Edgar Filing: SIRIUS XM HOLDINGS INC.

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

SIRI- 2014.06.30 -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 JUNE 30, 2014



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.:

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 July 25, 2014)
COMMON STOCK, $0.001 PAR VALUE	5,671,876,695	SHARES

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q



Item No.	Description

	PART I — Financial Information

Item 1.	Financial Statements:

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013	1

	Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	2

	Consolidated Statement of Stockholders’ Equity as of June 30, 2014	3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013	4

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	44

Item 4.	Controls and Procedures	44

	PART II — Other Information

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	46

	Signatures	47

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
(in thousands, except per share data)	2014			2013			2014			2013
Revenue:
Subscriber revenue	$	878,160		$	814,718		$	1,729,596		$	1,598,060
Advertising revenue	25,498			21,757			47,712			41,968
Equipment revenue	27,616			18,443			51,594			36,599
Other revenue	104,071			85,192			204,154			160,881
Total revenue	1,035,345			940,110			2,033,056			1,837,508
Operating expenses:
Cost of services:
Revenue share and royalties	200,221			155,859			395,632			304,390
Programming and content	69,570			70,381			144,440			144,991
Customer service and billing	90,092			80,290			181,161			160,684
Satellite and transmission	21,272			19,493			42,651			39,188
Cost of equipment	12,030			5,442			19,834			12,469
Subscriber acquisition costs	124,407			129,992			247,429			246,103
Sales and marketing	77,759			68,058			154,086			133,956
Engineering, design and development	15,630			15,052			31,541			29,894
General and administrative	72,582			60,392			148,825			116,732
Depreciation and amortization	67,204			67,415			135,471			134,433
Total operating expenses	750,767			672,374			1,501,070			1,322,840
Income from operations	284,578			267,736			531,986			514,668
Other income (expense):
Interest expense, net of amounts capitalized	(67,521		)	(49,728		)	(121,613		)	(95,902		)
Loss on extinguishment of debt and credit facilities, net	—			(16,377		)	—			(16,377		)
Interest and investment (loss) income	(1,066		)	294			3,283			1,932
Loss on change in value of derivatives	(7,463		)	—			(34,485		)	—
Other (loss) income	(1,745		)	256			(1,652		)	502
Total other expense	(77,795		)	(65,555		)	(154,467		)	(109,845		)
Income before income taxes	206,783			202,181			377,519			404,823
Income tax expense	(86,822		)	(76,659		)	(163,570		)	(155,699		)
Net income	$	119,961		$	125,522		$	213,949		$	249,124
Foreign currency translation adjustment, net of tax	(40		)	(109		)	78			(281		)
Total comprehensive income	$	119,921		$	125,413		$	214,027		$	248,843
Net income per common share:
Basic	$	0.02		$	0.02		$	0.04		$	0.04
Diluted	$	0.02		$	0.02		$	0.04		$	0.04
Weighted average common shares outstanding:
Basic	5,865,032			6,354,755			5,979,273			6,307,541
Diluted	6,210,078			6,447,517			6,054,771			6,526,698

See accompanying notes to the unaudited consolidated financial statements.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	As of June 30,			As of December 31,
	2014			2013
(in thousands, except share and per share data)	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	169,980		$	134,805
Accounts receivable, net	109,117			103,937
Receivables from distributors	93,159			88,975
Inventory, net	21,555			13,863
Prepaid expenses	110,994			110,530
Related party current assets	4,937			9,145
Deferred tax asset	846,612			937,598
Other current assets	13,764			20,160
Total current assets	1,370,118			1,419,013
Property and equipment, net	1,549,881			1,594,574
Long-term restricted investments	5,718			5,718
Deferred financing fees, net	13,334			12,604
Intangible assets, net	2,672,118			2,700,062
Goodwill	2,203,409			2,204,553
Related party long-term assets	108			30,164
Long-term deferred tax asset	801,079			868,057
Other long-term assets	8,769			10,035
Total assets	$	8,624,534		$	8,844,780
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	560,591		$	578,333
Accrued interest	55,028			42,085
Current portion of deferred revenue	1,635,901			1,586,611
Current portion of deferred credit on executory contracts	3,285			3,781
Current maturities of long-term debt	497,884			496,815
Current maturities of long-term related party debt	10,981			10,959
Related party current liabilities	4,961			20,320
Total current liabilities	2,768,631			2,738,904
Deferred revenue	144,717			149,026
Deferred credit on executory contracts	—			1,394
Long-term debt	4,115,429			3,093,821
Related party long-term liabilities	15,055			16,337
Other long-term liabilities	94,813			99,556
Total liabilities	7,138,645			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 June 30, 2014 and December 31, 2013	—			—
Common stock, par value $0.001; 9,000,000,000 shares authorized; 5,712,347,567 and 6,096,220,526 shares issued; 5,706,347,567 and 6,096,220,526 outstanding at June 30, 2014 and December 31, 2013, respectively	5,712			6,096
Accumulated other comprehensive loss, net of tax	(230		)	(308		)
Additional paid-in capital	7,221,372			8,674,129
Treasury stock, at cost; 6,000,000 and 0 shares of common stock at June 30, 2014 and December 31, 2013, respectively	(20,739		)	—
Accumulated deficit	(5,720,226		)	(5,934,175		)
Total stockholders’ equity	1,485,889			2,745,742
Total liabilities and stockholders’ equity	$	8,624,534		$	8,844,780

See accompanying notes to the unaudited consolidated financial statements.

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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	—	—		—		—			78			—			—		—			213,949			214,027
Share-based payment expense	—	—		—		—			—			36,027			—		—			—			36,027
Exercise of options and vesting of restricted stock units	—	—		3,835,837		4			—			256			—		—			—			260
Minimum withholding taxes on net share settlement of stock-based compensation	—	—		—		—			—			(7,452		)	—		—			—			(7,452		)
Issuance of common stock upon exercise of warrants	—	—		99,349		—			—			—			—		—			—			—
Common stock repurchased	—	—		—		—			—			(245,625		)	393,808,145		(1,257,090		)	—			(1,502,715		)
Common stock retired	—	—		(387,808,145	)	(388		)	—			(1,235,963		)	(387,808,145	)	1,236,351			—			—
Balance at June 30, 2014	—	$	—	5,712,347,567		$	5,712		$	(230	)	$	7,221,372		6,000,000		$	(20,739	)	$	(5,720,226	)	$	1,485,889

See accompanying notes to the unaudited consolidated financial statements.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	For the Six Months Ended June 30,
(in thousands)	2014			2013
Cash flows from operating activities:
Net income	$	213,949		$	249,124
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	135,471			134,433
Non-cash interest expense, net of amortization of premium	10,779			10,932
Provision for doubtful accounts	21,287			20,153
Amortization of deferred income related to equity method investment	(1,388		)	(1,388		)
Loss on extinguishment of debt and credit facilities, net	—			16,377
Gain on unconsolidated entity investments, net	(966		)	(1,382		)
Dividend received from unconsolidated entity investment	8,554			13,217
Loss on disposal of assets	—			126
Loss on change in value of derivatives	34,485			—
Share-based payment expense	36,027			30,012
Deferred income taxes	157,965			159,191
Other non-cash purchase price adjustments	(1,890		)	(137,889		)
Changes in operating assets and liabilities:
Accounts receivable	(26,467		)	(15,214		)
Receivables from distributors	(4,184		)	(6,863		)
Inventory	(7,692		)	8,649
Related party assets	2,388			205
Prepaid expenses and other current assets	(1,057		)	(28,317		)
Other long-term assets	1,238			1,353
Accounts payable and accrued expenses	(40,098		)	(69,310		)
Accrued interest	12,943			3,868
Deferred revenue	44,981			59,116
Related party liabilities	449			1,171
Other long-term liabilities	(4,702		)	(5,543		)
Net cash provided by operating activities	592,072			442,021
Cash flows from investing activities:
Additions to property and equipment	(58,417		)	(62,980		)
Acquisition of business, net of cash acquired	1,144			—
Return of capital from investment in unconsolidated entity	24,178			—
Net cash used in investing activities	(33,095		)	(62,980		)
Cash flows from financing activities:
Proceeds from exercise of stock options	260			21,658
Taxes paid in lieu of shares issued for stock-based compensation	(7,313		)	—
Proceeds from long-term borrowings and revolving credit facility, net of costs	1,921,230			1,136,640
Payment of premiums on redemption of debt	—			(14,719		)
Repayment of long-term borrowings and revolving credit facility	(905,815		)	(283,180		)
Common stock repurchased and retired	(1,532,164		)	(1,108,616		)
Net cash used in financing activities	(523,802		)	(248,217		)
Net increase in cash and cash equivalents	35,175			130,824
Cash and cash equivalents at beginning of period	134,805			520,945
Cash and cash equivalents at end of period	$	169,980		$	651,769

See accompanying notes to the unaudited consolidated financial statements.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(UNAUDITED)



	For the Six Months Ended June 30,
(in thousands)	2014		2013
Supplemental Disclosure of Cash and Non-Cash Flow Information
Cash paid during the period for:
Interest, net of amounts capitalized	$	92,068	$	76,540
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	$	20,739	$	35,173
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.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)


(1)	Business & Basis of Presentation

Business

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 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.

Liberty Media Corporation ("Liberty Media") beneficially owns, directly and indirectly, over 50% of the outstanding shares of our common stock. As a result, we are a "controlled company" for the purposes of the NASDAQ corporate governance requirements. 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., interests in Charter Communications, Live Nation and minority equity investments in Time Warner Inc., Time Warner Cable, and Viacom.

Basis of Presentation

This Quarterly Report on Form 10-Q presents information for Sirius XM Holdings Inc. (“Holdings”). Holdings has no operations independent of its wholly-owned subsidiary Sirius XM Radio Inc. ("Sirius XM").

The accompanying unaudited consolidated financial statements of Holdings and its subsidiaries 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.

All significant intercompany transactions have been eliminated in consolidation. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of June 30, 2014 and for the three and six months ended June 30, 2014 and 2013 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 and six months ended June 30, 2014 and have determined that no events have occurred that would require

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

adjustment to our unaudited consolidated financial statements. For a discussion of subsequent events that do not require adjustment to our unaudited consolidated financial statements 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 six months ended June 30, 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, which we collected during the three months ended March 31, 2014. As of June 30, 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.


(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 June 30, 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 were as follows:



	June 30, 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)	$	310,300	—	—	$	310,300	$	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)	$	—	5,267,804	—	$	5,267,804	$	—	4,066,755	—	$	4,066,755
Share Repurchase Agreement (d)	$	—	—	—	$	—	$	—	15,702	—	$	15,702


(a)	This amount approximates fair value. The carrying value of our investment in Sirius XM Canada was $0 and $26,972 as of June 30, 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 our debt as of June 30, 2014 and December 31, 2013.


(d)	The final installment under the share repurchase agreement with Liberty Media was settled on April 25, 2014. The fair value of the derivative associated with the share repurchase agreement was determined using observable inputs, including the U.S. spot LIBOR

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

curve and other available market data and was recorded in our unaudited consolidated balance sheets in Related party current liabilities, with changes in fair value recorded to our unaudited statements of comprehensive income.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive loss of $230 at June 30, 2014 was primarily comprised of the cumulative foreign currency translation adjustments related to our interest in Sirius XM Canada. During the three and six months ended June 30, 2014, we recorded a foreign currency translation adjustment of $(40) and $78, respectively. In addition, during the six months ended June 30, 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 currency translation losses out of Accumulated other comprehensive loss and into Interest and investment (loss) income.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, we will adopt this ASU on January 1, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU and we are currently evaluating which transition approach to use. We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements.


(4)	Earnings per Share

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 and six months ended June 30, 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 our Series B Preferred Stock into 1,293,509,076 shares of common stock.

Common stock equivalents of approximately 116,655,000 and 355,918,000 for the three months ended June 30, 2014 and 2013, respectively, and 386,276,000 and 352,795,000 for the six months ended June 30, 2014 and 2013, respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(in thousands, except per share data)	2014		2013		2014		2013
Numerator:
Net income	$	119,961	$	125,522	$	213,949	$	249,124
Less:
Allocation of undistributed income to Series B Preferred Stock	—		—		—		(4,979		)
Net income available to common stockholders for basic net income per common share	$	119,961	$	125,522	$	213,949	$	244,145
Add back:
Allocation of undistributed income to Series B Preferred Stock	—		—		—		4,979
Effect of interest on assumed conversions of convertible debt	5,363		—		—		—
Net income available to common stockholders for diluted net income per common share	$	125,324	$	125,522	$	213,949	$	249,124
Denominator:
Weighted average common shares outstanding for basic net income per common share	5,865,032		6,354,755		5,979,273		6,307,541
Weighted average impact of assumed Series B Preferred Stock conversion	—		—		—		128,636
Weighted average impact of assumed convertible debt	272,856		—		—		—
Weighted average impact of other dilutive equity instruments	72,190		92,762		75,498		90,521
Weighted average shares for diluted net income per common share	6,210,078		6,447,517		6,054,771		6,526,698
Net income per common share:
Basic	$	0.02	$	0.02	$	0.04	$	0.04
Diluted	$	0.02	$	0.02	$	0.04	$	0.04


(5)	Receivables

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.

Accounts receivable, net, consists of the following:



	June 30, 2014			December 31, 2013
Gross accounts receivable	$	116,703		$	113,015
Allowance for doubtful accounts	(7,586		)	(9,078		)
Total accounts receivable, net	$	109,117		$	103,937

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

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 distributors and retailers of our satellite radios. 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:



	June 30, 2014		December 31, 2013
Billed	$	41,153	$	38,532
Unbilled	52,006		50,443
Total	$	93,159	$	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:



	June 30, 2014			December 31, 2013
Raw materials	$	12,438		$	12,358
Finished goods	20,354			15,723
Allowance for obsolescence	(11,237		)	(14,218		)
Total inventory, net	$	21,555		$	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 June 30, 2014, there were no indicators of impairment and no impairment loss was recorded for goodwill during the three and six months ended June 30, 2014 and 2013. During the six months ended June 30, 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 June 30, 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.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

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. 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:



		June 30, 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		(288,999		)	91,001		380,000		(271,372		)	108,628
Licensing agreements	9.1 years	45,289		(21,447		)	23,842		45,289		(19,604		)	25,685
Proprietary software	6 years	16,552		(13,678		)	2,874		16,552		(13,384		)	3,168
Developed technology	10 years	2,000		(1,183		)	817		2,000		(1,083		)	917
Leasehold interests	7.4 years	132		(105		)	27		132		(96		)	36
Due to acquisition of connected vehicle business of Agero:
Definite life intangible assets:
OEM relationships	15 years	220,000		(9,778		)	210,222		220,000		(2,444		)	217,556
Proprietary software	10 years	10,663		(982		)	9,681		10,663		(245		)	10,418
Total intangible assets		$	3,008,290	$	(336,172	)	$	2,672,118	$	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 ⁽²⁾
XM-2 ⁽³⁾
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-1 satellite expired on May 31, 2014. The FCC has granted us special temporary authority for approximately six months to operate our XM-1 satellite and prepare it for deorbiting maneuvers.


(3)	The FCC license for our XM-2 satellite expired on March 31, 2014. The FCC has granted us special temporary authority for approximately six months to operate our XM-2 satellite and perform deorbiting maneuvers.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

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. We have filed an application to renew the license for our XM-4 satellite which expires in December 2014. That application is being processed by the FCC and we expect it will be granted in due course.

In connection with the Merger, $250,000 of the purchase price was allocated to the XM trademark. As of June 30, 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 June 30, 2014, there were no indicators of impairment, and no impairment loss was recorded for intangible assets with indefinite lives during the three and six months ended June 30, 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 $13,860 and $12,345 for the three months ended June 30, 2014 and 2013, respectively, and $27,944 and $24,936 for the six months ended June 30, 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)	$	27,072
2015	51,700
2016	48,545
2017	34,882
2018	19,463
Thereafter	156,802
Total definite life intangible assets, net	$	338,464


(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 June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Interest costs charged to expense	$	67,521	$	49,728	$	121,613	$	95,902
Interest costs capitalized	204		8,038		410		16,008
Total interest costs incurred	$	67,725	$	57,766	$	122,023	$	111,910

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $5,548 and $5,490 for the three months ended June 30, 2014 and 2013, respectively, and $10,779 and $10,932 for the six months ended June 30, 2014 and 2013, respectively.


(10)	Property and Equipment

Property and equipment, net, consists of the following:



	June 30, 2014			December 31, 2013
Satellite system	$	2,397,611		$	2,407,423
Terrestrial repeater network	107,885			109,367
Leasehold improvements	48,899			46,173
Broadcast studio equipment	59,502			59,020
Capitalized software and hardware	314,529			298,267
Satellite telemetry, tracking and control facilities	65,868			63,944
Furniture, fixtures, equipment and other	67,755			67,275
Land	38,411			38,411
Building	58,921			58,662
Construction in progress	141,820			103,148
Total property and equipment	3,301,201			3,251,690
Accumulated depreciation and amortization	(1,751,320		)	(1,657,116		)
Property and equipment, net	$	1,549,881		$	1,594,574

Construction in progress consists of the following:



	June 30, 2014		December 31, 2013
Satellite system	$	12,842	$	11,879
Terrestrial repeater network	41,958		30,078
Capitalized software	64,654		39,924
Other	22,366		21,267
Construction in progress	$	141,820	$	103,148

Depreciation expense on property and equipment was $53,344 and $55,070 for the three months ended June 30, 2014 and 2013, respectively, and $107,527 and $109,497 for the six months ended June 30, 2014 and 2013, respectively. We retired property and equipment of $13,518 and $12,862 during the six months ended June 30, 2014 and 2013, respectively, which included the retirement of our XM-2 satellite. Our XM-1 satellite is expected to be retired in the fourth quarter of 2014.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

Satellites

We currently own a fleet of eight operating 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-3	2005	2020
XM-4	2006	2021
XM-5	2010	2025

* Satellite was fully depreciated as of June 30, 2014 but is still in operation.


(11)	Related Party Transactions

In the normal course of business, we enter into transactions with related parties. Our related parties include Liberty Media, which has beneficially owned over 50% of our outstanding common stock since January 2013 and has two executives and one director on our board of directors. Gregory B. Maffei, the President and Chief Executive Officer of Liberty Media, is the Chairman of our board of directors.

We hold an equity method investment in Sirius XM Canada. We own approximately 47,300,000 shares of Sirius XM Canada, representing a 37.0% equity interest and a 25.0% voting interest. We primarily provide programming and content services to Sirius XM Canada.

During the three months ended June 30, 2014, we evaluated our investment in M-Way Solutions GmbH ("M-Way") and determined that there was an other than temporary decline in the fair value. As a result, we reduced our investment balance to zero and recognized a loss of $2,342 in Other (loss) income in our unaudited consolidated statements of comprehensive income.

We had the following related party balances at June 30, 2014 and December 31, 2013:



	Related party current assets				Related party long-term assets				Related party current liabilities				Related party current debt				Related party long-term liabilities
	2014		2013		2014		2013		2014		2013		2014		2013		2014		2013
Liberty Media	$	130	$	278	$	—	$	—	$	64	$	15,766	$	10,981	$	10,959	$	—	$	—
Sirius XM Canada	4,807		8,867		108		27,619		4,897		4,554		—		—		15,055		16,337
M-Way	—		—		—		2,545		—		—		—		—		—		—
Total	$	4,937	$	9,145	$	108	$	30,164	$	4,961	$	20,320	$	10,981	$	10,959	$	15,055	$	16,337

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

Liberty Media

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, we repurchased $160,000 of our common stock from Liberty Media in 2013. As of December 31, 2013, $15,702 was recorded to Related party current liabilities for the fair value of the derivative associated with the share repurchase agreement with Liberty Media as there were certain terms in the forward purchase contract that could cause the obligation to not be fulfilled. As a result, the instrument was a liability and was marked to fair value with any gain or loss recorded to our unaudited consolidated statements of comprehensive income. On April 25, 2014, we completed the final purchase installment under this share repurchase agreement and repurchased $340,000 of our shares of common stock from Liberty Media at a price of $3.66 per share. We recognized $7,463 and $34,485 to Loss on change in value of derivatives in our unaudited consolidated statements of comprehensive income related to this final repurchase during the three and six months ended June 30, 2014, respectively.

Liberty Media held $11,000 in principal amount of our 7% Exchangeable Senior Subordinated Notes due 2014 at June 30, 2014 and December 31, 2013.

Sirius XM Canada

Our related party current asset balances primarily consist of deferred programming costs, accrued interest and chip set costs that we are reimbursed for. Our related party long-term asset balance as of December 31, 2013 included our investment balance in Sirius XM Canada of which $26,161 related to equity method goodwill and intangible assets. Sirius XM Canada declared dividends to us of $30,010 and $3,730 during the three months ended June 30, 2014 and 2013, respectively, and $34,455 and $7,482 during the six months ended June 30, 2014 and 2013, respectively, which were recorded as a reduction to our investment balance in Sirius XM Canada. As a result of the dividends received from Sirius XM Canada during the three months ended June 30, 2014, our investment balance has been reduced to $0. Our related party liabilities as of June 30, 2014 and December 31, 2013 include $2,776 for the current portion of deferred revenue and $14,802 and $16,190, respectively, for the long-term portion of deferred revenue due to the carrying value of deferred revenue recorded as of the Merger date related to agreements with XM Canada, now Sirius XM Canada, for the rights to broadcast and market National Hockey League games for a ten-year term. 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 current existing agreements.

We recorded the following revenue and expenses associated with our related parties which were recorded in our unaudited consolidated statements of comprehensive income:



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Sirius XM Canada:
Revenue (a)	$	12,559		$	12,562		$	24,340		$	23,311
Share of net (losses) earnings (b)	$	(1,018	)	$	37		$	3,308		$	1,382
Liberty Media:
Expenses (c)	$	(279	)	$	(4,682	)	$	(556	)	$	(9,359	)


(a)	Under our agreements with Sirius XM Canada, we receive a percentage-based royalty for certain types of subscription revenue earned by Sirius XM Canada for the distribution of Sirius and XM channels, royalties for activation fees and reimbursements for other charges. We record revenue from Sirius XM Canada as Other revenue in our unaudited consolidated statements of comprehensive income.

(b)

Our share of Sirius XM Canada's net (losses) earnings is recorded to Interest and investment (loss) income in our unaudited consolidated statements of comprehensive income on a one month lag. During the six months ended June 30, 2014, our share of Sirius XM Canada’s net earnings included a gain of $1,251 related to the fair value received in excess of the carrying value associated with the redemption of our investment in Sirius XM Canada’s 8% convertible unsecured subordinated debentures in February 2014. This amount includes amortization related to the equity method intangible assets of $0 and $364 for the three months ended June 30, 2014 and 2013, respectively, and $363 and $727 for the six months ended June 30, 2014 and 2013, respectively.


(c)	We recognize Interest expense associated with the portion of the 7% Exchangeable Senior Subordinated Notes due 2014 held by Liberty Media.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)


(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 June 30, 2014 and December 31, 2013 our Long-term restricted investments were $5,718.

(13)Debt

Our debt as of June 30, 2014 and December 31, 2013 consisted of the following:

Carrying value at

Issuer / Borrower

Issued

Debt

Maturity Date

Interest Payable

Principal Amount

June 30, 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

501,489

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

495,165

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

643,345

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

594,791

594,499

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

494,882

494,653

Sirius XM
(a)(c)(d)

May 2014

6.00% Senior Notes

(the "6.00% Notes")

July 15, 2024

semi-annually on January 15 and July 15

1,500,000

1,483,308

—

Sirius XM
(a)(c)(e)

August 2012

5.25% Senior Secured Notes (the "5.25% Notes")

August 15, 2022

semi-annually on February 15 and August 15

400,000

394,894

394,648

Sirius XM
(f)

December 2012

Senior Secured Revolving Credit Facility (the "Credit Facility")

December 5, 2017

variable fee paid quarterly

1,250,000

—

460,000

Sirius XM

Various

Capital leases

Various

n/a

16,420

19,591

Total Debt

4,624,294

3,601,595

Less: total current maturities non-related party

497,884

496,815

Less: total current maturities related party

10,981

10,959

Total long-term debt

4,115,429

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 June 30, 2014, the common stock reserved for conversion in connection with the Exchangeable Notes was considered to be dilutive in our calculation of diluted net income per share and anti-dilutive during the six months ended June 30, 2014 and the three and six months ended June 30, 2013.


(c)	Substantially all of our domestic wholly-owned subsidiaries have guaranteed these notes.


(d)	In May 2014, Sirius XM issued $1,500,000 aggregate principal amount of 6.00% Senior Notes due 2024, with an original issuance discount of $16,875.


(e)	On April 10, 2014, we entered into a supplemental indenture to the indenture governing the 5.25% Notes pursuant to which we granted a first priority lien on substantially all of the assets of Sirius XM and the guarantors to the holders of the 5.25% Notes. The liens securing the 5.25% Notes are equal and ratable to the liens granted to secure the Credit Facility.

(f)

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

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

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 0.30% per annum as of June 30, 2014. As of June 30, 2014, $1,250,000 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 due to the long-term maturity of this debt.

Debt Repurchases

During the three months ended June 30, 2013, we purchased $29,013 and $100,650 of our then outstanding 8.75% Senior Notes due 2015 and 7.625% Senior Notes due 2018, respectively, for an aggregate purchase price, including interest, of $32,977 and $112,569, respectively, and recognized $3,755 and $12,622, respectively, to Loss on extinguishment of debt and credit facilities, net, consisting primarily of unamortized discount, deferred financing fees and repayment premium.

Covenants and Restrictions

The Exchangeable Notes require compliance with certain covenants that restrict our 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, our wholly-owned subsidiary, 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 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, 5.875% Notes and 6.00% 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, 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 June 30, 2014 and December 31, 2013, we were in compliance with our debt covenants.


(14)	Stockholders’ Equity

Common Stock, par value $0.001 per share

We were authorized to issue up to 9,000,000,000 shares of common stock as of June 30, 2014 and December 31, 2013. There were 5,712,347,567 and 6,096,220,526 shares of common stock issued and 5,706,347,567 and 6,096,220,526 shares outstanding on June 30, 2014 and December 31, 2013, respectively.

As of June 30, 2014, approximately 548,852,000 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.

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

Stock Repurchase Program

As of June 30, 2014, our board of directors had approved $4,000,000 for repurchases of our common stock. In July 2014, our board of directors approved an additional $2,000,000 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 to repurchase $500,000 of our common stock from Liberty Media. Pursuant to this agreement, we repurchased $160,000 of our common stock from Liberty Media in 2013. On April 25, 2014, we completed the final purchase installment and repurchased 92,888,561 shares of our common stock for $340,000 from Liberty Media at a price of $3.66 per share.

As there were certain terms in the forward purchase contract with Liberty Media that could have caused the obligation not to be fulfilled, the instrument was classified as a liability and was marked to fair value with any gain or loss recorded to our unaudited consolidated statements of comprehensive income. We recognized $7,463 and $34,485 to Loss on change in value of derivatives in our unaudited consolidated statements of comprehensive income during the three and six months ended June 30, 2014, respectively.

In May 2014, we entered into an accelerated share repurchase agreement ("ASR agreement") with a third-party financial institution to repurchase up to $600,000 of our common stock. Under the ASR agreement we prepaid $600,000 to the financial institution and received an initial delivery of 112,500,000 shares of our common stock. We retired these shares and recorded a $354,375 reduction to stockholders' equity in the second quarter of 2014. The remaining $245,625 under this ASR agreement is included in Additional paid-in capital within our unaudited consolidated balance sheets as of June 30, 2014. The ASR agreement is expected to mature no later than August 1, 2014 and will settle following maturity. The aggregate purchase price we will pay under the ASR agreement will be determined using a pre-agreed grid that references the volume-weighted average price (“VWAP”) of our common stock, and the total aggregate number of shares to be repurchased under the ASR agreement will be determined based on the VWAP of our common stock minus a discount during the term of the ASR agreement.

During the six months ended June 30, 2014, we repurchased 188,419,584 additional shares of our common stock for $612,903, including fees and commissions, on the open market. Common stock repurchases are retired upon settlement. As of June 30, 2014, $20,739 of common stock repurchases had not settled, nor been retired, and were recorded as Treasury stock within our unaudited consolidated balance sheets and unaudited consolidated statements of stockholders' equity.

As of June 30, 2014, our cumulative repurchases since December 2012 have totaled 914,066,011 shares for $3,315,263, and $684,737 remained available under our stock repurchase program, which excludes the additional $2,000,000 authorized by our board of directors in July 2014.

Share Lending Arrangements

To facilitate the offering of the Exchangeable Notes, we entered into share lending agreements with Morgan Stanley Capital Services Inc. and UBS AG London Branch in July 2008. All loaned shares were returned to us as of October 2011, and the share lending agreements were terminated.

We recorded interest expense related to the amortization of the costs associated with the share lending arrangement and other issuance costs for our Exchangeable Notes of $3,433 and $3,097 for the three months ended June 30, 2014 and 2013, respectively, and $6,779 and $6,306 for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the unamortized balance of the debt issuance costs was $5,922, with $5,792 recorded in Other current assets and $130 recorded in Related party current assets in our unaudited consolidated balance sheets. As of December 31, 2013, the unamortized balance of the debt issuance costs was $12,701, with $12,423 recorded in Other current assets, and $278 recorded in Related party current assets. These costs will continue to be amortized until the debt is terminated.

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(UNAUDITED)

(Dollar amounts in thousands, unless otherwise stated)

Preferred Stock, par value $0.001 per share

We were authorized to issue up to 50,000,000 shares of undesignated preferred stock as of June 30, 2014 and December 31, 2013, respectively. In January 2013, Liberty Media converted its remaining shares of the Series B Preferred Stock into 1,293,509,076 shares of our common stock. There were no shares of preferred stock issued or outstanding as of June 30, 2014 and December 31, 2013.

Warrants

We have issued warrants to purchase shares of our common stock in connection with distribution and programming agreements. During the three months ended June 30, 2014, 1,788,000 warrants were exercised to purchase shares of common stock on a net settlement basis, resulting in the issuance of 99,349 shares of our common stock. Approximately 16,667,000 and 18,455,000 warrants to acquire an equal number of shares of common stock were outstanding and fully vested as of June 30, 2014 and December 31, 2013, respectively. Warrants were included in our calculation of diluted net income per common share as the effect was dilutive for the three and six months ended June 30, 2014 and 2013. The outstanding warrants expire in the first quarter of 2015. At June 30, 2014 and December 31, 2013, the weighted average exercise price of outstanding warrants was $2.50 and $2.55 per share, respectively. We did not incur warrant related expenses during the three and six months ended June 30, 2014 and 2013.


(15)	Benefit Plans

We recognized share-based payment expense of $17,787 and $15,494 for the three months ended June 30, 2014 and 2013, respectively, and $36,027 and $30,012 for the six months ended June 30, 2014 and 2013, respectively.

2009 Long-Term Stock Incentive Plan

In May 2009, our stockholders approved the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan (the “2009 Plan”). Employees, consultants and members of our board of directors are eligible to receive awards under the 2009 Plan. The 2009 Plan provides for the grant of stock options, restricted stock awards, restricted stock units and other stock-based awards that the compensation committee of our board of directors may deem appropriate. Vesting and other terms of stock-based awards are set forth in the agreements with the individuals receiving the awards. Stock-based awards granted under the 2009 Plan are generally subject to a vesting requirement. Stock-based awards generally expire ten years from the date of grant. Each restricted stock unit entitles the holder to receive one share of common stock upon vesting. As of June 30, 2014, approximately 79,039,000 shares of common stock were available for future grants under the 2009 Plan.

Other Plans

We maintain four other share-based benefit plans — the XM 2007 Stock Incentive Plan, the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan, the XM 1998 Shares Award Plan and the XM Talent Option Plan. No further awards may be made under these plans and all outstanding awards are fully vested.

The following table summarizes the weighted-average assumptions used to compute the fair value of options granted to employees and members of our board of directors:



	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2014	2013	2014	2013
Risk-free interest rate	1.6%	0.7%	1.3%	0.7%
Expected life of options — years	4.78	4.71	4.11	4.71
Expected stock price volatility	40%	48%	36%	48%
Expected dividend yield	0%	0%	0%	0%

There were no options granted to third parties during the three and six months ended June 30, 2014 and 2013. We do not intend to pay regular dividends on our common stock. Accordingly, the dividend yield percentage used in the Black-Scholes-Merton option value is zero for all periods.

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(Dollar amounts in thousands, unless otherwise stated)

The following table summarizes stock option activity under our share-based plans for the six months ended June 30, 2014 (options in thousands):



	Options		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2013	264,239		$	2.42
Granted	5,441		$	3.59
Exercised	(11,568	)	$	1.70
Forfeited, cancelled or expired	(5,910	)	$	4.40
Outstanding as of June 30, 2014	252,202		$	2.44	6.83	$	299,833
Exercisable as of June 30, 2014	104,117		$	2.15	4.96	$	168,917

The weighted average grant date fair value of options granted during the six months ended June 30, 2014 and 2013 was $1.09 and $1.34, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2014 and 2013 was $20,435 and $33,660, respectively. During the six months ended June 30, 2014, the number of shares which were issued as a result of stock option exercises was 3,835,837.

We recognized share-based payment expense associated with stock options of $16,193 and $15,283 for the three months ended June 30, 2014 and 2013, respectively, and $32,808 and $29,801 for the six months ended June 30, 2014 and 2013, respectively.

The following table summarizes the nonvested restricted stock unit activity under our share-based plans for the six months ended June 30, 2014 (shares in thousands):



	Shares		Grant Date Fair Value
Nonvested as of December 31, 2013	6,984		$	3.58
Granted	270		$	3.70
Vested restricted stock units	—		$	—
Forfeited	(126	)	$	3.61
Nonvested as of June 30, 2014	7,128		$	3.58

The weighted average grant date fair value of restricted stock units granted during the six months ended June 30, 2014 and 2013 was $3.70 and $3.30, respectively. The total intrinsic value of restricted stock units that vested during the six months ended June 30, 2013 was $605. We recognized share-based payment expense associated with restricted stock units of $1,594 and $211 during the three months ended June 30, 2014 and 2013, respectively, and $3,219 and $211 during the six months ended June 30, 2014 and 2013, respectively.

Total unrecognized compensation costs related to unvested share-based payment awards for stock options, restricted stock units and shares granted to employees and members of our board of directors at June 30, 2014 and December 31, 2013, net of estimated forfeitures, were $131,608 and $164,292, respectively. The total unrecognized compensation costs at June 30, 2014 are expected to be recognized over a weighted-average period of 2.5 years.

401(k) Savings Plan

Sirius XM sponsors the Sirius XM Radio Inc. 401(k) Savings Plan (the “Sirius XM Plan”) for eligible employees. The Sirius XM Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax eligible earnings, subject to certain defined limits. We match 50% of an employee’s voluntary contributions per pay period on the first 6% of an employee’s pre-tax salary up to a maximum of 3% of eligible compensation. Employer matching contributions under the Sirius XM Plan vest at a rate of 33.33% for each year of employment and are fully vested after three years of employment for all current and future contributions. Beginning in January 2014, our cash employer matching contributions are no longer used to purchase

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(Dollar amounts in thousands, unless otherwise stated)

shares of our common stock on the open market, unless the employee elects our common stock as their investment option for this contribution. Prior to January 2014, the cash from employer matching contributions was used to purchase shares of our common stock on the open market. We contributed $1,254 and $968 during the three months ended June 30, 2014 and 2013, respectively, and $3,133 and $2,387, during the six months ended June 30, 2014 and 2013, respectively, to the Sirius XM Plan in fulfillment of our matching obligation.


(16)	Commitments and Contingencies

The following table summarizes our expected contractual cash commitments as of June 30, 2014:



	2014		2015		2016		2017		2018		Thereafter		Total
Debt obligations	$	506,037	$	7,482	$	4,265	$	928	$	78	$	4,150,000	$	4,668,790
Cash interest payments	105,893		232,170		231,953		232,565		228,063		939,813		1,970,457
Satellite and transmission	15,630		17,976		4,326		3,404		3,995		16,648		61,979
Programming and content	121,493		226,271		105,121		74,721		60,150		108,333		696,089
Marketing and distribution	13,169		18,536		10,603		7,070		6,226		6,707		62,311
Satellite incentive payments	6,018		11,511		12,367		13,296		14,302		54,178		111,672
Operating lease obligations	19,130		46,263		39,832		33,415		31,465		225,540		395,645
Other	46,460		16,379		5,851		1,807		1,040		265		71,802
Total (1)	$	833,830	$	576,588	$	414,318	$	367,206	$	345,319	$	5,501,484	$	8,038,745


(1)	The table does not include our reserve for uncertain tax positions, which at June 30, 2014 totaled $1,432, as the specific timing of any cash payments cannot be projected with reasonable certainty.

Debt obligations. Debt obligations include principal payments on outstanding debt and capital lease obligations.

Cash interest payments. Cash interest payments include interest due on outstanding debt and capital lease payments through maturity.

Satellite and transmission. We have entered into agreements with third parties to operate and maintain the off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater networks.

Programming and content. We have entered into various programming agreements. Under the terms of these agreements, our obligations include fixed payments, advertising commitments and revenue sharing arrangements. Our future revenue sharing costs are dependent upon many factors and are difficult to estimate; therefore, they are not included in our minimum contractual cash commitments.

Marketing and distribution. We have entered into various marketing, sponsorship and distribution agreements to promote our brand and are obligated to make payments to sponsors, retailers, automakers and radio manufacturers under these agreements. Certain programming and content agreements also require us to purchase advertising on properties owned or controlled by the licensors. We also reimburse automakers for certain engineering and development costs associated with the incorporation of satellite radios into new vehicles they manufacture. In addition, in the event certain new products are not shipped by a distributor to its customers within 90 days of the distributor’s receipt of goods, we have agreed to purchase and take title to the product.

Satellite incentive payments. Boeing Satellite Systems International, Inc., the manufacturer of certain of our in-orbit satellites, may be entitled to future in-orbit performance payments with respect to XM-3 and XM-4 based on the expected operating performance exceeding their fifteen-year design life. Boeing may also be entitled to an additional $10,000 if our XM-4 satellite continues to operate above baseline specifications during the five years beyond the satellite’s fifteen-year design life.

Space Systems/Loral, the manufacturer of certain of our in-orbit satellites, may be entitled to future in-orbit performance payments with respect to XM-5, FM-5 and FM-6 based on their expected operating performance exceeding their fifteen-year design life.

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(Dollar amounts in thousands, unless otherwise stated)

Operating lease obligations. We have entered into both cancelable and non-cancelable operating leases for office space, equipment and terrestrial repeaters. These leases provide for minimum lease payments, additional operating expense charges, leasehold improvements and rent escalations that have initial terms ranging from one to fifteen years, and certain leases have options to renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term, including reasonably assured renewal periods.

Other. We have entered into various agreements with third parties for general operating purposes. In addition to the minimum contractual cash commitments described above, we have entered into agreements with other variable cost arrangements. These future costs are dependent upon many factors, including subscriber growth, and are difficult to anticipate; however, these costs may be substantial. We may enter into additional programming, distribution, marketing and other agreements that contain similar variable cost provisions. The cost of treasury stock acquired from a third-party financial institution but not paid as of June 30, 2014 is included in this category.

We do not have any other significant off-balance sheet financing arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Legal Proceedings

State Consumer Investigations. A Multistate Working Group of 32 State Attorneys General, led by the Attorney General of the State of Ohio, is investigating certain of our consumer practices. The investigation focuses on practices relating to the cancellation of subscriptions; automatic renewal of subscriptions; charging, billing, collecting, and refunding or crediting of payments from consumers; and soliciting customers.

A separate investigation into our consumer practices is being conducted by the Attorneys General of the State of Florida and the State of New York. We are cooperating with these investigations and believe our consumer practices comply with all applicable federal and state laws and regulations.

In our opinion, the result of these investigations, including a possible settlement, will likely not have a material adverse effect on our business, financial condition or results of operations.

Other Matters. In the ordinary course of business, we are a defendant in various other lawsuits and arbitration proceedings, including derivative actions; actions filed by subscribers, both on behalf of themselves and on a class action basis; former employees; parties to contracts or leases; and owners of patents, trademarks, copyrights or other intellectual property. None of these matters, in our opinion, is likely to have a material adverse effect on our business, financial condition or results of operations.


(17)	Income Taxes

We file a consolidated federal income tax return for all of our wholly-owned subsidiaries, including Sirius XM. Income tax expense for the three months ended June 30, 2014 and 2013 was $86,822 and $76,659, respectively, and $163,570 and $155,699, for the six months ended June 30, 2014 and 2013, respectively. We estimate our annual effective tax rate for the year ending December 31, 2014 will be 39.0%. Our effective tax rate for the six months ended June 30, 2014 was 43.3% due to