SIRI- 2014.03.31 -10Q

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE TRANSITION PERIOD FROM __________ TO ________
COMMISSION FILE NUMBER 001-34295
 
SIRIUS XM HOLDINGS INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
38-3916511

(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1221 Avenue of the Americas, 36th Floor
 
 
New York, New York
 
10020
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (212) 584-5100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

(Class)
 
(Outstanding as of April 23, 2014)
COMMON STOCK, $0.001 PAR VALUE
 
6,033,782,973
SHARES

 

Table of Contents

SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Item No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)



For the Three Months Ended March 31,
(in thousands, except per share data)
2014
 
2013
Revenue:

 

Subscriber revenue
$
851,436

 
$
783,342

Advertising revenue
22,214

 
20,211

Equipment revenue
23,978

 
18,156

Other revenue
100,083

 
75,689

Total revenue
997,711

 
897,398

Operating expenses:

 

Cost of services:

 

Revenue share and royalties
195,411

 
148,531

Programming and content
74,870

 
74,610

Customer service and billing
91,069

 
80,394

Satellite and transmission
21,380

 
19,695

Cost of equipment
7,804

 
7,027

Subscriber acquisition costs
123,022

 
116,111

Sales and marketing
76,327

 
65,899

Engineering, design and development
15,911

 
14,842

General and administrative
76,243

 
56,340

Depreciation and amortization
68,267

 
67,018

Total operating expenses
750,304

 
650,467

Income from operations
247,407

 
246,931

Other income (expense):

 

Interest expense, net of amounts capitalized
(54,092
)
 
(46,174
)
Interest and investment income
4,349

 
1,638

Loss on change in value of derivatives
(27,023
)
 
—

Other income
95

 
247

Total other expense
(76,671
)
 
(44,289
)
Income before income taxes
170,736

 
202,642

Income tax expense
(76,748
)
 
(79,040
)
Net income
$
93,988

 
$
123,602

Foreign currency translation adjustment, net of tax
118

 
(172
)
Total comprehensive income
$
94,106

 
$
123,430

Net income per common share:

 

Basic
$
0.02

 
$
0.02

Diluted
$
0.02

 
$
0.02

Weighted average common shares outstanding:

 

Basic
6,094,784

 
6,259,803

Diluted
6,173,848

 
6,606,276


See accompanying notes to the unaudited consolidated financial statements.

1
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 
March 31, 2014
 
December 31, 2013
(in thousands, except share and per share data)
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
121,171

 
$
134,805

Accounts receivable, net
103,872

 
103,937

Receivables from distributors
89,486

 
88,975

Inventory, net
18,987

 
13,863

Prepaid expenses
123,239

 
110,530

Related party current assets
5,143

 
9,145

Deferred tax asset
896,386

 
937,598

Other current assets
19,501

 
20,160

Total current assets
1,377,785

 
1,419,013

Property and equipment, net
1,571,460

 
1,594,574

Long-term restricted investments
5,718

 
5,718

Deferred financing fees, net
11,988

 
12,604

Intangible assets, net
2,685,978

 
2,700,062

Goodwill
2,203,409

 
2,204,553

Related party long-term assets
33,663

 
30,164

Long-term deferred tax asset
834,663

 
868,057

Other long-term assets
9,511

 
10,035

Total assets
$
8,734,175

 
$
8,844,780

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
558,756

 
$
578,333

Accrued interest
57,376

 
42,085

Current portion of deferred revenue
1,623,668

 
1,586,611

Current portion of deferred credit on executory contracts
3,672

 
3,781

Current maturities of long-term debt
497,516

 
496,815

Current maturities of long-term related party debt
10,970

 
10,959

Related party current liabilities
47,536

 
20,320

Total current liabilities
2,799,494

 
2,738,904

Deferred revenue
146,830

 
149,026

Deferred credit on executory contracts
558

 
1,394

Long-term debt
2,943,202

 
3,093,821

Related party long-term liabilities
15,627

 
16,337

Other long-term liabilities
103,051

 
99,556

Total liabilities
6,008,762

 
6,099,038

Commitments and contingencies (Note 16)

 

Stockholders’ equity:
 
 
 
Preferred stock, undesignated, par value $0.001 (liquidation preference of $0.001 per share); 50,000,000 shares authorized and 0 shares issued and outstanding at March 31, 2014 and December 31, 2013
—

 
—

Common stock, par value $0.001; 9,000,000,000 shares authorized; 6,073,791,343 and 6,096,220,526 shares issued; 6,058,791,343 and 6,096,220,526 outstanding, at March 31, 2014 and December 31, 2013, respectively
6,074

 
6,096

Accumulated other comprehensive loss, net of tax
(190
)
 
(308
)
Additional paid-in capital
8,607,329

 
8,674,129

Treasury stock, at cost; 15,000,000 and 0 shares of common stock at March 31, 2014 and December 31, 2013, respectively
(47,613
)
 
—

Accumulated deficit
(5,840,187
)
 
(5,934,175
)
Total stockholders’ equity
2,725,413

 
2,745,742

Total liabilities and stockholders’ equity
$
8,734,175

 
$
8,844,780


See accompanying notes to the unaudited consolidated financial statements.

2
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)


 
Convertible Perpetual
Preferred Stock,
Series B-1
 
Common Stock
 
 
 
 
 
Treasury Stock
 
 
 
 
(in thousands, except share data)
Shares
 
Amount
 
Shares
 
Amount
 
Accumulated Other Comprehensive Loss
 
Additional
Paid-in
Capital
 
Shares
 
Amount
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance at December 31, 2013
—

 
$
—

 
6,096,220,526

 
$
6,096

 
$
(308
)
 
$
8,674,129

 
—

 
$
—

 
$
(5,934,175
)
 
$
2,745,742

Comprehensive income, net of tax
—

 
—

 
—

 
—

 
118

 
—

 
—

 
—

 
93,988

 
94,106

Share-based payment expense
—

 
—

 
—

 
—

 
—

 
18,240

 
—

 
—

 
—

 
18,240

Exercise of options and vesting of restricted stock units
—

 
—

 
2,070,817

 
2

 
—

 
257

 
—

 
—

 
—

 
259

Minimum withholding taxes on net share settlement of stock-based compensation
—

 
—

 
—

 
—

 
—

 
(4,252
)
 
—

 
—

 
—

 
(4,252
)
Common stock repurchased
—

 
—

 
—

 
—

 
—

 
—

 
39,500,000

 
(128,682
)
 
—

 
(128,682
)
Common stock retired
—

 
—

 
(24,500,000
)
 
(24
)
 
—

 
(81,045
)
 
(24,500,000
)
 
81,069

 
—

 
—

Balance at March 31, 2014
—

 
$
—

 
6,073,791,343

 
$
6,074

 
$
(190
)
 
$
8,607,329

 
15,000,000

 
$
(47,613
)
 
$
(5,840,187
)
 
$
2,725,413

See accompanying notes to the unaudited consolidated financial statements.

3
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 
For the Three Months Ended March 31,
(in thousands)
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
93,988

 
$
123,602

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization
68,267

 
67,018

Non-cash interest expense, net of amortization of premium
5,231

 
5,442

Provision for doubtful accounts
10,634

 
11,410

Amortization of deferred income related to equity method investment
(694
)
 
(694
)
Gain on unconsolidated entity investments, net
(4,326
)
 
(1,345
)
Dividend received from unconsolidated entity investment
4,222

 
9,674

Loss on disposal of assets
196

 
124

Loss on change in value of derivatives
27,023

 
—

Share-based payment expense
18,240

 
14,518

Deferred income taxes
74,565

 
83,631

Other non-cash purchase price adjustments
(945
)
 
(70,459
)
Changes in operating assets and liabilities:
 
 


Accounts receivable
(10,569
)
 
(13,143
)
Receivables from distributors
(511
)
 
1,663

Inventory
(5,124
)
 
5,242

Related party assets
654

 
26

Prepaid expenses and other current assets
(15,682
)
 
(51,815
)
Other long-term assets
522

 
1,730

Accounts payable and accrued expenses
(68,168
)
 
(97,537
)
Accrued interest
15,291

 
31,054

Deferred revenue
34,861

 
47,480

Related party liabilities
177

 
5,891

Other long-term liabilities
3,538

 
(4,597
)
Net cash provided by operating activities
251,390

 
168,915

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(28,601
)
 
(26,434
)
Acquisition of business, net of cash acquired
1,144

 
—

Net cash used in investing activities
(27,457
)
 
(26,434
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
259

 
10,946

Taxes paid in lieu of shares issued for stock-based compensation
(4,229
)
 
—

Repayment of long-term borrowings and revolving credit facility
(152,528
)
 
(1,933
)
Common stock repurchased and retired
(81,069
)
 
(465,712
)
Net cash used in financing activities
(237,567
)
 
(456,699
)
Net decrease in cash and cash equivalents
(13,634
)
 
(314,218
)
Cash and cash equivalents at beginning of period
134,805

 
520,945

Cash and cash equivalents at end of period
$
121,171

 
$
206,727

See accompanying notes to the unaudited consolidated financial statements.

4
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(UNAUDITED)

 
For the Three Months Ended March 31,
(in thousands)
2014
 
2013
Supplemental Disclosure of Cash and Non-Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized
$
30,687

 
$
2,928

Non-cash investing and financing activities:

 
 
Capital lease obligations incurred to acquire assets
719

 
—

Conversion of Series B preferred stock to common stock
—

 
1,293

Treasury stock not yet settled
47,613

 
27,923

Conversion of 7% Exchangeable Notes to common stock, net of debt issuance and deferred financing costs
—

 
45,097

See accompanying notes to the unaudited consolidated financial statements.

5
Table of Contents
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)


 
For the Three Months Ended March 31,
(in thousands, except per share data)
2014
 
2013
Revenue:
 
 
 
Subscriber revenue
$
851,436

 
$
783,342

Advertising revenue
22,214

 
20,211

Equipment revenue
23,978

 
18,156

Other revenue
100,083

 
75,689

Total revenue
997,711

 
897,398

Operating expenses:

 

Cost of services:

 

Revenue share and royalties
195,411

 
148,531

Programming and content
74,870

 
74,610

Customer service and billing
91,069

 
80,394

Satellite and transmission
21,380

 
19,695

Cost of equipment
7,804

 
7,027

Subscriber acquisition costs
123,022

 
116,111

Sales and marketing
76,327

 
65,899

Engineering, design and development
15,911

 
14,842

General and administrative
76,243

 
56,340

Depreciation and amortization
68,267

 
67,018

Total operating expenses
750,304

 
650,467

Income from operations
247,407

 
246,931

Other income (expense):

 

Interest expense, net of amounts capitalized
(54,092
)
 
(46,174
)
Interest and investment income
4,349

 
1,638

Gain on change in fair value of debt instruments
89,110

 
—

Other income
95

 
247

Total other income (expense)
39,462

 
(44,289
)
Income before income taxes
286,869

 
202,642

Income tax expense
(76,748
)
 
(79,040
)
Net income attributable to Sirius XM Radio Inc.'s sole stockholder
$
210,121

 
$
123,602

Foreign currency translation adjustment, net of tax
118

 
(172
)
Total comprehensive income attributable to Sirius XM Radio Inc.'s sole stockholder
$
210,239

 
$
123,430


See accompanying notes to the unaudited consolidated financial statements.

6
Table of Contents
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED BALANCE SHEETS

 
March 31, 2014
 
December 31, 2013
(in thousands, except share and per share data)
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
121,171

 
$
134,805

Accounts receivable, net
103,872

 
103,937

Receivables from distributors
89,486

 
88,975

Inventory, net
18,987

 
13,863

Prepaid expenses
123,239

 
110,530

Related party current assets
126,295

 
15,861

Deferred tax asset
896,386

 
937,598

Other current assets
19,501

 
20,160

Total current assets
1,498,937

 
1,425,729

Property and equipment, net
1,571,460

 
1,594,574

Long-term restricted investments
5,718

 
5,718

Deferred financing fees, net
11,988

 
12,604

Intangible assets, net
2,685,978

 
2,700,062

Goodwill
2,203,409

 
2,204,553

Related party long-term assets
33,663

 
30,164

Long-term deferred tax asset
834,663

 
868,057

Other long-term assets
9,511

 
10,035

Total assets
$
8,855,327

 
$
8,851,496

LIABILITIES AND STOCKHOLDER EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
558,756

 
$
578,332

Accrued interest
45,654

 
42,085

Current portion of deferred revenue
1,623,668

 
1,586,611

Current portion of deferred credit on executory contracts
3,672

 
3,781

Current maturities of long-term debt
886,943

 
963,630

Current maturities of long-term related party debt
10,970

 
10,959

Related party current liabilities
4,811

 
4,618

Total current liabilities
3,134,474

 
3,190,016

Deferred revenue
146,830

 
149,026

Deferred credit on executory contracts
558

 
1,394

Long-term debt
2,943,202

 
3,093,821

Related party long-term liabilities
15,627

 
16,337

Other long-term liabilities
103,051

 
99,556

Total liabilities
6,343,742

 
6,550,150

Commitments and contingencies (Note 16)

 

Stockholder equity:

 
 
Preferred stock, undesignated, par value $0.001 (liquidation preference of $0.001 per share); 50,000,000 shares authorized and 0 shares issued and outstanding at March 31, 2014 and December 31, 2013
—

 
—

Common stock, par value $0.001; 9,000,000,000 shares authorized and 1,000 shares issued and outstanding at March 31, 2014 and December 31, 2013
—

 
—

Accumulated other comprehensive loss, net of tax
(190
)
 
(308
)
Additional paid-in capital
8,679,538

 
8,679,538

Accumulated deficit
(6,167,763
)
 
(6,377,884
)
Total stockholder equity
2,511,585

 
2,301,346

Total liabilities and stockholder equity
$
8,855,327

 
$
8,851,496


See accompanying notes to the unaudited consolidated financial statements.

7
Table of Contents
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDER EQUITY
(UNAUDITED)

 
Convertible Perpetual
Preferred Stock,
Series B-1
 
Common Stock
 
 
 
 
 
 
 
 
(in thousands, except share data)
Shares
 
Amount
 
Shares
 
Amount
 
Accumulated Other Comprehensive Loss
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholder
Equity
Balance at December 31, 2013
—

 
$
—

 
1,000

 
$
—

 
$
(308
)
 
$
8,679,538

 
$
(6,377,884
)
 
$
2,301,346

Comprehensive income, net of tax
—

 
—

 
—

 
—

 
118

 
—

 
210,121

 
210,239

Balance at March 31, 2014
—

 
$
—

 
1,000

 
$
—

 
$
(190
)
 
$
8,679,538

 
$
(6,167,763
)
 
$
2,511,585

See accompanying notes to the unaudited consolidated financial statements.

8
Table of Contents
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 
For the Three Months Ended March 31,
(in thousands)
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
210,121

 
$
123,602

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization
68,267

 
67,018

Non-cash interest expense, net of amortization of premium
5,231

 
5,442

Provision for doubtful accounts
10,634

 
11,410

Amortization of deferred income related to equity method investment
(694
)
 
(694
)
Gain on unconsolidated entity investments, net
(4,326
)
 
(1,345
)
Dividend received from unconsolidated entity investment
4,222

 
9,674

Loss on disposal of assets
196

 
124

Gain on change in fair value of debt instruments
(89,110
)
 
—

Share-based payment expense
18,240

 
14,518

Deferred income taxes
74,566

 
83,631

Other non-cash purchase price adjustments
(945
)
 
(70,459
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(10,569
)
 
(13,143
)
Receivables from distributors
(511
)
 
1,663

Inventory
(5,124
)
 
5,242

Related party assets
(132,022
)
 
26

Prepaid expenses and other current assets
(15,682
)
 
(51,815
)
Other long-term assets
522

 
1,730

Accounts payable and accrued expenses
(20,532
)
 
(97,537
)
Accrued interest
15,291

 
31,054

Deferred revenue
34,861

 
47,480

Related party liabilities
177

 
5,891

Other long-term liabilities
3,538

 
(4,597
)
Net cash provided by operating activities
166,351

 
168,915

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(28,601
)
 
(26,434
)
Acquisition of business, net of cash acquired
1,144

 
—

Net cash used in investing activities
(27,457
)
 
(26,434
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
—

 
10,946

Repayment of long-term borrowings and revolving credit facility
(152,528
)
 
(1,933
)
Common stock repurchased and retired
—

 
(465,712
)
Net cash used in financing activities
(152,528
)
 
(456,699
)
Net decrease in cash and cash equivalents
(13,634
)
 
(314,218
)
Cash and cash equivalents at beginning of period
134,805

 
520,945

Cash and cash equivalents at end of period
$
121,171

 
$
206,727

See accompanying notes to the unaudited consolidated financial statements.

9
Table of Contents
SIRIUS XM RADIO INC. AND SUBSIDIARIES
(a wholly-owned subsidiary of Sirius XM Holdings Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(UNAUDITED)

 
For the Three Months Ended March 31,
(in thousands)
2014
 
2013
Supplemental Disclosure of Cash and Non-Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized
$
30,687

 
$
2,928

Non-cash investing and financing activities:
 
 
 
Capital lease obligations incurred to acquire assets
719

 
—

Conversion of Series B preferred stock to common stock
—

 
1,293

Conversion of 7% Exchangeable Notes to common stock, net of debt issuance and deferred financing costs
—

 
45,097

See accompanying notes to the unaudited consolidated financial statements.


10
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)


(1)
Business & Basis of Presentation

Business
This Quarterly Report on Form 10-Q presents information for Sirius XM Holdings Inc. (“Holdings”) and also contains the financial results of Sirius XM Radio Inc. (“Sirius XM”) on a combined basis. The terms “we,” “us,” “our,” and “our company” as used herein and unless otherwise stated or indicated by context, refers to Sirius XM Radio Inc. and its subsidiaries prior to the corporate reorganization described below and to Sirius XM Holdings Inc. and its subsidiaries after such corporate reorganization.
Sirius XM Holdings Inc.
Effective November 15, 2013, we completed a corporate reorganization. As part of the reorganization, Holdings replaced Sirius XM as our publicly held corporation and Sirius XM became a wholly-owned subsidiary of Holdings. Holdings was incorporated in the State of Delaware on May 21, 2013. Holdings has no operations independent of its subsidiary Sirius XM.

Liberty Media Corporation beneficially owns, directly and indirectly, over 50% of the outstanding shares of our common stock. Liberty Media owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries, Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its interests in Charter Communications, Live Nation Entertainment and minority equity investments in Time Warner Inc., Time Warner Cable and Viacom.
Sirius XM Radio Inc.
We broadcast music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, in the United States on a subscription fee basis through our two proprietary satellite radio systems. Subscribers can also receive music and other channels, plus features such as SiriusXM On Demand and MySXM, over the Internet, including through applications for mobile devices. We are also a leader in providing connected vehicle applications and services. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle owners while providing marketing and operational benefits to automakers and their dealers. Subscribers to our connected vehicle services are not included in our subscriber count.

We have agreements with every major automaker (“OEMs”) to offer satellite radios in their vehicles from which we acquire a majority of our subscribers. We also acquire subscribers through marketing campaigns to owners of factory-installed satellite radios that are not currently subscribing to our services. Additionally, we distribute our satellite radios through retail locations nationwide and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.

Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly basis. We offer discounts for prepaid and longer term subscription plans as well as discounts for multiple subscriptions. We also derive revenue from activation and other fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services, such as our weather, traffic, data and Backseat TV services.

In certain cases, automakers and dealers include a subscription to our radio services in the sale or lease price of new or previously owned vehicles. The length of these trial subscriptions varies but is typically three to twelve months. We receive subscription payments for these trials from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles.


11
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. Certain information and footnote disclosures normally included in the financial statements presented in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

Our financial statements include the consolidated accounts for Holdings and subsidiaries and the accompanying consolidated financial statements of Sirius XM and subsidiaries, whose operating results and financial position are consolidated into Holdings. The unaudited consolidated balance sheets and unaudited consolidated statements of comprehensive income for Holdings, and combined footnotes, are essentially identical to the unaudited consolidated balance sheets and unaudited consolidated statements of comprehensive income for Sirius XM, with the following exceptions:

•
The fair value of the remaining obligations under the share repurchase agreement with Liberty Media is recorded in Holdings' unaudited consolidated balance sheets, with changes in fair value recorded in Holdings' unaudited statements of comprehensive income. Refer to Note 14 for additional information related to the share repurchase agreement.
•
The fair value in excess of the carrying amount associated with the conversion feature for the 7% Exchangeable Senior Subordinated Notes due 2014 is recorded in Sirius XM's unaudited consolidated balance sheets, with changes in fair value recorded in Sirius XM's unaudited statements of comprehensive income. This is eliminated in Holdings' unaudited consolidated balance sheets and unaudited statements of comprehensive income.
•
As a result of our corporate reorganization effective November 15, 2013, all of the outstanding shares of Sirius XM's common stock were converted, on a share for share basis, into identical shares of common stock of Holdings.
    
With the exception of the items noted above, all significant intercompany transactions and balances between Holdings and Sirius XM and their respective consolidated subsidiaries are eliminated in both sets of unaudited consolidated financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of March 31, 2014 and for the three months ended March 31, 2014 have been made.

Interim results are not necessarily indicative of the results that may be expected for a full year. This Quarterly Report on Form 10-Q should be read together with our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC on February 4, 2014.

We have evaluated events subsequent to the balance sheet date and prior to the filing of this Quarterly Report on Form 10-Q for the three months ended March 31, 2014 and have determined that no events have occurred that would require adjustment to our unaudited consolidated financial statements. For a discussion of subsequent events refer to Note 18.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from those estimates. Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include asset impairment, depreciable lives of our satellites, share-based payment expense, and income taxes.

(2)
Acquisitions

On November 4, 2013, we purchased all of the outstanding shares of the capital stock of the connected vehicle business of Agero, Inc. ("Agero"). The transaction was accounted for using the acquisition method of accounting. During the three months ended March 31, 2014, the working capital calculation associated with this transaction was finalized, resulting in a decrease of $1,144 to the original purchase price and Goodwill. As of March 31, 2014, our Goodwill balance associated with the acquisition was $388,318. No other assets or liabilities have been adjusted as a result of the final working capital calculation.


12
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

(3)
Summary of Significant Accounting Policies

Fair Value of Financial Instruments
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are based on unadjusted quoted prices in active markets for identical instruments. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. As of March 31, 2014 and December 31, 2013, the carrying amounts of cash and cash equivalents, accounts and other receivables, and accounts payable approximated fair value due to the short-term nature of these instruments.

Our assets and liabilities measured at fair value are as follows:
 
March 31, 2014
 
December 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sirius XM Canada Holdings Inc. ("Sirius XM Canada") - investment (a)
$
369,800

 
—

 
—

 
$
369,800

 
$
432,200

 
—

 
—

 
$
432,200

Sirius XM Canada - fair value of host contract of debenture (b)
$
—

 
—

 
—

 
$
—

 
$
—

 
—

 
3,641

 
$
3,641

Sirius XM Canada - fair value of embedded derivative of debenture (b)
$
—

 
—

 
—

 
$
—

 
$
—

 
—

 
57

 
$
57

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt (c)
$
—

 
3,905,871

 
—

 
$
3,905,871

 
$
—

 
4,066,755

 
—

 
$
4,066,755

Share Repurchase Agreement (d)
$
—

 
42,725

 
—

 
$
42,725

 
$
—

 
15,702

 
—

 
$
15,702

(a)
This amount approximates fair value. The carrying value of our investment in Sirius XM Canada was $30,691 and $26,972 as of March 31, 2014 and December 31, 2013, respectively.
(b)
As of December 31, 2013, we held an investment in CAD $4,000 face value of 8% convertible unsecured subordinated debentures issued by Sirius XM Canada for which the embedded conversion feature was bifurcated from the host contract. Sirius XM Canada redeemed and converted the debentures during the three months ended March 31, 2014.
(c)
The fair value for non-publicly traded instruments is based upon estimates from a market maker and brokerage firm. Refer to Note 13 for information related to the carrying value of debt as of March 31, 2014 and December 31, 2013.
(d)
The fair value of the share repurchase agreement is determined using observable inputs, including the U.S. spot LIBOR curve and other available market data. The fair value of the derivative associated with the share repurchase agreement with Liberty Media is recorded in Holdings' unaudited consolidated balance sheets in Related party current liabilities, with changes in fair value recorded to Holdings' unaudited statements of comprehensive income.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive loss of $190 at March 31, 2014 was primarily comprised of the cumulative foreign currency translation adjustments related to our interest in Sirius XM Canada. During the three months ended March 31, 2014, we recorded a foreign currency translation adjustment of $118. In addition, during the three months ended March 31, 2014, upon the redemption and conversion of the 8% convertible unsecured subordinated debentures issued by Sirius XM Canada, we reclassified $223, net of tax, of previously recognized foreign translation losses out of Accumulated other comprehensive loss and into Interest and investment income.


13
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

(4)
Earnings per Share

Holdings
Basic net income per common share is calculated by dividing the income available to common stockholders by the weighted average common shares outstanding during each reporting period. Diluted net income per common share adjusts the weighted average number of common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt, warrants, stock options and restricted stock units) were exercised or converted into common stock, calculated using the treasury stock method. We had no participating securities during the three months ended March 31, 2014. In 2013, we utilized the two-class method in calculating basic net income per common share, as our Series B Preferred Stock was considered to be participating securities through January 18, 2013. On January 18, 2013, Liberty Media converted its remaining 6,250,100 outstanding shares of Sirius XM Series B Preferred Stock into 1,293,509,076 shares of common stock.

Common stock equivalents of approximately 386,975,000 and 349,681,000 for the three months ended March 31, 2014 and 2013, respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive.
 
For the Three Months Ended March 31,
(in thousands, except per share data)
2014
 
2013
Numerator:
 
 
 
Net income
$
93,988

 
$
123,602

Less:
 
 
 
Allocation of undistributed income to Series B Preferred Stock
—

 
(4,905
)
Net income available to common stockholders for basic net income per common share
$
93,988

 
$
118,697

Add back:
 
 


Allocation of undistributed income to Series B Preferred Stock
—

 
4,905

Net income available to common stockholders for diluted net income per common share
$
93,988

 
$
123,602

Denominator:
 
 


Weighted average common shares outstanding for basic net income per common share
6,094,784

 
6,259,803

Weighted average impact of assumed Series B Preferred Stock conversion
—

 
258,702

Weighted average impact of other dilutive equity instruments
79,064

 
87,771

Weighted average shares for diluted net income per common share
6,173,848

 
6,606,276

Net income per common share:
 
 
 
Basic
$
0.02

 
$
0.02

Diluted
$
0.02

 
$
0.02


Sirius XM
Net income per share for Sirius XM is not presented since Sirius XM is a wholly-owned subsidiary of Holdings.

(5)
Accounts Receivable, net

Accounts receivable, net, are stated at amounts due from customers net of an allowance for doubtful accounts. Our allowance for doubtful accounts is based upon our assessment of various factors. We consider historical experience, the age of the receivable balances, current economic conditions and other factors that may affect the counterparty’s ability to pay. Bad debt expense is included in Customer service and billing expense in our unaudited consolidated statements of comprehensive income.


14
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

Accounts receivable, net, consists of the following:
 
March 31,
2014
 
December 31,
2013
Gross accounts receivable
$
111,315

 
$
113,015

Allowance for doubtful accounts
(7,443
)
 
(9,078
)
Total accounts receivable, net
$
103,872

 
$
103,937


Receivables from distributors include billed and unbilled amounts due from OEMs for services included in the sale or lease price of vehicles, as well as billed amounts due from retailers. We have not established an allowance for doubtful accounts for our receivables from distributors as we have historically not experienced any significant collection issues with OEMs. Receivables from distributors consist of the following:
 
March 31,
2014
 
December 31,
2013
Billed
$
40,056

  
$
38,532

Unbilled
49,430

  
50,443

Total
$
89,486

  
$
88,975


(6)
Inventory, net

Inventory consists of finished goods, refurbished goods, chip sets and other raw material components used in manufacturing radios. Inventory is stated at the lower of cost or market. We record an estimated allowance for inventory that is considered slow moving or obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for resale in our direct to consumer distribution channel and components held for resale by us is reported as a component of Cost of equipment in our unaudited consolidated statements of comprehensive income. The provision related to inventory consumed in our OEM and retail distribution channel is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of comprehensive income.

Inventory, net, consists of the following:
 
March 31,
2014
 
December 31,
2013
Raw materials
$
14,269

 
$
12,358

Finished goods
18,439

 
15,723

Allowance for obsolescence
(13,721
)
 
(14,218
)
Total inventory, net
$
18,987

 
$
13,863


(7)
Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired in business combinations. Our annual impairment assessment is performed as of the fourth quarter of each year, and an assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. If the carrying value of goodwill exceeds its fair value, an impairment loss is recognized.

As of March 31, 2014, there were no indicators of impairment, and no impairment loss was recorded for goodwill during the three months ended March 31, 2014 and 2013. During the three months ended March 31, 2014, the working capital calculation associated with our acquisition of the connected vehicle business of Agero was finalized, resulting in a decrease of $1,144 to the original purchase price and Goodwill. As of March 31, 2014, the cumulative balance of goodwill impairments recorded since the July 2008 merger (the "Merger") between our wholly owned subsidiary, Vernon Merger Corporation, and XM Satellite Radio Holdings Inc. ("XM"), was $4,766,190, which was recognized during the year ended December 31, 2008.


15
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

(8)
Intangible Assets

We recorded intangible assets at fair value related to the Merger that were formerly held by XM Satellite Radio Holdings Inc. In November 2013, we recorded intangible assets at fair value as a result of the acquisition of the connected vehicle business of Agero. Our intangible assets include the following:
 
 
 
March 31, 2014
 
December 31, 2013
 
Weighted Average
Useful Lives
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
Due to the Merger:
 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite life intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
FCC licenses
Indefinite
 
$
2,083,654

 
$
—

 
$
2,083,654

 
$
2,083,654

 
$
—

 
$
2,083,654

Trademark
Indefinite
 
250,000

 
—

 
250,000

 
250,000

 
—

 
250,000

Definite life intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscriber relationships
9 years
 
380,000

 
(280,298
)
 
99,702

 
380,000

 
(271,372
)
 
108,628

Licensing agreements
9.1 years
 
45,289

 
(20,525
)
 
24,764

 
45,289

 
(19,604
)
 
25,685

Proprietary software
6 years
 
16,552

 
(13,531
)
 
3,021

 
16,552

 
(13,384
)
 
3,168

Developed technology
10 years
 
2,000

 
(1,133
)
 
867

 
2,000

 
(1,083
)
 
917

Leasehold interests
7.4 years
 
132

 
(101
)
 
31

 
132

 
(96
)
 
36

Due to acquisition of connected vehicle business of Agero:
 
 
 
 
 
 
 
 
 
 
 
 
 
Definite life intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
OEM relationships
15 years
 
220,000

 
(6,111
)
 
213,889

 
220,000

 
(2,444
)
 
217,556

Proprietary software
10 years
 
10,663

 
(613
)
 
10,050

 
10,663

 
(245
)
 
10,418

Total intangible assets
 
 
$
3,008,290

 
$
(322,312
)
 
$
2,685,978

 
$
3,008,290

 
$
(308,228
)
 
$
2,700,062


Indefinite Life Intangible Assets
We have identified our FCC licenses and the XM trademark as indefinite life intangible assets after considering the expected use of the assets, the regulatory and economic environment within which they are used and the effects of obsolescence on their use.

We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. The following table outlines the years in which each of our licenses expires:
FCC satellite licenses
 
Expiration year
SIRIUS FM-1
 
2017
SIRIUS FM-2
 
2017
SIRIUS FM-3
 
2017
SIRIUS FM-5
 
2017
SIRIUS FM-6 (1)
 

XM-1
 
2014
XM-2 (2)
 

XM-3
 
2021
XM-4
 
2014
XM-5
 
2018
(1)
The FCC license for our FM-6 satellite will be issued for a period of eight years, beginning on the date we certify to the FCC that the satellite has been successfully placed into orbit and that the operations of the satellite fully conform to the terms and conditions of the space station radio authorization.
(2)
The FCC license for our XM-2 satellite expired on March 31, 2014. The FCC has granted us special temporary authority for six months to operate our XM-2 satellite and prepare it for deorbiting maneuvers.


16
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

Prior to expiration, we are required to apply for a renewal of our FCC licenses. The renewal and extension of our licenses is reasonably certain at minimal cost, which is expensed as incurred. Each of the FCC licenses authorizes us to use the broadcast spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.

In connection with the Merger, $250,000 of the purchase price was allocated to the XM trademark. As of March 31, 2014, there were no legal, regulatory or contractual limitations associated with the XM trademark.

Our annual impairment assessment of our indefinite intangible assets is performed as of the fourth quarter of each year. An assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value. If the carrying value of the intangible assets exceeds its fair value, an impairment loss is recognized. As March 31, 2014, there were no indicators of impairment, and no impairment loss was recorded for intangible assets with indefinite lives during the three months ended March 31, 2014 and 2013.

Definite Life Intangible Assets
Subscriber relationships are amortized on an accelerated basis over 9 years, which reflects the estimated pattern in which the economic benefits will be consumed. Other definite life intangible assets include certain licensing agreements, which are amortized over a weighted average useful life of 9.1 years on a straight-line basis. The fair value of the OEM relationships and proprietary software acquired from the acquisition of the connected vehicle business of Agero are being amortized over their estimated weighted average useful lives of 15 and 10 years, respectively.

Amortization expense for all definite life intangible assets was $14,084 and $12,591 for the three months ended March 31, 2014 and 2013, respectively. Expected amortization expense for the remaining period in 2014, each of the fiscal years 2015 through 2018 and for periods thereafter is as follows:
Year ending December 31,
  
Amount
2014 (remaining)
  
$
40,932

2015
  
51,700

2016
  
48,545

2017
  
34,882

2018
  
19,463

Thereafter
  
156,802

Total definite life intangible assets, net
  
$
352,324


(9)
Interest Costs

We capitalized a portion of the interest on funds borrowed as part of the cost of constructing our satellites and related launch vehicles. We capitalized interest associated with our FM-6 satellite and related launch vehicle through its placement into orbit during the fourth quarter of 2013. We also incurred interest costs on our debt instruments and on our satellite incentive agreements. The following is a summary of our interest costs:
 
For the Three Months Ended March 31,
 
2014
 
2013
Interest costs charged to expense
$
54,092

 
$
46,174

Interest costs capitalized
206

 
7,970

Total interest costs incurred
$
54,298

 
$
54,144


Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $5,231 and $5,442 for the three months ended March 31, 2014 and 2013, respectively.


17
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

(10)
Property and Equipment

Property and equipment, net, consists of the following:
 
March 31,
2014
 
December 31,
2013
Satellite system
$
2,407,423

 
$
2,407,423

Terrestrial repeater network
106,895

 
109,367

Leasehold improvements
47,676

 
46,173

Broadcast studio equipment
59,122

 
59,020

Capitalized software and hardware
310,248

 
298,267

Satellite telemetry, tracking and control facilities
64,143

 
63,944

Furniture, fixtures, equipment and other
67,165

 
67,275

Land
38,411

 
38,411

Building
58,849

 
58,662

Construction in progress
119,523

 
103,148

Total property and equipment
3,279,455

 
3,251,690

Accumulated depreciation and amortization
(1,707,995
)
 
(1,657,116
)
Property and equipment, net
$
1,571,460

 
$
1,594,574


Construction in progress consists of the following:
 
March 31,
2014
 
December 31,
2013
Satellite system
$
12,085

  
$
11,879

Terrestrial repeater network
37,304

  
30,078

Capitalized software
47,540

 
39,924

Other
22,594

  
21,267

Construction in progress
$
119,523

  
$
103,148


Depreciation expense on property and equipment was $54,183 and $54,427 for the three months ended March 31, 2014 and 2013, respectively. We retired property and equipment of $3,500 and $12,656 and recognized a loss on the disposal of assets of $196 and $124 during the three months ended March 31, 2014 and 2013, respectively.


18
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

Satellites
We currently own a fleet of ten orbiting satellites. The chart below provides certain information on these satellites:
Satellite Designation
 
Year Delivered
 
Estimated End of
Depreciable Life
FM-1*
 
2000
 
2013
FM-2*
 
2000
 
2013
FM-3
 
2000
 
2015
FM-5
 
2009
 
2024
FM-6
 
2013
 
2028
XM-1*
 
2001
 
2013
XM-2*
 
2001
 
2013
XM-3
 
2005
 
2020
XM-4
 
2006
 
2021
XM-5
 
2010
 
2025
* Satellite was fully depreciated as of March 31, 2014 but is still in operation.

We own five orbiting satellites for use in the Sirius system and five orbiting satellites for use in the XM system. Four of these satellites were manufactured by Boeing Satellite Systems International, Inc., and six were manufactured by Space Systems/Loral.


(11)
Related Party Transactions

We had the following related party balances at March 31, 2014 and December 31, 2013:
 
Related party current assets
 
Related party long-term assets
 
Related party current liabilities
 
Related party long-term liabilities
 
Related party current debt
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Liberty Media
$
205

 
$
278

 
$
—

 
$
—

 
$
42,982

 
$
15,766

 
$
—

 
$
—

 
$
10,970

 
$
10,959

Sirius XM Canada
4,938

 
8,867

 
31,245

 
27,619

 
4,554

 
4,554

 
15,627

 
16,337

 
—

 
—

M-Way
—

 
—

 
2,418

 
2,545

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
5,143

 
$
9,145

 
$
33,663

 
$
30,164

 
$
47,536

 
$
20,320

 
$
15,627

 
$
16,337

 
$
10,970

 
$
10,959


Liberty Media
Since January 2013, Liberty Media has beneficially owned, directly and indirectly, over 50% of our outstanding common stock. We are a "controlled company" for the purposes of the NASDAQ corporate governance requirements. Two current Liberty Media executives and one Liberty Media director are members of our board of directors. Gregory B. Maffei, the President and Chief Executive Officer of Liberty Media, is the Chairman of our board of directors.

On October 9, 2013, we entered into an agreement with Liberty Media to repurchase $500,000 of our common stock from Liberty Media. Pursuant to that agreement with Liberty Media, we repurchased $160,000 of our common stock from Liberty Media in 2013. On January 23, 2014, we entered into an amendment to the agreement with Liberty Media to defer the previously scheduled $240,000 repurchase of shares of our common stock from Liberty Media from January 27, 2014 to April 25, 2014, the date of the final purchase installment under the agreement. On April 25, 2014, we completed the final purchase installment and repurchased $340,000 of our shares of common stock from Liberty Media at a price of $3.66 per share.


19
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

Liberty Media has advised us that as of March 31, 2014 and December 31, 2013 it also owned the following:
 
March 31,
2014
 
December 31,
2013
7% Exchangeable Senior Subordinated Notes due 2014
$
11,000

  
$
11,000

Less: discounts
30

  
41

Total carrying value of debt
$
10,970

  
$
10,959


As of March 31, 2014 and December 31, 2013, we recorded $257 and $64, respectively, related to accrued interest with Liberty Media to Related party current liabilities. The fair value of the derivative associated with the share repurchase agreement with Liberty Media was $42,725 and $15,702 as of March 31, 2014 and December 31, 2013, respectively, and is recorded in Holdings' unaudited consolidated balance sheets in Related party current liabilities. There were certain terms in the forward purchase contract that could cause the obligation not to be fulfilled. As a result, the instrument is a liability and is marked to fair value with any gain or loss recorded to Holdings' unaudited consolidated statements of comprehensive income. We recognized Interest expense associated with debt held by Liberty Media of $277 and $4,677 for the three months ended March 31, 2014 and 2013, respectively.

Sirius XM Canada
We own approximately 47,300,000 Class A shares on a converted basis of Sirius XM Canada representing a 37.0% equity interest and a 25.0% voting interest.

We had the following Related party current asset balances attributable to Sirius XM Canada at March 31, 2014 and December 31, 2013:
 
March 31,
2014
 
December 31,
2013
Deferred programming costs and accrued interest
$
1,152

 
$
2,782

Chip set and other services reimbursement
3,786

 
2,387

Fair value of host contract of debenture
—

 
3,641

Fair value of embedded derivative of debenture
—

 
57

Total
$
4,938

  
$
8,867


We provide Sirius XM Canada with chip sets and other services and we are reimbursed for these costs.

We held an investment in CAD $4,000 face value of 8% convertible unsecured subordinated debentures issued by Sirius XM Canada for which the embedded conversion feature was bifurcated from the host contract. The host contract was accounted for at fair value as an available-for-sale security with changes in fair value recorded to Accumulated other comprehensive income (loss), net of tax. The embedded conversion feature was accounted for at fair value as a derivative with changes in fair value recorded in earnings as Interest and investment income. Sirius XM Canada redeemed the debentures during the three months ended March 31, 2014, which resulted in the issuance to us of 675,675 shares of Sirius XM Canada common stock and an increase in our investment balance of $5,125. This conversion also resulted in a gain of $1,251 recorded to Interest and investment income during the three months ended March 31, 2014, related to the fair value received in excess of the carrying value as of the date of conversion.


20
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

Related party long-term asset balances attributable to Sirius XM Canada consisted of the following:    
 
March 31,
2014
 
December 31,
2013
Non-interest bearing note, principal
$
364

 
$
376

Investment balance*
30,691

 
26,972

Deferred programming costs and other receivables
190

 
271

Total
$
31,245

  
$
27,619

* The investment balance included equity method goodwill and intangible assets of $25,798 and $26,161 as of March 31, 2014 and December 31, 2013, respectively.

We hold a non-interest bearing note issued by Sirius XM Canada. Our interest in Sirius XM Canada is accounted for under the equity method. The excess of the cost of our ownership interest in the equity of Sirius XM Canada over our share of the net assets is recognized as goodwill and intangible assets and is included in the carrying amount of our investment. Equity method goodwill is not amortized. We periodically evaluate this investment to determine if there has been an other than temporary decline below carrying value. Equity method intangible assets are amortized over their respective useful lives, which is recorded in Interest and investment income.

Sirius XM Canada declared quarterly dividends to us of $4,445 and $3,752 during the three months ended March 31, 2014 and 2013, respectively, which were recorded as a reduction to our investment balance in Sirius XM Canada.

Related party liabilities attributable to Sirius XM Canada consisted of the following:
 
March 31,
2014
 
December 31,
2013
Deferred revenue for NHL licensing fees
$
1,500

 
$
1,500

Carrying value of deferred revenue
18,272

 
18,966

Deferred revenue for software licensing fees and other
409

 
425

Total
$
20,181

  
$
20,891


In 2005, XM entered into agreements to provide XM Canada, now Sirius XM Canada, with the right to offer XM satellite radio service in Canada. The agreements have an initial ten-year term, and Sirius XM Canada has the unilateral option to extend the agreements for an additional five-year term. We receive a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and an activation fee for each gross activation of an XM Canada subscriber on XM’s system. Sirius XM Canada is obligated to pay us a total of $70,300 for the rights to broadcast and market National Hockey League (“NHL”) games for a ten-year term. We recognize these payments on a gross basis as a principal obligor pursuant to the provisions of ASC 605, Revenue Recognition. The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, which is amortized on a straight-line basis through 2020, the end of the expected term of the agreements.

We recorded the following revenue from Sirius XM Canada as Other revenue in our unaudited consolidated statements of comprehensive income:
 
For the Three Months Ended March 31,
 
2014
 
2013
Royalty income
$
9,060

 
$
8,469

Amortization of Sirius XM Canada deferred income
694

 
694

Licensing fee revenue
1,500

 
1,171

Advertising and other reimbursements
106

 
415

Streaming revenue
421

 
—

Total revenue from Sirius XM Canada
$
11,781

 
$
10,749



21
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

Our share of net earnings or losses of Sirius XM Canada are recorded to Interest and investment income in our unaudited consolidated statements of comprehensive income on a one month lag. Our share of Sirius XM Canada’s net income was $4,689 and $1,708 for the three months ended March 31, 2014 and 2013, respectively. We recorded amortization expense related to the equity method intangible assets of $363 for the three months ended March 31, 2014 and 2013.

M-Way
As part of the acquisition of the connected vehicle business of Agero in November 2013, we acquired a 30% ownership in M-Way Solutions GmbH ("M-Way"), a German mobile software solutions provider, which is accounted for utilizing the equity method of accounting. We also acquired an option to purchase the remaining 70% ownership of M-Way which expires in 2017.

We have recorded $2,418 for our investment in M-Way in Related party long-term assets on our unaudited consolidated balance sheets. Our share of net earnings or losses of M-Way are recorded to Interest and investment income in our unaudited consolidated statements of comprehensive income on a one month lag. Our share of M-Way's net loss was $127 for the three months ended March 31, 2014.

(12)
Investments

Long Term Restricted Investments
Restricted investments relate to reimbursement obligations under letters of credit issued for the benefit of lessors of our office space. As of March 31, 2014 and December 31, 2013 our Long-term restricted investments were $5,718.



22
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

(13)
Debt

Our debt as of March 31, 2014 and December 31, 2013 consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
 Carrying value at
Issuer / Borrower
 
Issued
 
Debt
 
Maturity Date
 
Interest Payable
 
Principal Amount
 
March 31, 2014

December 31, 2013
Sirius XM
(a)(b)
 
August 2008
 
7% Exchangeable 
Senior Subordinated Notes (the "Exchangeable Notes")
 
December 1, 2014
 
semi-annually on June 1 and December 1
 
$
502,370

 
$
500,979

 
$
500,481

Sirius XM
(a)(c)
 
May 2013
 
4.25% Senior Notes
(the "4.25% Notes")
 
May 15, 2020
 
semi-annually on May 15 and November 15
 
500,000

 
494,986

 
494,809

Sirius XM
(a)(c)
 
September 2013
 
5.875% Senior Notes
(the "5.875% Notes")
 
October 1, 2020
 
semi-annually on April 1 and October 1
 
650,000

 
643,128

 
642,914

Sirius XM
(a)(c)
 
August 2013
 
5.75% Senior Notes
(the "5.75% Notes")
 
August 1, 2021
 
semi-annually on February 1 and August 1
 
600,000

 
594,644

 
594,499

Sirius XM
(a)(c)(d)
 
August 2012
 
5.25% Senior Secured Notes (the "5.25% Notes")
 
August 15, 2022
 
semi-annually on February 15 and August 15
 
400,000

 
394,770

 
394,648

Sirius XM
(a)(c)
 
May 2013
 
4.625% Senior Notes
(the "4.625% Notes")
 
May 15, 2023
 
semi-annually on May15 and November 15
 
500,000

 
494,767

 
494,653

Sirius XM
(e)
 
December 2012
 
Senior Secured Revolving Credit Facility (the "Credit Facility")
 
December 5, 2017
 
variable fee paid quarterly
 
1,250,000

 
310,000

 
460,000

Sirius XM
 
Various
 
Capital leases
 
Various
 
n/a
 
 n/a

 
18,414

 
19,591

Total Debt
 
3,451,688

 
3,601,595

Less: total current maturities (f)
 
508,486

 
507,774

Total long-term debt
 
$
2,943,202

 
$
3,093,821

(a)
The carrying value of the notes are net of the remaining unamortized original issue discount.
(b)
Sirius XM and Holdings are co-obligors with respect to the Exchangeable Notes. The Exchangeable Notes are senior subordinated obligations and rank junior in right of payment to our existing and future senior debt and equally in right of payment with our existing and future senior subordinated debt. Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under these notes on a senior subordinated basis. The Exchangeable Notes are exchangeable at any time at the option of the holder into shares of our common stock at an exchange rate of 543.1372 shares of common stock per $1,000 principal amount of the notes, which is equivalent to an approximate exchange price of $1.841 per share of common stock. During the three months ended March 31, 2014 and 2013, the common stock reserved for conversion in connection with the Exchangeable Notes was considered to be anti-dilutive in our calculation of diluted net income per share.
(c)
Substantially all of our domestic wholly-owned subsidiaries have guaranteed these notes.
(d)
On April 10, 2014, we entered into a supplemental indenture to the indenture governing the 5.25% Notes pursuant to which we agreed to grant a first priority lien on substantially all of the assets of Sirius XM and the guarantors to the holders of the Notes. The liens securing the 5.25% Notes are equal and ratable to the liens granted over such assets to secure the Credit Facility.
(e)
In December 2012, Sirius XM entered into a five-year Credit Facility with a syndicate of financial institutions for $1,250,000. Sirius XM's obligations under the Credit Facility are guaranteed by certain of its material domestic subsidiaries and are secured by a lien on substantially all of Sirius XM's assets and the assets of its material domestic subsidiaries. Borrowings under the Credit Facility are used for working capital and other general corporate purposes, including dividends, financing of acquisitions and share repurchases. Interest on borrowings is payable on a quarterly basis and accrues at a rate based on LIBOR plus an applicable rate. Sirius XM is also required to pay a variable fee on the average daily unused portion of the Credit Facility and is payable on a quarterly basis. The variable rate for the Credit Facility was 0.35% per annum as of March 31, 2014. As of March 31, 2014, $940,000 was available for future borrowing under the Credit Facility. Sirius XM's outstanding borrowings under the Credit Facility are classified as Long-term debt within our unaudited consolidated balance sheets as of March 31, 2014 due to the long-term maturity of this debt.
(f)
This balance includes $10,970 and $10,959 in related party current maturities as of March 31, 2014 and December 31, 2013, respectively.







23
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

The following table reconciles total current debt held at Holdings to the total current and long-term debt held at Sirius XM as of March 31, 2014 and December 31, 2013:
 
 Carrying value at
 
March 31, 2014
 
December 31, 2013
Total current debt at Holdings
$
508,486

 
$
507,774

Fair value in excess of carrying value associated with the Exchangeable Notes (a)
389,427

 
466,815

Total current debt at Sirius XM
$
897,913

 
$
974,589

Total long-term debt
$
2,943,202

 
$
3,093,821

Total debt at Sirius XM
$
3,841,115

 
$
4,068,410

(a)
In connection with our corporate reorganization in November 2013, the Exchangeable Notes were amended such that the settlement of the conversion feature is into shares of Holdings' common stock and Holdings and Sirius XM became co-obligors with respect to the Exchangeable Notes. The fair value of the Exchangeable Notes in excess of the carrying amount is recorded to Sirius XM's unaudited consolidated balance sheets in Current maturities of long-term debt. Changes in fair value are recorded in Gain on change in fair value of debt instruments within Sirius XM's unaudited consolidated statements of comprehensive income. We recognized $89,110 to Gain on change in fair value of debt instruments during the three months ended March 31, 2014. The fair value in excess of the carrying value of this instrument is eliminated in Holdings' unaudited consolidated balance sheets and unaudited statements of comprehensive income.

Covenants and Restrictions

The Exchangeable Notes require compliance with certain covenants that restrict Holdings' and Sirius XM's ability to, among other things, (i) enter into certain transactions with affiliates and (ii) merge or consolidate with another person.

Under the Credit Facility, Sirius XM must comply with a debt maintenance covenant that it not exceed a total leverage ratio, calculated as total consolidated debt to consolidated operating cash flow, of 5.0 to 1.0. The Credit Facility generally requires compliance with certain covenants that restrict Sirius XM's ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of Sirius XM's assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions.
    
The indentures for our other notes restrict Sirius XM's non-guarantor subsidiaries' ability to create, assume, incur or guarantee additional indebtedness without such non-guarantor subsidiary guaranteeing each such series of notes on a pari passu basis. The 4.25% Notes, 4.625% Notes, 5.75% Notes and 5.875% Notes are also subject to covenants that, among other things, limit Sirius XM's ability and the ability of its subsidiaries to create certain liens; enter into sale/leaseback transactions; and merge or consolidate.

Under our debt agreements, the following generally constitute an event of default: (i) a default in the payment of interest; (ii) a default in the payment of principal; (iii) failure to comply with covenants; (iv) failure to pay other indebtedness after final maturity or acceleration of other indebtedness exceeding a specified amount; (v) certain events of bankruptcy; (vi) a judgment for payment of money exceeding a specified aggregate amount; and (vii) voidance of subsidiary guarantees, subject to grace periods where applicable. If an event of default occurs and is continuing, our debt could become immediately due and payable.

At March 31, 2014 and December 31, 2013, we were in compliance with our debt covenants.


24
Table of Contents
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

(14)
Stockholders’ Equity

Common Stock, Holdings, par value $0.001 per share
We were authorized to issue up to 9,000,000,000 shares of common stock as of March 31, 2014 and December 31, 2013. There were 6,073,791,343 and 6,096,220,526 shares of common stock issued and 6,058,791,343 and 6,096,220,526 shares outstanding on March 31, 2014 and December 31, 2013, respectively.

As of March 31, 2014, approximately 557,981,000 shares of common stock were reserved for issuance in connection with outstanding convertible debt, warrants, incentive stock based awards and common stock to be granted to third parties upon satisfaction of performance targets.

Stock Repurchase Program
Since December 2012, our board of directors has approved $4,000,000 for repurchases of our common stock. Our board of directors did not establish an end date for this stock repurchase program. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions, including transactions with Liberty Media and its affiliates.
        
On October 9, 2013, we entered into an agreement with Liberty Media to repurchase $500,000 of our common stock from Liberty Media. Pursuant to the agreement with Liberty Media, we repurchased $160,000 of our common stock from Liberty Media in 2013. On January 23, 2014, we entered into an amendment to the agreement with Liberty Media to defer the previously scheduled $240,000 repurchase of shares of our common stock from Liberty Media from January 27, 2014 to April 25, 2014, the date of the final purchase installment under the agreement. On April 25, 2014, we completed the final purchase installment and repurchased $340,000 of our shares of common stock from Liberty Media at a price of $3.66 per share.
    
There were certain terms in the forward purchase contract that could cause the obligation not to be fulfilled. As a result, the instrument is a liability and is marked to fair value with any gain or loss recorded to Holdings' unaudited consolidated statements of comprehensive income. We recognized $27,023 to Loss on change in value of derivatives in Holdings' unaudited consolidated statements of comprehensive income during the three months ended March 31, 2014.

During the three months ended March 31, 2014, we repurchased 39,500,000 shares of our common stock for $128,682, including fees and commissions, on the open mar