Torstar Corporation
TSX : TS.NV.B

October 26, 2005 16:00 ET

Torstar Corporation: Revenues Up 4% In The Third Quarter

TORONTO, ONTARIO--(CCNMatthews - Oct. 26, 2005) - Torstar Corporation (TSX:TS.NV.B) today announced its results for the third quarter ended September 30, 2005.

Net income was $23.7 million or $0.30 per share in the third quarter of 2005, up $12.4 million or $0.16 per share from $11.3 million or $0.14 per share in the third quarter of 2004. The higher net income and earnings per share resulted from the positive impact of unusual items year over year, offset slightly by lower operating results, a non-cash foreign exchange loss and a higher effective tax rate.

Total revenues were $380.6 million in the third quarter up $14.1 million or 4% from $366.5 million in 2004 with revenue growth in both the Newspapers and Book publishing segments. Newspaper revenues were $242.4 million in the third quarter of 2005, up $11.7 million or 5% from $230.7 million in the third quarter of 2004. Book publishing revenues were $138.3 million in the third quarter, up $2.5 million from the same period last year as $9.1 million of underlying revenue growth was partially offset by the impact of foreign exchange rates.

Operating profit was $34.4 million in the quarter, down $2.9 million from $37.3 million in 2004. Newspaper operating profit was $13.8 million in the third quarter down $4.3 million from $18.1 million in the third quarter of 2004 with lower results at all of the newspaper operations. Increased investment at both TTN and Metroland in market expansion and new product launches contributed to lower operating results in the quarter. Book publishing operating profits were $25.0 million in the third quarter of 2005, up $1.7 million from $23.3 million in the same period last year including $1.3 million of underlying operating growth and $0.4 million from the impact of foreign exchange.

During the third quarter of 2005, the Canadian dollar strengthened relative to the U.S. dollar. This resulted in Torstar reporting a non-cash foreign exchange loss of $2.2 million on the translation of its net U.S. dollar asset position. Torstar has U.S. dollar denominated debt which provides a hedge against its net U.S. dollar assets. However the offset is not exact as the net U.S. dollar assets are primarily working capital with amounts fluctuating daily. In 2004, the non-cash foreign exchange losses were $1.1 million in the third quarter.

During the third quarter of 2005, Torstar reported a net unusual gain of $8.9 million. This net gain included a gain of $11.0 million on the sale of surplus land at 7 Queen's Quay East in Toronto reduced by a $2.1 million provision for a voluntary severance program at the Toronto Star's printing facility. In the third quarter of 2004, Torstar reported an unusual loss of $12.3 million from restructuring provisions and investment write-downs. Torstar has reported these items as unusual as they did not occur in the normal course of Torstar's businesses and could otherwise distort an assessment of past and future operating results.

The effective tax rate was 37.9% in the third quarter of 2005 compared with 46.7% in 2004. Backing out the effect of the unusual items in both quarters, the effective tax rate was 41.5% in 2005 and 39.4% in 2004. The higher effective tax rate in the third quarter of 2005 was from the larger TTN startup losses that were not tax-effected in either year.

"This was a difficult quarter for our newspaper businesses," said Robert Prichard, Torstar's President and Chief Executive Officer. "Soft revenues in our daily newspapers and significant investments in new products, expansion, the infrastructure to support growth in our community newspapers and new ventures led to reduced operating results despite overall revenue growth. Our outlook to year end remains cautious as uncertainty about advertising revenues remains significant. In book publishing, however, Harlequin grew its operating profits by 7% with a strengthened third quarter publishing schedule."

Newspapers

Newspaper segment revenues were $242.4 million in the third quarter, up $11.7 million from $230.7 million in 2004 with higher revenues at Metroland, CityMedia, Torstar Digital and TTN more than offsetting lower revenues at the Toronto Star. Newspaper EBITDA (operating profit before interest, taxes, depreciation and amortization) was $25.6 million in the quarter down $4.7 million from $30.3 million in 2004. TTN's EBITDA losses were $0.5 million higher in the quarter as it continued to build its sales organization and infrastructure.

During the third quarter Torstar completed the purchase of Paton Marketing Resources Inc., a contract publisher and producer of focused marketing campaigns aimed principally at youth audiences. Torstar also acquired more community newspapers through Metroland, including the Huntsville Forester, the Almaguin Forester and the remaining 50% of the Muskoka Advance and Huntsville, Bracebridge and Gravenhurst Weekenders.

The Toronto Star's revenues were down $1.4 million in the quarter as linage declines of 7.5% continue to negatively impact advertising revenues. Automotive linage continued to be soft during the third quarter. A 2.7% higher effective average line rate in the quarter partly offset the linage declines.

Metroland's revenues were up $10.8 million or 12.4% in the third quarter with growth in advertising and distribution revenues. Linage increased 13% in the quarter including the impact of acquisitions. On a "same paper" basis linage was flat in the quarter with increases in classified and real estate offset by declines in retail and national categories. Distribution volumes were up 8.4% in the quarter.

CityMedia revenues were up $1.1 million or 2.9% in the third quarter with growth in advertising, distributions and circulation. Third quarter linage was relatively flat at The Hamilton Spectator but down at The Record. The Record had a particularly strong third quarter in 2004 when there were a significant number of store openings in the Kitchener-Waterloo region.

Newsprint costs were down $0.7 million in the quarter from both pricing and lower consumption at the dailies. Payroll costs were $6.6 million higher in the third quarter with increased staffing levels at Metroland, Torstar Digital and TTN.

Newspaper segment operating profits were $13.8 million in the third quarter, down $4.3 million from $18.1 million in 2004. Metroland's operating profits were down $2.8 million in the quarter as the operation continued to invest in new products and market expansion. CityMedia's operating profit was down $0.5 million in the third quarter but would have been up slightly excluding the Hamilton Web strike costs.

Book Publishing

Harlequin's revenues were up $9.1 million or 6.7% in the third quarter excluding the impact of foreign exchange. North America Retail was up $7.8 million, North America Direct-To-Consumer was down $0.2 million and Overseas was up $1.5 million.

Harlequin's operating profits were up $1.3 million or 5.6% in the third quarter excluding the impact of foreign exchange. North America Retail operating profits were up $0.6 million in the quarter with higher volumes and revenue gains offset partially by increased promotional spending and higher costs. North America Direct-To-Consumer operating profits were down $0.1 million in the quarter on flat revenues. Overseas operating profits were up $0.8 million in the third quarter.

Subsequent Developments

On October 14, 2005, Torstar acquired Runge Publishing Inc. Runge Publishing operates 18 community newspapers in eastern Ontario, primarily located in the Ottawa valley area, including the Renfrew Mercury, Arnprior Chronicle-Guide and the Kanata Kourier-Standard. Runge Publishing will be reported with Metroland.

On October 25, 2005, Torstar announced that it has invested U.S. $3 million for a minority position in LiveDeal.com, a growing localized online classifieds provider that has been operating in the U.S. since 2003. Torstar also announced that its digital division, Torstar Digital, has entered into a joint venture to create LiveDeal Canada.

Other

On October 26, 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 December 31, 2005, to shareholders of record at the close of business on December 9, 2005.

For further details on Torstar's second quarter results please see the Interim Management Discussion and Analysis and Consolidated Financial Statements dated October 26, 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 90 community newspapers in Southern Ontario; and Harlequin Enterprises, a leading global publisher of women's fiction.


INTERIM MANAGEMENT'S DISCUSSION AND ANALYSIS

For the three and nine months ended September 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 nine months ended September 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 90 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 - Third quarter and year to date 2005

Overall Performance

Newspaper revenues were $242.4 million in the third quarter of 2005, up $11.7 million or 5% from $230.7 million in the third quarter of 2004. Book publishing revenues were $138.3 million in the third quarter, up $2.5 million from the same period last year as $9.1 million of underlying revenue growth was partially offset by the impact of foreign exchange rates. Total revenues were $380.6 million in the quarter up $14.1 million from $366.5 million in 2004.

Year to date Newspaper revenues were $746.9 million up $28.6 million, or 4% from $718.3 million in the same period in 2004. Book publishing revenues were $400.2 million in the first nine months of 2005 compared with $409.0 million in 2004 as $8.8 million of underlying revenue growth was more than offset by a $17.6 million decline from the impact of foreign exchange rates. Total revenues were $1,147.2 million year to date up $19.9 million from $1,127.3 million in the same period last year.

Newspaper operating profit was $13.8 million in the third quarter down $4.3 million from $18.1 million in the third quarter of 2004 with lower results at all of the newspaper operations. Year to date, Newspaper operating profit was $72.5 million down $5.7 million from $78.2 million in the same period in 2004. Increased investment at both TTN and Metroland in market expansion and new product launches contributed to lower operating results in the third quarter and first nine months of 2005.

Book Publishing operating profits were $25.0 million in the third quarter of 2005 up $1.7 million from $23.3 million in the same period last year including $1.3 million of underlying operating growth and $0.4 million from the impact of foreign exchange. Year to date Book Publishing operating profits were $72.9 million up $0.6 million from $72.3 million in 2004 with $0.2 million from underlying operations and $0.4 million from the impact of foreign exchange.

Corporate costs were $4.3 million in the third quarter of 2005 and $13.8 million year to date. These costs were flat in the quarter and up $1.5 million year to date. The increase in year to date costs includes higher accounting expense for stock options, mark-to-market adjustments on deferred share units and higher pension costs.

Interest expense was $2.7 million in the third quarter of 2005, consistent with the third quarter of 2004. Year to date, interest expense was $7.6 million down $0.5 million from $8.1 million in 2004. Interest rates have been relatively flat year over year while debt levels have been slightly lower.

During the third quarter of 2005, the Canadian dollar strengthened relative to the U.S. dollar. This resulted in Torstar reporting a non-cash foreign exchange loss of $2.2 million on the translation of its net U.S. dollar asset position. Torstar has U.S. dollar denominated debt which provides a hedge against its net U.S. dollar assets. However the offset is not exact as the net U.S. dollar assets are primarily working capital with amounts fluctuating daily. Year to date the non-cash foreign exchange loss was $2.8 million. In 2004, the non-cash foreign exchange losses were $1.1 million in the third quarter and $1.3 million year to date.

During the third quarter of 2005, Torstar reported an unusual gain of $8.9 million. This net gain included a gain of $11.0 million on the sale of surplus land at 7 Queen's Quay East in Toronto reduced by a $2.1 million provision for a voluntary severance program at the Toronto Star's printing facility. In the third quarter of 2004, Torstar reported an unusual loss of $12.3 million from restructuring provisions and investment write-downs. Torstar has reported these items as unusual as they did not occur in the normal course of Torstar's businesses and could otherwise distort an assessment of past and future operating results. On an after-tax basis, the 2005 gain was $0.10 per share and the 2004 loss was $0.11 per share.

Year to date, Torstar reported an unusual gain of $10.3 million which included the first quarter $1.4 million gain from the sale of the land and building in Kitchener that had previously been occupied by The Record. On an after-tax basis, the year to date 2005 gain was $0.11 per share.

The effective tax rate was 37.9% in the third quarter of 2005 compared with 46.7% in 2004. Backing out the effect of the unusual items in both quarters, the effective tax rate was 41.5% in 2005 and 39.4% in 2004. Year to date the effective tax rate after backing out the effect of the unusual items was 39.5% in 2005 and 38.7% in 2004. The higher effective tax rate in the third quarter of 2005 and year to date was from the larger TTN startup losses that were not tax-effected in either year.

Net income was $23.7 million or $0.30 per share in the third quarter of 2005, up $12.4 million or $0.16 per share from $11.3 million or $0.14 per share in the third quarter of 2004. Year to date net income was $80.9 million or $1.04 per share in 2005, up $10.8 million or $0.16 per share from $70.1 million or $0.88 per share in the same period in 2004. The higher net income and earnings per share resulted from the positive impact of unusual items year over year, offset slightly by lower operating results, the non-cash foreign exchange loss and the higher effective tax rate.

The following chart provides a continuity of earnings per share from 2004 to 2005:



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Third quarter Year to date
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Net income per share 2004 $0.14 $0.88
Unusual items 0.21 0.22
Foreign exchange (0.01) (0.02)
Tax rate (0.01) (0.01)
Operations (0.03) (0.05)
Shares outstanding 0.02
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Net income per share 2005 $0.30 $1.04
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The weighted average number of shares outstanding during the third quarter was 78.3 million down 0.9 million from 79.2 million in the third 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. The weighted average number of shares outstanding year to date in 2005 was 78.2 million down 1.1 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 94 community newspapers, a number of specialty publications, operates several consumer shows and publishes the jointly owned Metro daily commuter papers in Toronto, Ottawa and Vancouver 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 September 30:



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Toronto Torstar
Star Metroland CityMedia Digital(1) Other(2) Total
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2005
Revenue $98,429 $97,605 $38,287 $4,393 $3,662 $242,376
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Operating
profit
(loss) (1,734) 13,336 3,872 878 (2,543) 13,809
Depreciation 7,450 2,098 1,422 120 713 11,803
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Segment
EBITDA $5,716 $15,434 $5,294 $998 ($1,830) $25,612
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Margins:
- Operating
profit n/a 13.7% 10.1% 20.0% n/a 5.7%
- EBITDA 5.8% 15.8% 13.8% 22.7% n/a 10.6%

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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) Includes the results of TMGTV and TTN.


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Toronto Torstar
Star Metroland CityMedia Digital Other Total
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2004(3)
Revenue(4) $99,834 $86,758 $37,178 $3,812 $3,167 $230,749
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Operating
profit
(loss) (1,358) 16,051 4,377 1,091 (2,060) 18,101
Depreciation 8,269 1,751 1,460 174 567 12,221
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Segment
EBITDA $6,911 $17,802 $5,837 $1,265 ($1,493) $30,322
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Margins:
- Operating
profit n/a 18.5% 11.8% 28.6% n/a 7.8%
- EBITDA 6.9% 20.5% 15.7% 33.2% n/a 13.1%

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For the nine months(5) ended September 30:

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Toronto Torstar
Star Metroland CityMedia Digital Other Total
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2005
Revenue $311,099 $296,773 $116,497 $12,722 $9,849 $746,940
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Operating
profit
(loss) 13,053 50,341 14,296 2,636 (7,861) 72,465
Depreciation 24,453 6,157 4,269 374 2,170 37,423
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Segment
EBITDA $37,506 $56,498 $18,565 $3,010 ($5,691) $109,888
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Margins:
- Operating
profit 4.2% 17.0% 12.3% 20.7% n/a 9.7%
- EBITDA 12.1% 19.0% 15.9% 23.7% n/a 14.7%

2004
Revenue $321,375 $262,931 $113,510 $10,751 $9,774 $718,341
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Operating
profit
(loss) 12,898 53,187 14,227 2,762 (4,923) 78,151
Depreciation 25,392 4,604 4,381 523 1,458 36,358
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Segment
EBITDA $38,290 $57,791 $18,608 $3,285 ($3,465) $114,509
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Margins:
- Operating
profit 4.0% 20.2% 12.5% 25.7% n/a 10.9%
- EBITDA 11.9% 22.0% 16.4% 30.6% n/a 15.9%

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(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.

(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 $242.4 million in the third quarter, up $11.7 million from $230.7 million in 2004. Year to date revenues were $746.9 million, up $28.6 million from $718.3 million in the same period last year.

During the third quarter Torstar completed the purchase of Paton Marketing Resources Inc., a contract publisher and producer of focused marketing campaigns aimed principally at youth audiences. Torstar also acquired more community newspapers including the Huntsville Forester, the Almaguin Forester and the remaining 50% of the Muskoka Advance and Huntsville, Bracebridge and Gravenhurst Weekenders. Both Paton and the newspapers will be reported with Metroland.

The Toronto Star continued to face revenue challenges during the third quarter of 2005. Revenues were down $1.4 million in the quarter and $10.3 million year to date as linage declines continue to negatively impact advertising revenues. Linage was down 7.5% in the third quarter and 8.3% year to date with declines in most categories. National, retail and travel linage were down 2.5%, 9.9% and 13.3% respectively in the quarter. Automotive linage continued to be soft during the third quarter. A 2.7% higher effective average line rate in both the quarter and year to date partly offset the linage declines. Circulation revenue was higher in the quarter and year to date, reflecting higher home delivery and single copy prices.

Metroland's revenues were up $10.8 million in the third quarter and $33.8 million year to date with growth in advertising and distribution revenues. Linage increased 13% in the quarter including the impact of acquisitions. On a "same paper" basis linage was flat in the quarter with increases in classified and real estate offset by declines in retail and national categories. Distribution volumes were up 8.4% in the quarter and 9.6% year to date. Metroland continued to generate revenue growth from new products and expanded publishing areas during the third quarter.

CityMedia revenues were up $1.1 million in the third quarter and $3.0 million year to date with growth in advertising, distributions and circulation. Commercial print revenues were down both in the quarter and year to date. Third quarter linage was relatively flat at The Hamilton Spectator but down at The Record. The Record had a strong third quarter in 2004 when there were a significant number of store openings in the Kitchener-Waterloo region.

Newsprint costs were down $0.7 million in the quarter and $2.3 million year to date. Pricing remains favourable to 2004 but savings were also realized from lower consumption at the dailies. The Toronto Star has reduced consumption both from lower advertising linage but also from planned page reductions. A portion of the reduced consumption at the dailies was offset by higher consumption at Metroland from its expanded products.

The growth in Metroland's operations, including acquisitions and the expansion of Metro into Vancouver and Ottawa, the investment in Metroland's infrastructure to support the expansion, the ongoing strike-related costs at CityMedia, the investments in Torstar Digital and TTN, and the launch of Weekly Scoop all contributed to higher payroll and other expenses during the third quarter and year to date.

Newspaper segment operating profits were $13.8 million in the third quarter, down $4.3 million from $18.1 million in 2004. Year to date operating profits were $72.5 million down $5.7 million from $78.2 million in 2004. Metroland's operating profits were down $2.8 million in the quarter and $2.9 million year to date as the operation continued to invest in new products and market expansion. CityMedia's operating profit was down $0.5 million in the third quarter and up $0.1 million year to date. Excluding the strike costs CityMedia's operating profit would have been up slightly in the quarter and up $2.0 million year to date. The Toronto Star year to date operating profit was up $0.2 million from cost savings but was down $0.3 million in the third quarter.

TTN continued the Los Angeles installation during the third quarter of 2005. As expected while TTN continues to build its sales organization and infrastructure, EBITDA losses were $2.4 million in the third quarter up from $1.9 million in 2004. Year to date, TTN had EBITDA losses of $6.9 million compared with a loss of $5.0 million in 2004. Depreciation expense was up $0.2 million in the quarter and $0.8 million year to date reflecting the impact of the installations completed during 2004.

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 nine months ended September 30 (in $000's):



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Three Months Nine Months
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2005 2004 2005 2004
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Reported revenue,
prior year $135,791 $152,852 $408,985 $447,916
Impact of currency
movements (10,090) (2,641) (25,055) (13,641)
Impact of U.S. dollar
Hedges(6) 3,436 4,343 7,505 13,851
Change in operating
revenue 9,128 (18,763) 8,802 (39,141)
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Reported revenue,
current year $138,265 $135,791 $400,237 $408,985
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Three Months Nine Months
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2005 2004 2005 2004
Reported operating
profit, prior year $23,325 $36,246 $72,317 $95,302
Impact of currency
movements (2,426) (1,352) (6,636) (5,498)
Impact of U.S.
dollar hedges 3,436 460 7,505 5,153
Impact of other
currency hedges (611) 405 (472) 464
Change in operating
profit 1,255 (12,434) 229 (23,104)
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Reported operating
profit, current year $24,979 $23,325 $72,943 $72,317
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Depreciation and
amortization 1,902 2,164 5,844 6,267
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Segment EBITDA $26,881 $25,489 $78,787 $78,584
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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.


Harlequin's revenues were up $9.1 million in the third quarter excluding the impact of foreign exchange. North America Retail was up $7.8 million, North America Direct-To-Consumer was down $0.2 million and Overseas was up $1.5 million. Year to date revenues were up $8.8 million excluding the impact of foreign exchange. North America Retail was up $8.4 million, North America Direct-To-Consumer was down $3.4 million and Overseas was up $3.8 million.

Harlequin's operating profits were up $1.3 million in the third quarter excluding the impact of foreign exchange. North America Retail was up $0.6 million, North America Direct-To-Consumer was down $0.1 million and Overseas was up $0.8 million. Year to date operating profits were up $0.2 million excluding the impact of foreign exchange. North America Retail was down $5.1 million, North America Direct-To-Consumer was up $1.9 million and Overseas was up $3.4 million.

North America Retail revenues were up year over year in the third quarter from changes in the publishing schedule including new product introductions and various marketing initiatives. North America Retail series volumes were consistent with the third quarter of 2004 while single title volumes were higher. The revenue gains were partially offset by increased promotional spending and higher costs in the quarter. Year to date, the investment in promotional spending and higher costs have more than offset the revenue gains.

North America Direct-To-Consumer revenues and operating profits were relatively flat year over year in the third quarter despite the longer-term trend of a declining number of books sold. Year to date, lower volumes have been offset by a June 2004 price increase (the year over year impact being fully realized by the end of the second quarter of 2005) and lower investment in advertising and promotion.

On October 6, 2005 Harlequin announced the purchase of the assets of BET Books, the publishing arm of Black Entertainment Television. The addition of BET Books, a leading publisher of African American women's fiction and the imprints Arabesque, Sepia and New Spirit, to the Harlequin portfolio will enhance the position of Harlequin within a strong growth segment in the U.S. book market. The deal is expected to close during the fourth quarter.

The reported increases in Overseas revenues and operating profits for the third 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 through the third quarter and higher costs year to date associated with a new distributor. Japanese operating profits were up $0.5 million in the third quarter as declines in series volumes were offset by improved single title performance.

Harlequin's reported operating profit margin was 18.1% in the third quarter and 18.2% year to date up from 17.2% and 17.7% 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 13.0% in the third quarter and 13.4% year to date down from 13.8% and 14.5% in the same periods in 2004. There are no hedges in place for 2006.



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(in $000's) Three Months Nine Months
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2005 2004 2005 2004
Reported revenue $138,265 $135,791 $400,237 $408,985
Hedge gains(7) 7,779 4,343 21,356 13,851
---------------------------------------------------------------------
Revenue before hedges $130,486 $131,448 $378,881 $395,134
---------------------------------------------------------------------

Reported operating
profit $24,979 23,325 $72,943 $72,317
Hedge gains(8) 7,995 5,170 22,092 15,059
---------------------------------------------------------------------
Operating profit
before hedges $16,984 $18,155 $50,851 $57,258
---------------------------------------------------------------------

Reported margins 18.1% 17.2% 18.2% 17.7%
Margins excluding hedges 13.0% 13.8% 13.4% 14.5%

---------------------------------------------------------------------
---------------------------------------------------------------------


(7) The U.S. dollar foreign exchange contracts are designated as
hedges for accounting purposes and the related gains are recognized
in revenue as realized.

(8) Reported operating profit includes the realized gains on the U.S.
dollar contracts as well as the realized and unrealized gains
(losses) from the Euro contracts (which are not designated as hedges
for accounting purposes).


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 continued to benefit from robust economic conditions in British Columbia and Alberta. Torstar's loss from associated businesses was $0.2 million in the third quarter of 2005. Year to date, Torstar's income from associated businesses was $0.2 million.

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 third quarter of 2005, $53.1 million of cash was generated by operations, $6.3 million was used for investing activities and $44.5 million was used for financing activities. Cash and cash equivalents, net of bank overdraft, increased by $0.1 million in the quarter and $6.1 million year to date to $47.0 million at September 30, 2005.

Operating activities

Operating activities provided cash of $53.1 million in the third quarter down $4.4 million from $57.5 million in the third quarter of 2004. The decline was a combination of lower operating profits and higher pension funding. Non-cash working capital decreased $23.1 million in the third quarter of 2005 compared with a decrease of $22.1 million in 2004.

Year to date, operating activities provided $89.4 million of cash down $38.8 million from $128.2 million in 2004. Part of this decline was the result of the lower operating profits and higher pension funding. The balance of the decline was from an increase in non-cash working capital of $26.7 million in 2005 compared with a decrease in non-cash working capital of $4.8 million in 2004. This swing primarily relates to the timing of payments year over year.

Investing activities

During the third quarter, a net of $6.3 million was used for investing activities down $11.3 million from $17.6 million in the same period last year. The Metroland acquisitions and a portfolio investment in Vocel (a wireless application publisher with whom Harlequin has signed a licensing agreement) used $11.3 million of cash in the third quarter of 2005. Additions to capital assets used $7.1 million. Net proceeds of $12.0 million were received during the third quarter of 2005 from the sale of surplus land at 7 Queen's Quay East in Toronto.

Year to date capital additions were $25.1 million, down $6.4 million from $31.5 million in the first nine months of 2004. In 2004 press additions were underway at both Metroland and CityMedia. Acquisitions have used $34.9 million of cash in 2005 compared with $13.1 million in 2004. Total proceeds from the sale of the properties were $17.7 million year to date in 2005.

Financing activities

Financing activities used $44.5 million of cash during the third quarter of 2005 compared with a $39.3 million use of cash in 2004.

During the third quarter of 2005, Torstar repaid $45 million of medium term notes that matured and issued $100 million of new medium term notes that will mature in 2009 and 2010. The notes were issued in Canadian dollars with fixed interest rates. Torstar has entered into swap agreements effectively converting this debt into floating rate debt based on 90-day bankers' acceptance rates plus a spread. The swap agreements have been designated as hedges.

During the third quarter of 2005, Torstar repaid $92.2 million of commercial paper for a net decrease of $37.2 million of long-term debt. Average debt outstanding during the third quarter was $297 million in 2005 and $303 million in 2004. At September 30, 2005, Torstar had $198 million of available credit facilities after providing for outstanding letters of credit, commercial paper.

Cash dividends of $14.2 million were paid in the third quarter of 2005, up $0.6 million from $13.6 million in 2004. The increase reflected the higher dividend rate partially offset by a lower number of shares outstanding. Cash of $6.6 million was received during the third quarter from the exercise of stock options.

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. 30,000 shares were purchased under this issuer bid during the third quarter of 2005 for a total price of $0.8 million. Year to date Torstar purchased 559,200 shares for a total price of $13.0 million under a normal course issuer bid that was in place between May 7, 2004 and May 6, 2005. Torstar intends to continue to purchase shares over the next two quarters absent any significant acquisitions.

Contractual Obligations

Torstar has the following significant contractual obligations (in $000's):



---------------------------------------------------------------------
---------------------------------------------------------------------
Nature of Q4 2008-
obligation Total 2005 2006 2007 2009 2010 +
---------------------------------------------------------------------

Office leases $173,000 $3,300 $13,200 $13,200 $25,100 $118,200
Capital
purchases 2,000 400 1,200 400
Revenue share 2,700 300 400 700 1,300
Long-term debt 322,100 222,100 25,000 75,000
---------------------------------------------------------------------
---------------------------------------------------------------------
Total $499,800 $3,700 $14,700 $236,100 $50,800 $194,500
---------------------------------------------------------------------
---------------------------------------------------------------------


Office leases include the offices at One Yonge Street, in Toronto for Torstar and the Toronto Star, Harlequin's Toronto head office, offices in Kitchener for The Record and various offices for TTN. The One Yonge Street and Kitchener leases extend until the year 2020. Harlequin's lease will expire in 2009. The TTN leases expire in 2007 and 2008.

The revenue share obligations are commitments to various transit commissions in connection with TTN's U.S. operations. The commercial paper component of long-term debt is shown as payable in 2007 as the long-term credit facilities will expire in January 2007. Torstar expects to be able to renew its credit facilities at that time.

OUTLOOK

Torstar's newspapers continue to face multiple competitors both in print and other media for advertising in Southern Ontario. Advertising linage has been challenging throughout the year in most of our markets and it is difficult to predict what the traditionally stronger fourth quarter will bring.

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 Sept. 30, June 30, March 31, Dec. 31,
Ended 2005 2005 2005 2004
---------------------------------------------------------------------
Revenue $380,641 $405,437 $361,099 $414,523
Net Income $23,698 $36,112 $21,139 $42,592

Net income per Class A voting and Class non-voting share
Basic $0.30 $0.46 $0.27 $0.54
Diluted $0.30 $0.46 $0.27 $0.54
---------------------------------------------------------------------
---------------------------------------------------------------------


---------------------------------------------------------------------
---------------------------------------------------------------------
Quarter Sept. 30, June 30, March 31, Dec. 31,
Ended 2004 2004 2004 2003
---------------------------------------------------------------------
Revenue $366,540 $399,038 $361,748 $387,840
Net Income $11,309 $35,764 $23,038 $30,355

Net income per Class A voting and Class non-voting share
Basic $0.14 $0.45 $0.29 $0.39
Diluted $0.14 $0.44 $0.29 $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 third quarter of 2005 (ended September 30) included unusual income of $8.9 million that increased net income and net income per share. 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.

SUBSEQUENT DEVELOPMENTS

On October 14, 2005, Torstar acquired Runge Publishing Inc. Runge Publishing operates 18 community newspapers in eastern Ontario, primarily located in the Ottawa valley area, including the Renfrew Mercury, Arnprior Chronicle-Guide and the Kanata Kourier-Standard. Runge Publishing will be reported with Metroland.

On October 25, 2005, Torstar announced that it has invested U.S. $3 million for a minority position in LiveDeal.com, a growing localized online classifieds provider that has been operating in the U.S. since 2003. Torstar also announced that its digital division, Torstar Digital, has entered into a joint venture to create LiveDeal Canada.

OTHER

At September 30, 2005, Torstar had 9,916,522 Class A voting shares and 68,535,001 Class B non-voting shares outstanding and 5,138,468 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: October 26, 2005.



Torstar Corporation
Consolidated Statements
of Income
(unaudited)

Three months ended Nine months ended
September 30 September 30
---------------------------------------------------------------------
(thousands of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating revenue
Newspapers $242,376 $230,749 $746,940 $718,341
Book publishing 138,265 135,791 400,237 408,985
---------------------------------------------------------------------
$380,641 $366,540 $1,147,177 $1,127,326
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating profit
Newspapers $13,809 $18,101 $72,465 $78,151
Book publishing 24,979 23,325 72,943 72,317
Corporate (4,348) (4,155) (13,790) (12,301)
---------------------------------------------------------------------
34,440 37,271 131,618 138,167
Interest (2,667) (2,725) (7,559) (8,133)
Foreign exchange (2,181) (1,084) (2,836) (1,279)
Unusual items (note 8) 8,946 (12,282) 10,296 (12,282)
---------------------------------------------------------------------
Income before taxes 38,538 21,180 131,519 116,473
Income and other taxes (14,600) (9,900) (50,800) (46,600)
---------------------------------------------------------------------
Income before income
(loss) of associated
businesses 23,938 11,280 80,719 69,873
Income (loss) of
associated businesses (240) 29 230 238
---------------------------------------------------------------------
Net income $23,698 $11,309 $80,949 $70,111
---------------------------------------------------------------------
---------------------------------------------------------------------

Earnings per Class A and
Class B share (note 3(c)):
Net income - Basic $0.30 $0.14 $1.04 $0.88
Net income - Diluted $0.30 $0.14 $1.03 $0.87
---------------------------------------------------------------------
---------------------------------------------------------------------

(See accompanying notes)


Torstar Corporation
Consolidated Balance Sheets
(unaudited)

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

Assets
Current:
Cash and cash equivalents $48,897 $47,229
Receivables 233,565 247,942
Inventories 33,394 35,236
Prepaid expenses 73,705 68,250
Future income tax assets 22,586 23,851
---------------------------------------------------------------------

Total current assets 412,147 422,508
---------------------------------------------------------------------

Property, plant and equipment (net) 370,251 392,141
Investment in associated businesses 23,307 22,954
Goodwill (net) 499,562 499,637
Other assets 153,387 114,731
Future income tax assets 55,213 58,056
---------------------------------------------------------------------

Total assets $1,513,867 $1,510,027
---------------------------------------------------------------------
---------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current:
Bank overdraft $1,946 $6,414
Accounts payable and accrued liabilities 192,628 214,352
Income taxes payable 14,147 23,917
---------------------------------------------------------------------

Total current liabilities 208,721 244,683
---------------------------------------------------------------------

Long-term debt (note 2) 322,091 317,829
---------------------------------------------------------------------
Other liabilities 85,428 83,177
---------------------------------------------------------------------
Future income tax liabilities 71,577 70,677
---------------------------------------------------------------------

Shareholders' equity:
Share capital (note 3) 378,534 369,140
Contributed surplus 4,269 2,442
Retained earnings 452,622 425,787
Foreign currency translation adjustment (9,375) (3,708)
---------------------------------------------------------------------

Total shareholders' equity 826,050 793,661
---------------------------------------------------------------------

Total liabilities and shareholders'
equity $1,513,867 $1,510,027
---------------------------------------------------------------------
---------------------------------------------------------------------

(See accompanying notes)


Torstar Corporation
Consolidated Statements Of
Cash Flows
(unaudited)

Three months ended Nine months ended
September 30 September 30
---------------------------------------------------------------------
(thousands of dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash was provided by (used in)
Operating activities $53,070 $57,462 $89,388 $128,185
Investing activities (6,337) (17,589) (42,151) (45,797)
Financing activities (44,520) (39,282) (37,953) (92,139)
---------------------------------------------------------------------
Increase (decrease) in cash 2,213 591 9,284 (9,751)
Effect of exchange rate changes (2,091) (1,750) (3,148) (1,183)
Cash, beginning of period 46,829 40,642 40,815 50,417
---------------------------------------------------------------------
Cash, end of period $46,951 $39,483 $46,951 $39,483
---------------------------------------------------------------------
---------------------------------------------------------------------
Operating activities:
Net income $23,698 $11,309 $80,949 $70,111
Depreciation 13,084 13,775 41,398 40,792
Amortization 637 641 1,917 1,926
Future income taxes 1,400 (214) 2,100 123
(Income) loss of associated
businesses 240 (29) (230) (238)
Other (note 9) (9,103) 9,916 (10,068) 10,671
---------------------------------------------------------------------
29,956 35,398 116,066 123,385
Decrease (increase) in
non-cash working capital 23,114 22,064 (26,678) 4,800
---------------------------------------------------------------------
Cash provided by operating
activities $53,070 $57,462 $89,388 $128,185
---------------------------------------------------------------------
---------------------------------------------------------------------
Investing activities:
Additions to property, plant
and equipment ($7,115) ($7,845) ($25,083) ($31,547)
Acquisitions and investments
(note 7) (11,267) (9,733) (34,871) (13,073)
Investment in associated
business (note 7) (1,413)
Proceeds on sale of properties
(note 8) 12,044 17,744
Other 1 (11) 59 236
---------------------------------------------------------------------
Cash used in investing
activities ($6,337)($17,589) ($42,151) ($45,797)
---------------------------------------------------------------------
---------------------------------------------------------------------
Financing activities:
(Repayment) issuance of
commercial paper (net) ($92,150) $60,697 ($46,938) $96,635
Issuance of medium term notes
(note 2) 100,000 100,000
Repayment of medium term notes (45,000) (75,000) (45,000) (150,000)
Dividends paid (14,231) (13,588) (42,530) (40,888)
Exercise of stock options
(note 3(a)) 6,647 369 8,390 22,104
Purchase of shares for
cancellation (note 3(b)) (773) (12,795) (13,841) (23,007)
Other 987 1,035 1,966 3,017
---------------------------------------------------------------------
Cash used in financing
activities ($44,520)($39,282) ($37,953) ($92,139)
---------------------------------------------------------------------
---------------------------------------------------------------------

Cash represented by:
Cash and cash equivalents $48,897 $42,280 $48,897 $42,280
Bank overdraft (1,946) (2,797) (1,946) (2,797)
---------------------------------------------------------------------
$46,951 $39,483 $46,951 $39,483
---------------------------------------------------------------------
---------------------------------------------------------------------

(See accompanying notes)


Torstar Corporation
Consolidated Statements Of
Retained Earnings
(unaudited)

Nine months ended
September 30
---------------------------------------------------------------------
(thousands of dollars) 2005 2004
---------------------------------------------------------------------
---------------------------------------------------------------------

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

Net income 80,949 70,111

Dividends (43,425) (41,617)

Premium paid on repurchase of shares for
cancellation (note 3(b)) (10,689) (18,251)
---------------------------------------------------------------------

Retained earnings, end of period $452,622 $406,001
---------------------------------------------------------------------
---------------------------------------------------------------------

(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
September 30, 2005 December 31, 2004
---------------------------------------------------------------------

Commercial paper:
Cdn. Dollar denominated $115,569 $156,792
U.S. Dollar denominated 106,522 116,037
---------------------------------------------------------------------
222,091 272,829
---------------------------------------------------------------------

Medium Term Notes:
Cdn. Dollar denominated 100,000 45,000
---------------------------------------------------------------------

$322,091 $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 company issued Canadian $50 million and $25 million 3.85% medium term notes on September 8, 2005 and September 12, 2005 respectively, which mature on September 8, 2010. The company has entered into swap agreements effectively converting this debt into floating rate debt based on 90-day bankers' acceptance rates plus .39%. On September 9, 2005, the company issued Canadian $25 million 3.70% medium term notes, which mature on September 9, 2009. The company has entered into a swap agreement effectively converting this debt into floating rate debt based on 90-day bankers' acceptance rates plus .36%. Interest on the medium term notes as well as the payments under the swap agreements is paid semi-annually. The swap agreements have been designated as hedges and mature on the due dates of the respective notes.

In 2003, the company entered into an interest rate swap agreement that fixed the interest rate on U.S. $80 million of borrowings at approximately 3.5% for four years beginning December 2003.

The carrying values of the commercial paper long-term debt instruments approximate their fair value at September 30, 2005. The fair value of the medium term notes was $1.5 million favourable at September 30, 2005. The fair value of the Canadian interest rate swap agreements related to the medium term debt issuance noted above were $1.4 million unfavourable at September 30, 2005. The fair value of the U.S. interest rate swap agreement was $2.1 million favourable at September 30, 2005.

3. Share Capital

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

Class A shares (voting)

At September 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 129,130 3,229
Stock options exercised 421,850 8,390
Purchased for cancellation (589,200) (3,152)
Dividend reinvestment plan 36,151 895
Other 1,365 32
---------------------------------------------------------------------
September 30, 2005 68,535,001 $375,840
---------------------------------------------------------------------
---------------------------------------------------------------------

Total Class A and Class B shares 78,451,523 $378,534
---------------------------------------------------------------------
---------------------------------------------------------------------


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 September 30, 2005, 30,000 shares were repurchased and cancelled under this bid at an average price of $25.78 per share.

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 under the May 7, 2004 issuer bid at an average repurchase price of $24.02 per share for a total consideration of $48,044. During the nine months ended September 30, 2005, 589,200 Class B shares were repurchased under both issuer bids at an average price of $23.49 per share for a total consideration of $13,841. Retained earnings were reduced by $10,689 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 September 30 Nine months ended September 30
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Basic 78,271 79,249 78,179 79,297
Diluted 78,822 79,789 78,607 80,165


d) During the nine months ended September 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:

Weighted average
Share options exercise price
---------------------------------------------------------------------
December 31, 2004 4,936,962 $22.63
Granted 643,531 22.00
Exercised (421,850) (19.89)
Cancelled (20,175) (26.15)
---------------------------------------------------------------------
September 30, 2005 5,138,468 $22.77
---------------------------------------------------------------------
---------------------------------------------------------------------

Options exercisable at September 30, 2005 are as follows:

Range of Share options Weighted average
Exercise price Exercisable exercise price
---------------------------------------------------------------------
$15.75-18.05 454,900 $17.17
$18.50-22.20 1,836,614 $20.96
$25.00-29.01 1,068,035 $25.91
---------------------------------------------------------------------
$15.75-29.01 3,359,549 $22.02
---------------------------------------------------------------------
---------------------------------------------------------------------


b) The company has recognized in 2005 compensation expense totalling $1.8 million (2004 - $1.2 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 been recognized for grants in 2002 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 Nine months
ended September 30 ended September 30
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Net income - As reported $23,698 $11,309 $80,949 $70,111
- Pro forma $23,271 $10,745 $79,668 $68,277
Earnings per
share - Basic - As reported $0.30 $0.14 $1.04 $0.88
- Pro forma $0.30 $0.14 $1.02 $0.86
Earnings per
share - Diluted - As reported $0.30 $0.14 $1.03 $0.87
- Pro forma $0.30 $0.13 $1.01 $0.85


d) The company has a Deferred Share Unit Plan for executives and non-employee directors. As at September 30, 2005, 158,223 units were outstanding at a value of $3.7 million. The company has entered into a derivative instrument in order to offset its exposure to 149,880 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 $12.3 million for the nine months ended September 30, 2005 (2004 - $12.3 million) and $4.2 million for the quarter ended September 30, 2005 (2004 - $4.3 million). With respect to post-employment benefits other than pensions, for the nine months and quarter ended September 30, 2005 the net benefit cost was $3.3 million and $1.1 million respectively (2004 - $3.1 million and $1.2 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 2005, the company entered into an offsetting position for 3.0 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 September 30, 2005. As a result, an unrealized gain of $0.6 million was included in the operating profit of the book publishing segment for the nine months ended September 30, 2005.

7. Acquisitions

The company completed a number of community newspaper acquisitions during 2005 and 2004. In 2005, the community newspaper acquisitions totalled $32.5 million for which $32.3 million has been included in Other assets pending the completion of the final allocation of the purchase prices for a number of the acquisitions. These acquisitions were accounted for by the purchase method. On September 9, 2005, the company invested $2.4 million in Vocel, Inc. This portfolio investment is accounted for by the cost method.

In the nine months ended September 30, 2004, the purchase price of the acquisitions was $13.1 million of which $3.4 million related to intangible assets, $1.4 million related to tangible assets and $8.3 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. In the third quarter, a gain of $11.1 million was recognized on the sale of surplus land at 7 Queen's Quay East in Toronto and a $2.1 million provision was recorded with respect to a voluntary severance program at the Toronto Star's printing facility. Net proceeds on the sale of the Queen's Quay land were $12.0 million.

The 2004 unusual loss of $12.3 million includes restructuring costs, primarily related to severance, of $8.6 million in the Newspaper Segment and $1.1 million in the Book Publishing Segment. A $1.3 million recovery was recorded related to the restructuring provision made in 2003 for the closure of Harlequin's craft kit business. In addition, a $3.9 million write-off of the company's remaining interactive portfolio investments was recorded.



9. Other Cash (Used in) Provided by Operating Activities

Three months Nine months
ended September 30 ended September 30
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Gain on sale of properties ($11,065) ($12,415)
Foreign exchange 2,181 $1,084 2,836 $1,279
Post employment benefits (1,105) 4,294 (4,270) 2,829
Stock-based compensation
expense 569 450 3,442 2,442
Write-down of portfolio
investments 3,870 3,870
Other 317 218 339 251
---------------------------------------------------------------------
($9,103) $9,916 ($10,068) $10,671
---------------------------------------------------------------------
---------------------------------------------------------------------



Contact Information

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