 (2,465) 4,031 (21) 154 (cid:16) 3,811 (1,906) $ $ 22,250 9,416 $ $ 19,121 $ 15,290 $ 1,138 $ 20,985 $ 770 $ 10,955 $ Cost As at December 31, 2012 $ 29,550 $ 18,362 $ 1,510 $ 29,048 $ Office equipment1 Computer equipment Other equipment Leasehold improvements Additions Disposals, write-offs and transfers As at December 31, 2013 Accumulated depreciation As at December 31, 2012 Depreciation expense Disposals, write-offs and transfers As at December 31, 2013 Net book value as at December 31, 2013 $ $ 1,123 (234) 30,439 20,966 2,172 (213) $ $ 6,798 (832) 159 (cid:16) 2,105 (cid:16) 24,328 $ 1,669 $ 31,153 $ 87,589 13,076 $ 891 $ 16,123 $ 51,056 2,876 (841) 93 (cid:16) 984 $ 685 $ 2,957 (cid:16) 19,080 $ 12,073 $ 8,098 (1,054) 58,100 29,489 $ $ 22,925 7,514 $ $ 15,111 $ 9,217 $ 9,786 (4,392) 63,494 36,431 2013 Total 78,470 10,185 (1,066) 1 The net book value of office equipment includes $0.7 million of assets held under finance leases (2013 - $0.5 million). 5 2 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 52 2015-03-06 6:38 PM 8. INTANGIBLE ASSETS Cost As at December 31, 2013 Business acquisitions (Note 5) Additions Disposals, write-offs and transfers As at December 31, 2014 Accumulated amortization As at December 31, 2013 Amortization expense Disposals, write-offs and transfers As at December 31, 2014 Net book value as at December 31, 2014 $ $ NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Trademarks and domain names1 Non- competition agreements and logos Customer- related intangible assets Software2 2014 Total Intangible assets $ 951,023 $ 536,102 $ 12,113 $ 180,637 $ 1,679,875 10,309 (cid:16) (54,638) (cid:16) (cid:16) 4,882 (cid:16) 7,668 69,904 (5,272) (11,328) (1,723) 22,859 69,904 (72,961) $ 906,694 $ 530,830 $ 5,667 $ 256,486 $ 1,699,677 $ 65,132 $ 194,081 $ 11,671 $ 5,932 (54,638) 18,464 (5,272) 494 (11,328) 16,426 $ 207,273 $ 837 $ 98,497 $ 43,400 (1,723) 140,174 $ 369,381 68,290 (72,961) 364,710 890,268 $ 323,557 $ 4,830 $ 116,312 $ 1,334,967 Trademarks and domain names1 Non- competition agreements and logos Customer- related intangible assets Software2 2013 Total Intangible assets Cost As at December 31, 2012 $ 951,184 $ 536,102 $ 108,198 $ 134,960 $ 1,730,444 Additions Disposals, write-offs and transfers As at December 31, 2013 Accumulated amortization As at December 31, 2012 Amortization expense Disposals, write-offs and transfers As at December 31, 2013 Net book value as at December 31, 2013 $ $ (cid:16) (161) (cid:16) (cid:16) 785 51,288 52,073 (96,870) (5,611) (102,642) $ 951,023 $ 536,102 $ 12,113 $ 180,637 $ 1,679,875 $ 60,705 $ 175,612 $ 108,198 $ 73,781 $ 418,296 4,427 (cid:16) 18,469 (cid:16) 343 (96,870) 28,827 52,066 (4,111) (100,981) 65,132 $ 194,081 $ 11,671 $ 98,497 $ 369,381 885,891 $ 342,021 $ 442 $ 82,140 $ 1,310,494 1 Trademarks and domain names with indefinite useful lives amounted to $878.8 million as at December 31, 2014 and 2013. 2 Software assets under development amounted to $61 million (2013 - $25.3 million). 9. TRADE AND OTHER PAYABLES As at Trade Accrued interest on long-term debt and exchangeable debentures Payroll related Long-term incentive plans Publishing related Marketing related¹ Other accrued liabilities¹ December 31, 2014 December 31, 2013 $ 39,548 $ 44,085 5,027 5,994 8,871 4,809 5,730 12,069 82,048 $ 5,717 3,146 2,067 10,103 237 13,469 $ 78,824 1 Marketing related accruals of $0.2 million were reclassified from other accrued liabilities as at December 31, 2013. INT_RA2014_Engl.indd 53 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 5 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 10. PROVISIONS During the year ended December 31, 2014, Yellow Pages Limited recorded restructuring and special charges of $18.4 million. The majority of these costs was associated with internal reorganizations and workforce reductions in our legacy business, partially offset by a net curtailment gain of $1.4 million related to workforce reductions (refer to Note 11 – Post-employment benefits). During the year ended December 31, 2013, Yellow Pages Limited recorded restructuring and special charges of $23.3 million. These costs were associated with internal reorganizations, workforce reductions and the termination and renegotiation of certain 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. 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, 2013 $ 21,347 $ 19,762 $ 35,554 $ Charge1 Utilized provision Surplus provision Reclassification As at December 31, 2014 Less current portion Non-current portion 14,818 (21,361) (cid:16) 1,440 16,244 $ 15,508 736 $ 4,847 (6,869) (cid:16) (375) 33,937 (31,316) (3,367) (cid:16) 17,365 $ 34,808 $ 15,524 34,808 1,841 $ (cid:16) $ $ $ 76,663 53,602 (59,546) (3,367) 1,065 68,417 65,840 2,577 1 Included in the restructuring and special charges are $(1.3 million) (2013 - $(12 thousand)) of other costs not affecting the provision. 11. POST-EMPLOYMENT BENEFITS Yellow Pages Limited maintains pension plans with defined benefit and defined contribution components which cover substantially all of the employees of Yellow Pages Limited. Yellow Pages 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 defined benefit plans typically expose the Company to actuarial risks such as investment, interest rate, longevity and salary risks. Investment risk Interest risk Longevity risk Salary risk The present value of the defined benefit plan obligation is calculated using a discount rate determined by reference to high quality corporate bond yields; if the actual return on plan assets is below the assumed rate, it will create a plan deficit. Currently, the defined benefit plan has a relatively balanced investment in equity securities and debt instruments. Due to the long-term nature of the defined benefit plan obligation, the pension committee considers it appropriate that a reasonable portion of the plan assets should be invested in equity instruments to leverage the return generated by the fund. A decrease in the bond interest rate will increase the defined benefit plan obligation, particularly on a solvency basis. Although this will be partially offset by an increase in the return of the defined benefit plan’s investments, the impact may be material as pension liabilities are sensitive to variations in interest rates. The present value of the defined benefit plan liability is calculated based on assumptions regarding mortality rates of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the defined benefit obligation. The present value of the defined benefit plan obligation is calculated by reference to the projected salaries of plan participants. As such, a higher salary increase than projected of the plan participants will increase the defined benefit plan’s liability. The present value of the defined benefit obligation and the related current service cost and past service costs were measured using the projected benefit method prorated on service. This was based on the actuarial valuation of the plan assets and the present value of the defined benefit obligation which was carried out by Morneau Shepell, Fellows of the Canadian Institute of Actuaries and Society of Actuaries, as at December 31, 2012 and extrapolated as at December 31, 2014. For funding purposes, an actuarial valuation of the defined benefit component of the Yellow Pages pension plans was also performed as at May 31, 2014. 5 4 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 54 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 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, 2014 and 2013 were as follows: As at December 31, 2014 December 31, 2013 Pension Other Pension Other Benefits1 Benefits Benefits1 Benefits Fair value of plan assets, beginning of year $ 438,008 $ – $ 406,554 $ – Employer contributions Employee contributions Interest income Return on plan assets excluding interest income (actuarial gains) Benefit payments Assets distributed on settlement (Note 10) Administration costs Fair value of plan assets, end of year 28,212 1,680 20,534 31,103 2,029 19,991 2,073 – – – 803 15,901 43,478 – – – (35,011) (2,029) (47,274) (2,073) (8,195) (1,477) – – – (1,445) $ 474,854 $ – $ 438,008 $ – – – Accrued benefit obligation, beginning of year $ 576,664 $ 40,292 $ 651,238 $ 52,230 Current service cost Employee contributions Benefit payments Defined benefit obligation extinguished on settlement (Note 10) Interest cost Curtailment gain (Note 10) Past service costs Actuarial losses (gains) due to: Experience adjustments Changes in demographic assumptions Changes in financial assumptions Defined benefit obligation, end of year Net defined benefit obligation 10,047 1,680 264 – 14,802 803 866 – (35,011) (2,029) (47,274) (2,073) (7,541) 26,901 – – – 1,762 25,829 2,082 (312) (1,701) – – – – 19,966 68,107 – (3,297) (4,095) (739) 306 (6,046) 11,401 3,460 (70,792) (5,506) 1,163 (4,375) $ 660,501 $ 41,615 $ 576,664 $ 40,292 $ (185,647) $ (41,615) $ (138,656) $ (40,292) 1 Including unfunded supplementary defined benefit pension plans. 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 Pages Limited’s pension and other benefit obligations as at December 31, 2014 and 2013 were as follows: As at 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 Weighted average duration (years) December 31, 2014 December 31, 2013 Pension Other Pension Other Benefits Benefits Benefits Benefits 4.00% 3.00% 4.75% 3.00% 16 4.00% 3.00% 4.75% 3.00% 13 4.75% 3.00% 4.00% 3.25% 15 4.75% 3.00% 4.00% 3.25% 13 For measurement purposes, a 6.8% annual increase in the per capita cost of covered medical care benefits (the medical care cost trend rate) was assumed in 2014. The rate of increase of the cost of medical care was assumed to gradually decline to 4.5% by 2028 and to remain at that level thereafter. A 4.5% annual increase in per capita cost of covered dental care benefits was assumed in 2013 and thereafter. INT_RA2014_Engl.indd 55 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 5 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) The following table shows how the defined benefit obligation as at December 31, 2014 would have been affected by changes that were reasonably possible at that date in each significant actuarial assumption: Decrease of 0.25% in discount rate, end of year Increase of 0.25% in rate of compensation Increase of 1% in health care cost trend rates The net benefit plan costs included in the income statements are the following components: Pension Benefits Other Benefits $ $ $ 27,763 $ 1,269 4,552 N/A $ $ – 1,731 For the years ended December 31, Current service cost Administration costs Past service costs Service cost1 Curtailment gain Loss on settlement Net curtailment loss (gain) (Note 10) Interest cost Interest income Net interest on the net defined benefit obligation (Note 19) Net benefit costs (recovery) recognized in the income statement Actuarial losses (gains) recognized in other comprehensive income Total net benefit plan costs (recovery) for the Yellow Pages Group Corp. (“YPG Co.”) defined benefit plans Net benefit plan costs for the YPG Co. defined contribution plans1 1,477 – 11,524 (312) 654 342 26,901 (20,534) 6,367 18,233 56,970 75,203 6,500 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Total net benefit plan costs (recovery) $ 81,703 1 Included in operating costs. Pension Benefits 2014 Other Benefits Pension Benefits $ 10,047 $ 264 $ 14,802 $ 2013 Other Benefits 866 – (4,095) (3,229) – – – 2,082 – 2,082 (1,147) (8,718) 1,445 (3,297) 12,950 – – – 25,829 (15,901) 9,928 22,878 (108,915) $ $ $ $ $ $ $ – – 264 (1,701) – (1,701) 1,762 – 1,762 325 3,027 3,352 $ $ $ $ $ $ $ $ (86,037) $ (9,865) – 6,438 – 3,352 $ (79,599) $ (9,865) As a result of workforce reductions, the number of employees covered by the pension plans decreased, and this restructuring gave rise to a curtailment and a settlement as at March 1, 2014 (refer to Note 10 – Provisions). During the year ended December 31, 2013, the Company amended the retirement and post-employment benefit plans for certain groups of employees. These amendments were made prospectively and applied only to certain groups of employees and included among other items for the affected employees, the elimination of post-retirement benefits, the elimination of post- retirement indexing for future service, 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 $7.4 million in 2013. On May 31, 2013, the plan was split administratively into two plans: (cid:120) (cid:120) a plan that applies to all defined benefit plan and defined contribution plan members except Québec-based defined contribution plan members; and a plan that applies to all Québec-based defined contribution plan members. This split has no impact on the benefits of current active or retired members. 5 6 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 56 2015-03-06 6:38 PM Plan assets include primarily 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, 2014 and 2013: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) (in percentages - %) Fair value of the plan assets: Canadian bonds and debentures Canadian common stocks Global common stocks Pooled fund units Canadian pooled equity funds Global pooled equity funds Canadian pooled fixed-income funds Pooled mortgage funds Short-term notes and treasury bills Cash and cash equivalents December 31, 2014 December 31, 2013 31.5 11.0 9.5 18.0 21.0 6.0 2.0 0.5 0.5 27.5 12.5 10.0 19.0 22.0 6.5 1.5 0.5 0.5 As at December 31, 2014 and 2013, the publicly traded equity securities did not directly include any shares of Yellow Pages Limited. The total cash payments for pension and other benefit plans made by Yellow Pages Limited amounted to $35.6 million for 2014 (2013 – $28.5 million). Total cash payments for pension and other benefit plans expected in 2015 amount to approximately $47.4 million. Yellow Pages 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 Pages Limited is responsible to adequately fund the plans. Contributions reflect actuarial assumptions concerning future investment returns, salary projections and future service benefits. Yellow Pages Limited’s expense for provincial, federal and state pension plans was $7.7 million for the year ended December 31, 2014 (2013 – $7.3 million). As at December 31, 2014, Yellow Pages Limited had recognized an accumulated balance of $99.8 million, net of income taxes of $34.3 million, in actuarial losses in OCI. 12. LONG-TERM DEBT The long-term debt is comprised of the following: As at Senior secured notes Obligations under finance leases Less current portion1 Non-current portion December 31, 2014 December 31, 2013 $ $ $ 507,014 897 507,911 103,152 404,759 $ $ $ 646,577 891 647,468 89,051 558,417 1 The current portion of the senior secured notes may vary subject to the Excess Cash Flow clause under the indenture governing the senior secured notes. Asset-Based Loan In August 2013, the Company, through its subsidiary Yellow Pages Digital & Media Solutions Limited, entered into a five-year $50 million asset-based loan (“ABL”) expiring in August 2018. The ABL is used for general corporate purposes. Through the ABL, the Company has access to the funds in the form of prime rate loans, Banker’s acceptance (“BA”) equivalent loans or letters of credit. The ABL is secured by a first priority lien over the receivables of the Company. The ABL is subject to an availability reserve of $5 million if the Company’s trailing 12-month fixed charge coverage ratio is below 1.1 times. As at December 31, 2014, the fixed charge coverage ratio was below 1.1 times and the Company had $4.2 million of letters of credit issued and outstanding. As such, $40.8 million of the ABL was available as at December 31, 2014. Interest is calculated based either on the BA Rate or the Canadian Prime Rate plus an applicable margin. The loan agreement governing the ABL 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 and its business activities. As at December 31, 2014, the Company was in compliance with all covenants under the loan agreement governing the ABL. INT_RA2014_Engl.indd 57 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 5 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Senior Secured Notes On December 20, 2012, the Company through its subsidiary, Yellow Pages Digital & Media Solutions Limited, issued $800 million of 9.25% senior secured notes (“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 Senior Secured Notes are unconditionally guaranteed on a senior secured basis by Yellow Pages 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 Pages 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, the creation of liens, sale and leaseback transactions, mergers, consolidations and sales of assets, and 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 additional indebtedness and other transactions. As at December 31, 2014 and 2013, 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. 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). The Company was required to make minimum annual aggregate mandatory redemption payments of $75 million in 2014. In 2015, the minimum annual aggregate mandatory redemption payments was set at $50 million, or if the redemption payments made in 2014 exceeded $75 million, $50 million less such excess redemption payments. The Company made mandatory redemption payments of $139.6 million in 2014 (2013 - $118.4 million), thereby exceeding the $75 million minimum aggregate mandatory redemption payment for 2014 by $64.6 million. As such, the Company completed its minimum aggregate mandatory redemption payments for 2014 and 2015 combined. The Company is also required to use an amount equal to 75% of its consolidated Excess Cash Flow to redeem on a semi-annual basis 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:120) (cid:120) 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. During the year ended December 31, 2013, Yellow Pages Limited purchased on the open market $8 million of the Senior Secured Notes for a total cash consideration of $8.3 million and exercised its option to redeem $27 million of Senior Secured Notes for a total cash consideration of $28.4 million. A loss of $1.7 million was recorded in net earnings in financial charges (refer to Note 19 – Financial charges, net). 5 8 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 58 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 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, 2014 are as follows: Less than one year Between one and five years 13. EXCHANGEABLE DEBENTURES As at Face value of exchangeable debentures Less unaccreted interest Future minimum lease payments Interest Present value of minimum lease payments $ $ 382 566 948 $ $ 25 26 51 $ $ 357 540 897 December 31, 2014 December 31, 2013 $ $ 107,089 18,130 88,959 $ $ 107,500 19,566 87,934 On December 20, 2012, the Company through its subsidiary Yellow Pages Digital & Media Solutions Limited, issued $107.5 million of senior subordinated exchangeable debentures (“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 fair value on December 20, 2012 of the Exchangeable Debentures was $91.6 million. The Exchangeable Debentures are senior subordinated and unsecured obligations of Yellow Pages Digital & Media Solutions Limited. The Exchangeable Debentures are unconditionally guaranteed on a subordinated unsecured basis by Yellow Pages 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, 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, 2014 and 2013, 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 common shares at any time at an exchange price per common share equal to $19.04, subject to adjustment for specified 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 is being accreted such that the liability at maturity equals the principal amount less exchanges. During the year ended December 31, 2014, $0.4 million of Exchangeable Debentures at face value were exchanged for 21,584 common shares of Yellow Pages Limited with a fair value of $0.5 million (2013 – nil). INT_RA2014_Engl.indd 59 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 5 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 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:120) (cid:120) 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. The fair value was $0.1 million as at December 31, 2014 (2013 - $20 thousand). 14. INCOME TAXES A reconciliation of income taxes at Canadian statutory rates with reported income taxes is as follows: Earnings before income taxes and earnings from investments in associates Combined Canadian federal and provincial tax rates1 Income tax expense at statutory rates (Decrease) increase resulting from: Settlement of tax assessments Non-deductible expenses for tax purposes² Unrecognized tax attributes of the current year Loss on settlement of note receivable Disposal of investment in associate Recognition of previously unrecognized tax attributes Rate differential on temporary differences Other² (Recovery of) provision for income taxes For the years ended December 31, $ $ 2014 147,425 26.56% 39,156 (84,828) 1,265 – 886 636 (923) – 2,871 2013 239,253 26.46% 63,306 $ $ – 1,001 3,332 – – (3,312) (300) (606) $ (40,937) $ 63,421 1 The combined applicable statutory tax rate increased by 0.1% resulting mainly from the provincial allocation of revenues earned and the increase in the British Columbia and New Brunswick statutory tax rates. 2 Certain expenses were reclassified in the prior period to conform to this year’s presentation. (Recovery of) provision for income taxes includes the following amounts: Current Deferred For the years ended December 31, 2014 (67,829) 26,892 (40,937) $ $ $ $ 2013 48,241 15,180 63,421 The Company obtained settlements from the Canada Revenue Agency. In conjunction, in the fourth quarter of 2014, Yellow Pages Limited recorded an income tax receivable in the amount of $47.8 million in the consolidated statement of financial position as well as a recovery of income taxes of $84.8 million related to the cancellation of certain income tax liabilities. 6 0 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 60 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (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- employment benefits Accrued liabilities Property, plant and equipment and lease inducements Exchang- eable Deben- tures Deferred income tax liabilities (assets), net Intangible assets December 31, 2013 $ (4,765) $ (4,057) $ (9,469) $ (48,818) $ (13,127) $ (4,798) $ 5,259 $ 109,099 $ 29,324 Business acquisitions – (3,936) – – – – – 3,665 (271) Expense (benefit) to income statement Expense to OCI Other December 4,731 (2,833) 1,862 527 2,607 6,323 (272) 13,947 26,892 – – – – – – (15,935) – – – – – – – – (15,935) 8,657 8,657 31, 2014 $ (34) $ (10,826) $ (7,607) $ (64,226) $ (10,520) $ 1,525 $ 4,987 $ 135,368 $ 48,667 Deferred financing costs Non-capital losses carry forward Deferred revenues Post- employment benefits Accrued liabilities Property, plant and equipment and lease inducements Exchang- eable Deben- tures Deferred income tax (assets) liabilities, net Intangible assets December 31, 2012 $ (11,112) $ (3,954) $ (11,726) $ (77,362) $ (9,941) $ (920) $ 5,599 $ 96,030 $ (13,386) Expense (benefit) to income statement Expense to OCI Other December 6,347 (103) 2,257 – – – – – – (2,582) 31,126 – (3,186) (3,878) (340) 16,665 15,180 – – – – – – – 31,126 (3,596) (3,596) 31, 2013 $ (4,765) $ (4,057) $ (9,469) $ (48,818) $ (13,127) $ (4,798) $ 5,259 $ 109,099 $ 29,324 As at December 31, 2014, the Company had not recognized deferred income tax assets with respect to foreign operating losses of $103.3 million which expire from 2028 to 2034, Canadian capital losses of $3.9 million which can be utilized indefinitely, and deductible temporary differences of $173 million. 15. SHAREHOLDERS’ CAPITAL Common shares An unlimited number of common shares are authorized to be issued. Balance, December 31, 2013 Exchange of Exchangeable Debentures (Note 13) Balance, December 31, 2014 Balance, December 31, 2013 and 2012 For the year ended December 31, 2014 Number of Shares Amount 27,955,077 $ 4,029,869 21,584 456 27,976,661 $ 4,030,325 For the year ended December 31, 2013 Number of Shares Amount 27,955,077 $ 4,029,869 YELLOW PAGES LIMITED 2014 ANNUAL REPORT 6 1 INT_RA2014_Engl.indd 61 2015-03-06 6:38 PM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Warrants On December 20, 2012, the Company issued 2,995,506 common share purchase warrants (“Warrants”). As at December 31, 2014 and 2013, the Company had a total of 2,995,506 Warrants outstanding. Each Warrant is transferable and entitles the holder to purchase one common share of Yellow Pages Limited 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 December 20, 2012 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 16. EARNINGS PER SHARE 2.27% 10 years December 20, 2022 33.5% The following table reconciles the net earnings attributable to common shareholders and the weighted average number of shares outstanding used in computing basic earnings per share to weighted average number of shares outstanding used in computing diluted earnings per share: Weighted average number of shares outstanding used in computing basic earnings per share Dilutive effect of restricted share units and performance share units Dilutive effect of stock options Dilutive effect of Exchangeable Debentures For the years ended December 31, 2014 2013 27,128,062 813,909 142,945 27,797,170 157,907 14,624 5,624,422 5,646,008 Weighted average number of shares outstanding used in computing diluted earnings per share 33,709,338 33,615,709 Net earnings available to common shareholders of Yellow Pages Limited used in the computation of basic and diluted earnings per share Impact of assumed conversion of Exchangeable Debentures, net of applicable taxes Net earnings adjusted for dilutive effect For the years ended December 31, 2014 2013 $ 188,540 $ 176,360 7,291 7,244 $ 195,831 $ 183,604 For the years ended December 31, 2013 and 2014, the diluted earnings per share calculation did not take into consideration the potential dilution effect of the warrants (refer to Note 15 – Shareholders’ capital) as they are not dilutive. 6 2 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 62 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 17. STOCK-BASED COMPENSATION PLANS Yellow Pages Limited’s stock-based compensation plans consist of restricted share units, performance share units, deferred share units and stock options of Yellow Pages Limited. 2013 Restricted Share Unit and Performance Share Unit Plan On May 6, 2013, Yellow Pages Limited adopted a restricted share unit and performance share unit plan (the “RSU and PSU Plan”) to reward the key employees and officers of Yellow Pages Limited (the “Participants”). Following the implementation of the RSU and PSU Plan, Yellow Pages Limited granted to Participants a number of restricted share units (“RSUs”) and/or performance share units (“PSUs”), as applicable, based on the volume weighted average trading price of the common shares for the five days immediately preceding the grant date. The RSUs are time-based awards and will vest upon the continuous employment of the Participants for a period of 36 months starting from the date of the grant; or such other period not exceeding 36 months determined by the Board of Directors. The PSUs are performance-based awards and will vest upon confirmation by the Board of Directors of the achievement of specified performance targets and upon the continuous employment of the Participants for a period of 36 months starting from the date of the grant; or such other period not exceeding 36 months determined by the Board of Directors. The PSUs for which the performance targets have not been achieved shall automatically be forfeited and cancelled. Pursuant to the terms of the RSU and PSU Plan, if the RSU and PSU Plan is funded, Participants will receive, upon vesting of the RSUs and PSUs, common shares of the Company acquired on the open market. In the event the RSU and PSU Plan is unfunded, Yellow Pages Limited will pay to the Participant an amount in cash, equivalent to the number of RSUs or PSUs that have vested. The number of PSUs that vest could potentially reach up to one-and-a-half times the actual number of PSUs awarded if the actual performance reaches the maximum level of performance targets. 2014 During the year ended December 31, 2014, 571,322 common shares of Yellow Pages Limited (2013 - 454,482) were purchased on the open market of the TSX by the trustee appointed under the RSU and PSU Plan at a cost of $12.5 million (2013 - $6.6 million) and are restricted for the purpose of funding of the RSU and PSU Plan. The total number of common shares of Yellow Pages Limited held by the trustee for the purpose of funding the RSU and PSU Plan amounted to 1,018,989 as at December 31, 2014. The following table summarizes the status of the RSU and PSU grants during the years ended December 31: Number of Outstanding, beginning of period Granted Settled Forfeited Outstanding, end of period Weighted average remaining life (years) RSUs 252,655 198,008 (6,815) (44,610) 399,238 1.4 2014 PSUs 131,776 286,609 – (55,095) 363,290 1.7 RSUs – 300,871 – (48,216) 252,655 2 2013 PSUs – 140,669 – (8,893) 131,776 2 As at December 31, 2014, there was an additional 181,607 common shares restricted for the PSUs set aside (2013 – 65,883 common shares), representing the portion which provides for a payout in excess of 100% and limited to a maximum payout of 150%. During the year ended December 31, 2014, an expense of $4.4 million (2013 - $1.6 million) was recorded in the consolidated income statement in relation to the RSU and PSU Plan. INT_RA2014_Engl.indd 63 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 6 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Deferred Share Unit Plan 2013 On June 12, 2013, Yellow Pages Limited adopted a deferred share unit plan (the “DSU Plan”). The DSU Plan was amended in October 2013 to provide for the participation by eligible employees as designated by the Board of Directors. The Company shall settle the vested DSUs in cash or in common shares of Yellow Pages Limited acquired on the open market at the discretion of the Company when a Director leaves the Board of Directors or an eligible employee ceases employment with the Company. The following table summarizes the status of the DSU grants during the years ended December 31: Outstanding, beginning of period Granted Variation due to change in stock price Number of DSUs 100,557 50,584 – 2014 Liability¹ $ 2,067 1,056 (164) Outstanding and vested, end of period 151,141 $ 2,959 Number of DSUs – 100,557 – 100,557 2013 Liability¹ – 1,250 817 $ $ 2,067 1 The liability related to the DSU Plan is recorded in trade and other payables, and the expense related to the units vested and the variation due to changes in stock price is included in operating costs. Stock Options 2013 On December 20, 2012, as part of the implementation of Yellow Pages Limited’s Recapitalization transaction, a new stock option plan (the “Stock Option Plan”) was adopted. The Stock Option Plan is intended to attract and retain the services of selected employees of Yellow Pages Limited who are in a position to make a material contribution to the successful operation of the business, provide meaningful incentive to management to lead Yellow Pages Limited through the transformation of its business and to more closely align the interests of management with those of the shareholders of Yellow Pages Limited. A maximum of 1,290,612 stock options may be granted under the Stock Option Plan. On May 6, 2013, 376,000 stock options were granted to selected employees of Yellow Pages Limited. These stock options vest 50% in February 2015, 25% in February 2016 and 25% in February 2017. 2014 During the year ended December 31, 2014, 195,800 stock options were granted to selected employees. These stock options vest 50% in February 2016, 25% in February 2017 and 25% in February 2018. The following table summarizes the status of the stock option grants during the years ended December 31: Number of options Weighted average exercise price per option Number of options 2014 2013 Weighted average exercise price per option Outstanding, beginning of period Granted Forfeited Outstanding, end of period Exercisable, end of period 376,000 195,800 (91,600) 480,200 (cid:16) $10.12 $24.35 $14.42 $15.10 (cid:16) (cid:16) 376,000 (cid:16) 376,000 (cid:16) (cid:16) $10.12 (cid:16) $10.12 (cid:16) The following table provides additional information about Yellow Pages Limited’s Stock Option Plan as at December 31: Exercise price $10.12 $24.65 $20.33 $19.61 Exercisable, end of period Number of options outstanding Weighted average remaining life Number of options outstanding 2014 2013 Weighted average remaining life 311,500 156,100 4,900 7,700 480,200 (cid:16) 5.4 6.2 6.4 6.5 5.6 (cid:16) 376,000 (cid:16) (cid:16) (cid:16) 376,000 (cid:16) 6.4 (cid:16) (cid:16) (cid:16) 6.4 (cid:16) 6 4 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 64 2015-03-06 6:38 PM Stock options were valued using a binomial option pricing model. Expected volatility is based on the historical share price volatility over the average expected life of the options granted. The following table shows the key inputs into the valuation model for the years ended December 31: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Weighted average grant share date price Exercise price Expected volatility Contractual life Risk-free interest rate Weighted average remaining life $ $ 2014 25.00 24.35 30% 7 years 2.40% 6.2 years $ $ 2013 8.66 10.12 40% 7 years 1.94% 6.3 years An expense of $1.2 million was recorded during the year ended December 31, 2014 (2013 - $0.4 million) in relation to the Stock Option Plan. 18. OPERATING COSTS Salaries, commissions and benefits Supply chain and logistics1,3 Other goods and services2,3 Information systems Bad debt expense (Note 22) $ For the years ended December 31, 2014 285,025 110,489 111,416 45,533 9,089 2013 $ 281,567 107,640 107,009 44,964 14,469 $ 561,552 $ 555,649 ¹ Supply chain and logistics costs relate to external supplier costs for manufacturing and distribution of our print and online products. 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 million (2013 - $19.8 million). 3 Certain expenses within other goods and services in 2013 were reclassified to supply chain and logistics to conform to this year’s presentation. 19. FINANCIAL CHARGES, NET The significant components of the financial charges are as follows: Interest on long-term debt and Exchangeable Debentures Net interest on the defined benefit obligations (Note 11) Reclassification of accumulated foreign currency translation loss (Note 6) Gain on business acquisition (Note 5) Loss on the settlement of note receivable (Note 22) Loss on the optional redemption of the Senior Secured Notes (Note 12) Other, net For the years ended December 31, 2014 $ 63,897 $ 8,129 1,598 (3,613) 1,150 (cid:16) 955 2013 79,017 12,010 (cid:16) (cid:16) (cid:16) 1,670 660 $ 72,116 $ 93,357 INT_RA2014_Engl.indd 65 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 6 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 20. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following are non-cash transactions: Additions to property, plant and equipment included in trade and other payables Additions to intangible assets included in trade and other payables Additions to property, plant and equipment under finance leases Exchange of Exchangeable Debentures (Note 13) 21. COMMITMENT AND CONTINGENCIES For the years ended December 31, 2014 1,903 4,485 540 456 $ $ $ $ 2013 1,005 4,134 (cid:16) (cid:16) $ $ $ $ a) Yellow Pages Limited has commitments under various leases for premises, equipment, purchase and service contract obligations for both operating and capital expenditures for each of the next five years and thereafter, as at December 31, 2014, and in the aggregate of: 2015 2016 2017 2018 2019 Thereafter Operating leases Other Total commitments $ 20,698 20,395 18,000 7,108 6,587 93,646 $ 49,496 15,939 4,714 2,409 2,161 2,338 $ 70,194 36,334 22,714 9,517 8,748 95,984 $ 166,434 $ 77,057 $ 243,491 Under certain lease agreements, inducements for leasehold improvements exist. These lease inducements are accounted for as part of deferred credits and amount to $8.9 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 Pages Limited has four billing and collection services agreements. The term of the Billing and Collection Services Agreement with Bell Canada (“Bell”) expires on December 31, 2017. The agreement with TELUS Communications Inc. (“TELUS”) expires in 2031. The agreement with MTS Allstream Inc. expires on October 2, 2016, with two automatic renewal periods for ten 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, Yellow Pages Limited 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 these publication agreements are terminated in accordance with their terms, these other listing information and trademark licenses with Bell, TELUS, MTS Allstream Inc. or Bell Aliant, as the case may be, may also be terminated. These other agreements with Bell, TELUS, MTS Allstream Inc. and Bell Aliant will terminate between 2031 and 2037. c) Yellow Pages 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 Pages 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 trade and other payables, and provisions 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 Pages Limited. 6 6 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 66 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 22. FINANCIAL RISK MANAGEMENT Credit Risk Credit risk stems primarily from the potential inability of a customer or counterparty to a financial instrument to meet its contractual obligations. Yellow Pages Limited is exposed to credit risk with respect to cash, cash equivalents and trade receivables from customers. The carrying value of financial assets represents Yellow Pages Limited’s maximum exposure. Credit risk associated with cash and cash equivalents is minimized substantially by ensuring that these financial assets are placed with creditworthy counterparties. An ongoing review is performed to evaluate changes in the status of counterparties. Yellow Pages Limited’s extension of credit to customers involves judgment. Yellow Pages 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 Pages Limited considers that it has limited exposure to concentration of credit risk with respect to trade receivables 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 year. Bell, TELUS, MTS Allstream Inc. and Bell Aliant provide Yellow Pages 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 Pages Limited. Yellow Pages Limited retains the ultimate collection risk on these receivables. Allowance for doubtful accounts and past due receivables are reviewed by management at each statement of financial position date. Yellow Pages 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 collectible. Subsequent recoveries of amounts previously written off are credited to the income statement. In 2011, Yellow Pages Limited sold Trader Corporation. The purchase price consideration included a note receivable of $15 million. The note receivable was to mature in 2020. Interest and principal on the note receivable was subordinated to the senior debt of Trader Corporation. In May 2014, Yellow Pages Limited settled this note receivable, which had a carrying value of $15.3 million, including accrued interest of $3.4 million, for $14.1 million, and recorded a loss of $1.2 million in financial charges (refer to Note 19 – Financial charges, net). The note receivable including accrued interest was presented in financial and other assets in the consolidated statement of financial position as at December 31, 2013. The components of trade and other receivables are as follows: As at 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, 2014 December 31, 2013 $ $ $ $ 73,498 29,950 5,783 109,231 23,047 132,278 $ $ $ $ 81,449 33,341 4,373 119,163 23,283 142,446 1 Other receivables is mainly comprised of sales tax receivables and a loan receivable associated with a forward contract. Yellow Pages Limited’s trade receivables are stated after deducting an allowance for doubtful accounts of $19.2 million as at December 31, 2014 (2013 - $21.1 million). The movements in the allowance for doubtful accounts were as follows: As at Balance, beginning of year Bad debt expense, net of recovery Written-off Balance, end of year December 31, 2014 December 31, 2013 $ $ $ 21,122 9,089 (10,964) 19,247 $ 23,812 14,469 (17,159) 21,122 INT_RA2014_Engl.indd 67 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 6 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Market Risk (i) Interest Rate Risk Yellow Pages Limited is exposed to interest rate risks resulting from fluctuations in interest rates on cash equivalents that earn interest at market rates and on its ABL with rates which are generally based on the Canadian BA rate. Yellow Pages Limited does not use derivative instruments to reduce its exposure to interest rate risk. As at December 31, 2014, the ABL had $4.2 million of letters of credit issued and outstanding. The Company 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 Pages 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 Pages Limited’s fixed rate debt. As interest rates on the Senior Secured Notes and Exchangeable Debentures are fixed, the Company is not exposed to interest rate fluctuation risk. (ii) Foreign Exchange Risk Yellow Pages Limited is exposed to foreign exchange risk arising from various currency transactions, which are not significant. Foreign exchange transaction risk arises primarily from commercial transactions that are denominated in a currency that is not the functional currency of Yellow Pages Limited’s business unit that is party to the transaction. Yellow Pages Limited is exposed to fluctuations in the U.S. dollar. The effect on net earnings from existing U.S. dollar exposures of a one point increase or decrease in the Canadian/U.S. dollar exchange rate is not significant. The Company’s operating costs, net of revenues, denominated in U.S dollars were approximately $50 million for the year ended December 31, 2014. Liquidity Risk Liquidity risk is the exposure of Yellow Pages Limited to the risk of not being able to meet its financial obligations as they become due. Yellow Pages Limited manages this risk by maintaining detailed cash forecasts and long-term operating and strategic plans. The management of liquidity requires a constant monitoring of expected cash inflows and outflows which is achieved through a detailed forecast of the Company’s liquidity position to ensure adequacy and efficient use of cash resources. The Company was required to make minimum annual aggregate mandatory redemption payments on its Senior Secured Notes of $75 million in 2014. In 2015, the minimum annual aggregate mandatory redemption payments was set at $50 million, or if the redemption payments made in 2014 exceeded $75 million, $50 million less such excess redemption payments. The Company made mandatory redemption payments of $139.6 million in 2014, thereby exceeding the minimum aggregate mandatory redemption payment for 2014 by $64.6 million. As such, the Company completed its minimum aggregate mandatory redemption payments for 2014 and 2015 combined. The Company is also required to use an amount equal to 75% of its consolidated Excess Cash Flow to redeem on a semi-annual basis the Senior Secured Notes. This requirement will be met through internally-generated cash and cash on hand. The following are the contractual maturities of the financial liabilities and related capital amounts: Total 1 year 2 – 3 years 4 – 5 years After 5 years Payments due for the years following December 31, 2014 Non-derivative financial liabilities Long-term debt1,2 $ 507,014 $ 102,795 $ – $ 404,219 $ 897 107,089 82,048 68,417 357 – 82,048 65,840 342 – – 2,042 198 – – 535 – – 107,089 – – $ 765,465 $ 251,040 $ 2,384 $ 404,952 $ 107,089 Obligations under finance leases1 Exchangeable Debentures1 Trade and other payables Provisions Total 1 Principal amount. 2 The repayment of the Senior Secured Notes may vary subject to the Excess Cash Flow clause under the indenture governing the Senior Secured Notes. 6 8 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 68 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) Fair values The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of cash and cash equivalents, trade and other receivables, trade and other payables, and the current portion of provisions is approximately equal to their carrying values due to their short-term maturity. The fair value of the Senior Secured Notes and the Exchangeable Debentures is evaluated based on quoted market prices 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 not measured at fair value on the statement of financial position: Current portion of long-term debt Non-current portion of long-term debt Exchangeable Debentures Fair value hierarchy The three levels of fair value hierarchy are as follows: December 31, 2014 Level Carrying Value 1 1 1 $ $ $ 103,152 404,759 88,959 $ $ $ Fair Value 108,035 423,959 117,819 (cid:120) (cid:120) (cid:120) 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 consolidated statement of financial position, as well as the reconciliation of Level 3 fair value measurements for the years ended December 31: As at December 31, 2013 Gain on fair value of financial liability (put option) (Note 5) Settlement of financial liability (Note 5) As at December 31, 2014 As at December 31, 2012 Other As at December 31, 2013 Investment – available-for- sale Put option – financial liability 2014 Total 3,520 $ (18,472) $ (14,952) – – 2,344 16,128 3,520 $ – $ Investment – available-for- sale Put option – financial liability 2,344 16,128 3,520 2013 Total 3,520 – 3,520 $ $ (18,479) $ (14,959) 7 7 (18,472) $ (14,952) $ $ $ $ INT_RA2014_Engl.indd 69 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 6 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) The fair value of the financial liability (put option) related to 411 was the difference between the price to acquire the remaining ownership interest in the associate, which was based on a fixed multiple of adjusted earnings, income taxes, depreciation and amortization, and the fair value of the investment in the associate on June 1, 2014, using similar assumptions as those used for the online products of Yellow Pages as at December 31, 2013, as described in Note 4 – Impairment of intangible assets. Yellow Pages Limited’s available-for-sale 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 statements of financial position date. 23. CAPITAL DISCLOSURES Yellow Pages 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 Pages 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 Pages Limited to monitor its financial leverage is its ratio of net debt to Latest Twelve Month EBITDA1. Yellow Pages Limited also uses other financial metrics to monitor its financial leverage including Fixed Charges Coverage Ratio and net debt to total capitalization. Yellow Pages Limited’s capital is comprised of net debt, Exchangeable Debentures and equity attributable to shareholders of Yellow Pages Limited as follows: As at Cash and cash equivalents Senior Secured Notes Exchangeable Debentures Obligations under finance leases Net debt, net of cash and cash equivalents Equity attributable to shareholders Total capitalization Net debt to total capitalization December 31, 2014 December 31, 2013 $ $ $ $ 102,776 507,014 88,959 897 494,094 684,180 1,178,274 41.9% $ $ $ $ 202,287 646,577 87,934 891 533,115 544,495 1,077,610 49.5% 1 Latest twelve month income from operations before depreciation and amortization and restructuring and special charges (“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. Latest Twelve Month EBITDA Net Debt to Latest Twelve Month EBITDA ratio 24. GUARANTEES For the years ended December 31, 2014 2013 $ 315,976 $ 416,112 1.6 1.3 In the normal course of operations, Yellow Pages Limited has entered into agreements which are customary in the industry that provide for indemnifications and guarantees to counterparties in transactions involving business acquisitions, business dispositions and sale of assets. Yellow Pages 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 Pages Limited. Yellow Pages Limited benefits from directors’ and officers’ liability insurance which it has purchased. No amount has been accrued in the consolidated statement of financial position as at December 31, 2014 and 2013 with respect to these indemnities. The nature of these guarantees prevents Yellow Pages Limited from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. 7 0 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 70 2015-03-06 6:38 PM NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 25. SEGMENTED INFORMATION The Company operates in a single business segment which is to provide Canadian businesses with digital and print media solutions. As at December 31, 2014, Yellow Pages Limited had non-current assets, other than deferred tax assets, held in a foreign country (United States of America) of $3.5 million (2013 - $4.2 million). 26. LIST OF SUBSIDIARIES Principal activity Proportion of ownership December 31, Canada Yellow Pages Digital & Media Solutions Limited1 Digital and print media marketing solutions provider Yellow Pages Homes Limited 411 Local Search Corp.2 4400348 Canada Inc. 3 USA YPG (USA) Holdings, Inc. Publisher of locally-targeted real estate listings Online search engine operator Booking and reservation management system provider Holding company Yellow Pages Digital & Media Solutions LLC Operational support services provider 2014 100% 100% 100% 100% 100% 100% 2013 100% 100% 30% – 100% 100% 1 On January 1, 2015, YPG Financing Inc. amalgamated with Yellow Pages Group Corp., and the amalgamated entity bears the name of Yellow Pages Digital & Media Solutions Limited (refer to Note 1 – Description). 2 On June 1, 2014, the Company acquired the remaining 70% of 411 Local Search Corp. and increased its ownership to 100% (refer to Note 5 – Business acquisitions). As at December 31, 2013, the investment in 411 of 30% was accounted for using the equity method. 3 On December 17, 2014, the Company acquired the shares of 4400348 Canada Inc. (refer to Note 5 – Business acquisitions). 27. RELATED PARTY DISCLOSURES Key management personnel compensation Yellow Pages Limited’s key management personnel have authority and responsibility for planning, directing and controlling the Company’s activities and consist of Yellow Pages Limited’s executive team and the Board of Directors. Total compensation expense for key management personnel, and the composition thereof, is as follows: Salary, fees and other short-term employee benefits Post-employment benefits Stock-based compensation Termination benefits For the years ended December 31 2014 2013¹ $ 7,693 $ 6,209 541 3,656 2,655 499 2,109 5,555 $ 14,545 $ 14,372 1 During 2014, management reassessed its key management personnel. The prior period has been revised to reflect this change in composition. Other related party transactions For the years ended December 31, Sales of good and services Associate Transaction value 2014 2013 Balance outstanding 2014 2013 $ 328 $ 3,479 $ – $ 662 All outstanding balances with this related party were based on arm’s length prices and were settled in cash under standard payment conditions. None of these balances were secured. INT_RA2014_Engl.indd 71 2015-03-06 6:38 PM YELLOW PAGES LIMITED 2014 ANNUAL REPORT 7 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – DECEMBER 31, 2014 (ALL TABULAR AMOUNTS ARE IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT SHARE INFORMATION) 28. COMPARATIVE FIGURES Yellow Pages Limited reclassified certain items in the consolidated statements of cash flows in the cash flows from operating activities section for the comparative period to conform to the current year’s presentation. This reclassification has no impact on the total cash flows from operating activities. 7 2 YELLOW PAGES LIMITED 2014 ANNUAL REPORT INT_RA2014_Engl.indd 72 2015-03-06 6:38 PM Total Debt(in millions of Canadian dollars)$888M $735M$597M2012201320142014Financial & operationalhighlightsREVENUES (in millions of Canadian dollars)DIGITAL REVENUES (in millions of Canadian dollars)% OF REVENUES SOURCED FROM DIGITAL SOLUTIONSEBITDA (in millions of Canadian dollars)EBITDA MARGINFREE CASH FLOW (in millions of Canadian dollars)CUSTOMER COUNTCUSTOMER PENETRATION - YELLOW PAGESTM 360° SOLUTIONCUSTOMER PENETRATION - DIGITALTOTAL DIGITAL VISITSREVENUES (in millions of Canadian dollars)DIGITAL REVENUES(in millions of Canadian dollars)EBITDA(in millions of Canadian dollars)NET DEBT(in millions of Canadian dollars)$971.8M$406.3M$416.1M$533.1M$877.5M (9.7%)$442.8M 9%$316M (24.1%)$494.1M$877.5M $442.8M 50.5%$316M36% $72.6M256,000 36.6% 64%424.1Mof debt repaidin 2014$140M Growing the customer base to promote revenue growth. new customers acquired in 2014A Focus on Returningto GrowthAnnual Report 201422,100YELLOW PAGES LIMITED - 2014 ANNUAL REPORTThis anual report is printed on Rolland Enviro 100, the environmentally responsible choice, because it is processed chlorine free, accredited Eco-Logo and 100% post-consumer. In other words, no new trees have been cut to produce this paper, and all the fibre comes from recycling bins.www.corporate.yp.caYellow Pages has spent the last hundred years enabling connections between businesses and Canadian consumers. Our company’s mission is small and medium-sized business support and, through their success, the growth and prosperity of Canada’s neighbourhood economies. Implemented in 2014, our Return to Growth plan is designed to ensure that this legacy continues by allowing our company to invest in gaining a leadership position within the local digital advertising industry.In its first year, we succeeded in meeting key objectives laid out in our Return to Growth plan. We strengthened brand recognition across Canada, while also delivering Canadian users richer content and experiences across our network of digital search properties. A key milestone was reached in Q3 2014, whereby our digital revenues surpassed those of print for the first time in the company’s history. Our digital revenue growth was supported by targeted strategies to accelerate customer acquisition, the launch of new digital solutions, as well as the implementation of new technologies and processes to deliver an enhanced experience to customers.Additionally, over the course of 2014, we repaid a total of $140 million in debt, returning value to shareholders while retaining our flexibility to continue the necessary investments in our transformation. I’m proud of the commitment and efforts of our employees nationwide, who work tirelessly to deliver the transformation of this company. I am also very appreciative of the ongoing trust and loyalty of our customers Canada-wide and the confidence our shareholders hold in management’s ability to execute upon our long-term strategy. We remain focused, determined and committed to execute on our digital transformation and return Yellow Pages to revenue and profitability growth by 2018. Julien BillotPresident & Chief Executive OfficerWe’re committed to to growth planexecuting our return 20132013201320132014201420142014Annual_report_YPG_2014.indd 9-162015-03-10 1:42 PM

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