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OFFON

LORAL SPACE & COMMUNICATIONS INC.

(LORL)
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Loral Space mmunications : & COMMUNICATIONS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/13/2021 | 04:26pm EDT

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements (the "financial statements") included in Item 1 and our latest Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC").


                                     INDEX

Topic                                   Location
  Overview                              Page 27
  Consolidated Operating Results        Page 33
  Liquidity and Capital Resources:      Page 38
  Loral                                 Page 38
  Telesat                               Page 39
  Statements of Cash` Flows             Page 42
  Affiliate Matters                     Page 42
  Commitments and Contingencies         Page 42
  Other Matters                         Page 42



Loral Space & Communications Inc., a Delaware corporation, together with its subsidiaries ("Loral," the "Company," "we," "our," and "us") is a leading satellite communications company engaged, through our ownership interests in affiliates, in satellite-based communications services.

Disclosure Regarding Forward-Looking Statements

Except for the historical information contained in the following discussion and analysis, the matters discussed below are not historical facts, but are "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, we or our representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts. These forward-looking statements can be identified by the use of words such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend" or "outlook" or other variations of these words. These statements, including without limitation, those relating to Telesat, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or quantify. Actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond our control. For a detailed discussion of these and other factors and conditions, please refer to the Commitments and Contingencies section below and to our other periodic reports filed with the SEC. We operate in an industry sector in which the value of securities may be volatile and may be influenced by economic and other factors beyond our control. We undertake no obligation to update any forward-looking statements.





Overview


On November 23, 2020, Loral entered into a Transaction Agreement and Plan of Merger (as it may be amended from time to time, the "Transaction Agreement") with Telesat Canada, a Canadian corporation ("Telesat"), Telesat Partnership LP, a limited partnership formed under the laws of Ontario, Canada ("Telesat Partnership"), Telesat Corporation, a newly formed corporation incorporated under the laws of the Province of British Columbia, Canada and the sole general partner of Telesat Partnership ("Telesat Corporation"), Telesat CanHold Corporation, a corporation incorporated under the laws of British Columbia, Canada and wholly owned subsidiary of Telesat Partnership ("Telesat CanHoldco"), Lion Combination Sub Corporation, a Delaware corporation and wholly owned subsidiary of the Company ("Merger Sub"), Public Sector Pension Investment Board, a Canadian Crown corporation ("PSP"), and Red Isle Private Investments Inc., a Canadian corporation and wholly owned subsidiary of PSP ("Red Isle"), under which Merger Sub will merge with and into Loral, with Loral surviving the merger as a wholly owned subsidiary of Telesat Partnership (the "Merger"), and Loral stockholders receiving common shares of Telesat Corporation and/or units of Telesat Partnership that will be exchangeable for common shares of Telesat Corporation following the expiration of a six-month lock-up period (the "Transaction").







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The Transaction Agreement contains a number of customary conditions that must be fulfilled to complete the Transaction, including (i) approval of (A) a majority of the outstanding Loral voting common stock and (B) a majority of the outstanding Loral voting common stock not held by MHR Fund Management LLC ("MHR"), PSP, any other party to the Transaction Agreement or certain of their respective affiliates; (ii) the parties having obtained certain regulatory consents and approvals; (iii) no legal proceedings having been commenced that would enjoin or prohibit the consummation of the Transaction; (iv) the listing of the Class A and Class B shares of Telesat Corporation on a U.S. securities exchange; (v) no "Material Adverse Effect" (as defined in the Transaction Agreement) having occurred; (vi) Telesat remaining in good standing with respect to its material debt obligations; (vii) the accuracy of certain representations (subject to certain qualifications as to materiality) and material performance of certain covenants by the parties, subject to specified exceptions; (viii) effectiveness of a registration statement on Form F-4 in connection with the Transaction (the "Registration Statement") and the issuance of a receipt for each of the Canadian preliminary and final prospectuses in respect of the Transaction; (ix) no U.S., Canadian or Spanish governmental agency having commenced civil or criminal proceeding against Loral alleging that any member of the "Loral Group" has criminally violated any law, and no member of the "Loral Group" having been indicted or convicted for, or pled nolo contendere to, any such alleged criminal violation; (x) Loral remaining solvent and not having entered into any bankruptcy or related proceeding; and (xi) the delivery by the parties of certain closing deliverables. If the parties have confirmed that all the conditions are satisfied or waived (other than those conditions that by their terms are to be satisfied at the closing of the Transaction (the "Closing"), but which conditions are capable of being satisfied at the Closing), then PSP and Loral will each have the right to extend the Closing for any number of periods of up to 30 days each and no longer than 120 days in the aggregate, from the date on which the Closing otherwise would have occurred. If the Closing is extended, the Closing will occur on the first two consecutive business days commencing on the fifth business day after the expiration of the final extension period on which the conditions are satisfied or waived (other than the conditions (i) with respect to no "Material Adverse Effect" (as defined in the Transaction Agreement) having occurred, (ii) that by their terms are to be satisfied at the Closing, but subject to the satisfaction or waiver of such conditions at the Closing and (iii) if PSP extends the Closing, with respect to a civil or criminal legal proceeding alleging that Loral or any of its subsidiaries (excluding XTAR, LLC ("XTAR") and Globalstar de Mexico, S. de R.L. de C.V. ("GdM") and their subsidiaries), has criminally violated a law). Subject to the satisfaction of the conditions to Closing and any extensions described above, we expect to complete the Transaction in the late third quarter or early fourth quarter of 2021.

On June 30, 2021, the Registration Statement was declared effective by the Securities and Exchange Commission ("SEC"), and a Special Meeting of Stockholders to consider the approval of the Transaction and the Transaction Agreement and related proposals (the "Special Meeting") was scheduled for August 9, 2021. Prior to the convening of the Special Meeting, however, Loral was informed by Telesat of recent developments regarding the possibility of a potential investment by the government of Canada (the "GoC") in the development of Telesat Lightspeed, Telesat's global constellation of low earth orbit ("LEO") satellites (the "Potential GoC Investment Transaction"). See "Description of Business - Telesat Lightspeed" below. The Potential GoC Investment Transaction, if consummated, would occur following the pending Transaction. In light of the Potential GoC Investment Transaction, the Special Meeting was convened as scheduled but was immediately adjourned without conducting any other business in order to provide stockholders with an opportunity to receive and consider additional information that is anticipated to be disclosed with respect to the Potential GoC Investment Transaction before voting on the Transaction. The Special Meeting will be reconvened and held virtually on Monday, August 23, 2021, at 10:00 a.m. eastern time. The record date of the Special Meeting, June 10, 2021, remains unchanged.

On August 6, 2021, Loral was notified that the applications filed with the Federal Communications Commission (the "FCC") for the transfer of control of Telesat's and XTAR's FCC licenses in connection with the Transaction had been approved. The FCC's approval is conditioned on Telesat's and certain of its subsidiaries' compliance with a Letter of Agreement entered into with the Department of Justice (the "DOJ") to address certain national security and law enforcement risks identified by the DOJ and certain Executive Branch agencies. Certain other regulatory consents and approvals required to consummate the Transaction are still pending.





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Upon satisfaction of the terms and subject to the conditions set forth in the Transaction Agreement, the Transaction will result in the current stockholders of Loral, PSP and the other shareholders in Telesat (principally current or former management of Telesat) owning approximately the same percentage of equity in Telesat indirectly through Telesat Corporation and/or Telesat Partnership as they currently hold (indirectly in the case of Loral stockholders and PSP) in Telesat, Telesat Corporation becoming the publicly traded general partner of Telesat Partnership and Telesat Partnership indirectly owning all of the economic interests in Telesat, except to the extent that the other shareholders in Telesat elect to retain their direct interest in Telesat.

The Transaction Agreement provides certain termination rights for both Loral and PSP and further provides that, in certain circumstances, Loral may be required to pay to Red Isle a termination fee of $6.55 million or $22.91million or to pay to PSP a "breach" fee of $40 million, in each case as provided in the Transaction Agreement.




Description of Business



Loral has one operating segment consisting of satellite-based communications services. Loral participates in satellite services operations primarily through its ownership interest in Telesat, a leading global satellite operator. Telesat provides its satellite and communication services from a fleet of geostationary satellites that occupy Canadian and other orbital locations. Telesat is also developing a planned global constellation of LEO satellites known as "Telesat Lightspeed." Loral holds a 62.6% economic interest and a 32.6% voting interest in Telesat as of June 30, 2021.

Telesat's GEO Satellite Business

The satellite services business is capital intensive and the build-out of a satellite fleet requires substantial time and investment. Once the investment in a satellite is made, the incremental costs to maintain and operate the satellite are relatively low over the life of the satellite, with the exception of in-orbit insurance. Telesat has been able to generate a large contractual revenue backlog by entering into long-term contracts with some of its customers, in some cases for all or substantially all of a satellite's orbital maneuver life. Historically, this has resulted in revenue from the satellite services business being fairly predictable.

As of June 30, 2021, Telesat provided satellite services to customers from its fleet of 15 geostationary satellites, as well as the Canadian payload on the ViaSat-1 satellite. Telesat also manages the operations of additional satellites for third parties. As of June 30, 2021, Telesat's contracted backlog from its geostationary satellite business was approximately $1.9 billion.



Telesat Lightspeed


Telesat has commenced the development of what it believes will be the world's most advanced constellation of LEO satellites and integrated terrestrial infrastructure, called "Telesat Lightspeed" - a platform designed to revolutionize the provision of global broadband connectivity. In January 2018, Telesat's first LEO satellite was successfully launched into orbit. This Phase 1 LEO satellite has demonstrated certain key features of the Telesat Lightspeed system design, specifically the capability of the satellite and customer terminals to deliver a low latency broadband experience. Telesat also installed ground infrastructure at its teleport in Allan Park in Canada to support testing with a variety of existing and prospective customers and potential suppliers of the Telesat Lightspeed system hardware who have been participating in trials since the second half of 2018.

Telesat continues to advance its Telesat Lightspeed plans:

On August 9, 2021, Telesat and the Government of Ontario announced that they have partnered to bridge the digital divide in Ontario by leveraging Telesat's advanced, state-of-the-art LEO satellite network, Telesat Lightspeed. Under this $109 million, five-year partnership, a dedicated Telesat Lightspeed capacity pool will be made available at substantially reduced rates to Canadian Internet service providers ("ISPs"), including Indigenous owned and operated ISPs, as well as mobile network operators to expand high-speed Internet and LTE/5G networks to Ontario's unserved and underserved communities. The transaction is subject to the entering into of a further, definitive agreement which Telesat expects to execute in the coming weeks.



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On August 12 2021, Telesat announced that it had entered into a non-binding term sheet (the "Term Sheet") with the GoC regarding a $1.44 billion investment by the GoC or one of its Crown corporations ("Canada") to support Telesat Lightspeed. In return, Telesat will commit to make certain minimum capital and operating expenditures in Canada in connection with the program and, in addition, to create hundreds of Canadian high-quality, full-time jobs and co-ops and provide academic scholarships.

The Term Sheet contemplates the following: (i) a CAD 790 million unsecured term loan from Canada to Telesat Leo Inc. ("Telesat LEO"), a wholly owned subsidiary of Telesat organized under the laws of Canada that will develop Telesat Lightspeed (the "Loan"); (ii) the purchase of preferred shares of Telesat Leo by Canada, for an aggregate value of up to CAD 650 million (the "Canada Preferred Shares"); and (iii) warrants issued to Canada to purchase Telesat Corporation Class A common shares ("Telesat Parent Shares") with an aggregate exercise price of CAD 144 million (the "Warrants" and, together with the Canada Preferred Shares, the "Equity Investments," and the Equity Investments together with the Loan, the "Investments").

Under the Loan, Telesat LEO would be the borrower of a CAD 790 million unsecured term loan with an interest rate of 2% per annum, payable semi-annually in arrears or capitalized at the option of Telesat LEO. The proceeds from the Loan must be used exclusively for working capital and operational purposes in connection with the design, construction, delivery, launch, operation and maintenance of Telesat LEO's low earth orbit satellite constellation of an initial 298 satellites and associated infrastructure. The Loan will require certain affirmative covenants of Telesat and Telesat LEO (collectively, the "Benefit to Canada Clauses"), which include minimum Canadian based operating expenditures, capital expenditures and Canadian control requirements, among others. The Loan would have a 20-year term, would not be subject to voluntary prepayment, but would be subject to reduction in principal amount if certain milestones set forth in the Term Sheet are met. Telesat will not be an obligor under the Loan.

The Canada Preferred Shares would be preferred shares of Telesat LEO with a per share subscription price of CAD 100 and would have a subscription amount of up to CAD 650 million (the "Subscription Amount"). The Canada Preferred Shares include a cumulative and compounding preferred dividend initially at 1% per annum and increasing to 5.5% per annum. The Canada Preferred Shares carry no voting rights except as provided by law and except for certain veto rights set out in Schedule B to the Term Sheet.

The Warrants would permit Canada to purchase a number of Telesat Parent Shares with an aggregate exercise price equal to the aggregate of (i) 10% of the principal amount of the Loan and (ii) 10% of the Subscription Amount of the Canada Preferred Shares. The exercise price of the Warrants would be the 180-day volume weighted average trading price of the Telesat Parent Shares on Nasdaq immediately after the listing of the Telesat Parent Shares, would be exercisable any time after the second anniversary of the listing of the Telesat Parent Shares and would have a term of 10 years.

The Investments all have certain conditions to closing, which include the execution of definitive documentation for the Investments in form and substance acceptable to Canada and the closing of the Transaction.

The Term Sheet is a non-binding agreement, and there can be no assurance that definitive documentation regarding the terms of the Investments will be executed. Telesat will seek to negotiate definitive documentation with the GoC, but there is no guarantee it will be successful in doing so. This summary is qualified by reference to the complete text of the Term Sheet, a copy of which is filed herewith as Exhibit 99.2.

With the investment from the GoC and other financing sources already in place, Telesat now has arrangements for approximately CAD 4 billion in funding for the program. These arrangements, including the GoC Investments, are subject to a number of conditions, including the entering into of further, definitive agreements.




Government Grant



In May 2019, Telesat entered into an agreement with the government of Canada pursuant to which the government of Canada will contribute up to CAD 85 million through July 31, 2023 to support the development of the Telesat Lightspeed constellation. In return for the grant, Telesat made a number of commitments to the government of Canada, including commitments to conduct over CAD 200 million of research and development activities in Canada as well as to expand Telesat's Canadian workforce. As of June 30, 2021, Telesat claimed CAD 22.1 million against the government grant and incurred CAD 239 million in connection with this program.


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During the six months ended June 30, 2021, Telesat claimed CAD 5.1 million against the government grant and incurred CAD 104.7 million in connection with this program.




Canadian C-band



On August 27, 2020, Innovation, Science and Economic Development Canada ("ISED") launched a public consultation (the "Consultation") on repurposing of C-band spectrum in Canada and on May 21, 2021 released its "Decision on the Technical and Policy Framework for the 3650¬4200 MHz Band and Changes to the Frequency Allocation of the 3500-3650 MHz Band." In the decision, ISED largely adopted the proposal it had set forth in the Consultation which will require satellite operators to cease use of 300 MHz of C-band spectrum (3700-4000 MHz), other than in satellite-dependent areas, by March 31, 2025; ISED plans to auction the spectrum to companies that want to use it to provide terrestrial wireless services, principally 5G, in Canada. ISED did not provide for payments to satellite operators for either clearing expense reimbursement or as an incentive to clear the spectrum. In the decision, ISED rejected a proposal put forward by Telesat Canada, whereby Telesat Canada - the sole C-band licensee in Canada - would accelerate, and be responsible for, the clearing of a portion of the C-band spectrum for 5G and would auction a portion of that spectrum to Canadian wireless operators for 5G services, using the auction proceeds to fund the cost of clearing and to help fund the construction of Telesat Lightspeed.



Telesat Outlook


Telesat's desirable spectrum rights, commitment to providing the highest level of customer service, deep technical expertise and culture of innovation have enabled it to successfully develop its business to date. Leveraging these strengths and building on its existing contractual revenue backlog, Telesat's focus is on profitably growing its business by increasing the utilization of its in-orbit satellites and, in a disciplined manner, deploying expansion satellite capacity where strong market demand is anticipated.

After decades of developing and successfully operating its geosynchronous orbit-based satellite services business, Telesat is now poised to revolutionize the provision of global broadband connectivity by developing Telesat Lightspeed, which Telesat believes will be the world's most advanced constellation of LEO satellites and integrated terrestrial infrastructure.

Telesat believes that it is well positioned to serve its customers and the markets in which it participates. Telesat actively pursues opportunities to develop new satellites, particularly in conjunction with current or prospective customers who will commit to long-term service agreements prior to the time the satellite construction contract is signed. However, while Telesat regularly pursues these opportunities, it does not procure additional or replacement satellites until it believes there is a demonstrated need and a sound business plan for such satellite capacity.

In 2021, Telesat remains focused on increasing utilization of its existing satellites, the development of the Telesat Lightspeed constellation and identifying and pursuing opportunities to invest in other expansion of satellite capacity, all while maintaining operating discipline.

Telesat's operating results are subject to fluctuations as a result of exchange rate variations. For the six months ended June 30, 2021, approximately 52.5% of Telesat's revenues, 33.3% of its operating expenses, 100% of its interest expense and a significant portion of its capital expenditures were denominated in U.S. dollars. The most significant impact of variations in the exchange rate is on the U.S. dollar denominated indebtedness and cash and short-term investments. As of June 30, 2021, Telesat's U.S. dollar denominated debt totaled $3.0 billion. As of June 30, 2021, a five percent increase (decrease) in the Canadian dollar against the U.S. dollar on financial assets and liabilities would have increased (decreased) Telesat's net income by approximately $119.8 million. This analysis assumes all other variables, in particular interest rates, remain constant.





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In connection with the acquisition of our ownership interest in Telesat in 2007, Loral has agreed that, subject to certain exceptions described in the Shareholders Agreement, for so long as Loral has an interest in Telesat, it will not compete in the business of leasing, selling or otherwise furnishing fixed satellite service, broadcast satellite service or audio and video broadcast direct to home service using transponder capacity in the C-band, Ku-band and Ka-band (including in each case extended band) frequencies and the business of providing end-to-end data solutions on networks comprised of earth terminals, space segment, and, where appropriate, networking hubs.



Other


We own 56% of the ordinary membership interests of XTAR, a joint venture between us and Hisdesat Servicios Estrategicos, S.A. ("Hisdesat") of Spain. Hisdesat owns the remaining 44% of the ordinary membership interests and all of XTAR's Class A membership interests, which have liquidation priority over the ordinary membership interests. Prior to July 1, 2020, XTAR owned and operated an X-band satellite, XTAR-EUR (the "Satellite") located at the 29° E.L. orbital slot (the "Orbital Slot"). In addition, prior to July 1, 2020, XTAR leased from Hisdesat 7.2 72MHz X-band transponders on the Spainsat satellite located at 30° W.L. (the "Transponder Lease"). For services provided by Loral, XTAR, until December 31, 2013, was charged a quarterly management fee under a management agreement with Loral (the "Loral Management Agreement").

On July 1, 2020, Loral, XTAR and Hisdesat restructured their relationship, including, among other things, the following: (i) Hisdesat purchased the Satellite and certain assets related to operation of the Satellite (the "Purchased Assets") from XTAR; (ii) XTAR's agreement with Hisdesat to operate the Satellite at the Orbital Slot was terminated and the rights and licenses to operate the Satellite at the Orbital Slot reverted to Hisdesat; (iii) the Transponder Lease was terminated; (iv) XTAR and Hisdesat entered into an agreement under which XTAR will continue to market and sell capacity on the Satellite and on the Spainsat satellite; (v) XTAR and Loral terminated the Loral Management Agreement; and (vi) Loral granted to Hisdesat an option to acquire for nominal consideration, subject to receipt of all required regulatory approvals, Loral's membership interests in XTAR. As of the date of this report, Hisdesat has not exercised this option. On July 2, 2020, Loral received from XTAR $5.9 million from the proceeds of the sale of the Purchased Assets in full and final settlement of the past due receivable outstanding of $6.6 million under the Loral Management Agreement.



COVID-19


On March 11, 2020, the World Health Organization designated the COVID-19 coronavirus as a global pandemic. Various policies and initiatives have been implemented worldwide to reduce the global transmission of COVID-19, including the promotion of social distancing and the adoption of remote working policies.

Although the COVID-19 pandemic has had a limited impact on Telesat's and our ability to operate our respective businesses, Telesat's customers in the maritime and aeronautical markets have been significantly impacted by the pandemic. At the request of some of these customers, Telesat amended the terms of certain of their contracts to mitigate the adverse financial impact that COVID-19 is having on their respective businesses. These arrangements have had an adverse impact on Telesat's revenues and will continue to adversely impact Telesat's revenues in the near term. While not sufficient to offset adverse impacts referred to above, Telesat experienced some increased demand for services as a result of COVID-19, primarily from rural broadband connectivity services.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was signed into law, and on April 24, 2020, the Paycheck Protection Program and Healthcare Enhancement Act was signed into law (collectively, the "COVID-19 Acts") The COVID-19 Acts provided substantial stimulus and assistance packages intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The COVID-19 Acts reduced our income tax provision for the three and six months ended June 30, 2020 by approximately $0.4 million and $3.5 million, respectively. We continue to monitor any other effects that may result from the COVID-19 Acts.





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Consolidated Operating Results

See Critical Accounting Matters in our latest Annual Report on Form 10-K filed with the SEC and Note 2 to the financial statements.

Changes in Critical Accounting Policies - There have been no changes in our critical accounting policies during the six months ended June 30, 2021.

Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020

The following compares our consolidated results for the three months ended June 30, 2021 and 2020 as presented in our financial statements:

General and Administrative Expenses


                                      Three Months Ended
                                           June 30,
                                        2021         2020

                                        (In thousands)

General and administrative expenses $ 1,900 $ 1,801

General and administrative expenses were comparable for the three months ended June 30, 2021 and 2020.




Other Expense




                Three Months Ended
                     June 30,
                  2021         2020

                  (In thousands)
Other expense $    2,097    $  2,703



For the three months ended June 30, 2021 and 2020, other expense primarily includes Transaction related expenses.




Income Tax Benefit


                      Three Months Ended
                           June 30,
                       2021          2020

                        (In thousands)
Income tax benefit $     201    $     1,469



For the three months ended June 30, our income tax benefit is summarized as follows: (i) for 2021, we recorded a current provision of $0.3 million and a deferred tax benefit of $0.5 million, resulting in a net tax benefit of $0.2 million and (ii) for 2020, we recorded a current provision of $0.4 million and a deferred tax benefit of $1.9 million, resulting in a net tax benefit of $1.5 million. Our deferred income tax benefit for 2020 included a benefit of $0.4 million from the COVID-19 Acts.

Our income tax benefit for each period is computed by applying an expected effective annual tax rate against the pre-tax results for the six-month periods ended June 30, 2021 and 2020 (after adjusting for certain tax items that are discrete to each period). This amount is then reduced by the tax benefit (provision) recorded for the three months ended March 31, 2021 and 2020. The current income tax provision for each period includes our anticipated income tax liability related to Global Intangible Low Taxed Income ("GILTI") from Telesat and our provision for uncertain tax positions ("UTPs"). After utilizing our net operating loss ("NOL") carryforwards and allowable tax credits, federal income tax on GILTI from Telesat was zero for each period. The deferred income tax benefit for each period includes the impact of equity in net income (loss) of affiliates from our condensed consolidated statement of operations and the periodic effect of our accounting for GILTI. Since our deferred tax assets related to the investment in Telesat will be realized from the future recognition of GILTI, the federal portion of these deferred tax assets was valued at zero as of June 30, 2021 and December 31, 2020.


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To the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment, subject to the provisions of the Transaction Agreement, in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets.

Equity in Net Income of Affiliates


          Three Months Ended
               June 30,
             2021        2020

            (In thousands)

Telesat $ 25,291 $ 76,515

As of June 30, 2021, we held a 62.6% economic interest and a 32.6% voting interest in Telesat. Loral's equity in net income (loss) of Telesat is based on our proportionate share of Telesat's results in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and in U.S. dollars. The amortization of Telesat fair value adjustments applicable to the Loral Skynet assets and liabilities acquired by Telesat in 2007 is proportionately eliminated in determining our share of the net income of Telesat. Our equity in net income of Telesat also reflects amortization of profits eliminated, to the extent of our economic interest in Telesat, on satellites we constructed for Telesat while we owned Space Systems/Loral, LLC (formerly known as Space Systems/Loral, Inc.) ("SSL") and on Loral's sale to Telesat in April 2011 of its portion of the payload on the ViaSat-1 satellite and related assets.




Summary financial information for Telesat in accordance with U.S. GAAP and in
Canadian dollars and U.S. dollars for the three months ended June 30, 2021 and
2020 follows (in thousands):




                                         Three Months Ended       Three Months Ended
                                              June 30,                 June 30,
                                         2021          2020        2021        2020

                                       (In Canadian dollars)       (In U.S. dollars)
Statement of Operations Data:
Revenues                                  188,626      208,610     153,664     149,761
Operating expenses                       (62,982)     (46,609)    (50,955)    (33,465)
Depreciation and amortization            (56,335)     (59,936)    (45,854)    (43,031)
Other operating (expense) income             (74)            9        (69)          11
Operating income                           69,235      102,074      56,786      73,276
Interest expense                         (46,637)     (51,195)    (37,916)    (36,685)
Foreign exchange gain                      35,143      125,547      28,619      98,313

Gain (loss) on financial instruments 2,725 (6,867) 2,209 (4,884) Other (expense) income

                      (333)        1,204       (279)         799
Income tax provision                     (13,071)     (13,721)    (10,773)    (10,138)
Net income                                 47,062      157,042      38,646     120,681
Average exchange rate for translating
Canadian dollars                           1.2282       1.3929
to U.S. dollars ( 1 U.S. dollar
equals)



Telesat's revenue increased by $3.9 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 due primarily to the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue, partially offset by a slight reduction in service for a North American DTH customer as well as non-renewals from certain other enterprise customers and lower consulting activities. The foreign exchange rate change increased Telesat's revenue by $8.4 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.





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Telesat's operating expenses increased by $17.5 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 primarily due to higher share-based compensation expense, higher wages primarily associated with the hiring of additional employees to support the Telesat Lightspeed program and the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses, partially offset by higher capitalized engineering costs, lower bad debt expense due to a bad debt provision recorded in the prior year for maritime and aeronautical customers and lower consulting activities. The foreign exchange rate change increased Telesat's operating expenses by $4.2 million for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020.

Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020

The following compares our consolidated results for the six months ended June 30, 2021 and 2020 as presented in our financial statements:

General and Administrative Expenses


                                      Six Months Ended
                                          June 30,
                                        2021       2020

                                       (In thousands)

General and administrative expenses $ 3,629 $ 3,449

General and administrative expenses were higher by $0.2 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 primarily from an increase in compensation expense and annual meeting expenses.

Interest and Investment Income


                                 Six Months Ended
                                     June 30,
                                   2021       2020

                                  (In thousands)

Interest and investment income $ 3 $ 1,029

Interest and investment income decreased by $1.0 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 due to the lower cash balance resulting primarily from payment of cash dividends of $170.1 million and $46.4 million in May 2020 and December 2020, respectively, and lower interest rates earned on the cash balance during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.




Other Expense


                Six Months Ended
                    June 30,
                  2021       2020

                 (In thousands)
Other expense $    4,472   $ 4,140





For the six months ended June 30, 2021 and 2020, other expense primarily includes Transaction related expenses.





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Income Tax Benefit (Provision)


                                 Six Months Ended
                                     June 30,
                                   2021       2020

                                  (In thousands)

Income tax benefit (provision) $ 423 $ (647)

For the six months ended June 30, our income tax benefit (provision) is summarized as follows: (i) for 2021, we recorded a current provision of $0.6 million and a deferred tax benefit of $1.0 million, resulting in a net tax benefit of $0.4 million and (ii) for 2020, we recorded a current provision of $0.9 million and a deferred tax benefit of $0.3 million, resulting in a net tax provision of $0.6 million. Our deferred income tax benefit for 2020 included a benefit of $3.5 million from the COVID-19 Acts.

Our income tax benefit (provision) for each period is computed by applying an expected effective annual tax rate against the pre-tax results for the six month periods ended June 30, 2021 and 2020 (after adjusting for certain tax items that are discrete to each period). The current income tax provision for each period includes our anticipated income tax liability related to GILTI from Telesat and our provision for UTPs. After utilizing our NOL carryforwards and allowable tax credits, federal income tax on GILTI from Telesat was zero for each period. The deferred income tax benefit for each period includes the impact of equity in net income (loss) of affiliates from our condensed consolidated statement of operations and the periodic effect of our accounting for GILTI. Since our deferred tax assets related to the investment in Telesat will be realized from the future recognition of GILTI, the federal portion of these deferred tax assets was valued at zero as of June 30, 2021 and December 31, 2020.

During 2021, the statute of limitations for assessment of additional tax will expire with regard to certain UTPs, potentially resulting in a $19.5 million reduction to our income tax provision.

To the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets, we would generate sufficient taxable income from the appreciated value of our Telesat investment, subject to the provisions of the Transaction Agreement, in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets

Equity in Net Income (Loss) of Affiliates


          Six Months Ended
              June 30,
           2021        2020

           (In thousands)

Telesat $ 59,893 $ (40,559)

The following is a reconciliation of the changes in our investment in Telesat for the six months ended June 30, 2021:




                                                                  Six Months Ended
                                                                   June 30, 2021
                                                                   (In thousands)
Balance, January 1, 2021                                                   $ 192,664
Components of equity in net income of Telesat:
Equity in net income of Telesat                                 $ 57,723

Eliminations of affiliate transactions and related amortization 2,170 59,893 Equity in Telesat-related other comprehensive loss

                           (4,186)
Balance, June 30, 2021                                                     $ 248,371




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Summary financial information for Telesat in accordance with U.S. GAAP and in Canadian dollars and U.S. dollars as of June 30, 2021 and December 31, 2020 and for the six months ended June 30, 2021 and 2020 follows (in thousands):




                                      June 30,    December 31,   June 30,    December 31,
                                        2021          2020         2021          2020

                                       (In Canadian dollars)        (In U.S. dollars)
Balance Sheet Data:
Current assets                        1,546,189        894,835   1,247,156        703,210
Total assets                          5,613,586      5,018,579   4,527,918      3,943,875
Current liabilities                     162,122        165,233     130,767        129,849
Long-term debt                        3,693,039      3,159,944   2,978,805      2,483,256
Total liabilities                     4,471,426      3,996,600   3,606,651      3,140,747
Shareholders' equity                  1,142,160      1,021,979     921,267        803,128
Period end exchange rate for
translating Canadian
dollars to U.S. dollars (1 U.S.          1.2398         1.2725
dollar equals)





                                         Six Months Ended         Six Months Ended
                                             June 30,                 June 30,
                                         2021         2020        2021        2020

                                       (In Canadian dollars)      (In U.S. dollars)
Statement of Operations Data:
Revenues                                 379,895      418,060     303,718     308,326
Operating expenses                     (103,185)     (93,259)    (82,495)    (68,781)
Depreciation and amortization          (110,781)    (119,928)    (88,567)    (88,448)
Other operating expense                    (705)        (212)       (564)       (156)
Operating income                         165,224      204,661     132,092     150,941
Interest expense                        (88,828)    (106,075)    (71,016)    (78,232)
Foreign exchange gain (loss)              70,103    (167,224)      56,046   (123,330)

Gain (loss) on financial instruments 4,745 (16,120) 3,794 (11,889) Other (loss) income

                      (1,348)        5,880     (1,076)       4,338
Income tax provision                    (34,626)     (12,821)    (27,683)     (9,456)
Net income (loss)                        115,270     (91,699)      92,157    (67,628)
Average exchange rate for translating
Canadian dollars                          1.2514       1.3570
to U.S. dollars (1 U.S. dollar
equals)



Telesat's revenue decreased by $4.6 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 due primarily to decreases in the maritime and commercial aviation markets resulting from the COVID-19 pandemic as well as non-renewals from certain other enterprise customers, a slight reduction in service for a North American DTH customer and lower consulting activities, partially offset by the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated revenue. The foreign exchange rate change increased Telesat's revenue by $11.2 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.

Telesat's operating expenses increased by $13.7 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 primarily due to higher share-based compensation expense, higher wages primarily associated with the hiring of additional employees to support the Telesat Lightspeed program and the impact of the change in the U.S. dollar/Canadian dollar exchange rate on Canadian dollar denominated expenses, partially offset by higher capitalized engineering costs, reversal of a bad debt provision relating to the maritime and aeronautical customers that was recorded during the six months ended June 30, 2020 and lower consulting activities. The foreign exchange rate change increased Telesat's operating expenses by $4.3 million for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.



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Backlog


Telesat's backlog as of June 30, 2021 and December 31, 2020 was $1.9 billion and $2.1 billion, respectively.

Liquidity and Capital Resources



Loral


As described above, Loral's principal asset is a 62.6% economic interest in Telesat. The operations of Telesat are not consolidated but are presented using the equity method of accounting. Loral has no debt. Telesat has third party debt with financial institutions. Cash is maintained at Loral and Telesat to support the operating needs of each respective entity. The ability of Telesat to pay dividends or certain other restricted payments as well as consulting fees in cash to Loral is governed by applicable covenants relating to its debt and its shareholder agreement.




Cash and Available Credit



At June 30, 2021, Loral had $23.2 million of cash and cash equivalents and no debt. The Company's cash and cash equivalents as of June 30, 2021 decreased by $8.4 million from December 31, 2020 due primarily to corporate expenses of $4.2 million adjusted for changes in working capital and net of consulting fees from Telesat, payments of $3.9 million related to strategic initiatives and pension and other post-retirement funding of $0.3 million. A discussion of cash changes by activity is set forth in the sections "Net Cash Used in Operating Activities."

Loral did not have a credit facility as of June 30, 2021 and December 31, 2020.



Cash Management


We have a cash management investment program that seeks a competitive return while maintaining a conservative risk profile. Our cash management investment policy establishes what we believe to be conservative guidelines relating to the investment of surplus cash. The policy allows us to invest in commercial paper, money market funds and other similar short-term investments but does not permit us to engage in speculative or leveraged transactions, nor does it permit us to hold or issue financial instruments for trading purposes. The cash management investment policy was designed to preserve capital and safeguard principal, to meet all of our liquidity requirements and to provide a competitive rate of return for similar risk categories of investment. The policy addresses dealer qualifications, lists approved securities, establishes minimum acceptable credit ratings, sets concentration limits, defines a maturity structure, requires all firms to safe keep securities on our behalf, requires certain mandatory reporting activity and discusses review of the portfolio. We operate the cash management investment program under the guidelines of our investment policy and continuously monitor the investments to avoid risks.

We currently invest our cash primarily in two liquid government AAA money market funds. The dispersion across funds reduces the exposure of a default at any one fund.




Liquidity



We believe that our cash and cash equivalents will be sufficient to fund projected expenditures for the next 12 months or until the Closing of the Transaction, if sooner. We expect that our major cash outlays during the next 12 months will include general corporate expenses net of consulting fees from Telesat and costs associated with completing the Transaction, including employee severance costs and professional fees. Loral receives consulting fees from Telesat of $1.25 million per quarter under a consulting agreement which expires on October 31, 2021.

Under the terms of the Transaction Agreement, Loral is required to make a $7 million payment to Red Isle at Closing. Telesat Corporation is obligated to make this payment as well as costs associated with completing the Transaction if Loral does not have sufficient cash at Closing.





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Risks to Cash Flow


In 2012, we sold our former subsidiary, SSL, to MDA. Under the terms of the purchase agreement, we are obligated to indemnify MDA from liabilities with respect to certain pre-closing taxes the total amount of which has not yet been determined. Where appropriate, we intend vigorously to contest the underlying tax assessments, but there can be no assurance that we will be successful. Although no assurance can be provided, we do not believe that these tax-related matters will have a material adverse effect on our financial position or results of operations.



Telesat



Cash and Available Credit



As of June 30, 2021, Telesat had CAD 1.47 billion of cash and short-term investments as well as approximately $200 million of borrowing availability under its revolving credit facility.



Liquidity


A large portion of Telesat's annual cash receipts are reasonably predictable because they are primarily derived from an existing backlog of long-term customer contracts and high contract renewal rates. Telesat believes its cash and short-term investments as of June 30, 2021, cash flows from operating activities, and drawings on the revolving credit facility under its senior secured credit facilities will be adequate to meet Telesat's expected cash requirements for at least the next 12 months for activities in the normal course of business, including required interest and principal payments on debt and Telesat's capital requirements. This includes the commitments Telesat has made to date for the Telesat Lightspeed program, but does not include the capital that would be required to complete construction of the constellation.

The construction of any satellite replacement or expansion program will require significant capital expenditures, and in particular Telesat currently estimates that its planned Telesat Lightspeed constellation will require a capital investment of approximately $5 billion for satellites, launch vehicles, insurance and related ground systems. Cash required for any future satellite programs may be funded from a range of sources including: cash and short-term investments; cash flow from operating activities; cash flow from customer prepayments; through borrowings on the revolving credit facility under Telesat's senior secured credit facilities; vendor financing; equity investments, including through the issuance of public equity; export credit agency financing; additional secured or unsecured debt financing; proceeds received from repurposing C-band spectrum, and from government sources. In addition, Telesat may sell certain satellite assets and, in accordance with the terms and conditions of Telesat's senior secured credit facilities, reinvest the proceeds in replacement satellites or pay down indebtedness under Telesat's senior secured credit facilities. Telesat's ability to access these sources of funding, however, is not guaranteed, and therefore, Telesat may not be able to fully fund additional replacement or new satellite programs.





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Debt


Telesat's debt as of June 30, 2021 and December 31, 2020 was as follows:


                                                               June 30,      December 31,
                              Maturity        Currency           2021            2020

                                                                     (In thousands)
Senior Secured Credit
Facilities:
Revolving credit facility    December        USD or CAD      $         -   $            -
                             2024            equivalent
Term Loan B - U.S. facility  December            USD           1,552,815        1,552,815
                             2026
                             October             USD             550,000          550,000
6.5% Senior notes            2027
4.875% Senior secured notes  June 2027           USD             400,000          400,000
                             December            USD             500,000                -

5.625% Senior secured notes 2026

                                                               3,002,815        2,502,815
Deferred financing costs and prepayment                          (2,031)            1,824

options

Total debt under international financial                       3,000,784        2,504,639
reporting standards
U.S. GAAP adjustments                                           (21,979)         (21,383)
Total debt under U.S. GAAP                                     2,978,805        2,483,256
Current portion                                                        -                -
Long term portion                                            $ 2,978,805   $    2,483,256



As of June 30, 2021, Telesat was in compliance with the financial covenants of its senior secured credit facilities, the indenture governing its 4.875% Senior Secured Notes, the indenture governing its 5.625% Senior Secured Notes and the indenture governing its senior notes.

Senior Secured Credit Facilities

The obligations under Telesat's credit agreement and the guarantees of those obligations are secured, subject to certain exceptions, by a first priority security interest in the assets of Telesat and certain of its subsidiaries (the "Guarantors"). The credit agreement contains covenants that restrict the ability of Telesat and the Guarantors to take specified actions, including, among other things and subject to certain significant exceptions: creating liens, incurring indebtedness, making investments, engaging in mergers, selling property, paying dividends, entering into sale-leaseback transactions, creating subsidiaries, repaying subordinated debt or amending organizational documents. The credit agreement also requires Telesat and the Guarantors to comply with a maximum first lien leverage ratio and contains customary events of default and affirmative covenants, including an excess cash sweep, that may require Telesat to repay a portion of the outstanding principal under its senior secured credit facilities prior to the stated maturity.

Telesat's senior secured credit facilities are comprised of the following facilities:




i - Revolving Credit Facility



Telesat's revolving credit facility ("Revolving Facility") is a $200 million loan facility available in either U.S. dollar or Canadian dollar equivalent, maturing in December 2024. Loans under the Revolving Facility bear interest at a floating interest rate. For Canadian Prime Rate and Alternative Base Rate ("ABR") loans, an applicable margin ranging from 0.75% to 1.25% is applied to the Prime Rate and ABR as these interest rates are defined in the senior credit facilities. For Bankers' Acceptance ("BA") Loans and Eurodollar Loans, an applicable margin ranging from 1.75% to 2.25% is applied to either the BA interest rate or LIBOR. The rates on the Revolving Facility vary depending upon the results of the first lien leverage ratio. Telesat's Revolving Facility currently has an unused commitment fee that ranges from 25 to 37.5 basis points per annum, depending upon the result of the total leverage ratio. As of June 30, 2021, other than CAD 0.3 million in drawings related to letters of credit, there were no borrowings under this facility.



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ii - Term Loan B - U.S. Facility

Telesat's term loan B - U.S. facility ("U.S. TLB Facility") is a $1,908.5 million facility maturing in December 2026. As of June 30, 2021, $1,552.8 million of this facility was outstanding, which represents the full amount available. The borrowings under Telesat's U.S. TLB Facility bear interest at a floating rate of either: (i) LIBOR as periodically determined for interest rate periods selected by Telesat in accordance with the terms of the senior secured credit facilities plus an applicable margin of 2.75%; or (ii) Alternative Base Rate as determined in accordance with the terms of the senior secured credit facilities plus an applicable margin of 1.75%.

In December 2020, Telesat made a $341.4 million prepayment on its outstanding term loans under its U.S. TLB Facility. The mandatory principal repayments on Telesat's U.S. TLB Facility are one quarter of 1.00% of the value of the loan, which must be paid on the last day of each quarter. As a result of the prepayment made in December 2020, mandatory quarterly principal repayments will no longer be required.



Senior Secured Notes


Telesat has senior secured notes, in the amount of $400.0 million, which bear interest at an annual rate of 4.875% and are due in June 2027 (the "4.875% Senior Secured Notes"). The 4.875% Senior Secured Notes indenture includes covenants or terms that restrict Telesat's ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, investments or acquisitions, enter into certain transactions with affiliates, modify or cancel its satellite insurance, effect mergers with another entity, and redeem its 4.875% Senior Secured Notes, without penalty, before December 1, 2024, in each case subject to exceptions provided in the 4.875% Senior Secured Notes indenture.

On April 27, 2021, Telesat issued senior secured notes in the amount of $500 million at an annual rate of 5.625%, which are due in December 2026 (the "5.625% Senior Secured Notes"). The 5.625% Senior Secured Notes indenture includes covenants and terms that restrict Telesat's ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, investments or acquisitions, enter into certain transactions with affiliates, modify or cancel its satellite insurance, effect mergers with another entity, and redeem the 5.625% Senior Secured Notes, without penalty, before December 6, 2022, in each case subject to exceptions provided in the 5.625% Senior Secured Notes indenture. Telesat incurred debt issuance costs of CAD 6.8 million in connection with the issuance of the 5.625% Senior Secured Notes.




Senior Notes



Telesat's senior notes, in the amount of $550 million, bear interest at an annual rate of 6.5% and are due in October 2027. They include covenants or terms that restrict Telesat's ability to, among other things, incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments, investments or acquisitions, enter into certain transactions with affiliates, modify or cancel its satellite insurance, effect mergers with another entity, and redeem its senior notes, without penalty, before October 15, 2024, in each case subject to exceptions provided in the senior notes indenture.



Debt Service Cost


The interest expense on Telesat's senior secured credit facilities, senior notes, senior secured notes and interest rate swaps, excluding the impact of the amortization of deferred financing costs, prepayment options and loss on repayment for the year ended December 31, 2021, is expected to be approximately CAD 162.1 million.

Derivatives

Telesat uses, from time to time, interest rate and currency derivatives to manage its exposure to changes in interest rates and foreign exchange rates.


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As of June 30, 2021, Telesat had two outstanding interest rate swaps which hedge the interest rate risk associated with the variable interest rate on $900 million of U.S. denominated Term Loan B borrowings. These contracts, which mature in September 2021 and September 2022, are at fixed interest rates of 1.95% to 2.04%, respectively, excluding applicable margin. As of June 30, 2021, the fair value of the interest rate swaps was a liability of $8.6 million.

Telesat also has foreign currency embedded derivatives in its purchase contracts with suppliers and sales contracts with customers as a result of some of these contracts being denominated in a currency other than the functional currency of the substantial parties to the respective contract. The fair value of these foreign currency embedded derivatives as of June 30, 2021 was a net liability of $7.9 million.

Capital Expenditures

Telesat has entered into contracts for the development of Telesat Lightspeed constellation and other capital expenditures. The outstanding commitments associated with these contracts were approximately CAD 203.0 million as of June 30, 2021. These expenditures may be funded from some or all of the following: cash and short-term investments; cash flow from operating activities; cash flow from customer prepayments; or funds available under the revolving credit facility.


Statements of Cash Flows



Net Cash Used in Operating Activities

Net cash used in operating activities was $8.4 million for the six months ended June 30, 2021, consisting primarily of a $8.0 million cash use attributable to net income adjusted for non-cash operating items, a $0.6 million decrease in pension and other post-retirement liabilities and a $0.4 million increase in other current assets, partially offset by a $0.5 million increase in other liabilities and a $0.1 million increase in accrued employment costs and other current liabilities.

Net cash used in operating activities was $7.3 million for the six months ended June 30, 2020, consisting primarily of a $6.9 million cash use attributable to net loss adjusted for non-cash operating items, a $0.6 million decrease in accrued employment costs and other current liabilities, a $0.9 million decrease in income taxes payable, net of refunds receivable, and a $0.9 million decrease in pension and other post-retirement liabilities, partially offset by a $1.9 million increase in other liabilities.

Net Cash Used in Financing Activities

Net cash used in financing activities was $170.1 million for the six months ended June 30, 2020 attributable to the payment of a cash dividend to common shareholders in May 2020.



Affiliate Matters


Loral has made certain investments in joint ventures in the satellite services business that are accounted for under the equity method of accounting (see Note 5 to our financial statements for further information on affiliate matters).

Commitments and Contingencies

Our business and operations are subject to a number of significant risks, the most significant of which are summarized in Part II, Item 1A - Risk Factors and also in Note 13 to our condensed consolidated financial statements.

Other Matters

Recent Accounting Pronouncements

There are no accounting pronouncements that have been issued but not yet adopted that we believe will have a significant impact on our financial statements.



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Financials (USD)
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Net income 2020 93,1 M - -
Net cash 2020 31,3 M - -
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