35 TORSTAR 2004 MANAGEMENT’S DISCUSSION & ANALYSIS DISCUSSION AND ANALYSIS If the outstanding U.S. dollar contracts were marked-to- market at December 31, 2004, there would be a gain of $29.2 million. Torstar will close out the 2006 Euro contracts evenly throughout 2005. The counterparties to the foreign currency contracts are all major financial institutions with high credit ratings. Further details are contained in Note 13 of the consolidated financial statements. In order to manage its interest rate risk on its long-term debt, Torstar has entered into interest rate swaps and  collars. In 2004, these instruments established an  interest rate of approximately 3.5% on $80 million of U.S. dollar denominated debt and a range of 2.7% to 3.4% on an average of $205 million of Canadian dollar denominated debt.  Torstar is party to a U.S. interest rate swap arrangement that fixes the interest rate on U.S. $80 million of  borrowings at approximately 3.5% for four years ending December 2007. During 2004, Torstar had an interest rate collar agreement that established a Canadian dollar weighted average interest range of 2.7% to 3.4%. The collar was for  $250 million of Canadian dollar denominated debt  in the first quarter of 2004 and was reduced by  $30 million each quarter for the remainder of 2004. This arrangement ended in December 2004. All of Torstar’s Canadian dollar debt is at floating rates. Torstar has not entered into any interest rate derivative instruments for its Canadian dollar debt for 2005. Torstar’s exposure to credit related losses in the event of non-performance by counterparties to the interest rate swap and collar arrangements is mitigated by accepting only major financial institutions with high credit ratings as counterparties. Further details are contained in Note 6 of the consolidated financial statements. Torstar maintains a number of defined benefit plans which provide pension benefits to its employees in Canada and the U.S. Torstar also maintains defined  contribution plans in the U.S. and in certain of Harlequin’s overseas operations. The accounting for defined benefit plans requires the use of actuarial estimates for pension expense and pension plan obligations. In making the estimates, certain assumptions must be made. The significant assumptions made by Torstar in 2004 and 2003 for determining the pension plan obligations and expenses were: At December 31, 2004, Torstar had entered into forward foreign exchange and currency option contracts to establish the following exchange rates or ranges: Effective January 1, 2004, Euro, Pound Sterling and Ye n contracts ceased to qualify for hedge accounting and ar e marked to market each quarter. The mark to market gai n or loss plus the realized gain or loss on these contracts i s recorded in Book Publishing operating profit. Gains of $0.6 million and $1.1 million were recorded on these contracts during 2004 and 2003 respectively. Effective January 1, 2004, (see discussion under “Changes in Accounting Policies”) the U.S. dollar contracts are  designated as hedges against the U.S. dollar revenues. In 2004, gains of $21.4 million were reported in Book Publishing revenues. In 2003, gains of $13.7 million on the U.S. dollar contracts were recorded in Book P ublishing operating profit upon maturity of the contract.  To manage the exchange risk in its operating results, Torstar has entered into forward foreign exchange and currency options contracts. Torstar’s most significant exposure is to the movements in the U .S.$/Cdn.$ exchange rate, but it also manages its exchange risk on movements in the Euro, Pound Sterling and Yen relative to the Canadian dollar. Harlequin’s international operations provide Torstar with approximately 33% of its operating revenues. As a result, fluctuations in exchange rates can have a significant impact on Torstar’s reported profitability. INTEREST RATES FOREIGN EXCHANGE FINANCIAL INSTRUMENTS  In order to offset the exchange risk on its balance sheet from net U.S. dollar denominated assets, Torstar maintains a certain level of U.S. dollar denominated debt. These net assets are primarily current in nature, and to the extent that the amount of net U.S. dollar assets differs from the amount of the U.S. dollar debt, a foreign exchange gain or loss is recognized in earnings. PENSION OBLIGATIONS  EXCHANGE RATE YEAR CURRENCY AMOUNT OR RANGE 2005 U.S. dollars 76,000,000 $1.59 – 1.64 2006 Euros 4,000,000 $1.68