yellow pages income fund · 2013. 10. 24. · , , hometrader.ca, , and lespac.com. mission and...

Q2

Yellow Pages Income FundSecond Quarter Report 2009

Period endedJune 30, 2009

Yellow Pages Income Fund16 Place du Commerce, Nuns’ Island

Verdun, Quebec H3E 2A5

www.ypg.com

This quarterly report is printed on Rolland Enviro 100, the envi-ronmental responsible choice, because it is processed chlorine free, accredited Eco-Logo (Environment Canada) and 100% post-consumer. In other words, no trees have been cut to pro-duce this paper, and all the fibre comes from recycling bins.

Head Offi ce16 Place du CommerceNuns’ IslandVerdun, Quebec H3E 2A5

Investor RelationsTelephone: 1 877 YLO-2003 (1 877 956-2003)E-mail: [email protected]

AuditorsDeloitte & Touche LLP

Units ListedToronto Stock Exchange Symbols :

YLO.UN Units YPG.BD Exchangeable Debentures YPG.PR.A Series 1 Cumulative Redeemable First Preferred sharesYPG.PR.B Series 2 Cumulative Redeemable First Preferred shares

Transfer AgentCIBC Mellon Trust Company2001 University StreetSuite 1600Montreal, Quebec H3E 2A6Telephone: 1 800 387-0825E-mail: [email protected]

For further information on Yellow Pages Income Fund,visit our corporate Web site at www.ypg.com.

Table of Contents

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

Interim Consolidated Balance Sheet .........................................................................................36

Interim Consolidated Statements of Earnings ...........................................................................37

Interim Consolidated Statements of Comprehensive Income ...................................................38

Interim Consolidated Statements of Unitholders’ Equity ...........................................................39

Interim Consolidated Statements of Cash Flows.......................................................................40

Notes to the Interim Consolidated Financial Statements......................................................41-56

YELLOW PAGES INCOME FUND Management’s Discussion and Analysis

Management’s Discussion and Analysis August 6, 2009

This management’s discussion and analysis (MD&A) is intended to help the reader understand and assess trends and significant changes in the results of operations and financial condition of Yellow Pages Income Fund and its subsidiaries for the three and six-month periods ended June 30, 2009 and should be read in conjunction with our audited consolidated financial statements, accompanying notes and MD&A for the year ended December 31, 2008, as well as our unaudited interim consolidated financial statements and accompanying notes for the period ended June 30, 2009. Quarterly reports, the annual report and supplementary information can be found under the “financial reports” section of our corporate web site: www.ypg.com. Additional information, including our annual information form (AIF), can be found on SEDAR at www.sedar.com. In this MD&A, the words “we”, “us”, “our”, “the Company”, “the Fund” and “YPG” refer to Yellow Pages Income Fund and its subsidiaries (including Yellow Pages Group Co., Yellow Pages Group, LLC and YPG Directories, LLC (collectively YPG USA), and Trader Corporation), which are reported under the following segments:

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

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

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

These forward-looking statements describe our expectations on August 6, 2009.

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

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

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

Risks that could cause our actual results to differ materially from our current expectations are discussed in section 7 – Risks and Uncertainties. This MD&A is divided into the following sections:

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

SECOND QUARTER REPORT 2009 1


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

Our Business

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

Directories

We are Canada’s largest directories publisher and the exclusive owner of the Yellow Pages™, Pages Jaunes™ Walking Fingers & Design™ and Canada411™ trademarks in Canada. We have been an industry leader since we published our first directory in 1908. YPG publishes annually more than 340 different telephone directories with a total circulation of approximately 30 million copies. With more than 405,000 advertising customers, we manage one of the largest face-to-face sales forces for small and medium-sized enterprises (SMEs) in Canada. We also operate print community directories under the Your Community Phonebook brand name in selected Mid-Atlantic and Southeast American markets.

We are the official publisher of directories for Bell Canada (Bell), TELUS Communications Inc. (TELUS), Bell Aliant Regional Communications LP (Bell Aliant), MTS Allstream Inc. and for a number of other incumbent telephone companies that have a leading share in their respective markets.

We also operate the leading online directories in Canada including YellowPages.ca™, Canada411.ca™ as well as the CanadaPlus.ca™ group of city sites. This complementary online presence allows us to package print and online advertising products and offer them on a national basis.

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

Vertical Media

We are the Canadian leader in Vertical Media through Trader Corporation. Trader has over 160 publications and 20 web sites covering four main product verticals: automotive, real estate, employment, and generalist.

Trader is the leading new and used car destination with its AutoTrader.ca™ web site.

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

Mission and Strategy

Our mission and strategy statements have not changed since the release of our MD&A for the year ended December 31, 2008. Therefore, to review our mission and strategy, please refer to the corresponding sections in the MD&A for the year ended December 31, 2008.

Capability to Deliver Results

Our capability to deliver results has not changed since the release of our MD&A for the year ended December 31, 2008. Therefore, to review our capability to deliver results, please refer to the corresponding sections in the MD&A for the year ended December 31, 2008.

2 SECOND QUARTER REPORT 2009


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

Overall Performance

Adjusted Revenues decreased by $9.4 million or 2.2% over the second quarter of 2008 to $421.2 million. Revenues decreased by $12.9 million or 3 % to $417.5 million in the same period;

Adjusted EBITDA decreased by $9.3 million or 4% over the second quarter of 2008 to $226.1 million. Income from operations before depreciation and amortization and restructuring and special charges decreased by $11.9 million or 5% to $224.1 million in the same period; and

Distributable cash per unit decreased by $0.01 over the second quarter of 2008 to $0.35.

Highlights by Segment 1 (in thousands of Canadian dollars– except unit information) Three-month periods ended June 30, Directories Vertical Media Consolidated 2009 2008 2009 2008 2009 2008Revenues $351,060 $339,878 $66,474 $90,564 $417,534 $430,442Income from operations before

depreciation and amortization and restructuring and special charges $202,750 $203,549 $21,319 $32,432 $224,069 $235,981

Basic earnings per unit $0.23 $0.26Cash flow from operating activities $185,487 $181,839

Adjusted Revenues2 $354,747 $340,056 $66,474 $90,564 $421,221 $430,620Adjusted EBITDA2 $204,802 $203,012 $21,319 $32,432 $226,121 $235,444Distributable cash3 $181,653 $190,942Distributable cash per unit $0.35 $0.36

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

2 Please refer to definitions relative to understanding our results on page 4 of this MD&A and Consolidated Results table on page 6 of this MD&A for a reconciliation of Adjusted Revenues and Adjusted EBITDA.

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

Adjusted Revenues (in millions of dollars)

354.7340.1

66.590.6

0

75

150

225

300

375

450

Q2 2008 Q2 2009

Vertical MediaDirectories

430.6(2.2%)

421.2

Adjusted EBITDA(in millions of dollars)

203 204.8

32.4 21.3

0

50 100

150

200

250

Q2 2008 Q2 2009

Vertical MediaDirectories

235.4(4%)

226.1

Distributable Cash per Unit

$0.36 $0.35

0.00

0.10

0.20

0.30

0.40

Q2 2008 Q2 2009

(2.8%)



Definitions relative to understanding our results

Adjusted Revenues

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

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

Adjusted Income from Operations before Depreciation and Amortization and Restructuring and Special charges (Adjusted EBITDA)

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

As stated, EBITDA is not a calculation based on GAAP and is not considered an alternative to income from operations or net earnings in the context of measuring YPG’s performance. EBITDA does not have a standardized meaning and is therefore not likely to be comparable with similar measures used by other publicly traded companies. For a reconciliation with GAAP, please refer to Consolidated Operating and Financial Results later in this section. EBITDA should not be used as an exclusive measure of cash flow since it does not account for the impact of working capital changes, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed on page 21 of this MD&A.

Distributable Cash

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

Cash Distributions per Unit

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



Performance Relative to Business Strategy

Organic growth

Directories

Customer First

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

Enhancement and expansion of products

Online growth continued to be strong in the second quarter driven by a consistent focus on expanding the strategy related to directory category bundles and continued innovation in online offerings for both the user and the advertiser.

From a consumer perspective we successfully launched YellowPages.ca™ mobile search applications for the iPhone™, Blackberry® and Google™ Android™ smartphones during the second quarter. These applications provide consumers with a user-friendly tool to easily search for local businesses and people from their mobile devices.

The Enhanced Directory Plus bundle (which includes Google AdwordsTM) and our online video product Profile Plus, both of which were launched in 2008, continue to have strong momentum and will remain a focus for the balance of the year. The Showcase bundle which was launched last year also continues to be enthusiastically received by customers. It offers a compelling value proposition by providing advertisers with visibility in both print and online, coupled with increased advertising exposure through a video, additional business information and Google AdwordsTM. The bundle strategy will be further expanded to include pilots, in selected markets, of Silver, Gold and Platinum Showcase bundles that will provide the option of a larger print display ad and thereby improved online ranking. All of the bundles offer multimedia coverage in print, online with yp.ca on YellowPages.ca and search engines as well as through YellowPages.ca’s mobile search applications.

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

Vertical Media

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

The roll-out of the new digital ad-taking system and digitization of sales processes across the country will be completed in 2009 allowing for standardization, productivity gains and ad workflow optimization.

Enhancement and expansion of products

The launch of “Dealer Smart Solutions”, which results from our commercial agreement with Dealer Dot Com, Inc. (Dealer.com), is well underway and sales training has been completed in Ontario, Alberta, Manitoba, Saskatchewan and British Columbia. In Ontario, all TDSR (Trader Dealer Showroom) customers have been converted to the new offering as of the second quarter of 2009. Deployment began in July for Alberta and will begin in August for Manitoba, Saskatchewan and British Columbia. Dealer Smart Solutions expands the breadth of Trader’s online advertising solutions and leverages the investments we have made in developing best in class inventory management systems (TDSR). The new offer includes enhanced inventory management, inventory syndication, dealer web site management, search engine optimization and advertising campaign marketing and tracking tools, all of which are dedicated to promoting the dealership and its inventory. Dealer Smart Solutions offers customers unequalled access to best-in-class online solutions under one fully integrated platform, allowing them to maximize their efficiency and reduce their costs.



Redesign of the home page, results page and new car section of AutoTrader.ca were completed in the second quarter of 2009. Dealer inventory is now accessible via a maximum of two clicks which should improve user satisfaction and advertiser return on investment.

Consolidated Operating and Financial Results

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

Three-month periods ended June 30,

Six-month periods ended June 30,

2009 2008 2009 2008

Revenues $417,534 $430,442 $825,887 $845,013

Operating costs 193,465 194,461 377,955 381,639

Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) 224,069 235,981 447,932 463,374

Depreciation and amortization 34,005 50,860 72,122 106,824

Restructuring and special charges 20,584 - 20,584 -

Income from operations 169,480 185,121 355,226 356,550

Financial charges, net 37,401 30,221 74,957 64,886

Earnings before dividends on Preferred shares, income taxes, share of losses from equity investees and non-controlling interest 132,079 154,900 280,269 291,664

Dividends on Preferred shares 5,687 5,687 11,375 11,375

Earnings before income taxes, share of losses from equity investees and non-controlling interest 126,392 149,213 268,894 280,289

Provision for income taxes 7,898 13,293 18,491 17,264

Share of losses from equity investees 1,589 - 1,411 -

Non-controlling interest 78 234 552 351

Net earnings $116,827 $135,686 $248,440 $262,674

Basic earnings per unit $0.23 $0.26 $0.48 $0.50

Diluted earnings per unit $0.19 $0.24 $0.40 $0.46

Revenues $417,534 $430,442 $825,887 $845,013

Elimination of purchase accounting impact 3,687 178 8,876 736

Adjusted Revenues1 $421,221 $430,620 $834,763 $845,749

Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) $224,069 $235,981 $447,932 $463,374

Elimination of purchase accounting impact 2,052 (537) 4,094 (1,327)

Adjusted EBITDA1 $226,121 $235,444 $452,026 $462,047

Adjusted EBITDA margin 53.7% 54.7% 54.2% 54.6%

Total assets $9,397,527 $9,209,699

Total long-term debt $2,788,330 $2,507,831

1 Adjusted Revenues and Adjusted EBITDA – The acquisitions in the Directories segment were accounted for using the purchase method of accounting which resulted in the elimination of deferred revenues and deferred publication costs related to those directories published prior to each acquisition. These deferred revenues along with related deferred publication costs would have been recognized in 2008 and 2009, had the acquisitions not occurred. As a result, reported revenues and expenses are not representative of revenues and expenses that would have otherwise been reported and are not representative of revenues and expenses that will be reported in subsequent periods.



Online Usage – Unduplicated Unique Visitors (in millions)

9.79.8

0

2

4

6

8

10 12

Q2 2008 Q2 2009

Analysis of Consolidated Operating and Financial Results

Revenues

Revenues decreased by $12.9 million to $417.5 million during the second quarter of 2009 and by $19.1 million to $825.9 million for the six-month period ended June 30, 2009, compared with the same periods last year. The continued economic slowdown in Canada has impacted our revenues, especially in the Vertical Media segment. As such our revenues in Vertical Media decreased by $24.1 million during the second quarter of 2009 and by $41.7 million for the six-month period ended June 30, 2009, compared with the same periods last year. YPG USA contributed $8 million of revenues for the second quarter of 2009, and $15.9 million for the six-month period ended June 30, 2009. Organic online revenue growth reached 23.2% for the second quarter below our growth target of 30% due mainly to lower revenues in the Vertical Media segment. Online revenues from the Directories and Vertical Media segments combined reached $75.2 million in the second quarter of 2009 and $143.8 million for the six months period ended June 30, 2009. Online growth is driven by strong adoption of our online products in both of our segments. Our network of web sites in Directories and Vertical Media attracted 9.7 million unduplicated unique visitors1 on average during the second quarter of 2009. The continuing shift in the media and publishing industries towards more online content continues to place more pressure on our traditional print offerings especially in the Vertical Media segment.

EBITDA

EBITDA decreased by $11.9 million to $224.1 million during the second quarter of 2009, and by $15.4 million to $447.9 million for the six-month period ended June 30, 2009, compared with the same periods last year. The decrease for the period is directly attributable to lower revenues in the Vertical Media segment.

Cost of sales decreased by $2.9 million to $116.7 million during the second quarter of 2009 and by $3.2 million to $229.1 million for the six-month period ended June 30, 2009, compared with the same periods last year. Direct costs decreased as a result of the decline in revenues in the Vertical Media segment while indirect costs were impacted by cost containment initiatives. The cost reduction was partly offset by the cost incurred by YPG USA which was acquired in the third quarter of 2008.

Gross profit margin was relatively stable at 72.1% for the second quarter of 2009 compared to 72.2% for the second quarter in 2008 and at 72.3% for the six-month period ended June 30, 2009 compared to 72.5% for the same period last year.

General and administrative expenses increased by $1.9 million to $76.8 million during the second quarter of 2009 compared with the same period last year, and remained relatively stable at $148.9 million for the six-month period ended June 30, 2009. The increase in general and administrative expenses is mainly attributable to costs at YPG USA.

Depreciation and amortization

Depreciation and amortization decreased by $16.9 million to $34 million during the second quarter of 2009 compared with the same period last year, and decreased by $34.7 million to $72.1 million for the six-month period ended June 30, 2009. The decrease relates to lower amortization of certain intangible assets related to the acquisitions of Trader and Aliant which have been fully amortized, offset by the amortization related to the acquisition of YPG USA.

1 Source: comScore Media Metrix Canada.



Restructuring and special charges

During the second quarter of 2009, we recorded non-recurring charges relating to an internal reorganization, workforce reduction, the termination of certain contractual obligations and other items amounting to $20.6 million.

Financial charges and dividends on preferred shares

Financial charges increased by $7.2 million to $37.4 million during the second quarter of 2009 compared with the same period last year, and increased by $10.1 million to $75 million for the six-month period ended June 30, 2009. The increase is due to the charges related to derivative financial instruments. The effective average interest rate on our debt portfolio as of June 30, 2009 was 5.1%. Dividends on the two series of preferred shares amounted to $5.7 million in the second quarters of 2009 and 2008 and $11.4 million for the six-month periods ended June 30, 2009 and 2008.

Provision for income taxes

The combined effective provincial and federal tax rate was 30.6 % and 31.6% in 2009 and 2008. The Fund recorded tax expenses of 6.4% and 6.9% of the earnings for the second quarter and the six-month period ended June 30, 2009, respectively. The Fund’s subsidiary, YPG LP, is a limited partnership, and as such, is not subject to income taxes whereas YPG LP’s subsidiaries are subject to income tax. The difference between the statutory and the effective tax rates is primarily due to inter-company revenues which are not currently taxable when received by YPG LP.

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

Shares of losses from equity investees

During the second quarter we recorded our share of losses from our equity investments in the amount of $1.6 million.

Net earnings

Net earnings decreased by $18.9 million to reach $116.8 million during the second quarter of 2009 and by $14.2 million to $248.4 million for the six-month period ended June 30, 2009, compared with the same periods last year. The decrease in revenues and the restructuring and special charges have driven the decrease in net earnings.

Analysis of Adjusted Consolidated Operating and Financial Results

Adjusted Revenues

Adjusted Revenues decreased by $9.4 million to $421.2 million in the second quarter of 2009 and by $11 million to $834.8 million for the six-month period ended June 30, 2009, compared to the same periods last year. Despite the contribution of $11.7 million from YPG USA during the second quarter of 2009 and $24.8 million for the six-month period ended June 30, 2009, the decline in adjusted revenues is due to lower revenues in the Vertical Media segment.



Adjusted EBITDA

Adjusted EBITDA decreased by $9.3 million to $226.1 million in the second quarter of 2009, and by $10 million to $452 million for the six-month period ended June 30, 2009, compared to the same periods last year. The decrease is largely due to lower revenues in the Vertical Media segment.

Cost of sales decreased by $2 million to $118.3 million in the second quarter of 2009, and by $0.4 million to $233.9 million for the six-month period ended June 30, 2009, compared to the same periods last year. The decrease is due to lower revenues in the Vertical Media segment as well as cost containment efforts and has been partly offset by the costs incurred by YPG USA which was acquired in the third quarter of 2008.

Gross profit margin was slightly lower at 71.9% in the second quarter of 2009 compared to 72.1% in the second quarter of 2008. Over the six-month period ended June 30, 2009, the gross profit margin decreased to 72% from 72.3% recorded during the same period last year. The decrease is mainly attributable to lower margins in our US directory publishing operations.

General and administrative expenses increased by $1.9 million to $76.8 million in the second quarter of 2009 compared to the same period last year and decreased by $0.5 million to $148.9 million for the six-month period ended June 30, 2009. The increase in general and administrative expenses is mainly attributable to costs at YPG USA.



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

2009 2008 2007

Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3

Revenues $417,534 $408,353 $425,559 $426,141 $430,442 $414,571 $412,566 $416,507

Operating costs 193,465 184,490 194,020 188,348 194,461 187,178 190,670 188,005

Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) 224,069 223,863 231,539 237,793 235,981 227,393 221,896 228,502

Depreciation and amortization 34,005 38,117 45,872 33,369 50,860 55,964 66,826 64,746

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

Income from operations 169,480 185,746 149,442 204,424 185,121 171,429 155,070 163,756

Financial charges, net 37,401 37,556 42,644 34,731 30,221 34,665 33,281 34,164

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

Earnings before dividends on Preferred shares, income taxes, share of losses (earnings) from equity investees and non-controlling interest 132,079 148,190 106,380 165,336 154,900 136,764 121,789 129,592

Dividends on Preferred shares 5,687 5,688 5,687 5,688 5,687 5,688 5,688 5,654

Earnings before income taxes, share of losses (earnings) from equity investees and non-controlling interest 126,392 142,502 100,693 159,648 149,213 131,076 116,101 123,938

Provision for (recovery of) income taxes 7,898 10,593 21 13,379 13,293 3,971 (40,877) 1,703

Share of losses (earnings) from equity investees 1,589 (178) - - - - - -

Non-controlling interest 78 474 182 206 234 117 (70) 98

Net earnings $116,827 $131,613 $100,490 $146,063 $135,686 $126,988 $157,048 $122,137

Basic earnings per unit $0.23 $0.26 $0.19 $0.28 $0.26 $0.24 $0.29 $0.23

Diluted earnings per unit $0.19 $0.21 $0.17 $0.25 $0.24 $0.22 $0.28 $0.22

Revenues $417,534 $408,353 $425,559 $426,141 $430,442 $414,571 $412,566 $416,507

Elimination of purchase accounting impact 3,687 5,189 - 15 178 558 806 1,142

Adjusted Revenues $421,221 $413,542 $425,559 $426,156 $430,620 $415,129 $413,372 $417,649

Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) $224,069 $223,863 $231,539 $237,793 $235,981 $227,393 $221,896 $228,502

Elimination of purchase accounting impact 2,052 2,042 (115) (312) (537) (790) (875) (857)

Adjusted EBITDA $226,121 $225,905 $231,424 $237,481 $235,444 $226,603 $221,021 $227,645

Adjusted EBITDA margin 53.7% 54.6% 54.4% 55.7% 54.7% 54.6% 53.5% 54.5%



Adjusted Revenues throughout 2007 and 2008 reflect sustained organic growth in our Directories segment quarter over quarter. In addition, Adjusted Revenues were favourably impacted by the acquisitions of Vertical Guides LP on October 31, 2007 and YPG USA on September 5, 2008. For the fourth quarters of 2007 and 2008, revenues in Vertical Media were lower than their respective third quarters due to the seasonality of certain Vertical Media publications. In addition, revenues and Adjusted Revenues for the third and fourth quarters of 2008 were lower than the second quarter of 2008 due to lower revenues in the Vertical Media segment being negatively impacted by adverse economic conditions. Revenues for the first and second quarters of 2009 reflect continuing pressure on revenues resulting from the economic downturn facing our industry especially in our Vertical Media segment.

In 2007 and 2008, the improvement in Adjusted EBITDA margins highlights the synergies realized through the integration of acquired businesses and our cost containment initiatives. The decrease in the fourth quarter of 2007 and 2008 is attributable to the seasonality of certain Vertical Media publications. Furthermore the results for the first and second quarters of 2009 were negatively impacted by the economic downturn affecting our business.

Net earnings were affected by purchase accounting and are not comparable quarter over quarter. In addition, an adjustment to reflect the enactment of lower future income taxes was made during the fourth quarter of 2007 and restructuring and special charges were recorded during the fourth quarter of 2008 and the second quarter of 2009.

Segmented Information – Directories

Key Performance Indicators

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

During the second quarter of 2009, we have continued to observe a more cautious behaviour from advertisers due to the adverse economic conditions they are experiencing. In this environment, we expect revenue growth from our online product offerings to continue, but also expect cyclical revenue pressure to remain in our traditional print offerings. Given the current economic climate we reported in the first quarter that, we do not expect to meet our Revenue and EBITDA targets for the Directories segment in 2009. Please refer to Section 5 – Outlook for a more thorough discussion.

Adjusted Revenues grew organically below our 2009 target range for the second quarter of 2009 at 0.9%. Adjusted Revenues including revenues from YPG USA grew by 4.3%. The adjusted revenue growth reflects a lower than expected performance in the print category. Our objective of providing our customers with high quality leads through compelling print and online bundles continues to support increased online penetration of the print advertiser base and to drive strong internet revenue growth. While directory revenues benefit from some level of diversification across multiple headings and regional geographies, a slowing of the economy and what we believe to be a generalized reduction in advertising spending mitigated revenue growth and impacted EBITDA. Adjusted EBITDA increased by 0.9%. Our Adjusted EBITDA grew below our 2009 target range for the second quarter of 2009. During the second quarter of 2009, the Company recorded non-recurring expenses amounting to $4.3 million. These represent non-recurring costs associated with the current economic conditions. Excluding this non-recurring expense, Adjusted EBITDA grew by 3 %. Please refer to Section 5 – Outlook for a discussion of our 2009 revised targets.



Adjusted Revenues (in millions of dollars)

340.1 354.7

0

50 100

150

200

250

300

350

400

Q2 2008 Q2 2009

4.3%

Operating and Financial Results

Operating Results1 (in thousands of Canadian dollars)


Six-month periods endedJune 30,

2009 2008 2009 2008

Revenues $351,060 $339,878 $699,859 $677,309

Operating costs 148,310 136,329 289,309 269,584




Income from operations $158,825 $160,476 $334,363 $318,252

Revenues $351,060 $339,878 $699,859 $677,309

Elimination of purchase accounting impact 3,687 178 8,876 736

Adjusted Revenues $354,747 $340,056 $708,735 $678,045

Income from operations before depreciation and amortization and restructuring and special charges (EBITDA) $202,750 $203,549 $410,550 $407,725

Elimination of purchase accounting impact 2,052 (537) 4,094 (1,327)

Adjusted EBITDA $204,802 $203,012 $414,644 $406,398

1 See Note 18 - Segmented Information of the interim consolidated financial statements of the Company for the period ended June 30, 2009.

Analysis of Operating and Financial Results

Revenues and Adjusted Revenues

Revenues increased by $11.2 million to $351.1 million during the second quarter of 2009 and by $22.6 million to reach $699.9 million for the six-month period ended June 30, 2009, compared with the same periods last year. Excluding the effect of purchase accounting, Adjusted Revenues increased by $14.7 million to $354.7 million during the second quarter of 2009, and by $30.7 million to $708.7 million for the six-month period ended June 30, 2009, compared with the same periods last year. Organic growth amounted to $2.9 million or 0.9% for the second quarter of 2009, and $5.9 million or 0.9% for the six-month period ended June 30, 2009 driven by continued growth in online revenues. As of June 30, 2009 the number of directories customers choosing to advertise both in print and online reached 61% across Canada compared to 57% for the corresponding period last year. YPG USA contributed

Adjusted EBITDA(in millions of dollars)

204.8203

0

50

100

150

200

250

Q2 2008 Q2 2009

0.9%



$8 million of revenues and $11.7 million of adjusted revenues for the second quarter of 2009 and $15.9 million of revenues and $24.8 million of adjusted revenues for the six-month period ended June 30, 2009.

EBITDA and Adjusted EBITDA

EBITDA decreased by $0.8 million to $202.8 million in the second quarter of 2009 and increased by $2.8 million to reach $410.6 million for the six-month period ended June 30, 2009, compared with the same periods last year. Excluding the effect of purchase accounting, Adjusted EBITDA increased by $1.8 million to $204.8 million in the second quarter of 2009 and by $8.2 million to $414.6 million for the six-month period ended June 30, 2009, compared with the same periods last year. The increases result mainly from our cost containment efforts in the supply chain and as a result of the creation of a center of excellence in our publishing operations.

Cost of sales amounted to $85.6 million in the second quarter of 2009 compared with $77.5 million for the same period last year. In the first six months of 2009, cost of sales was $169.2 million compared to $152.5 million for the first six months of 2008. Excluding the effect of purchase accounting, cost of sales increased in the second quarter of 2009 to $87.2 million compared with $78.2 million for the same period last year. In the first six months of 2009, cost of sales increased to $173.9 million compared to $154.5 million for the same period last year. These increases are due to our new operations in the USA which are partly offset by the results of our cost containment efforts.

Gross profit margin was lower at 75.6% in the second quarter of 2009 compared to 77.2% for the same period last year and 75.8% for the six-month period ended June 30, 2009 compared to 77.5% for the same period last year. Excluding the effect of purchase accounting, gross profit margin was 75.4% in the second quarter of 2009 compared to 77% for the same period last year and 75.5% for the six-month period ended June 30, 2009 compared to 77.2% for the same period last year. The lower margins are attributable to the impact of the publishing operations of YPG USA where margins are significantly lower than in Canada.

General and administrative expenses in the second quarter of 2009 increased by $3.9 million to $62.8 million and by $3 million to $120.1 million for the six-month period ended June 30, 2009, compared with the same periods last year. The increase reflects the costs associated with YPG USA acquired in the third quarter of 2008 and the non-recurring bad debt expense associated with the current economic climate offset by our cost containment efforts in the three and six-month periods ended June 30, 2009.


Depreciation and amortization decreased from $43.1 million in the second quarter of 2008 to $28.8 million in the second quarter of 2009. Over the first six months of 2009, when compared to the same period last year, depreciation and amortization decreased to $61 million from $89.5 million. The decrease in the three-month and six- month periods ended June 30, 2009 compared to the same periods last year is due to the lower amortization of intangible assets of Aliant and MTS which were respectively acquired in 2007 and 2006, offset by the amortization related to the acquisition of YPG USA. Excluding the effect of purchase accounting, depreciation and amortization was $10.5 million for the second quarter of 2009, down from $11.4 million for the second quarter of 2008 and $20.6 million for the six-month period ended June 30, 2009 compared to $22.5 million for the same period last year.

Restructuring Initiatives

During the second quarter of 2009, we undertook additional restructuring initiatives to further improve our operational capabilities. As a result of an internal reorganization, workforce reductions and the termination of certain contractual obligations, the Fund recorded restructuring and special charges of $15.2 million in the second quarter.



Segmented Information – Vertical Media

Key Performance Indicators

Each year, we set targets to advance our goals and drive results similarly to the Directories segment. The targets were established in August 2008 based on our economic and business outlooks for 2009 at that time. We did not expect the Canadian macroeconomic conditions to deteriorate and persist or their impact to be as significant. We considered third party expectations regarding Canadian advertising trends as well as expected migration from print to online advertising solutions for advertisers. In the second quarter, approximately 36.5% of Vertical Media revenues were generated from online products. However, we continued to experience pressure in our traditional print offerings. Given these results and the current economic climate, we reported in the first quarter that we do not expect to meet our Revenue and EBITDA targets for the Vertical Media segment in 2009.

For the second quarter, revenues were lower by 22.4%, excluding US operations sold in October 2008, publications that were discontinued, and ad centers that were closed in late 2008. The adverse economic conditions which have prevailed throughout the second quarter impacted our ability to generate revenue growth consistent with our objectives. In our largest vertical, automotive, representing two-thirds of Trader revenues, reduced spending on vehicle advertising reflected the economic environment which impacted vehicle sales as potential buyers limited their spending. In the real estate vertical, representing approximately 19% of revenues, advertising continues to be impacted by the reduced activity in the new homes and condos market which is down in all regions across Canada. Despite significant cost savings from our cost containment initiatives. EBITDA decreased by 34.3%, below our target range for the second quarter, as a result of the accelerated revenue shortfall. Please refer to Section 5 – Outlook for a discussion of our 2009 revised targets.

Operating and Financial Results

Operating Results1 (in thousands of Canadian dollars)



2009 2008 2009 2008

Revenues $66,474 $90,564 $126,028 $167,704

Operating costs 45,155 58,132 88,646 112,055




Income from operations $10,655 $24,645 $20,863 $38,298

1 See Note 18 – Segmented Information of the interim consolidated financial statements of the Company for the period ended June 30, 2009.



Analysis of Operating and Financial Results

Revenues

Revenues from our Vertical Media segment amounted to $66.5 million in the three-month period ended June 30, 2009 compared to $90.6 million for the same period last year representing a 26.6% decrease. Revenues for the six-month period ended June 30, 2009 amounted to $126 million compared to $167.7 million for the same period last year, representing a decline of 24.9%. Excluding the impact of the U.S. operations sold in October 2008, the revenue decline for the quarter ended June 30, 2009, is attributable to lower revenues across all product verticals and all regions.

Given that the majority of Trader revenues reside in the Vehicle and Real Estate verticals and that these sectors continue to experience significant downward pressure, advertising expenditures have also been correspondingly reduced. Consequently, as a result of the revenue performance, EBITDA contracted in the quarter. Significant cost containment efforts were executed in the latter part of 2008 and in the first half of 2009 which should position us for a future economic recovery.

EBITDA

EBITDA decreased by $11.1 million to $21.3 million for the second quarter of 2009 and decreased by $18.3 million to $37.4 million for the six-month period ended June 30, 2009, compared to the same periods last year due to lower revenues.

Cost of sales decreased to $31.1 million for the second quarter of 2009 compared to $42.1 million for the same period last year. For the six-month period ended June 30, 2009, cost of sales was $59.9 million compared to $79.8 million for the same period last year. These results directly relate to the decline in revenues and are a reflection of our cost containment efforts with respect to our call center operations as well as optimization of circulation and distribution capabilities for our print publications.

Gross profit margin remained relatively stable at 53.2% for the second quarter of 2009 compared to 53.5% for the same period last year and unchanged at 52.4% for the six-month period ended June 30, 2009 compared the same period last year.

General and administrative expenses amounted to $14 million in the second quarter of 2009 compared to $16 million for the same period last year. For the six-month period ended June 30, 2009, general and administrative expenses were $28.7 million compared to $32.2 million for the same period last year. The reduction is a reflection of our cost containment initiatives.


Depreciation and amortization amounted to $5.2 million in the second quarter of 2009 compared to $7.8 million for the same period last year and $11.1 million for the six-month period ended June 30, 2009 compared to $17.4 million for the same period last year. Excluding the effect of purchase accounting, depreciation and amortization was $4.9 million for the second quarter of 2009 compared to $4.6 million for the same period last year, and $10.5 million for the first six months of 2009 compared to $7.5 million for the same period last year due to higher amortization of software.

Restructuring initiatives

During the second quarter of 2009, we continued to make progress in positioning Trader for future growth and profitability by planning and executing initiatives to optimize our call centres and the circulation and distribution for our print publications. As a result, the Fund recorded restructuring and other special charges of $5.4 million during the quarter.



3. Liquidity and Capital Resources

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

Financial Position

Capital Structure (in thousands of Canadian dollars)

As at June 30, 2009 As at December 31, 2008

Cash and cash equivalents $63,743 $25,054

Medium Term Notes 1,855,766 2,051,370

Exchangeable Debentures 288,070 285,470

Credit facilities 250,000 358,700

Commercial paper 388,000 -

Obligations under capital leases 8,272 13,786

Long-term debt, including current portion $2,790,108 $2,709,326

Net debt (net of cash and cash equivalents) $2,726,365 $2,684,272

Preferred shares 489,499 489,072

Net debt and Preferred shares (net of cash and cash equivalents) 3,215,864 3,173,344

Unitholders’ equity 5,503,769 5,561,492

Total capitalization including Preferred shares $8,719,633 $8,734,836

Net debt to total capitalization 31.3% 30.7%

Net debt and Preferred shares to total capitalization 36.9% 36.3%

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

Net Debt to Latest Twelve Month Adjusted EBITDA1

2.9 x

0.0

0.8

1.5

2.3

3.0

3.8

Dec. 31, 2008 June 30, 2009

Ratio

3.0x

Capital Structure(in millions of dollars)

2,684

5,561 5,504

2,726

489 489

0

2,000

4,000

6,000

8,000

10,000

Dec. 31, 2008 June 30, 2009

EquityPreferred SharesNet Debt

31.3%

30.7%



As at June 30, 2009, YPG had approximately $2.7 billion of debt net of cash and cash equivalents, or $3.2 billion including preferred shares which was higher than the net debt position as at December 31, 2008. The increase in net debt and preferred shares during the quarter results from capital deployed for investments, the purchase of restricted units under the long-term incentive plan, offset by positive operating free cash flow (net of distributions). The net debt to Latest Twelve Month Adjusted EBITDA1 ratio as of June 30, 2009 was 3.0 times, compared to 2.9 times as of December 31, 2008. The net debt and preferred shares to Latest Twelve Month Adjusted EBITDA1 ratio was at 3.5 times as of June 30, 2009. The net debt to total capitalization was at 31.3% compared to 30.7% as of December 31, 2008, while the net debt and preferred shares to total capitalization stood at 36.9% as of June 30, 2009 compared to 36.3% as of December 31, 2008.

Credit Facilities and Commercial Paper Program

As at August 6, 2009, YPG has in place two senior unsecured credit facilities (the Credit Facilities) totalling $800 million consisting of:

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

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

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

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

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

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

YPG Holdings Inc., a subsidiary of YPG, maintains a commercial paper program with an authorized limit of $500 million. The Principal Revolving Facility serves as a back-up facility for the program. During the second quarter of 2009, the Company continued to take advantage of improved conditions in the Canadian money markets to issue commercial paper to replace drawings under its Principal Revolving Facility and to fund its short term liquidity requirements. As at June 30, 2009, there was $388 million of commercial paper outstanding (no amount was outstanding at December 31, 2008). As of June 30, 2009, there was no amount drawn under the Principal Revolving Facility, compared to $358.7 million drawn as at December 31, 2008.

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




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

YPG was in compliance with all of its debt covenants as at June 30, 2009.

Medium Term Note Program

YPG Holdings Inc. had a total of $1.9 billion of notes outstanding under its Medium Term Note program as of June 30, 2009 with varying maturity dates between 2011 and 2036. The Medium Term Notes Series 1 in the amount of $450 million matured in April 2009 and were repaid using proceeds from the new revolving facility as described above. The next maturity of Medium Term Notes is the Series 6 notes in the amount of $150 million maturing in February 2011.

On June 25, 2009, YPG Holdings Inc. issued Medium Term Notes Series 7 for gross proceeds of $260 million maturing on February 2, 2015. These notes bear interest at 7.30% and were issued at par. Of the net proceeds $200 million was used to reduce indebtedness under the New Credit Facility while the balance was used to reduce commercial paper indebtedness as well as for general corporate purposes. As at June 30, 2009, indebtedness under the New Credit Facility stood at $250 million.

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

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

Medium Term Notes Series 7, 8 and 9 were issued under our Short Form Base Shelf Prospectus dated June 20, 2008. This prospectus has a life of 25 months and a remaining balance of $485 million. The recent long-term debt issuances are consistent with our past financing practices, our objective being to refinance drawings under the New Credit Facility with longer term funded debt or through the issuance of other capital market securities.

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

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

During the second quarter of 2009, the Company also repurchased for cancellation $2.5 million face value of Medium Term Notes Series 2, maturing in 2014 with a coupon of 5.71%.




Exchangeable Unsecured Subordinated Debentures

YPG Holdings Inc. has a total of $300 million of Exchangeable Unsecured Subordinated Debentures outstanding (the Exchangeable Debentures). The Exchangeable Debentures have a maturity date of August 1, 2011 and are exchangeable at any time, at the option of the holder, for units of the Fund at an exchange price of $20.00 per unit. The Exchangeable Debentures are redeemable at par at the option of YPG Holdings Inc. after August 1, 2009, subject to certain restrictions. The Exchangeable Debentures also provide YPG Holdings Inc. with the option to repay the principal and interest in units of the Fund. An amount of approximately $13 million, representing the value of the exchange option, has been classified as a component of Unitholders’ equity on the balance sheet.

Cumulative Redeemable Preferred Shares

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

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

On June 9, 2009, the Fund received approval from the Toronto Stock Exchange on its notice of intention to make a normal course issuer bid for its first preferred shares through the facilities of the Toronto Stock Exchange from June 11, 2009 to June 10, 2010, in accordance with applicable regulations of the Toronto Stock Exchange. Under its normal course issuer bid, the Fund intends to purchase for cancellation up to 1,200,000 and 800,000 of its outstanding Preferred Shares Series 1 and 2, respectively. These figures represent 10% of the public float of each series of preferred shares outstanding on June 9, 2009. Since June 11, 2009, 8,800 Preferred Shares Series 1 and 12,600 Preferred Shares Series 2 were repurchased at average prices of $22.47 and $17.43, respectively. The total cost of repurchasing preferred shares in the second quarter of 2009 amounted to $0.4 million, including brokerage fees.

Liquidity

As part of its capital structure guidelines, YPG remains committed to maintaining adequate liquidity at all times. To this end, YPG has access to committed bank lines, and has been proactive in increasing its liquidity and capital resources. As at June 30, 2009, YPG maintained two credit facilities totalling $950 million, providing sufficient liquidity to fund its operations.

Following the debt issuances in June and July 2009, the remaining balance of $250 million of the New Credit Facility was repaid and cancelled.

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

As a result of these financing activities, the Company currently maintains $800 million of credit facilities. On June 30, 2009, cash and cash equivalents amounted to $63.7 million. In addition to cash and cash equivalents, YPG Holdings Inc. may issue additional notes amounting to $112 million under its commercial paper program and access another $200 million under its Principal Revolving Facility. Alternatively, if additional notes are not issued under the commercial paper program, YPG Holdings may access the full $312 million available under its Principal Revolving Facility.



Unit data

As at August 6, 2009 outstanding unit data was as follows:

Outstanding Unit Data As at June 30 and August 6, 2009 As at December 31, 2008

Units outstanding 518,035,546 518,301,059

Options outstanding 393,125 394,912

The units are voting and participate equally in the income, losses and capital distributions of the Fund. In February 2006, 19,000,000 Exchangeable Units of YPG LP (exchangeable for units of the Fund) were issued as a partial consideration for the acquisition of Trader Media Corp. (TMC), one of two companies from which we have built our Vertical Media business. As at December 31, 2008, 8,185,000 Exchangeable Units of YPG LP had been exchanged for an equal number of Units of the Fund. On March 30, 2009 and on April 9, 2009, 1,000,000 and 1,100,000 Exchangeable Units of YPG LP were exchanged for an equal number of Units of the Fund, respectively. As a result, at August 6, 2009, 8,715,000 Exchangeable Units of YPG LP remain outstanding. The units underlying the outstanding Exchangeable Units of YPG LP are included in the outstanding unit data.

No options were granted following the inception of the Fund.

YPG Holdings Inc. also has a total of $300 million of Exchangeable Debentures which are exchangeable at any time, at the option of the holder into units of the Fund at an exchange price of $20.00 per unit.

YPG Holdings Inc. has also issued 12,000,000 Preferred Shares Series 1 for gross proceeds of $300 million and 8,000,000 Preferred Shares Series 2 for gross proceeds of $200 million. Both series of preferred shares are redeemable by the issuer under certain conditions through the issuance of units of the Fund. Under normal course issuer bid program in effect since June 11, 2009, Preferred Shares Series 1 and 2 were purchased for cancellation in June 2009. As at June 30, 2009, there were 11,991,200 Preferred Shares Series 1 and 7,987,400 Preferred Shares Series 2 outstanding.

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

Contractual Obligations and Other Commitments

Contractual obligations (in thousands of Canadian dollars)

Payments due for the periods ending December 31

Total 6 months 1 – 3 years 4 – 5 years After 5 years

Long-term debt1,2 $2,795,500 $- $1,088,000 $297,500 $1,410,000

Obligations under capital leases 8,272 999 5,494 1,767 12

Preferred shares2 499,465 - 299,780 - 199,685

Operating leases 180,680 12,803 67,082 39,835 60,960

Purchase obligations 16,423 10,117 3,181 250 2,875

Total contractual obligations $3,500,340 $23,919 $1,463,537 $339,352 $1,673,532

1 Including Exchangeable Debentures 2 Principal amount



Obligations under capital leases

We enter into capital lease agreements for office equipment and software. As of June 30, 2009, minimum payments under these capital leases up to 2015 totalled $8.3 million.

Operating leases

We rent our premises and equipment under various operating leases. As of June 30, 2009, minimum payments under these operating leases up to 2019 totalled $180.7 million.

Purchase obligations

We use the services of outside suppliers to distribute our directories and have entered into long-term agreements with a number of these suppliers. These agreements expire between 2009 and 2038. As at June 30, 2009, we have an obligation to purchase services for $16.4 million over the next five years and thereafter. Cash from operations will be used to meet these purchase obligations.

Sources and Uses of Cash

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

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



2009 2008 2009 2008

Cash flow from operating activities

Cash flow from operations $162,728 $198,614 $344,490 $389,934

Change in operating assets and liabilities 22,759 (16,775) 38,415 (62,757)

$185,487 $181,839 $382,905 $327,177

Cash flow used in investing activities

Acquisition of equity investments $(2,800) $- $(47,698) $-

Business acquisition, net of cash acquired and bank indebtedness assumed (25,189) - (25,189) (17,250)

Acquisition of fixed assets (12,313) (11,787) (24,802) (23,915)

Acquisition of intangibles (246) (100) (246) (100)

Proceeds from lease inducements - 40 33 40

$(40,548) $(11,847) $(97,902) $(41,225)

Cash flow used in financing activities

Issuance of long-term debt $562,000 $49,600 $699,300 $104,655

Repayment of long-term debt (510,836) (17,322) (611,880) (17,322)

Distributions to Unitholders (134,150) (148,989) (284,683) (298,807)

Repurchase of Units - (54,115) (13,382) (54,115)

Other (31,036) 1,327 (35,310) (19,988)

$(114,022) $(169,499) $(245,955) $(285,577)



Cash flow from operating activities

Cash flow from operating activities increased from $181.8 million in the second quarter of 2008 to $185.5 million in the second quarter of 2009, and to $382.9 million in the six-month period ended June 30, 2009 from $327.2 million in the same period last year. Cash flow from operations decreased by $35.9 million and $45.4 million for the three-month and six-month periods ended June 30, 2009, respectively. The decrease reflects lower Adjusted EBITDA contribution generated through our operations as a result of lower revenues and the restructuring and special charge. The increase in operating assets and liabilities for the second quarter of 2009 was $39.5 million when compared to the same period last year and $101.2 million for the six-month period ended June 30, 2009 compared to same period last year. These changes are mainly due to the timing of the payment of certain accounts payable and accrued liabilities as reflected on our balance sheet.

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

Cash flow used in investing activities

Cash used in investing activities increased during the second quarter of 2009 from $11.8 million in 2008 to $40.5 million in 2009, and to $97.9 million in the six-month period ended June 30, 2009 from $41.2 million in the same period last year. During the first quarter of 2009, the Fund made an investment in Dealer.com representing a total cash outflow of $44.9 million. During the second quarter of 2009, the Fund exercised its option to acquire the remaining 50% interest in LesPAC in which the Fund already had a 50% ownership representing a total cash outflow of $25.2 million. Acquisition of fixed assets also increased during the second quarter of 2009 from $11.8 million in 2008 to $12.3 million, and to $24.8 million in the sixth-month period ended June 30, 2009 from $23.9 million in the same period last year as described below. In 2008, we acquired the directory assets of TbayTel for $17.3 million.

Acquisition of Fixed Assets, Net of Lease Inducements (in thousands of Canadian dollars) Three-month periods ended June 30, Six-month periods ended June 30,

2009 2008 2009 2008

Transition capital $2,254 $- $4,499 $-

Maintenance 4,256 5,313 7,219 10,528

New initiatives 5,855 5,277 10,408 9,461

Leasehold improvements, net of lease inducements 613 748 711 1,081

Total $12,978 $11,338 $22,837 $21,070

Adjustment to reflect expenditures on a cash basis (665) 409 1,932 2,805

Acquisition of fixed assets, net of lease inducements $12,313 $11,747 $24,769 $23,875

Transition Capital – Amounts in 2009 relate to the acquisition of YPG USA. No such expenses were incurred in 2008. We expect to deploy Transition Capital related to the YPG USA acquisition up to mid-2010 of approximately $10 million.

Maintenance capital expenditures decreased from $5.3 million in the second quarter of 2008 to $4.3 million in the second quarter of 2009, and to $7.2 million for the six-month period ended June 30, 2009 compared with $10.5 million for the same period last year. The lower investments reflect reduced spending mainly in the Vertical Media segment.



Capital spending for new initiatives increased to $5.9 million for the second quarter of 2009 compared with $5.3 million for the second quarter of 2008 and to $10.4 million for the six-month period ended June 30, 2009 compared with $9.5 million for the same period last year. The increase is due to the launch of new product initiatives such as My Virtual Paper and Dealer Smart Solutions.

There were no meaningful leasehold improvement projects during the quarter.

Total capital expenditures for the second quarter of 2009 amounted to $13 million and were in line with expectations.

Cash flow used in financing activities

The lower level of cash distributions per unit compared to the same quarter last year, combined with a reduced number of units outstanding, resulted in a decrease in distributions to unitholders from $149 million in the second quarter of 2008 to $134.2 million in the second quarter of 2009, and from $298.8 million in the first six months of 2008 to $284.7 million in the first six months of 2009.

Off-Balance Sheet Arrangements

(See Notes 21 and 26 of the Consolidated Financial Statements of the Company for the year ended December 31, 2008).

Financial and Other Instruments

(See Note 24 of the Consolidated Financial Statements of the Company for the year ended December 31, 2008).

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

Derivative Instruments

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

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

On June 1, 2009, the Fund discontinued hedge accounting on the first tranche and on June 19, 2009, the Fund discontinued hedge accounting on the second tranche. The Fund continues to hold the swaps as it continues to have the floating rate exposure under its commercial paper program. Please refer to Note 7 of the Financial Statements for further details.

In February 2009, the Fund entered into additional floating to fixed interest rate swaps to fix the rate on its floating rate exposure to the Canadian Banker’s acceptance rate. The Fund will pay a fixed rate of interest of between 0.73% and 0.74% and receive a floating rate corresponding to the Banker’s acceptance rate on an amount of $200 million between April 21, 2009 and December 21, 2009. As at June 30, 2009, these interest rate swaps met the criteria for hedge accounting. On July 22, 2009, the interest rate swaps were unwound concurrently with the repayment of the New Credit Facility for an amount of $0.3 million.



Taking into consideration the debt instruments outstanding, the preferred shares, the cash and the above-mentioned derivative instruments, our fixed-to-floating ratio was 98% fixed rate as at June 30, 2009. While the counterparties of these agreements expose YPG to credit losses in the event of non-performance, we believe that the possibility of incurring such losses is remote. This is due to the creditworthiness of all counterparties, all of whom are highly-rated Canadian chartered banks.

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

The carrying value of outstanding interest rate derivatives was a liability of $3.5 million and the carrying value of embedded derivatives was an asset of $1.9 million on June 30, 2009. The carrying value is calculated as is customary in the industry using discounted cash flows with quarter-end market rates. For the second quarter of 2009, we reported an unrealized loss of $0.9 million (2008 – $5 million gain) on derivatives, excluding the loss on derivatives designated as cash flow hedges in prior periods transferred to earnings in the period.



4. Distributable Cash

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

Distributable Cash (in thousands of Canadian dollars)



2009 2008 2009 2008

Cash flow from operating activities $185,487 $181,839 $382,905 $327,177

Operating non-cash items1 (2,159) (5,079) (3,421) (10,889)

Change in operating assets and liabilities2 (22,759) 16,775 (38,415) 62,757

Maintenance capital expenditures3 (4,256) (5,313) (7,219) (10,528)

Restructuring and special charges4 20,584 - 20,584 -

Other5 4,756 2,720 7,665 5,444

Distributable cash $181,653 $190,942 $362,099 $373,961

Weighted average number of units outstanding 512,153,331 526,113,061 512,991,928 528,078,713

Distributable cash per unit6 $0.35 $0.36 $0.70 $0.71

Distributions declared $118,195 $148,538 $268,527 $298,376

Distributions declared per unit $0.23 $0.28 $0.52 $0.57

Payout ratio7 66% 78% 74% 80%

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

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

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

4 Restructuring and special charges are excluded from the calculation as they do not reflect the ongoing operations of the business. 5 Includes amounts related to non-controlling interest in LesPAC, investments subject to significant influence, tax related amounts

and other amounts that do not reflect the ongoing operations of the business. 6 Please refer to Section 2 – Highlights by Segment for the calculation of Basic earnings per unit. 7 The level of distributions paid is reviewed periodically to take into account the current and prospective performance of the

business and other items considered to be prudent. See the section Distribution Policy.



Distributable Cash (in thousands of Canadian dollars) Three-month

period ended June 30,

Six-month period ended

June 30, Previously completed

fiscal years

2009 2009 2008 2007

Cash flow from operating activities $185,487 $382,905 $692,356 $695,540

Net earnings $116,827 $248,440 $509,227 $527,709

Actual cash distributions declared $(118,195) $(268,527) $(599,930) $(581,986)

Excess of cash flows from operating activities over cash distributions declared $67,292 $114,378 $92,426 $113,554

Shortfall of net earnings over cash distributions declared $(1,368) $(20,087) $(90,703) $(54,277)

Impact of purchase accounting on net earnings $18,514 $40,980 $122,981 $166,592

Excess of net earnings over cash distributions declared excluding impact of purchase accounting $17,146 $20,893 $32,278 $112,315

Distributions declared exceeded net earnings by $1.4 million for the three-month period ended June 30, 2009 and $20.1 million for the six-month period ended June 30, 2009. The Fund does not use net earnings as a basis to calculate distributions. Net earnings in accordance with GAAP include expenses which do not affect cash such as amortization of non-compete agreements, customer contracts and customer relationships and software. As a result of our acquisitions over the past several years, our net earnings have been affected by purchase accounting, resulting in an increased amount of amortization related to the acquired intangibles. The costs of these intangible assets are included in the purchase price but there are no future cash outflows associated with maintaining these intangible assets. If we exclude the impact of purchase accounting, net earnings exceeded distributions declared by $17.1 million and $20.9 million for the three-month and six-month periods ended June 30, 2009, respectively.

Cash distributions declared were lower than distributable cash resulting in a payout ratio of 66% for the three-month period ended June 30, 2009, and 74% for the six-month period ended June 30, 2009. The level of distributions declared is reviewed periodically to take into account the current and prospective performance of the business and other items considered to be prudent.

Distributable cash

Distributable cash decreased from $190.9 million in the second quarter of 2008 to $181.7 million in the second quarter of 2009 and from $374 million in the six-month period ended June 30, 2008 to $362.1 million for the same period this year. The decrease is mainly due to lower EBITDA for the second quarter of 2009.

Distributable cash per unit decreased from $0.36 in the second quarter of 2008 to $0.35 for the second quarter of 2009. For the six months of 2009, it was $0.70 compared to $0.71 for the same period last year. This decrease represents a retraction of 2.8% for the second quarter of 2009 and 1.4% for the six-month period ended June 30, 2009.

The Fund’s cumulative distributable cash since its Initial Public Offering (“IPO”) in August of 2003 to June 30, 2009 is approximately $3.3 billion, or $7.04 per unit. Total distributions declared during the same period reached approximately $2.8 billion, or $6.00 per unit representing a cumulative payout ratio of 85%.



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

Our long-term debt management strategy is to refinance our funded debt at maturity. Our funded debt portfolio currently has an average term of approximately 7.5 years. We are reasonably assured that we will be able to refinance these obligations given our previously demonstrated access to capital markets, our commitment to investment grade credit ratings, and adequate liquidity under our existing credit facilities.

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

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

Furthermore, our Medium Term Note program and our Exchangeable Unsecured Subordinated Debentures, which represent $1.9 billion of our total long-term debt portfolio as of June 30, 2009, do not provide for any contractual limitations on the distribution of cash.

Distributions declared per unit

Distributions declared per unit decreased from $0.57 in the first six-month period of 2008 to $0.52 for the same period in 2009 as a result of the decrease in distributions per unit on an annualized basis in May 2009.

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

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

On October 31, 2006, the Federal Minister of Finance announced that income other than taxable dividends earned by existing publicly-traded income trusts (or other flow-through entities) such as the Fund, would be taxed beginning in 2011 (October 31, 2006 Announcement). To effect this, the Minister introduced Bill C-52 which received Royal Assent on June 22, 2007. The Bill contained what has become known as the “SIFT Rules” to bring these tax changes into force.

During the four-year interim period, income trusts will be subject to growth guidelines issued by the Federal Department of Finance (the Normal Growth Guidelines). Growth will be measured by the amount of equity issued by the Fund, to benefit from the deferred application of the new tax regime to 2011. Please refer to Section 7 – Risks and Uncertainties: Income Tax Matters of our MD&A for the year ended December 31, 2008 for more details on the SIFT Rules.

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

Distribution policy

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



5. Outlook The development and execution of our corporate strategy and operating plans continue to be guided by our vision of "Connecting Buyers and Sellers”. Each year, we establish targets to advance our goals and drive results through the execution of initiatives to maximize revenue growth and cash flow generation. We are confident that this consistent approach to the marketplace will enable us to generate sustainable long-term growth in revenues and positive operating leverage in Directories and Vertical Media.

Full year targets are usually established and communicated to investors concurrent with the release of our second quarter results. These targets have been established and are periodically reviewed through our ongoing business planning process. Some of the information which follows is considered “forward looking” because it is based on current expectations of our business, on the markets we operate in, and on various estimates and assumptions. Please refer to our cautionary note on page 1 for more information. For the fiscal year ending December 31, 2010, we are providing guidance on key performance indicators such as growth in Revenues, EBITDA and Distributable Cash per unit. Consistent with our historical practice, we do not intend however to provide quarterly guidance for key performance metrics. Our preference remains to review on a periodic basis through our MD&A our progress in reaching our stated objectives for the full year taking into account changes in the economic environment, local operating and economic conditions, direct and indirect competition for our products and other relevant factors.

Our objectives for the fiscal year ending December 31, 2009 were established in August 2008 based on our economic and business outlooks at that time. While we acknowledged in February and May 2009 that this year would be challenging, we did not expect these difficult conditions to be so broad, nor their impact to be as significant. We continue to experience very challenging economic and market conditions. In developing an updated operating framework for the balance of this year and going into 2010, our planning assumption is that there will be no sustained economic recovery before early 2010. We considered, among other things, Canadian macroeconomic conditions, Canadian GDP, advertiser trends and historical usage trends. We also considered the impact of new product initiatives such as the Showcase suite of bundles and Dealer Smart Solutions.

Directories – Key Performance Indicators

Year-over-Year Performance – Directories Revised

2009 Target Six-month period

ended June 30, 2009 2010 Target

Adjusted Revenues Stable at

approx. $1,400 million $709 million

$1,385 to $1,415 million

Adjusted EBITDA $825 to $830 million $415 million $830 to 840 million

In our Directories segment, we continue to benefit from high visibility associated with the recurring, predictable and resilient nature of our revenue sources through a diversified customer base. Our goal is to position our revenue base through this cycle by introducing new products that should largely compensate for revenue pressures in the more traditional print domain. The nature of the directory business model, the relatively low level of ongoing capital spending and strong cost containment should enable us to achieve a high level of EBITDA conversion.

The financial performance for the six-month period ended June 30, 2009 reflects operating cost savings and other benefits being realized from our national platform in directories. We continue to develop and are executing business process improvement initiatives which should result in continuing strong EBITDA performance.

The principal growth drivers for 2010 consist of maintaining our focus on customer acquisition, introducing more integrated bundles for the directory category and continuing to innovate from an online perspective. For the 2010 selling cycle, we also expect to expand the existing product offerings for online advertisers.

For fiscal year 2010 in our Directories segment, guidance for Adjusted Revenues is $1,385 to $1,415 million representing organic growth of -1% to 1%. Our guidance for Adjusted EBITDA is $830 to $840 million.



Vertical Media – Key Performance Indicators

Year-over-Year Performance – Vertical Media Revised



Revenues $255 to $265 million $126 million $275 to $295 million EBITDA $75 to $80 million $37 million $80 to $90 million

In our Vertical Media segment, visibility is more limited due to the weekly frequency of most of our publications somewhat compensated by online organic growth. During the period from the fourth quarter 2008 to the second quarter 2009, Trader management has dedicated significant time and resources to cost containment and the completion of restructuring initiatives. These restructuring initiatives included further consolidation of our supply chain, business process re-engineering through the digitization of front- and back-office functions, the discontinuance of underperforming publications as well as the closure of ad production centres. This was followed more recently by the planning and execution of additional initiatives to optimize our call centres as well as the circulation and distribution capabilities for our print publications.

We are in the process of diversifying our revenue sources through the introduction of integrated solutions for our customers. Through our relationship with Dealer.com, we have developed and are now deploying cost-effective solutions for automotive dealers under the Dealer Smart Solutions brand. This approach to the marketplace provides our customers with media placement and syndication, lead tracking and analytics, data capture, inventory management and website design, development and optimization capabilities. The introduction of Dealer Smart Solutions has extended Trader’s historical focus on media placement to more integrated service and media solutions. Dealer Smart Solutions is also expected to support the transition to a more stable and predictable revenue model while achieving improved advertiser retention.

In our Vertical Media segment for fiscal year 2010, based on the above-mentioned factors, our guidance for Revenues is $275 to $295 million and $80 to $90 million for EBITDA.

Consolidated – Key Performance Indicators

Online Revenues

As we expand our offers of multimedia products, we expect online advertising to represent a growing share of our media mix with advertisers both in Directories and in Vertical Media. Recent online growth reflects our successful efforts to increase the proportion of our directory customers choosing to advertise online with us as well. As at June 30, 2009, online penetration in Directories had reached approximately 61% across Canada. Our initial approach to online penetration in the marketplace was to offer traditional print and online bundles to our advertisers. More recently, we have begun to extend our online product offering which is expected to further bolster our online reach and revenue generation as we further monetize our online platform.

The execution of a successful online roadmap begins by enhancing the consumer’s experience. We are adopting a new approach to presenting our rich content to consumers. We have improved the user interface for online searches to provide a home page that is clearer and more intuitive. The results page is also being redesigned to show geo-relevant results while the business profile for advertisers is being revamped for better search engine optimization. These changes are expected to improve the online search experience for consumers while translating into an improved value proposition for advertisers through an evolving and expanding product line.

We expect annualized online revenues for Directories and Vertical Media combined to grow by approximately 20% in 2010. Our objective remains to grow the online proportion of Directories revenues from 14.7% currently to a target of approximately 20% as we exit 2010. Online revenues already represent 37.5% of Vertical Media revenues.



Year-over-Year Performance – Consolidated Revised



Online organic growth approx. 30% 26% approx. 20% Distributable Cash per unit Stable Stable 1% to 3%

Distributable Cash per unit

We have also taken decisive measures to position YPG through these difficult times. In 2009, we remain confident in our ability to achieve a level of Distributable Cash per unit that is comparable to last year. For 2010, growth of 1% to 3% in distributable cash per unit is premised on strong organic execution, the successful introduction of new products both print and online and the completion of restructuring initiatives that should improve returns in both of our operating platforms. We may also augment cost containment through the identification and execution of additional initiatives to further integrate back- and front-office capabilities. Please refer to Section 7 – Risks and Uncertainties.

After careful consideration and analysis, and in order to position YPG through this current difficult economic cycle and to improve our financial risk profile, we made the decision to reduce cash distributions per unit from $1.17 to $0.80 per unit payable June 15 to unitholders of record May 29, 2009. Our decision was based on our objective of securing additional financial flexibility. As a result of a lower payout to unitholders, we anticipate retaining an incremental $300 million of pre-tax earnings from now to the end of 2010, which will be mostly applied to paying down debt and improving our credit protection measures.

6. Critical Assumptions

Our critical accounting estimates have not changed since the release of our MD&A for the year ended December 31, 2008. Please refer to the corresponding sections in the MD&A for the year ended December 31, 2008.

Goodwill Impairment Testing

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

The goodwill impairment test involves a two-step methodology. The Fund has initiated step one of the valuation process to determine whether goodwill is impaired. While the analysis is not yet finalized, indications are that fair value might be below the carrying value of approximately $1 billion thus potentially requiring the performance of the second step of the analysis. Results of step two will determine the amount of impairment charge that may potentially be recorded. At the time of issuing these financial statements, the Fund has not been able to reasonably estimate the amount of potential impairment loss, and thus has not recorded an amount in its financial statements for this quarter. The impairment testing will be completed during the third quarter with any potential impairment loss recorded in net earnings for that period.

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

Change in Accounting Policies

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



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

Effect of New Accounting Standards Not Yet Implemented

a) International Financial Reporting Standards (IFRS).

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

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

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

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

Phase 1: Scoping and Diagnostic Phase

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

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

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

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



Phase 2: Impact Analysis and Design Phase

In this phase, each area identified from the scoping and diagnostic phase will be addressed. Phase 2 includes:

Make accounting policy choices, including those under IFRS 1 choices

Determine the changes required to existing accounting policies

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

Develop draft IFRS financial statements

Phase 3: Implementation and Review Phase

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

Current status of our IFRS changeover plan

We have completed the scoping and diagnostic phase of our changeover plan and we are now in the impact analysis and design phase. We have identified a number of differences and policy alternatives between Canadian GAAP and IFRS that will modify our financial statements. During this process, we noted that several of our current accounting policies are consistent with currently applicable IFRS requirements.

Our Phase 2 work has commenced. The efforts and resources allocated to the resolution of each difference are tributary to the scale of the potential impact that the difference can have on our financial statements. Accounting policy choices are currently being analyzed by Management and Members of the Audit Committee and should be concluded upon by the end of 2009. Issues that need to be resolved before the transition date are being taking care of by work teams specially created for this purpose. The project progress is carefully monitored by the implementation team, who ensures adequate resources are available to meet the different milestones or our plan.

Despite the above, the current International Accounting Standards Board (IASB) and International Financial Reporting Interpretations Committee (IFRIC) projects are likely to significantly modify some of the actual IFRS requirements and could ultimately change our preliminary analysis and modify some of our accounting choices. As such, we carefully monitor the work of the IASB on several different projects including: Financial instruments, Revenue Recognition, Leases, Income Taxes, Liabilities, Fair value Measurement and Post-employment benefits including pension.

At this time, the impact on our future financial position and results of operations is not reasonably determinable or estimable; however, such impact may be material.

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



Key Activity Milestones / Deadlines Status Financial statement presentation

Identify differences between IFRS and Canadian GAAP applicable to the Fund

Evaluate and select ongoing IFRS policies

Evaluate and select IFRS 1 choices Prepare financial statements format Quantify the effects of changeover to IFRS

Senior management sign off and audit committee review for all items to be completed by the end of 2009. Subsequent changes to IFRS will be analyzed and reviewed on a quarterly basis

Completed the identification of IFRS differences Evaluation and selection of accounting policy alternatives is underway Preparation of draft financial statements is underway

Financial reporting expertise

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

Level 1 is a general awareness IFRS training.

Level 2 is a detailed training on relevant topics.

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

Level 1 to be completed by the end of the second quarter of 2009 Level 2 to be completed by the end of 2009 Level 3 to be completed by the end of 2010

Level 1 training is completed Level 2 training is significantly completed Level 3 training should start in the fourth quarter of 2009

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

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

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

Identification of IFRS differences with system impacts is underway and should be completed by the end of the third quarter of 2009 Parallel processing alternatives identified and under review

Business activities: Financial covenants

Identify impact on financial covenants and business practices

Complete any required renegotiations/changes

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

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

Business activities: Compensation arrangements

Identify impact on compensation arrangements

Make any required changes

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

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

Business activities: Capital adequacy

Identify impact on capital adequacy Make any required changes

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

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

Business activities: Customer and supplier contracts

Evaluate impact on customer and supplier agreements

Make any required changes

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

Process of identifying issues will start in the fourth quarter of 2009

Control activities: Internal control over financial reporting (ICOFR)

Assess required changes to existing internal control processes and procedures

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

ongoing changes

Assessment of required changes to be completed by the end of 2009 Revision to actual internal controls and modifications planned for the second quarter of 2010

Assessment of required changes is underway Revision of actual controls will start in 2010

Control activities: Disclosure controls and procedures (DC&P)

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

See ICOFR deadlines above Analysis of impact on key performance indicators to be completed by the end of 2009 by Investors relations special team

MD&A disclosures have begun Investors relations special team created



b) Section 1582, Business Combinations. This new Section will be applicable to business combinations for which the acquisition date is on or after the Fund’s interim and fiscal year beginning January 1, 2011. Early adoption is permitted. This Section improves the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. The Fund has not yet determined the impact of the adoption of this new Section on the consolidated financial statements.

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

d) Section 1602, Non-Controlling interests. This new Section will be applicable to financial statements relating to the Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Fund has not yet determined the impact of the adoption of this new Section on the consolidated financial statements.

7. Risks and Uncertainties

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

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

1. Strategic risks – which are primarily external to the business;

2. Financial risks – generally related to matters addressed in the Financial Risk Management Policy and in the Pension Statement of Investment Policy and Procedures; and,

3. Operational risks – related principally to risks under the control of management across key functional areas of the organization.

YPG has put in place certain guidelines in order to manage the risks to which it may be exposed. Please refer to the MD&A for the year ended December 31, 2008 for a complete description of these risk factors. Despite these guidelines, the Company cannot provide assurances that any such efforts will be successful. Our risks and uncertainties have not changed since the release of our MD&A for the year ended December 31, 2008. For more information, please refer to the corresponding section in our MD&A for the year ended December 31, 2008.

8. Controls and Procedures

Management including the President and Chief Executive Officer and the Executive Vice President – Corporate Services and Chief Financial Officer have determined that there were no changes to the internal control over financial reporting during the quarter ended June 30, 2009 that would materially affect or are reasonably likely to materially affect its internal control over financial reporting.


YELLOW PAGES INCOME FUND

INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF YELLOW PAGES INCOME FUND

June 30, 2009 (unaudited) Table of contents Interim Consolidated Balance Sheet ..............................................................................................................36

Interim Consolidated Statements of Earnings ................................................................................................37 Interim Consolidated Statements of Comprehensive Income ........................................................................38 Interim Consolidated Statements of Unitholders’ Equity ................................................................................39 Interim Consolidated Statements of Cash Flows………………. .....................................................................40 Notes to the Interim Consolidated Financial Statements.......................................................................... 41-56



Interim Consolidated Balance Sheet (in thousands of Canadian dollars – unaudited) As at June 30, 2009 As at December 31, 2008ASSETS CURRENT ASSETS Cash and cash equivalents $ 63,743 $ 25,054 Accounts receivable 234,495 249,786 Prepaid expenses 10,104 11,596 Deferred publication costs and other assets 143,225 140,741 Future income taxes 40,125 43,723 491,692 470,900

DEFERRED PUBLICATION COSTS 9,007 12,068FIXED ASSETS 91,648 104,642OTHER ASSETS (Note 5) 46,940 2,315DERIVATIVE FINANCIAL INSTRUMENTS 1,912 4,500INTANGIBLES 2,061,458 2,102,466GOODWILL 6,663,323 6,648,667FUTURE INCOME TAXES 31,547 20,661 $ 9,397,527 $ 9,366,219

LIABILITIES AND UNITHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 208,679 $ 209,284 Distributions payable 34,553 50,709 Deferred revenues 118,353 112,364 Current portion of long-term debt (Note 7) 1,778 3,807 363,363 376,164

DEFERRED CREDITS 24,756 26,143FUTURE INCOME TAXES 138,231 117,114ACCRUED BENEFIT LIABILITIES 86,070 78,197DERIVATIVE FINANCIAL INSTRUMENTS 3,509 3,974LONG-TERM DEBT (Note 7) 2,500,260 2,420,049EXCHANGEABLE DEBENTURES (Note 8) 288,070 285,470PREFERRED SHARES (Note 9) 489,499 489,072NON-CONTROLLING INTEREST – 8,544UNITHOLDERS’ EQUITY 5,503,769 5,561,492 $ 9,397,527 $ 9,366,219

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



Interim Consolidated Statements of Earnings For the periods ended June 30, (in thousands of Canadian dollars, except per unit information - unaudited)

Three months Six months

2009 2008 2009 2008

Revenues $ 417,534 $ 430,442 $ 825,887 $ 845,013

Operating costs 193,465 194,461 377,955 381,639

Income from operations before depreciation and amortization and restructuring and special charges 224,069 235,981 447,932 463,374


Restructuring and special charges (Note 15) 20,584 – 20,584 –

Income from operations 169,480 185,121 355,226 356,550

Financial charges, net (Note 13) 37,401 30,221 74,957 64,886

Earnings before dividends on Preferred shares, income taxes, share of losses from equity investees and non-controlling interest 132,079 154,900 280,269 291,664

Dividends on Preferred shares 5,687 5,687 11,375 11,375

Earnings before income taxes, share of losses from equity investees and non-controlling interest 126,392 149,213 268,894 280,289

Provision for income taxes 7,898 13,293 18,491 17,264

Share of losses from equity investees 1,589 – 1,411 –

Non-controlling interest 78 234 552 351

Net earnings $ 116,827 $ 135,686 $ 248,440 $ 262,674

Basic earnings per unit $ 0.23 $ 0.26 $ 0.48 $ 0.50

Weighted average number of units outstanding used in computing earnings per unit (Note 10) 512,153,331 526,113,061 512,991,928 528,078,713

Diluted earnings per unit $ 0.19 $ 0.24 $ 0.40 $ 0.46

Weighted average number of units outstanding used in computing diluted earnings per unit (Note 10) 665,654,081 611,946,207 663,601,407 609,162,219




Interim Consolidated Statements of Comprehensive Income For the periods ended June 30, (in thousands of Canadian dollars – unaudited)

Three months Six months

2009 2008 2009 2008

Net earnings $ 116,827 $ 135,686 $ 248,440 $ 262,674 Other comprehensive income (loss), net of related income

taxes: Net gains on derivatives designated as cash flow hedges1

527 – 135 – Net loss (gain) on derivatives designated as cash flow

hedges in prior periods transferred to earnings in the period2 370 (76) 484 (151)

Change in gains and losses on derivatives designated as cash flow hedges 897 (76) 619 (151)

Unrealized gain (loss) on available–for–sale investment in the period3 177 (386) 225 (2,254)

Unrealized losses on translating financial statements of self-

sustaining foreign operations (9,128) – (6,449) –

Other comprehensive loss (8,054) (462) (5,605) (2,405)

Comprehensive income $ 108,773 $ 135,224 $ 242,835 $ 260,269 1. Net of income taxes for the three-month period ended June 30, 2009 of $230 and net of income taxes for the six-month period ended June 30, 2009

of $59. 2. Net of income taxes for the three-month period ended June 30, 2009 of $163 (2008 – $31) and net of income taxes for the six-month period ended

June 30, 2009 of $214 (2008 - $62) 3. Net of income taxes for the three-month period ended June 30, 2009 of nil (2008 – nil) and net of income taxes for the six-month period ended

June 30, 2009 of nil (2008 – nil)




Interim Consolidated Statements of Unitholders’ Equity For the six-month periods ended June 30, (in thousands of Canadian dollars - unaudited)

2009

Unitholders’Capital

(Note 10)

EquityComponent ofExchangeable

DebenturesRestricted

UnitsContributed

Surplus

Accumulated Other

Comprehen-sive Income

(Note 16) Deficit Total

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

Issuance of units (Note 10) 7 – – – – – 7

Repurchase of units (Note 10) (3,169) – – 1,244 – – (1,925)

Restricted units (Note 12) – – (26,551) (3,562) – – (30,113)

Restricted units vested (Note 12) – – 15,091 (15,091) – – –

Distributions (Note 11) – – – – – (268,527) (268,527)Other comprehensive

income – – – – (5,605) – (5,605)Net earnings

for the period – – – – – 248,440 248,440

Balance, June 30, 2009 $ 6,141,254 $ 12,542 $ (69,763) $ 62,166 $ 3,526 $ (645,956) $ 5,503,769

2008

Unitholders’Capital

(Note 10)

Equity Component ofExchangeable

DebenturesRestricted

UnitsContributed

Surplus

Accumulated Other

Comprehen-sive Income

(Loss)(Note 16) Deficit Total

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

Issuance of units 6,321 – – – – – 6,321Repurchase of units

(Note 10) (74,547) – – 9,926 – – (64,621)Restricted units

(Note 12) – – (21,618) 4,683 – – (16,935)Restricted units - vested

(Note 12) – – 1,197 (1,197) – – –Distributions (Note 11) – – – – – (298,376) (298,376)Other comprehensive

loss – – – – (2,405) – (2,405)Net earnings

for the period – – – – – 262,674 262,674

Balance, June 30, 2008 $ 6,253,245 $ 12,542 $ (55,818) $ 35,510 $ (1,773) $ (570,868) $ 5,672,838




Interim Consolidated Statements of Cash Flows For the periods ended June 30, (in thousands of Canadian dollars - unaudited)

Three months Six months 2009 2008 2009 2008

OPERATING ACTIVITIES Net earnings $ 116,827 $ 135,686 $ 248,440 $ 262,674 Items not affecting cash and cash equivalents:

Depreciation and amortization 34,005 50,860 72,122 106,824 Amortization of deferred financing costs 1,927 1,714 3,919 3,371 Accretion on Exchangeable Debentures 626 588 1,247 1,170 Net benefit plan costs 4,383 3,633 7,873 7,066 Non-cash derivative financial instruments 1,217 (5,007) 2,867 (5,151)Stock compensation (recovery) expense (2,062) 1,896 (3,562) 4,683 Gain on repurchase of preferred shares and debt (221) – (221) – Other non-cash items (111) (1,168) (2,238) (2,018)Future income taxes 4,470 10,178 12,080 10,964 Non-controlling interest 78 234 552 351 Share of losses from equity investees 1,589 – 1,411 –

Change in operating assets and liabilities 22,759 (16,775) 38,415 (62,757) 185,487 181,839 382,905 327,177

INVESTING ACTIVITIES Acquisition of equity investments (Note 5) (2,800) – (47,698) – Business acquisition, net of cash acquired and bank

indebtedness assumed (Note 4) (25,189) – (25,189) (17,250)Acquisition of fixed assets (12,313) (11,787) (24,802) (23,915)Acquisition of intangibles (246) (100) (246) (100)Proceeds from lease inducements – 40 33 40

(40,548) (11,847) (97,902) (41,225)

FINANCING ACTIVITIES Issuance of long-term debt 562,000 49,600 699,300 104,655 Repayment of long-term debt (510,836) (17,322) (611,880) (17,322)Distributions to unitholders (134,150) (148,989) (284,683) (298,807)Distribution to non-controlling interest (772) (416) (1,634) (1,078)Proceeds from exercise of options (Note 10) 7 1,375 7 2,183 Repurchase of preferred shares and long-term debt (2,790) – (2,790) – Repurchase of units – (54,115) (13,382) (54,115)Purchase of restricted units (Note 12) (25,300) (1,168) (26,551) (21,618)Proceeds received (payments made) from derivative

financial instruments (272) 3,215 (272) 3,215 Debt issuance and other costs (1,909) (1,679) (4,070) (2,690)

(114,022) (169,499) (245,955) (285,577)Effect of exchange rates changes on cash and cash

equivalents denominated in foreign currencies (495) – (359) – INCREASE IN CASH AND CASH EQUIVALENTS 30,422 493 38,689 375 CASH AND CASH EQUIVALENTS, BEGINNING OF

PERIOD 33,321 53,157 25,054 53,275

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 63,743 $ 53,650 $ 63,743 $ 53,650

Supplemental disclosure of cash flow information (Note 14)



YELLOW PAGES INCOME FUND Notes to the Interim Consolidated Financial Statements – June 30, 2009

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

1. Basis of presentation

These unaudited interim consolidated financial statements (the “financial statements”) have been prepared by management in accordance with Canadian generally accepted accounting principles (“GAAP”), and include the accounts of Yellow Pages Income Fund (the “Fund”), YPG Trust (the “Trust”), YPG LP, YPG General Partner Inc. (“YPG GP”), YPG Holdings Inc., Yellow Pages Group Co. (“YPG Co.”), Trader Corporation (“Trader”), LesPAC s.e.n.c. (“LesPAC”), and those of YPG (USA) Holdings, Inc., Yellow Pages Group, LLC, and YPG Directories, LLC, (collectively “YPG USA”). These financial statements do not contain all disclosures required by Canadian GAAP for annual financial statements and, accordingly, the financial statements should be read in conjunction with the most recently prepared annual consolidated financial statements for the year ended December 31, 2008.

These financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements for the year ended December 31, 2008, with the exception of the following:

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

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

2. Description of the Fund

The Fund is an unincorporated, open-ended, limited purpose trust established under the laws of the Province of Ontario on June 25, 2003 by a declaration of trust and amended by amended and restated declarations. The Fund has been created to invest, through the Trust, a wholly-owned trust, in partnership units of YPG LP and shares of YPG GP, the general partner of YPG LP. YPG LP, through subsidiaries, operates print and online directories and classified advertising in all the Provinces of Canada and also operates independent directories in selected Mid-Atlantic and Southeast American markets.

References herein to the Fund represent the financial position, results of operations, cash flows and disclosures of the Fund and its subsidiaries on a consolidated basis.


YELLOW PAGES INCOME FUND Notes to the Interim Consolidated Financial Statements – June 30, 2009 (all tabular amounts are in thousands of Canadian dollars, except unit information - unaudited)

3. Goodwill impairment testing

As at June 30, 2009, the Fund had approximately $6.7 billion of goodwill, of which approximately $1.0 billion relates to the Vertical Media segment. The Fund determined that the deterioration of the economic environment in the vehicle and real estate industries and its continuing negative impact on our Vertical Media segment revenues was an indicator that the goodwill related to the Vertical Media segment should be tested for potential impairment.

The goodwill impairment test involves a two-step methodology. The first step is accomplished by comparing the fair value of the reporting unit to its carrying value. The Fund determines fair value, by using the “discounted expected future cash flow” model. The process for determining the fair value requires management to make a number of estimates and assumptions such as market conditions, projected future sales, cost of sales, earnings and discount rates. If the carrying value of the reporting unit exceeds its estimated fair value, a second step is required. In the second step, the Company must allocate the fair value of the reporting unit to the reporting unit’s net identifiable assets, with any value in excess allocated to goodwill. A goodwill impairment loss would be recognized to the extent that the carrying value of goodwill exceeds its implied fair value.

The Fund has initiated step one of the valuation process. While the analysis is not yet finalized, indications are that the fair value might be below the carrying value of the reporting unit thus potentially requiring the performance of the second step of the analysis. Results of step two will determine the amount of impairment charge, if any, that may be recorded. At the time of issuing these financial statements, the Fund has not been able to reasonably estimate the amount of impairment loss, if any, due to the complexity in establishing key assumptions and estimates resulting from recently acquired businesses, significant changes in the business model and go-to-market strategy with Trader provisioning integrated solutions through Dealer Smart Solutions and restructuring initiatives implemented towards the end of the second quarter. The impairment testing will be completed during the third quarter with any potential impairment loss recorded in net earnings for that period.

4. Business acquisition

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

The Fund accounted for the acquisition of non-controlling interest as a step-purchase. The excess of the purchase price over the net book value of the non-controlling interest acquired was allocated to the net identifiable assets acquired on the basis of their fair value. The purchase price allocations are preliminary and are subject to change once the final valuation of the assets acquired and the liabilities assumed are completed and the final determination of the costs related to acquisition have been made. The Fund’s share in the fair value increments of the underlying net identifiable assets of LesPAC acquired was allocated as follows :




4. Business acquisition (continued)

Current liabilities Accounts payable and accrued liabilities $ (337)

Intangibles Trademark 1,500Customer contracts 145

Future income tax liabilities (526)Net identifiable assets acquired 782Non-controlling interest acquired 7,462Goodwill 16,945Purchase price $ 25,189

Consideration:

Cash $ 25,000Transaction costs 189 $ 25,189

5. Other assets

June 30, 2009 December 31, 2008Investments – equity method $ 43,516 $ –Investment – available for sale 453 228Other 2,971 2,087

$ 46,940 $ 2,315

On February 6, 2009, a subsidiary of the Fund acquired a 20% equity interest in Dealer Dot Com Inc. (“Dealer.com”) for a cash consideration of $44.9 million (including acquisition related costs of $1.8 million). The acquisition was financed with cash on hand. The investment is accounted for using the equity method. During the period from acquisition to June 30, 2009, the Fund’s share of losses from the equity investee was $1.2 million.

The allocation of the acquisition cost over the costs assigned to the underlying net assets of the investee at the date of acquisition has not been finalized.

On April 9, 2009, a subsidiary of the Fund acquired a 24% equity interest in a small technology provider for a cash consideration of $2.8 million (including acquisition related costs of $0.6 million). The acquisition was financed with cash on hand. The investment is accounted for using the equity method. During the period from acquisition to June 30, 2009, the Fund’s share of losses from the equity investee was $0.2 million.

The difference between the acquisition cost and the Fund’s share of the underlying net book value of the investees’ assets for the equity method investments, at the date of purchase amounted to $45.3 million.



6. Employee benefit plans

The total net benefit plan costs for the three-month and six-month periods ended June 30, 2009 were $5.1 million (2008 – $3.8 million) and $8.8 million (2008 – $7.3 million) for pension benefits. Other benefits costs totalled $0.2 million (2008 – $1.1 million) and $1.1 million (2008 – $2 million) for the same periods.

7. Long-term debt

June 30, 2009

Principal amountFair value adjustment

of hedged itemDeferred

financing costs TotalMedium Term Notes $ 1,857,500 $ 14,664 $ (16,398) $ 1,855,766Credit facilities 250,000 – – 250,000Commercial paper 388,000 – – 388,000Obligations under capital leases 8,272 – – 8,272 2,503,772 14,664 (16,398) 2,502,038Less current portion of long-term debt 1,778 – – 1,778 $ 2,501,994 $ 14,664 $ (16,398) $ 2,500,260

December 31, 2008

Principal amountFair value adjustment

of hedged itemDeferred

financing costs TotalMedium Term Notes $ 2,050,000 $ 15,909 $ (14,539) $ 2,051,370Credit facilities 358,700 – – 358,700Obligations under capital leases 13,786 – – 13,786 2,422,486 15,909 (14,539) 2,423,856Less current portion of long-term debt 3,807 – – 3,807 $ 2,418,679 $ 15,909 $ (14,539) $ 2,420,049

Medium Term Notes

On June 25, 2009, YPG Holdings Inc. issued 7.3% Series 7 Medium Term Notes for gross proceeds of $260 million maturing February 2, 2015, priced at par, for an initial yield to noteholders of 7.3% compounded semi-annually.

The proceeds from the issuance of the Series 7 Medium Term Notes were used to reduce indebtedness under the New Credit Facility while the balance was used to reduce commercial paper indebtedness as well as for general corporate purposes. In addition, an amount of $2.5 million of the Series 2 Medium Term Notes was repurchased during the quarter for a total cash consideration of $2.4 million. The difference between the purchase price and the carrying value of the Series 2 Medium Term Notes of $0.1 million was recorded in net earnings.




7. Long-term debt (continued)

The Fund has in place two senior unsecured credit facilities (the “Credit Facilities”) totalling $950 million consisting of:

A $700 million facility (the “Principal Facility”) which is comprised of:

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

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

The Principal Facility can be used for general corporate purposes and as back-up for the commercial paper program.

A $250 million 2-year non-revolving term loan maturing in May 2011 (the “New Credit Facility” formerly the “New Revolving Facility”).

On April 21, 2009, the Fund used the full amount of the New Revolving Facility to repay its then maturing $450 million Series 1 Medium Term Notes. The Fund did not request an extension of the revolving period on the New Revolving Facility. Therefore, on May 7 2009, this facility automatically converted to a 2-year non revolving term loan maturing in May 2011 (the “New Credit Facility”). From that date, repayments on the New Credit facility will automatically reduce the limit of the facility.

The Fund had $312 million of unutilized Principal Revolving Facility at June 30, 2009. The maturities range between May 2011 and May 2012.

The Fund was in compliance with all of its debt covenants as at June 30, 2009.

Interest rate swaps

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

In October 2008, the Fund entered into floating to fixed interest rate swaps to fix the rate on its floating rate exposure to the Canadian Banker’s acceptance rate. The Fund will pay a fixed rate of interest of 2.25% and receive a floating rate corresponding to the Banker’s acceptance rate on an amount of $150 million between November 3, 2008 and May 3, 2009, increasing to $300 million from May 3, 2009 to January 5, 2010.

The interest rate swaps are comprised of two tranches:

the first tranche was a $50 million interest rate swap that increased to $100 million on May 3, 2009, and

the second tranche was a $100 million interest rate swap that increased to $200 million on May 3, 2009.

The Fund discontinued hedge accounting on the first tranche effective June 1, 2009. On June 19, 2009, the Fund discontinued hedge accounting on the second tranche. All of the accumulated losses on the interest rate swaps remained in accumulated other comprehensive income and will be reclassified to net earnings over the life of the interest rate swaps which mature January 5, 2010. The Fund continues to hold the swaps.



7. Long-term debt (continued)

In February 2009, the Fund also entered into floating to fixed interest rate swaps to fix the rate on its floating rate exposure to the Canadian Banker’s acceptance rate. The Fund will pay a fixed rate of interest of between 0.73% and 0.74% and receive a floating rate corresponding to the Banker’s acceptance rate on an amount of $200 million between April 21, 2009 and December 21, 2009. As at June 30, 2009, these interest rate swaps met the criteria for hedge accounting.

8. Exchangeable debentures

June 30, 2009 December 31, 2008 Principal amount $ 300,000 $ 300,000 Equity component (12,542) (12,542)Accretion (Note 13) 6,900 5,653 Deferred financing costs (6,288) (7,641) $ 288,070 $ 285,470

9. Preferred shares

June 30, 2009 December 31, 2008

Shares issued, Series 1 and Series 2 $ 499,465 $ 500,000 Derivative component 1,584 1,586 Accretion (Note 13) (255) (190)Deferred financing costs (11,295) (12,324) $ 489,499 $ 489,072

Normal course issuer bid

On June 9, 2009, the Fund received approval from the Toronto Stock Exchange (“TSX”) on its notice of intention to make a normal course issuer bid for its first preferred shares through the facilities of the TSX from June 11, 2009 to June 10, 2010, in accordance with applicable rules of the TSX.

Under its normal course issuer bid, the Fund could purchase for cancellation up to 1,200,000 and 800,000 of its outstanding first preferred shares, series 1 (“Series 1 shares”) and first preferred shares, series 2 (“Series 2 shares”), respectively. As at June 30, 2009, the Fund purchased for cancellation 8,800 Series 1 shares of the Fund for a total cash consideration of $0.2 million including brokerage fees at an average price of $22.47 per Series 1 share and 12,600 Series 2 shares of the Fund for a total cash consideration of $0.2 million including brokerage fees at an average price of $17.43 per Series 2 share. The average carrying value of these Series 1 and Series 2 shares was $0.2 million and $0.3 million, respectively. The difference between the purchase price and the carrying value of the Series 1 and Series 2 shares of $0.1 million was recorded in net earnings.

10. Unitholders’ capital The Fund’s Declaration of Trust provides that an unlimited number of units may be issued. Each unit is transferable and represents an equal undivided beneficial interest in any distributions from the Fund, whether of net earnings, net realized capital gains (other than net realized capital gains distributed to redeeming Unitholders) or other amounts, and in the net assets of the Fund in the event of termination or winding up of the Fund. All Trust units are of the same class with equal rights and privileges. The units issued are not subject to future calls or assessments, and entitle the holders thereof to one vote for each whole unit held at all meetings of Unitholders.




10. Unitholders’ capital (continued)

June 30, 2009 Number of Units Amount Balance, December 31, 2008 518,301,059 $ 6,144,416 Units issued 1,787 7 Repurchase of units (267,300) (3,169)Balance June 30, 2009 1,2 518,035,546 $ 6,141,254

June 30, 2008 Number of Units Amount Balance, December 31, 2007 533,188,571 $ 6,321,471 Units issued 556,889 6,321 Repurchase of units (6,285,600) (74,547)Balance, June 30, 2008 1,2 527,459,860 $ 6,253,245 1 Includes 8,715,000 (2008 – 10,815,000) Exchangeable Units of YPG LP issued as partial consideration of the Trader Media Corp. (“TMC”)

acquisition, which are presented as part of Unitholders’ capital as the criteria of Emerging Issues Committee Abstract 151 Exchangeable Securities Issued by Subsidiaries of Income Trust are met.

2 Includes 7,851,772 Restricted Units (2008 – 4,196,070) pursuant to the Restricted Unit Plan.

Normal course issuer bid

On March 28, 2008, the Fund received approval from the Toronto Stock Exchange (“TSX”) on its notice of intention to make a normal course issuer bid for its units through the facilities of the TSX from April 2, 2008 to April 1, 2009, in accordance with applicable rules of the TSX.

Under its normal course issuer bid, the Fund could purchase for cancellation up to 25 million of its outstanding units. During the six-month period ended June 30, 2009, the Fund purchased for cancellation 267,300 (2008 – 6,285,600) Units of the Fund for a total cash consideration of $1.9 million (2008 – $64.6 million) including brokerage fees at an average price of $7.20 per unit (2008 – $10.28). The average carrying value of these Units was $11.86 per Unit. The difference between the purchase price and the carrying value of the Units of $1.2 million (2008 – $9.9 million) was credited to Contributed Surplus. An amount of $11.5 million representing 1,789,600 Units repurchased in the last three days of December 2008 was settled in January 2009.

Exercise of options

During the three-month period ended June 30, 2009, optionholders exercised 1,787 (2008 – 350,771) options at an exercise price of $3.92 per option for cash consideration of $7 thousand (2008 – $1.4 million). These options were exercised into 1,787 (2008 – 350,771) shares of YPG Holdings Inc. which were automatically exchanged into 1,787 (2008 – 350,771) units of the Fund pursuant to the Optionholders’ Liquidity Agreement, at an average stated value of approximately $3.92 (2008– $10.90) per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of nil (2008 – $2.4 million).

During the six-month period ended June 30, 2009, optionholders exercised 1,787 (2008 – 556,889) options at an exercise price of $3.92 per option for cash consideration of $7 thousand (2008 – $2.2 million). These options were exercised into 1,787 (2008 – 556,889) shares of YPG Holdings Inc. which were automatically exchanged into 1,787 (2008 – 556,889) units of the Fund pursuant to the Optionholders’ Liquidity Agreement, at an average stated value of approximately $3.92 (2008– $11.35) per share, which in turn were exchanged into units of YPG LP. This transaction gave rise to an increase in goodwill of nil (2008 – $4.1 million).



10. Unitholders’ capital (continued)

Earnings per unit

The following table reconciles the net earnings and the weighted average number of units outstanding used in computing basic earnings per unit to weighted average number of units outstanding used in computing diluted earnings per unit:

For the three-month periods ended June 30,

For the six-month periods ended June 30,

2009 2008 2009 2008Weighted average number of units outstanding used in computing

basic earnings per unit 512,153,331 526,113,061 512,991,928 528,078,713Dilutive effect of options 394,028 601,406 394,468 741,741Dilutive effect of Restricted Units1 5,839,440 4,166,543 5,027,131 3,703,136Dilutive effect of Series 1 Preferred shares 55,225,035 30,399,449 54,445,358 28,739,486Dilutive effect of Series 2 Preferred shares 36,814,987 20,266,299 36,296,061 19,159,657Dilutive effect of Exchangeable Debentures 55,227,260 30,399,449 54,446,461 28,739,486Weighted average number of units outstanding used in computing

diluted earnings per unit 665,654,081 611,946,207 663,601,407 609,162,2191 Subject to specific pay-out conditions.

Earnings per unit

For the three-month periods

ended June 30,For the six-month periods

ended June 30, 2009 2008 2009 2008Net earnings $ 116,827 $ 135,686 $ 248,440 $ 262,674Impact of assumed conversion of Exchangeable Debentures, net of

applicable taxes 3,930 3,652 7,848 7,294Impact of assumed conversion of Series 1 Preferred shares, net of

applicable taxes 3,167 3,154 6,330 6,305Impact of assumed conversion of Series 2 Preferred shares, net of

applicable taxes 2,357 2,353 4,713 4,705Net earnings adjusted for dilutive effect $ 126,281 $ 144,845 $ 267,331 $ 280,978

The Exchangeable Units of YPG LP issued as partial consideration of the TMC acquisition described above are included in the number of units for both basic and diluted earnings per unit.

11. Distributions to unitholders

The Fund’s distribution policy is to make distributions of its available cash taking into account the current and prospective performance of its business, amounts to service debt obligations, maintenance capital expenditures, taxes and other items considered to be prudent.

Cash distributions are payable monthly to the Unitholders and Exchangeable Unitholders of record on the last business day of each month and are paid on the 15th day of the following month.

During the six-month period ended June 30, 2009, the Fund declared total distributions to Unitholders and Exchangeable Unitholders of $268.5 million (2008 – $298.4 million) or $0.5233 per unit (2008 – $0.5650).




12. Stock-based compensation plans

The Fund’s stock-based compensation plans consist of a Restricted Unit Plan and a Stock Option Plan.

Restricted Unit Plan

On August 30, 2004, YPG LP, through its general partner YPG GP, established the YPG Co. Restricted Unit Plan (the “RU Plan”) to encourage ownership of units, to enhance YPG Co.’s ability to attract, motivate and retain key personnel, to reward the participants for significant performance and associated growth in distributable cash of the Fund and to align the interests of the participants and the Unitholders of the Fund.

Employees who were awarded units under the RU Plan prior to January 1, 2006 (pre-2006 grants) and subsequent to 2008, were granted Restricted Units in equal proportions between time-based vesting and performance-based vesting criteria. During the years 2006 to 2008, YPG LP awarded Restricted Units to key employees which are performance-based and vest between 2009 to 2011. The Fund also awarded Restricted Units to non-executive directors of YPG GP, the general partner of YPG LP, which are time-based vesting only.

During the six-month period ended June 30, 2009, an amount of $15 million (2008 – $10.9 million) representing 2,407,340 (2008 – 961,397) Restricted Units were granted at an average market price of $6.23 (2008 – $11.35). For the 2006 to 2008 grants to key employees, the number of Restricted Units that vest can potentially reach two times the actual number of Restricted Units awarded if the actual performance reaches the maximum level of the objectives. In the case of the 2009 grants to key employees, the number of performance-based Restricted Units that vest can potentially reach two and a half times the actual number of performance-based Restricted Units awarded. Consequently, $24.1 million was used (2008 – $19.8 million) to purchase 3,849,791 (2008 – 1,742,404) Restricted Units of the Fund on the open market of the Toronto Stock Exchange, which will be held in escrow in order to provide up to a 250% pay-out subject to adjustment at time of vesting. In addition, an amount of $2.5 million (2008 – $1.8 million) was used to reinvest in 401,018 (2008 – 164,738) Restricted Units using the proceeds from the distributions on the Restricted Units held in escrow. This includes 179,163 (2008 – 74,749) Restricted Units associated with the maximum pay-out provisions.

The following table summarizes the status of the grants:

June 30, 2009 Number of Restricted Units 2007 to 2009 Grants Outstanding, beginning of period 2,221,443 Granted 2,407,340 Vested (501,317)Forfeited (182,122)Cash distributions reinvested 221,855 Outstanding, end of period 4,167,199

June 30, 2008 Number of Restricted Units Pre-2006 Grants 2006 to 2008 Grants Outstanding, beginning of year 69,915 1,167,613 Granted – 961,397 Vested (68,163) (16,168)Forfeited (2,271) (98,728)Cash distributions reinvested 519 89,470 Outstanding, end of period – 2,103,584



12. Stock-based compensation plans (continued)

As at June 30, 2009 there were 244,505 (2008 – 162,334) Restricted Units which were not allocated to any specific employee and 3,440,068 (2008 – 1,930,152) Restricted Units associated with the maximum pay out provisions. A recovery of $2.1 million and $3.6 million was recorded in the consolidated statement of earnings for the three-month and six-month periods ended June 30, 2009 compared to an expense of $1.9 million and $4.7 million for the corresponding periods in 2008.

Stock Options

The following table summarizes the status of the stock option program:

June 30, 2009

Number of optionsWeighted average exercise

price per optionOutstanding, beginning of period 394,912 $ 3.92Exercised (1,787) 3.92Outstanding, end of period 393,125 $ 3.92Exercisable, end of period 393,125 $ 3.92

June 30, 2008

Number of optionsWeighted average exercise

price per option

Outstanding, beginning of period 977,600 $ 3.92Exercised (556,889) 3.92

Outstanding, end of period 420,711 $ 3.92

Exercisable, end of period 420,711 $ 3.92

No options have been granted to employees and non-employees since the inception of the Fund.

13. Financial charges, net

The significant components of the Fund’s financial charges are as follows:

For the three-month periods ended June 30,

For the six-month periods ended June 30,

2009 2008 2009 2008 Interest on Medium Term Notes $ 23,144 $ 26,776 $ 49,919 $ 53,885 Interest on Credit Facilities 3,642 2 5,626 620 Interest on Exchangeable Debentures, net of accretion 4,125 4,125 8,250 8,250 Interest on Commercial paper 1,209 1,267 1,474 1,629 Standby fees and other financial charges, net 758 774 1,667 1,167 Other charges (credits) related to derivative financial instruments 1,489 (5,007) 3,139 (5,151)Gain on repurchase of preferred shares and long-term debt (221) – (221) – Amortization of deferred financing costs 1,927 1,714 3,919 3,371 Accretion on Exchangeable Debentures (Note 8) 626 588 1,247 1,170 Accretion on Preferred shares (Note 9) (33) (31) (65) (61)Foreign exchange loss 735 13 2 6

$ 37,401 $ 30,221 $ 74,957 $ 64,886




14. Supplemental disclosure of cash flow information

Supplemental information:

For the three-month periods

ended June 30,For the six-month periods

ended June 30, 2009 2008 2009 2008Interest paid $ 31,823 $ 27,608 $ 71,256 $ 66,555Dividends on Preferred shares paid $ 5,687 $ 5,687 $ 11,375 $ 11,375Income taxes and capital taxes (received) paid $ (630) $ 4,189 $ 3,101 $ 15,091Additions to fixed assets under capital leases $ – $ 52 $ 172 $ 674Additions to fixed assets included

in accounts payable and accrued liabilities $ 2,220 $ 2,418 $ 2,220 $ 2,418

Cash and cash equivalents consist of:

As at June 30, 2009 2008Cash $ 3,743 $ 8,350Short-term investments 60,000 45,300 $ 63,743 $ 53,650

15. Restructuring and special charges

In connection with the acquisitions of Advertising Directory Solutions Holdings Inc. (“ADS”), Trader, MTS Media (“MTS”), Aliant Directory Services (“Aliant”), and YPG USA, the Fund recorded provisions for restructuring and special charges of $25.8 million, $38.7 million, $8.3 million, $0.9 million, and USD$6.5 million (CDN$6.9 million), respectively. The Fund has adopted formal plans to integrate and restructure the acquired businesses. Consequently, the Fund established provisions related to planned termination of employment of certain employees of the acquired businesses who were performing functions already available through its existing structure and other restructuring of the acquired businesses’ operations. The other special charges are composed mainly of costs to exit or terminate specific leases and contracts which the Fund intends to modify or terminate, and costs related to decommissioning of the existing technology platforms following the integration of the acquired business’ operations. The liabilities related to these costs were initially included in the underlying net identifiable assets acquired. During the fourth quarter of 2008, the Fund recorded non-recurring charges relating to an internal reorganization, workforce reduction, the termination of certain contractual commitments, the acceleration of business process changes in call centers, the discontinuance of under-performing publications, the closure of certain ad centers and other items in the amount of $36.2 million. Included in these restructuring and special charges of $36.2 million are write-off of costs totalling $3.6 million which does not impact the restructuring and special charges provision.

In addition, during the second quarter of 2009, the Fund recorded additional restructuring and special charges of $20.6 million related to an internal reorganization, workforce reduction and termination of certain contractual commitments. Included in these restructuring and special charges are write-offs of deferred lease improvements, capital assets under capital leases and other amounts totalling $0.3 million which do not impact the restructuring and special charges provision.



15. Restructuring and special charges (continued)

The following table sets forth the restructuring reserve activities and special charges provision:

Restructuring charges Other special charges Total Balance as at December 31, 2008 $ 31,254 $ 9,805 $ 41,059 Provision related to 2009 initiatives 6,779 14,136 20,915 Utilized in 2009:

Cash (10,240) (5,740) (15,980)Balance as at June 30, 2009 $ 27,793 $ 18,201 $ 45,994

16. Accumulated other comprehensive income (loss)

The components of Accumulated other comprehensive income (loss) are as follows:

June 30, 2009 Net losses on derivatives designated as cash flow hedges, net of income taxes1 $ (2,310)Unrealized gains on translating financial statements of self-sustaining foreign operations 5,611 Unrealized gain on available–for–sale investment 225 Balance June 30, 2009 $ 3,526

June 30, 2008 Net gain on derivatives designated as cash flow hedges, net of income taxes1 $ 1,842 Unrealized loss on available–for–sale investment (3,615)Balance June 30, 2008 $ (1,773)

1 The gains and losses on derivatives designated as cash flow hedges in prior periods will be transferred to net earnings over the term of the underlying debt which matures on January 2010, May 2011, February 2016 and February 2036.

17. Guarantees

In the normal course of operations, the Fund has entered into agreements that contain certain features which meet the definition of a guarantee under the guidance provided by CICA Accounting Guideline 14, Disclosure of Guarantees and which are customary in the industry.

The Fund has entered into agreements which contain indemnification of its trustees and officers indemnifying them against expenses (including legal fees), judgments, fines and any amount actually and reasonably incurred by them in connection with any action, suit or proceeding in which the trustees and/or officers are sued as a result of their service, if they acted honestly and in good faith with a view to the best interests of the Fund. The Fund benefits from directors’ and officers’ liability insurance which is purchased by the Fund. No amount has been accrued in the interim consolidated balance sheet as of June 30, 2009 with respect to this indemnity.




17. Guarantees (continued)

Pursuant to the acquisitions of Aliant, LesPAC, and YPG USA, the Fund has entered into agreements whereby the Fund agrees to indemnify and hold harmless the vendors from and against any and all claims, liabilities, costs and expenses arising out of, based upon or related to (i) any breach by the Fund in the performance of its obligations under these agreements and (ii) any breach of a representation contained herein. Furthermore, agreements entered into by Trader and its predecessor companies prior to the acquisition contain indemnifications similar to the ones just described. No amount has been accrued in the interim consolidated balance sheet as June 30, 2009, with respect to these indemnities.

The nature of these guarantees prevents the Fund from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties.

18. Segmented information

The Fund's reportable segments consist of strategic business units that offer different products. Management has determined that the Fund operates in two reportable segments: Directories and Vertical Media. The Directories segment operates in print and online directories, and specialized publications. The Vertical Media segment operates in the vertical print publications and web sites by topic or area of interest. The accounting policies of the segments are the same as those used for the consolidated financial statements. The Fund or chief operating decision maker analyzes the performance of its operating segments based on their income from operations which is not a measure of performance under GAAP; however, management uses this performance measure for assessing the operating performance of its reportable segments.

The tables below summarize the selected financial information by segment:

For the three-month period ended June 30, 2009 Directories1 Vertical Media ConsolidatedRevenues $ 351,060 $ 66,474 $ 417,534Operating costs 148,310 45,155 193,465Income from operations before depreciation

and amortization and restructuring and special charges 202,750 21,319 224,069

Depreciation and amortization 28,764 5,241 34,005Restructuring and special charges 15,161 5,423 20,584Income from operations $ 158,825 $ 10,655 $ 169,480

For the six-month period ended June 30, 2009

Directories1 Vertical Media ConsolidatedRevenues $ 699,859 $ 126,028 $ 825,887Operating costs 289,309 88,646 377,955Income from operations before depreciation

and amortization and restructuring and special charges 410,550 37,382 447,932

Depreciation and amortization 61,026 11,096 72,122Restructuring and special charges 15,161 5,423 20,584Income from operations $ 334,363 $ 20,863 $ 355,2261 Included in the Directories segment are the results of YPG USA. Consequently, $8 million of revenues are included for the three-month period ended

June 30, 2009 (2008 – nil) and $15.9 million for the six-month period ended June 30, 2009 (2008 – nil) and were generated in the United States of America. Revenues are attributed to countries based on the location of the customer.



18. Segmented information (continued)

For the three-month period ended June 30, 2008 Directories1 Vertical Media ConsolidatedRevenues $ 339,878 $ 90,564 $ 430,442Operating costs 136,329 58,132 194,461Income from operations before depreciation

and amortization 203,549 32,432 235,981Depreciation and amortization 43,073 7,787 50,860Income from operations $ 160,476 $ 24,645 $ 185,121

For the six-month period ended June 30, 2008

Directories1 Vertical Media ConsolidatedRevenues $ 677,309 $ 167,704 $ 845,013Operating costs 269,584 112,055 381,639Income from operations before depreciation

and amortization 407,725 55,649 463,374Depreciation and amortization 89,473 17,351 106,824Income from operations $ 318,252 $ 38,298 $ 356,550

1 Included in the Directories segment are the results of YPG USA. Consequently, $8 million of revenues are included for the three-month period ended June 30, 2009 (2008 – nil) and $15.9 million for the six-month period ended June 30, 2009 (2008 – nil) and were generated in the United States of America. Revenues are attributed to countries based on the location of the customer.

June 30, 2009 Directories1 Vertical Media2 ConsolidatedIntangibles $ 1,722,621 $ 338,837 $ 2,061,458Goodwill $ 5,682,991 $ 980,332 $ 6,663,323Total assets $ 7,948,028 $ 1,449,499 $ 9,397,527

December 31, 2008

Directories1 Vertical Media2 ConsolidatedIntangibles $ 1,768,649 $ 333,817 $ 2,102,466Goodwill $ 5,685,280 $ 963,387 $ 6,648,667Total assets $ 7,971,215 $ 1,395,004 $ 9,366,219

1 Included in the Directories segment is goodwill of $60.7 million (December 31, 2008 – $63 million) and capital assets of $100.8 million at June 30, 2009 (December 31, 2008 – $125.2 million) relating to YPG USA. Included in the total assets of the Directories segment is $2.6 million (2008 – nil) related to the recent equity-investment acquisition.

2 The amount of investment in Dealer.com of $40.9 million (2008 – nil) is included in the total assets of the Vertical Media segment.




18. Segmented information (continued)

For the six-month periods ended June 30, 2009 2008Additions to fixed assets1

Directories $ 13,636 $ 10,877Vertical Media $ 7,095 $ 8,663

Additions to intangible assets Directories $ 246 $ 100Vertical Media $ – $ –

1 These amounts represent total expenditures for additions to fixed assets, whether they are paid or not.

19. Effect of new accounting standards not yet implemented

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

IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosure requirements. As a result, the Fund has established a changeover plan to convert to these new standards according to the timetable set with these new rules. An implementation team has been created and third party advisors have been engaged to provide training to our staff. The Fund completed the scoping and diagnostic phase in the last quarter of 2008 and the impact analysis and design phase is progressing as planned. The Fund’s analysis of IFRSs in comparison to Canadian GAAP has identified a number of differences. At this time, the impact on our future financial position and results of operations is not reasonably determinable or estimable. The Fund will continually review and adjust the changeover plan to ensure the implementation process properly addresses the key elements of the plan.

b) Section 1582, Business Combinations. This new Section will be applicable to business combinations for which the acquisition date is on of after the Fund’s interim and fiscal year beginning January 1, 2011. Early adoption is permitted. This Section improves the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. The Fund has not yet determined the impact of the adoption of this new Section on the consolidated financial statements.

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

d) Section 1602, Non-Controlling interests. This new Section will be applicable to financial statements relating to the Fund’s interim and fiscal year beginning on or after January 1, 2011. Early adoption is permitted. This Section establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Fund has not yet determined the impact of the adoption of this new Section on the consolidated financial statements.



20. Subsequent events

Medium Term Notes

On July 3, 2009, YPG Holdings Inc. issued Series 8 Medium Term Notes for gross proceeds of $90 million as follows:

a) $90 million of 6.85% Series 8 Notes maturing December 3, 2013, priced at par, for an initial yield to noteholders of 6.85% compounded semi-annually.

On July 10, 2009, YPG Holdings Inc. issued additional Series 8 Medium Term Notes and Series 9 Medium Term Notes for combined gross proceeds of $165 million as follows:

a) $35 million of 6.85% Series 8 Notes maturing December 3, 2013, priced at par, for an initial yield to noteholders of 6.85% compounded semi-annually.

b) $130 million of 6.5% Series 9 Notes maturing July 10, 2013 priced at par, for an initial yield to noteholders of 6.5% compounded semi-annually.

Additional financing

On July 24, the Fund announced that it had arranged a 5-year term loan of $100 million with an institutional investor which matures July 23, 2014. The credit facility will be available for general corporate purposes, including the refinancing of existing indebtedness.


Head Offi ce16 Place du CommerceNuns’ IslandVerdun, Quebec H3E 2A5

Investor RelationsTelephone: 1 877 YLO-2003 (1 877 956-2003)E-mail: [email protected]

AuditorsDeloitte & Touche LLP

Units ListedToronto Stock Exchange Symbols :

YLO.UN Units YPG.BD Exchangeable Debentures YPG.PR.A Series 1 Cumulative Redeemable First Preferred sharesYPG.PR.B Series 2 Cumulative Redeemable First Preferred shares

Transfer AgentCIBC Mellon Trust Company2001 University StreetSuite 1600Montreal, Quebec H3E 2A6Telephone: 1 800 387-0825E-mail: [email protected]

For further information on Yellow Pages Income Fund,visit our corporate Web site at www.ypg.com.

Table of Contents

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

Interim Consolidated Balance Sheet .........................................................................................36

Interim Consolidated Statements of Earnings ...........................................................................37

Interim Consolidated Statements of Comprehensive Income ...................................................38

Interim Consolidated Statements of Unitholders’ Equity ...........................................................39

Interim Consolidated Statements of Cash Flows.......................................................................40

Notes to the Interim Consolidated Financial Statements......................................................41-56

Q2

Yellow Pages Income FundSecond Quarter Report 2009

Period endedJune 30, 2009

Yellow Pages Income Fund16 Place du Commerce, Nuns’ Island

Verdun, Quebec H3E 2A5

www.ypg.com

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