Torstar Corporation
TSX : TS.NV.B

July 27, 2005 16:00 ET

Torstar Corporation: Newspaper Revenues Up 4% In The Second Quarter

TORONTO, ONTARIO--(CCNMatthews - July 27, 2005) - Torstar Corporation (TSX:TS.NV.B) today announced its results for the second quarter ended June 30, 2005.

Net income was $36.1 million or $0.46 per share in the second quarter of 2005, up $0.3 million or $0.01 per share from $35.8 million or $0.45 per share in the second quarter of 2004. The increase of $0.01 per share in the quarter reflected the lower number of shares outstanding. Year to date net income was $57.3 million or $0.73 per share in 2005, down $1.5 million or $0.01 per share from $58.8 million or $0.74 per share in the same period in 2004.

Total revenues were $405.4 million in the quarter, up $6.4 million from $399.0 million in 2004. Newspaper revenues were $272.7 million in the second quarter of 2005, up $9.8 million or 3.7% from $262.9 million in the second quarter of 2004. Book Publishing revenues were $132.8 million in the second quarter, down $3.3 million from the same period last year as $2.9 million of underlying revenue growth was more than offset by the impact of foreign exchange rates. Total revenues were $766.5 million year to date, up $5.7 million from $760.8 million in the same period last year.

"Profits in both Newspapers and Book Publishing increased in the quarter led by strong performances by Metroland and CityMedia," said Robert Prichard, Torstar's President and Chief Executive Officer. "However, some of the current underlying trends in linage at the Toronto Star and unit sales at Harlequin remain challenging, leading to constrained expectations for the remainder of the year in these businesses. At the same time, we are continuing to invest in future growth for both our book publishing and newspaper businesses. Harlequin launched its new book business in Brazil during the second quarter and has introduced several new products in the North American market during July. In addition, we are expanding our community newspapers into Niagara, extending our Metro franchise to Vancouver and Ottawa, building the Transit Television Network, strengthening our presence on the Internet with Torstar Digital and, most recently, announcing the launch of Weekly Scoop - a new weekly glossy celebrity magazine."

Newspaper operating profit was $42.1 million in the second quarter up $0.7 million from $41.4 million in the second quarter of 2004 with higher profits at CityMedia and Metroland more than offsetting the increased investment in TTN's business. Book Publishing operating profits were $23.4 million in the second quarter of 2005 up $0.5 million from $22.9 million in the same period last year including the positive impact of the foreign exchange hedge contracts.

Newspapers

Newspaper segment revenues were $272.7 million in the second quarter, up $9.8 million from $262.9 million in 2004 with higher revenues at Metroland, CityMedia and Torstar Digital more than offsetting declines at the Toronto Star. Newspaper segment EBITDA (operating profit before interest, taxes, depreciation and amortization) was $84.3 million in the second quarter of 2005 consistent with the second quarter last year. TTN's EBITDA losses were $2.4 million in 2005 up from $1.6 million in 2004.

During the second quarter Torstar completed the purchase of several community newspapers and the Toronto Wine & Cheese Show. The newspapers acquired include The Bracebridge Examiner, The Gravenhurst Banner, The Muskokan, the Meaford Express, the Thornbury Courier-Herald, the Parry Sound North Star and the Parry Sound Beacon Star.

The Toronto Star's revenues were down $7.1 million in the second quarter of 2005 and $8.9 million year to date as linage declines of 8.6% continued to negatively impact advertising revenues. Toronto Star circulation revenues were up $0.4 million in the quarter, reflecting the increases in home delivery and single copy prices.

Metroland's revenues were up $14.8 million in the second quarter and $23.0 million year to date with growth from advertising, distributions and new products. Advertising linage at the community newspapers was up 9.4% and distribution volumes grew 11.3% in the second quarter. CityMedia's revenues were up $1.8 million in the quarter from improved advertising revenues at both the daily and community newspapers.

Newsprint expenses were down $1.2 million in the quarter in the Newspaper segment from reduced consumption and lower average prices. Payroll costs were up $3.3 million in the quarter with expansion at Metroland, TTN, and Torstar Digital more than offsetting lower payroll costs at the Toronto Star and The Hamilton Spectator from the restructuring programs that occurred in the third quarter of 2004.

Book Publishing

Harlequin's revenues were up $2.9 million in the second quarter excluding the impact of foreign exchange. North America Retail was up $2.7 million, North America Direct-To-Consumer was down $1.9 million and Overseas was up $2.1 million. Harlequin's operating profits in the second quarter rose by $0.5 million to $23.4 million from $22.9 million in the same period a year ago. However, excluding the impact of foreign exchange, profits were flat. North America Retail operating profits were down $2.2 million in the quarter from lower volumes, higher production costs and promotional spending. The second quarter 2005 North America Retail series volumes were below the second quarter of 2004 but were in line with the fourth quarter of 2004 and the first quarter of 2005. North America Direct-To-Consumer operating profits were up $0.9 million in the quarter as reduced promotional spending and a mid-year 2004 price increase more than offset the impact of lower volumes. Overseas operating profits were up $1.3 million as actual returns for retail sales were lower than previously provided for.

Recent Developments

Subsequent to the end of the quarter, Metroland completed the purchase of Paton Publishing. Paton Publishing, located in Mississauga, does contract publishing and focused marketing campaigns aimed principally at youth audiences.

On July 18, 2005, the Toronto Star announced a voluntary severance program for production management staff at the Vaughan printing facility as part of the Star's ongoing focus on reducing costs and improving margins.

Earlier today, Torstar announced the October 2005 launch of a new weekly glossy celebrity magazine, called Weekly Scoop, to be sold on newsstands across Canada.

Other

On July 27, 2005, Torstar declared a quarterly dividend of 18.5 cents per share on its Class A shares and Class B non-voting shares, payable on September 30, 2005, to shareholders of record at the close of business on September 9, 2005.

For further details on Torstar's second quarter results please see the Interim Management Discussion and Analysis and Consolidated Financial Statements dated July 27, 2005.

Certain statements in this report may constitute forward-looking statements that reflect management's expectations regarding the Company's future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipate", "believe", "expect", "intend" and similar expressions have been used to identify these forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. References in this discussion to "Torstar" are to Torstar Corporation and its subsidiaries.

Torstar Corporation is a broadly based media company listed on the Toronto Stock Exchange (TS.nv.b). Its businesses include newspapers led by the Toronto Star, Canada's largest daily newspaper; CityMedia Group, publishers of daily and community newspapers in Southwestern Ontario; Metroland Printing, Publishing & Distributing, publishers of more than 75 community newspapers in Southern Ontario; and Harlequin Enterprises, a leading global publisher of women's fiction.



For more information please contact:

D. P. Holland
Executive Vice-President and Chief Financial Officer
Torstar Corporation
416-869-4031


INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three and six months ended June 30, 2005 and 2004

The following review and analysis of Torstar Corporation's (the "Company" or "Torstar") operations and financial position for the three and six months ended June 30, 2005 and 2004 should be read in conjunction with the audited consolidated financial statements and Management's Discussion and Analysis of Torstar Corporation for the year ended December 31, 2004 set forth in the Company's Annual Report for such fiscal year and incorporated by reference in the Company's renewal Annual Information Form dated March 21, 2005.

Certain statements in this report may constitute forward-looking statements that reflect management's expectations regarding the Company's future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipate", "believe", "expect", "intend" and similar expressions have been used to identify these forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. References in this discussion to "Torstar" are to Torstar Corporation and its subsidiaries.

Torstar reports its financial results under Canadian generally accepted accounting principles ("GAAP"). However, management believes that many of the company's shareholders, creditors, other stakeholders and analysts prefer to assess the company's performance using earnings before interest, unusual items, taxes, depreciation and amortization of intangible assets ("EBITDA") as an estimate of the cash generated by the business, in addition to the GAAP measures. Torstar calculates segment EBITDA as operating profit before depreciation and amortization of intangible assets. Torstar's method of calculating EBITDA may differ from other companies and accordingly, may not be comparable to measures used by other companies.

Torstar Corporation is a broadly based media company listed on the Toronto Stock Exchange (TS.nv.b). Its businesses include newspapers led by the Toronto Star, Canada's largest daily newspaper; CityMedia Group, publishers of daily and community newspapers in Southwestern Ontario; Metroland Printing, Publishing & Distributing, publishers of more than 75 community newspapers in Southern Ontario; and Harlequin Enterprises, a leading global publisher of women's fiction.

Torstar reports its operations in two segments: Newspapers and Book Publishing.

RESULTS OF OPERATIONS - Second quarter and year to date 2005

Overall Performance

Newspaper revenues were $272.7 million in the second quarter of 2005, up $9.8 million or 3.7% from $262.9 million in the second quarter of 2004. Book Publishing revenues were $132.8 million in the second quarter, down $3.3 million from the same period last year as $2.9 million of underlying revenue growth was more than offset by the impact of foreign exchange rates. Total revenues were $405.4 million in the quarter up $6.4 million from $399.0 million in 2004.

Year to date Newspaper revenues were $504.6 million up $17.0 million, or 3.5% from $487.6 million in the same period in 2004. Book publishing revenues were $262.0 million in the first six months of 2005 down $11.2 million from 2004 primarily due to the impact of foreign exchange rates. Total revenues were $766.5 million year to date up $5.7 million from $760.8 million in the same period last year.

Newspaper operating profit was $42.1 million in the second quarter up $0.7 million from $41.4 million in the second quarter of 2004 with higher profits at CityMedia and Metroland more than offsetting the increased investment in the Transit Television Network's (TTN) business and the slight decrease in profits at the Toronto Star. Year to date, Newspaper operating profit was $58.7 million down $1.4 million from $60.1 million in the same period in 2004 as the higher TTN operating losses more than offset improved newspaper results.

Book Publishing operating profits were $23.4 million in the second quarter of 2005 up $0.5 million from $22.9 million in the same period last year including the positive impact of the foreign exchange hedge contracts. Year to date Book Publishing operating profits were $48.0 million down $1.0 million from $49.0 million in 2004 as lower North America Retail results more than offset improvements in the North America Direct-To-Consumer and Overseas results.

Corporate costs were $4.5 million in the second quarter of 2005 and $9.4 million year to date. These costs were up $0.7 million in the quarter and $1.3 million year to date. The increase in costs includes higher accounting expense for stock options, mark-to-market adjustments on deferred share units and higher pension costs.

Interest expense was $2.6 million in the second quarter of 2005, consistent with the second quarter of 2004. Year to date, interest expense was $4.9 million down $0.5 million from $5.4 million in 2004. Interest rates were flat year over year while debt levels were lower in the first quarter of 2005 and flat in the second quarter compared with the same periods in 2004.

There were no unusual items in the second quarter of 2005 or 2004. In the first quarter of 2005, the unusual gain of $1.4 million was from the sale of the land and building in Kitchener that had previously been occupied by The Record.

The effective tax rate was 38.8% in the second quarter of 2005 and 38.9% year to date. These rates were slightly higher than the effective rate of 38.5% in the second quarter and year to date in 2004. Higher TTN startup losses that were not tax-effected in either year added 0.6% and 0.8% to the 2005 second quarter and year to date effective tax rates respectively.

Net income was $36.1 million or $0.46 per share in the second quarter of 2005, up $0.3 million or $0.01 per share from $35.8 million or $0.45 per share in the second quarter of 2004. The increase of $0.01 per share in the quarter reflected the lower number of shares outstanding. The weighted average number of shares outstanding during the second quarter was 78.1 million down 1.6 million from 79.7 million in the second quarter of 2004. The decrease was the result of the normal course issuer bid for 2 million shares that Torstar completed between May 2004 and April 2005 offset in part by shares issued on the exercise of stock options.

Year to date net income was $57.3 million or $0.73 per share in 2005, down $1.5 million or $0.01 per share from $58.8 million or $0.74 per share in the same period in 2004. On a year to date per share basis operating profits net of tax were down $0.03, while the unusual gain and fewer shares outstanding contributed $0.01 each. The weighted average number of shares outstanding year to date in 2005 was 78.1 million down 1.2 million from 79.3 million in the same period of 2004.

Newspapers

The Newspaper segment includes the newspaper and commercial printing results of the Toronto Star, CityMedia Group and Metroland Printing, Publishing and Distributing; Torstar Digital; Torstar Media Group Television ("TMG TV") and Transit Television Network ("TTN"). CityMedia Group publishes three daily newspapers - The Hamilton Spectator, The Record (Kitchener, Cambridge and Waterloo) and the Guelph Mercury - along with 10 community newspapers and a number of specialty publications. Metroland publishes 77 community newspapers, a number of specialty publications, operates several consumer shows and publishes the jointly owned Toronto daily commuter paper Metro and the Chinese language newspaper Sing Tao Daily. Torstar Digital was established in 2005 as a reporting unit for the Newspaper segment's independent Internet operations including workopolis, Toronto.com and the Torstar Digital corporate group. Each newspaper reports the results for its own website within the newspaper results.

Selected financial information for the Newspaper segment (in $000's):

For the three months ended June 30:



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Toronto Metro- City- Torstar Other
Star land Media Digital(1) (2) Total
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2005
Revenue $111,544 $110,902 $42,643 $4,194 $3,374 $272,657
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Operating profit 12,818 23,365 7,902 703 (2,639) 42,149
Depreciation 8,536 2,108 1,424 130 745 12,943
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Segment EBITDA $21,354 $25,473 $9,326 $833 ($1,894) $55,092
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Margins:
- Operating
profit 11.5% 21.1% 18.5% 16.8% n/a 15.5%
- EBITDA 19.1% 23.0% 21.9% 19.9% n/a 20.2%

2004(3)
Revenue(4) $118,690 $96,056 $40,875 $3,614 $3,694 $262,929
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Operating profit 13,198 22,006 6,881 838 (1,483) 41,440
Depreciation 8,541 1,416 1,460 174 468 12,059
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Segment EBITDA $21,739 $23,422 $8,341 $1,012 ($1,015) $53,499
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Margins:
- Operating
profit 11.1% 22.9% 16.8% 23.2% n/a 15.8%
- EBITDA 18.3% 24.4% 20.4% 28.0% n/a 20.3%
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(1) Torstar Digital was established in 2005 as a reporting unit for the Newspaper segment's independent Internet operations including workopolis and Toronto.com and the Torstar Digital corporate group. Each newspaper reports the results for its own website within the newspaper results.

(2) Consists of TMGTV and TTN.

(3) The 2004 results have been restated to include the workopolis and Toronto.com results in Torstar Digital.

(4) 2004 quarterly revenue and margins for the Toronto Star and CityMedia have been restated from those previously presented to reflect the change in accounting for circulation revenues gross of certain distribution costs. This change was implemented in the fourth quarter of 2004.



For the six months(5) ended June 30:

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Toronto Metro- City- Torstar
Star land Media Digital Other Total
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2005
Revenue $212,670 $199,168 $78,210 $8,329 $6,187 $504,564
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Operating profit 14,787 37,005 10,424 1,758 (5,318) 58,656
Depreciation 17,003 4,059 2,847 254 1,457 25,620
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Segment EBITDA $31,790 $41,064 $13,271 $2,012 ($3,861) $84,276
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Margins:
- Operating
profit 7.0% 18.6% 13.3% 21.1% n/a 11.6%
- EBITDA 14.9% 20.6% 17.0% 24.2% n/a 16.7%

2004
Revenue $221,542 $176,175 $76,332 $6,936 $6,607 $487,592
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Operating profit 14,254 37,138 9,849 1,672 (2,863) 60,050
Depreciation 17,123 2,853 2,921 349 891 24,137
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Segment EBITDA $31,377 $39,991 $12,770 $2,021 ($1,972) $84,187
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Margins:
- Operating
profit 6.4% 21.1% 12.9% 24.1% n/a 12.3%
- EBITDA 14.2% 22.7% 16.7% 29.1% n/a 17.3%
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(5) Torstar Digital results have been restated from the first quarter presentation to include only workopolis, Toronto.com and the Torstar Digital corporate group. The financial results from the websites directly related to the newspapers are now included with the newspaper results.


Newspaper segment revenues were up $9.8 million in the second quarter and $17.0 million year to date with higher revenues at Metroland, CityMedia and Torstar Digital more than offsetting declines at the Toronto Star.

During the second quarter Torstar completed the purchase of several community newspapers and the Toronto Wine & Cheese Show. The newspapers acquired include The Bracebridge Examiner, The Gravenhurst Banner, The Muskokan, the Meaford Express, the Thornbury Courier-Herald, the Parry Sound North Star and the Parry Sound Beacon Star. These businesses will all be reported with Metroland.

The Toronto Star's revenues were down $7.1 million in the second quarter of 2005 and $8.9 million year to date as linage declines of 8.6% continued to negatively impact advertising revenues. Careers linage was up 9.2% in the quarter while national, retail and travel were down 10.7%, 4.9% and 7.5% respectively. National linage was negatively impacted in the second quarter by lower automotive advertising. Year to date, careers linage was up 5.2% while national, retail and travel were down 3.1%, 7.6% and 10.3%. The Star's effective average line rate was negatively impacted during the second quarter by the mix of business but was up 2.7% year to date. Toronto Star circulation revenues were up $0.4 million in the quarter and $1.0 million year to date, reflecting the increases in home delivery and single copy prices.

Metroland's revenues were up $14.8 million in the second quarter and $23.0 million year to date with growth from advertising, distributions and new products. Advertising linage at the community newspapers was up 9.4% in the second quarter and 8.3% year to date. Distribution volumes were up 11.3% in the quarter and 10.3% year to date. Revenue growth from new products included directories magazines, and Metro's expansion into Vancouver and Ottawa.

CityMedia's revenues were up $1.8 million in the quarter and $1.9 million year to date from improved advertising revenues at both the daily and community newspapers. Linage was up 5.8% in the quarter at The Hamilton Spectator with a strong performance from local advertising.

Newsprint expenses were down $1.2 million in the quarter and $1.6 million year to date in the Newspaper segment. About two-thirds of the cost savings were due to lower average newsprint prices in 2005. Lower consumption at the Toronto Star due to planned paging decreases and lower linage was partially offset by higher consumption at Metroland for new products including the Metro expansion. Payroll costs were up $3.3 million in the quarter and $5.0 million year to date. Metroland, TTN, and Torstar Digital all had higher payroll costs reflecting the investments in growth by these operations. The Toronto Star and The Hamilton Spectator had lower payroll costs from the restructuring programs that occurred in the third quarter of 2004.

Other expenses were higher in the quarter and year to date for Metroland, TTN and Torstar Digital from the growth in the businesses. CityMedia continued to incur strike costs during the second quarter from the strike by The Hamilton Web mailroom and production staff. Depreciation expense was higher at Metroland and TTN from the expanded operations and Metroland's new printing press that became operational in the second quarter of 2004.

TTN's Los Angeles installation began, as scheduled, late in the second quarter of 2005. In May 2005 Gerry Noble was appointed President and CEO and has relocated to TTN's head office in Orlando, Florida. TTN had EBITDA losses of $2.4 million in the second quarter and $4.6 million year to date up as expected from $1.6 million and $3.1 million in the same periods in 2004. Operating losses were $3.1 million in the quarter and $5.9 million year to date up from $2.0 million and $3.8 million in the same periods last year as TTN continues to build out the business.

Book Publishing

The Book Publishing segment reports the results of Harlequin Enterprises Limited, a leading global publisher of women's fiction. Harlequin publishes women's fiction around the world, selling books through the retail channel and directly to the consumer by mail and the Internet. Harlequin's women's fiction publishing operations are comprised of three divisions: North America Retail, North America Direct-To-Consumer and Overseas.

As an international publisher, Harlequin's results are affected by changes in foreign exchange rates relative to the Canadian dollar. The most significant is the change in the U.S.$/Cdn.$ exchange rate. To offset some of this risk, Torstar has entered into forward foreign exchange and option contracts for U.S. dollars and Euros.

The following charts identify the impact of foreign currency movements, foreign currency hedges and underlying operations on reported revenue and operating profit for the three and six months ended June 30 (in $000's):



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Three Months Six Months
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2005 2004 2005 2004
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Reported revenue, prior year $136,109 $145,173 $273,194 $295,064
Impact of currency movements (8,357) (22) (14,965) (11,000)
Impact of U.S. dollar hedges(6) 2,117 4,433 4,069 9,508
Change in operating revenue 2,911 (13,475) (326) (20,378)
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Reported revenue,
current year $132,780 $136,109 $261,972 $273,194
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(6) The U.S. dollar hedges were reported in revenue effective January 1, 2004. The impact of the U.S. dollar hedges in 2004 is the full gain on the hedges while the 2005 impact is the incremental gain year over year. Torstar has hedged $76 million of its 2005 U.S. dollar revenue at $1.59 ($75 million at $1.58 in 2004). There are no hedges in place for 2006.



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Three Months Six Months
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2005 2004 2005 2004

Reported operating profit,
prior year $22,871 $29,159 $48,992 $59,056
Impact of currency movements (2,269) (163) (4,210) (4,146)
Impact of U.S. dollar hedges 2,117 1,003 4,069 4,693
Impact of other currency hedges 665 (659) 139 59
Change in operating profit (13) (6,469) (1,026) (10,670)
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Reported operating
profit, current year $23,371 $22,871 $47,964 $48,992
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Depreciation and amortization 1,970 2,152 3,942 4,103
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Segment EBITDA $25,341 $25,023 $51,906 $53,095
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Harlequin's revenues were up $2.9 million in the second quarter excluding the impact of foreign exchange. North America Retail was up $2.7 million, North America Direct-To-Consumer was down $1.9 million and Overseas was up $2.1 million. Year to date revenues were down $0.3 million excluding the impact of foreign exchange. North America Retail was up $0.6 million, North America Direct-To-Consumer was down $3.2 million and Overseas was up $2.3 million.

Harlequin's operating profits were flat in the second quarter excluding the impact of foreign exchange. North America Retail was down $2.2 million, North America Direct-To-Consumer was up $0.9 million and Overseas was up $1.3 million. Year to date operating profits were down $1.0 million excluding the impact of foreign exchange. North America Retail was down $5.7 million, North America Direct-To-Consumer was up $2.0 million and Overseas was up $2.7 million.

The reported increase in North America Retail second quarter revenues resulted from the favourable effect of a mid-year 2004 series price increase and a very difficult second quarter in 2004. The second quarter 2005 North America Retail series volumes were below the second quarter of 2004 but were in line with the fourth quarter of 2004 and the first quarter of 2005. Higher product costs and promotional spending contributed to the lower operating profits both in the second quarter and year to date.

The lower North America Direct-To-Consumer revenues were from lower volumes that are consistent with the longer-term trend of a declining number of books sold. Operating profits were up in the quarter and year to date as reduced promotional spending and a mid-year 2004 price increase more than offset the impact of lower volumes.

The reported increases in Overseas revenues and operating profits for the second quarter and year to date arose primarily as actual returns for retail sales were lower than previously provided for. The U.K. continued to face retail volume declines for both series and single titles. In Japan a decline in series volumes was partially offset by improved single title performance.

Harlequin's reported operating profit margin was 17.6% in the second quarter and 18.3% year to date up from 16.8% and 17.9% in the same periods in 2004. Harlequin's margins are impacted by the gains realized on foreign exchange hedges that were in place for 2004 and 2005. Excluding the impact of the foreign exchange hedge gains from revenue and operating profit as calculated below, the operating profit margin was 13.1% in the second quarter and 13.6% year to date down from 14.3% and 14.8% in the same periods in 2004. There are no hedges in place for 2006.



---------------------------------------------------------------------
Three Months Six Months
---------------------------------------------------------------------
2005 2004 2005 2004

Reported revenue $132,780 $136,109 $261,972 $273,194
Hedge gains 6,550 4,433 13,577 9,508
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Revenue before hedges $126,230 $131,676 $248,395 $263,686
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Reported operating profit $23,371 $22,871 $47,964 $48,992
Hedge gains 6,834 4,052 14,097 9,889
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Operating profit before
hedges $16,537 $18,819 $33,867 $39,103
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Reported margins 17.6% 16.8% 18.3% 17.9%
Margins excluding hedges 13.1% 14.3% 13.6% 14.8%
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Associated Businesses

Torstar has a 19.35% equity investment in Black Press Ltd. and a 30% equity interest in Q-ponz Inc. Black Press Ltd. is a privately held company that publishes 95 newspapers (both dailies and weeklies) and has 17 printing plants in Western Canada, Washington State and Hawaii. Q-ponz Inc. is a coupon envelope business based in Toronto.

Black Press has performed strongly showing growth, benefiting from robust economic conditions in British Columbia and Alberta. Torstar's income from associated businesses was $0.6 million in the second quarter of 2005 and $0.5 million year to date.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Funds are generally used for capital expenditures, debt repayment and distributions to shareholders. Long-term debt is used to supplement funds from operations and as required for acquisitions. It is expected that future cash flows from operating activities, combined with the credit facilities available will be adequate to cover forecasted financing requirements.

In the second quarter of 2005, $17.1 million of cash was generated by operations, $31.9 million was used for investing activities and $19.4 million was generated by financing activities. Cash and cash equivalents, net of bank overdraft, increased by $4.1 million in the quarter and $6.0 million year to date to $46.8 million at June 30, 2005.

Operating activities

Operating activities provided cash of $17.1 million in the second quarter down $11.2 million from $28.3 million in the second quarter of 2004. The decline was related to the level of pension funding during the second quarter of 2005 and a $10.0 million larger increase in non-cash working capital. Non-cash working capital increased $32.4 million in the second quarter of 2005 from higher newspaper receivables (second quarter revenues are higher than first quarter) and lower payables due to the timing of payments including payments to authors, distributors and payments related to the 2004 restructuring provisions. The increase in non-cash working capital was higher than the increase of $22.4 million in the second quarter of 2004 due to the timing of payments including income tax installments, distributor incentives and customer refunds.

Year to date non-cash working capital increased by $49.8 million compared with an increase of $17.3 million in the same period last year.

Investing activities

During the second quarter, $31.9 million was used for investing activities up $17.9 million from $14.0 million in the same period last year. The Metroland acquisitions of several community newspapers and the Toronto Wine and Cheese Show used $23.6 million of cash in the second quarter of 2005 and additions to capital assets used $8.2 million.

Year to date capital additions were $18.0 million, down $5.7 million from $23.7 million in the first six months of 2004. In 2004 press additions were underway at both Metroland and CityMedia. During the first quarter of 2005, net proceeds of $5.7 million were received from the sale of property in Kitchener that had previously been occupied by The Record.

Financing activities

Financing activities provided $19.4 million of cash during the second quarter of 2005 compared with an $11.5 million use of cash in 2004.

During the second quarter of 2005, Torstar increased its long-term debt by $33.4 million. Average debt outstanding during the second quarter was $303 million in 2005 and $308 million in 2004. At June 30, 2005, Torstar had $57 million of available credit facilities after providing for outstanding letters of credit, commercial paper and the medium term notes that will mature in September 2005.

Cash dividends of $14.1 million were paid in the second quarter of 2005, up $0.4 million from $13.7 million in 2004. The increase reflected the higher dividend rate partially offset by a lower number of shares outstanding. During the second quarter of 2005, Torstar purchased 70,100 shares for a total price of $1.7 million under the normal course issuer bid that opened on May 7, 2004. In the second quarter of 2004, 377,600 shares were purchased for a total price of $10.2 million.

Torstar commenced a normal course issuer bid on May 6, 2005, effective for one year, to repurchase for cancellation up to 2 million Class B shares. No shares were purchased under this bid during the second quarter of 2005. Torstar intends to purchase approximately 2 million shares over the next three quarters absent any significant acquisitions.

Contractual Obligations

There were no changes in Torstar's significant contractual obligations during the first six months of 2005.

OUTLOOK

Torstar's newspapers continue to face multiple competitors both in print and other media for advertising in Southern Ontario. However, the growth that was realized in advertising revenues by Torstar's smaller city dailies and community newspapers during the second quarter is encouraging.

Harlequin continues to focus on its strategic plan for 2005, which includes a significant increase in the level of North American retail advertising and promotional investment spending, primarily in the second half of the year. The 2005 publishing schedule also anticipates lower volumes in the fourth quarter of 2005 compared to the fourth quarter of 2004.



SUMMARY OF QUARTERLY RESULTS

(In thousands of dollars except for per share amounts)

---------------------------------------------------------------------
---------------------------------------------------------------------
Quarter June 30, March 31, Dec. 31, Sept. 30,
ended 2005 2005 2004 2004
---------------------------------------------------------------------
Revenue $405,437 $361,099 $414,523 $366,540
Net Income $36,112 $21,139 $42,592 $11,309

Net income per Class A voting and Class non-voting share
Basic $0.46 $0.27 $0.54 $0.14
Diluted $0.46 $0.27 $0.54 $0.14
---------------------------------------------------------------------

---------------------------------------------------------------------
---------------------------------------------------------------------
Quarter June 30, March 31, Dec. 31, Sept. 30,
ended 2004 2004 2003 2003
---------------------------------------------------------------------
Revenue $399,038 $361,748 $387,840 $368,040
Net Income $35,764 $23,038 $30,355 $29,715

Net income per Class A voting and Class non-voting share
Basic $0.45 $0.29 $0.39 $0.38
Diluted $0.44 $0.29 $0.38 $0.38
---------------------------------------------------------------------


The summary of quarterly results illustrates the cyclical nature of revenues and operating profits in the Newspaper Segment. The fourth quarter (ended December 31) tends to be the strongest for the daily newspapers. The weekly and community newspapers have a more even performance during the year. The fourth quarter of 2003 (ended December 31) and the third quarter of 2004 (ended September 30) included unusual losses of $7.8 million and $12.3 million that negatively impacted net income and net income per share in those quarters.

RECENT DEVELOPMENTS

Subsequent to the end of the quarter, Metroland completed the purchase of Paton Publishing. Paton Publishing, located in Mississauga, does contract publishing and focused marketing campaigns aimed principally at youth audiences.

On July 18, 2005, the Toronto Star announced a voluntary severance program for management staff at the Vaughan printing facility as part of the Star's ongoing focus on reducing costs and improving margins.

On July 27, 2005 Torstar announced the October 2005 launch of a new weekly glossy celebrity magazine, called Weekly Scoop, to be sold on newsstands across Canada.

OTHER

At June 30, 2005, Torstar had 9,916,522 Class A voting shares and 68,227,589 Class B non-voting shares outstanding and 5,475,168 options to purchase Class B non-voting shares outstanding to executives and non-executive directors. More information on Torstar's share capital and stock option plan is provided in Notes 3 and 4 of the consolidated financial statements.

Additional information relating to Torstar is available on SEDAR at www.sedar.com.

Dated: July 27, 2005



Torstar Corporation
Consolidated Statements
of Income
(unaudited)

Three months ended Six months ended
June 30 June 30
---------------------------------------------------------------------
(thousands of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenue
Newspapers $272,657 $262,929 $504,564 $487,592
Book publishing 132,780 136,109 261,972 273,194
---------------------------------------------------------------------
$405,437 $399,038 $766,536 $760,786
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating profit
Newspapers $42,149 $41,440 $58,656 $60,050
Book publishing 23,371 22,871 47,964 48,992
Corporate (4,537) (3,814) (9,442) (8,146)
---------------------------------------------------------------------
60,983 60,497 97,178 100,896
Interest (2,595) (2,626) (4,892) (5,408)
Foreign exchange (407) (405) (655) (195)
Unusual items (note 8) 1,350
---------------------------------------------------------------------
Income before taxes 57,981 57,466 92,981 95,293
Income and other taxes (22,500) (22,100) (36,200) (36,700)
---------------------------------------------------------------------
Income before income of
associated businesses 35,481 35,366 56,781 58,593
Income of associated
businesses 631 398 470 209
---------------------------------------------------------------------
Net income $36,112 $35,764 $57,251 $58,802
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per Class A and
Class B share (note 3(C)):
Net income - Basic $0.46 $0.45 $0.73 $0.74
Net income - Diluted $0.46 $0.44 $0.73 $0.73
---------------------------------------------------------------------
---------------------------------------------------------------------

(See accompanying notes)




Torstar Corporation
Consolidated Balance Sheets
(unaudited)

June 30 December 31
---------------------------------------------------------------------
(thousands of dollars) 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------

Assets
Current:
Cash and cash equivalents $48,813 $47,229
Receivables 249,970 247,942
Inventories 34,297 35,236
Prepaid expenses 79,756 68,250
Future income tax assets 23,299 23,851
------------- ------------

Total current assets 436,135 422,508
------------- ------------

Property, plant and equipment (net) 377,732 392,141
Investment in associated businesses 23,517 22,954
Goodwill (net) 499,624 499,637
Other assets (note 7) 141,102 114,731
Future income tax assets 58,015 58,056
------------- ------------

Total assets $1,536,125 $1,510,027
------------- ------------
------------- ------------

Liabilities and Shareholders' Equity
Current:
Bank overdraft $1,984 $6,414
Accounts payable and accrued liabilities 186,254 214,352
Income taxes payable 14,641 23,917
------------- ------------

Total current liabilities 202,879 244,683
------------- ------------

Long-term debt (note 2) 365,070 317,829
------------- ------------
Other liabilities 84,206 83,177
------------- ------------
Future income tax liabilities 70,577 70,677
------------- ------------

Shareholders' equity:
Share capital (note 3) 371,755 369,140
Contributed surplus 3,660 2,442
Retained earnings 444,046 425,787
Foreign currency translation adjustment (6,068) (3,708)
------------- ------------

Total shareholders' equity 813,393 793,661
------------- ------------

Total liabilities and shareholders'
equity $1,536,125 $1,510,027
------------- ------------
------------- ------------

(See accompanying notes)



Torstar Corporation
Consolidated Statements Of
Cash Flows
(unaudited)


Three months ended Six months ended
June 30 June 30
---------------------------------------------------------------------
(thousands of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash was provided by (used in)
Operating activities $17,079 $28,311 $36,318 $70,723
Investing activities (31,875) (13,967) (35,814) (28,208)
Financing activities 19,366 (11,487) 6,567 (52,857)
---------------------------------------------------------------------
Increase (decrease) in cash 4,570 2,857 7,071 (10,342)
Effect of exchange rate
changes (467) 87 (1,057) 567
Cash, beginning of period 42,726 37,698 40,815 50,417
---------------------------------------------------------------------
Cash, end of period $46,829 $40,642 $46,829 $40,642
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating activities:
Net income $36,112 $35,764 $57,251 $58,802
Depreciation 14,289 13,600 28,314 27,017
Amortization 641 644 1,280 1,285
Future income taxes 500 (4) 700 337
Income of associated
businesses (631) (398) (470) (209)
Other (1,463) 1,143 (965) 755
---------------------------------------------------------------------
49,448 50,749 86,110 87,987
Increase in non-cash
working capital (32,369) (22,438) (49,792) (17,264)
---------------------------------------------------------------------
Cash provided by operating
activities $17,079 $28,311 $36,318 $70,723
---------------------------------------------------------------------
---------------------------------------------------------------------
Investing activities:
Additions to property,
plant and equipment ($8,219) ($11,117) ($17,968) ($23,702)
Acquisitions (note 7) (23,604) (1,635) (23,604) (3,340)
Investment in associated
business (note 7) (1,413) (1,413)
Other (note 8) (52) 198 5,758 247
---------------------------------------------------------------------
Cash used in investing
activities ($31,875) ($13,967) ($35,814) ($28,208)
---------------------------------------------------------------------
---------------------------------------------------------------------
Financing activities:
Issuance of commercial
paper (net) $33,409 $10,663 $45,212 $35,938
Repayment of mid-term notes (75,000)
Dividends paid (14,147) (13,676) (28,299) (27,300)
Exercise of stock options
(note 3(a)) 1,164 723 1,743 21,735
Purchase of shares for
cancellation (note 3(b)) (1,740) (10,212) (13,068) (10,212)
Other 680 1,015 979 1,982
---------------------------------------------------------------------
Cash provided by (used in)
financing activities $19,366 ($11,487) $6,567 ($52,857)
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash represented by:
Cash and cash equivalents $48,813 $43,421 $48,813 $43,421
Bank overdraft (1,984) (2,779) (1,984) (2,779)
---------------------------------------------------------------------
$46,829 $40,642 $46,829 $40,642
---------------------------------------------------------------------
---------------------------------------------------------------------

(See accompanying notes)



Torstar Corporation
Consolidated Statements Of
Retained Earnings
(unaudited)

Six months ended
June 30
-------------------------------------------------------------------
(thousands of dollars) 2005 2004
-------------------------------------------------------------------
-------------------------------------------------------------------

Retained earnings, beginning of period $425,787 $395,758

Net income 57,251 58,802

Dividends (28,914) (27,770)

Premium paid on repurchase of shares
for cancellation (note 3(b)) (10,078) (8,200)
-------------------------------------------------------------------

Retained earnings, end of period $444,046 $418,590
-------------------------------------------------------------------
-------------------------------------------------------------------

(See accompanying notes)


TORSTAR CORPORATION

Notes to the Interim Consolidated Financial Statements

(Dollar amounts in thousands unless otherwise stated)

1. Accounting policies

The accounting policies used in the preparation of these unaudited interim consolidated financial statements conform with those in Torstar Corporation's December 31, 2004 audited annual consolidated financial statements. These interim financial statements do not include all of the disclosures included in the annual financial statements and accordingly should be read in conjunction with the annual consolidated financial statements.



2. Long-term debt

---------------------------------------------------------------------
As at As at
June 30, 2005 December 31, 2004
---------------------------------------------------------------------
Commercial paper:
Cdn. Dollar denominated $190,589 $156,792
U.S. Dollar denominated 129,481 116,037
------------- ---------------
320,070 272,829
------------- ---------------
Medium Term Notes:
Cdn. Dollar denominated 45,000 45,000
------------- ---------------

$365,070 $317,829
------------- ---------------
------------- ---------------


All commercial paper and medium term notes with a term of less than one year have been classified as long-term debt as the company has the ability and intention to refinance these amounts under its existing credit facilities.

The carrying values of the various long-term debt instruments approximate their fair value at June 30, 2005. The company entered into an interest rate swap agreement that will fix the interest rate on U.S. $80 million of borrowings at approximately 3.5% for four years beginning December 2003. The fair value of the U.S. interest rate swap arrangement was $1.2 million favourable at June 30, 2005.



3. Share Capital

a) A summary of changes to the company's share capital is as follows:

Class A shares (voting)
At June 30, 2005 there were 9,916,522 Class A shares outstanding
with a stated value of $2,694. The only changes in the Class A
shares since December 31, 2004 were the conversion to Class B
shares of 1,953 shares with a stated value of $1.

Class B shares (non-voting)

Shares Amount
------------ ----------
December 31, 2004 68,533,752 $366,445
Converted from Class A 1,953 1
Issued under Employee Share
Purchase Plan 128,959 3,225
Stock options exercised 95,900 1,743
Purchased for cancellation (559,200) (2,990)
Dividend reinvestment plan 25,306 615
Other 919 22
------------ ----------
June 30, 2005 68,227,589 $369,061
------------ ----------
------------ ----------

Total Class A and Class B shares 78,144,111 $371,755
------------ ----------
------------ ----------


b) The company commenced a normal course issuer bid on May 6, 2005, effective for one year, to repurchase for cancellation up to 2 million Class B shares, representing approximately 2.9% of the company's outstanding Class B shares. As at June 30, 2005 no shares were repurchased under this bid. A similar issuer bid, which commenced May 7, 2004, was completed in the second quarter. 2,000,000 Class B shares were repurchased and cancelled since the beginning of this issuer bid at an average repurchase price of $24.02 per share for a total consideration of $48,044. During 2005, 559,200 Class B shares were repurchased at an average price of $23.37 per share for a total consideration of $13,068. Retained earnings were reduced by $10,078 representing the excess of the cost of the shares repurchased over their stated value.

c) Earnings per share

Basic per share amounts have been determined by dividing net income by the weighted average number of shares outstanding during the period. Diluted per share amounts have taken into consideration the dilutive effect of stock options and the employee share purchase plan. The weighted average number of Class A and Class B shares outstanding (in thousands) were:



Three months ended Six months ended
June 30 June 30
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Basic 78,098 79,669 78,132 79,310
Diluted 78,707 80,935 78,560 80,357


d) During the six months ended June 30, 2005, controlling shareholders sold 10,000 Class B shares.

4. Stock-based compensation

The company has four stock-based compensation plans: an executive share option plan, an employee share purchase plan, a deferred share unit plan for employees and a deferred share unit plan for non-employee directors.



a) A summary of changes in the executive share option plan is as follows:

Share options Weighted average
exercise price
--------------- -------------------
December 31, 2004 4,936,962 $22.63
Granted 643,531 22.00
Exercised (95,900) (18.18)
Cancelled (9,425) (25.53)
--------------- -------------------
June 30, 2005 5,475,168 $22.63
--------------- -------------------
--------------- -------------------

Options exercisable at June 30, 2005 are as follows:

Range of Share options Weighted average
exercise price Exercisable exercise price
-------------- ------------- ----------------
$15.75-18.05 488,100 $17.11
$18.50-22.20 2,144,614 $20.96
$25.00-29.01 1,028,160 $25.78
------------- ----------------
$15.75-29.01 3,660,874 $21.80
------------- ----------------
------------- ----------------


b) The company has recognized in 2005 compensation expense totalling $1.1 million (2004 - $0.8 million) for the stock options granted in 2003 to 2005 and the employee share purchase plans originating in 2004 and 2005. The fair value of the executive stock options granted in 2005 was estimated to be $3.48 (2004 - $5.52) per option at the date of grant using the Black-Scholes option pricing model with the assumptions of a risk-free interest rate of 3.7% (2004 - 4.1%), expected dividend yield of 3.4% (2004 - 2.4%), expected volatility of 20.7% (2004 - 20.6%) and an expected time until exercise of 5 years.

c) No compensation expense has been recognized for the company's stock-based compensation plans granted in 2002. Had compensation cost for the company's stock-based compensation plans been determined based on the fair value method of accounting for stock-based compensation, the company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:



Three months Six months
ended June 30 ended June 30
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Net income - As reported $36,112 $35,764 $57,251 $58,802
- Pro forma $35,685 $35,118 $56,397 $57,532
Earnings per
share - Basic - As reported $0.46 $0.45 $0.73 $0.74
- Pro forma $0.46 $0.44 $0.72 $0.73
Earnings per
share - Diluted - As reported $0.46 $0.44 $0.73 $0.73
- Pro forma $0.45 $0.43 $0.72 $0.72


d) The company has a Deferred Share Unit Plan for executives and non-employee directors. As at June 30, 2005, 149,880 units were outstanding at a value of $3.7 million. During the second quarter, the company entered into a derivative instrument in order to offset its exposure to 139,868 units. Changes in the fair value of this instrument will be recorded as compensation expense and will offset the impact of changes in the value of the outstanding deferred share units.

5. Employee Future Benefits

The company maintains a number of defined benefit plans, which provide pension benefits to its employees in Canada and the United States. Post employment benefits other than pensions are also available to employees, primarily in the Canadian newspapers operations, which provide for various health and life insurance benefits.

The company has expensed net pension benefit costs of $8.1 million for the six months ended June 30, 2005 (2004 - $7.7 million) and $3.9 million for the quarter ended June 30, 2005 (2004 - $3.9 million). With respect to post-employment benefits other than pensions, for the six months and quarter ended June 30, 2005 the net benefit cost was $2.2 million and $1.2 million respectively (2004 - $1.9 million and $1.0 million respectively).

6. Forward Foreign Exchange Contracts and Options

As described in Note 13 of the company's December 31, 2004 annual financial statements, the company has entered into various forward foreign exchange contracts and option contracts.

During the first half of 2005 the company entered into an offsetting position for 2.0 million of its 4.0 million 2006 Euro forward foreign exchange contracts.

The company has marked to market its outstanding Euro forward foreign exchange contracts at June 30, 2005. As a result, an unrealized gain of $0.4 million was included in the operating profit of the book publishing segment for the six months ended June 30, 2005.

7. Acquisitions

The company completed a number of community newspaper acquisitions during 2005 and 2004. In 2005, the total purchase price of $23.6 million has been included in Other assets pending the completion of the final allocation of the purchase prices. In 2004, the total purchase price was $3.3 million of which $2.8 million was allocated to goodwill. The company also acquired on June 17, 2004 a 30% equity interest in an associated business.

8. Unusual items

During the first quarter of 2005, the company recognized a $1.4 million gain from the completion of the sale of the land and building previously occupied by The Record in Kitchener. Net proceeds were $5.7 million.

Contact Information

  • Torstar Corporation
    D. P. Holland
    Executive Vice-President and Chief Financial Officer
    416-869-4031