SIRI- 2014.09.30 -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 SEPTEMBER 30, 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 October 24, 2014)
COMMON STOCK, $0.001 PAR VALUE
 
5,494,443,257
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 September 30,

For the Nine Months Ended September 30,
(in thousands, except per share data)
2014

2013

2014

2013
Revenue:
 
 
 
 
 
 
 
Subscriber revenue
$
902,514


$
834,053


$
2,632,110


$
2,432,113

Advertising revenue
25,300


21,918


73,012


63,886

Equipment revenue
23,129


17,989


74,723


54,588

Other revenue
106,144


87,549


310,298


248,430

Total revenue
1,057,087


961,509


3,090,143


2,799,017

Operating expenses:







Cost of services:







Revenue share and royalties
204,307


162,627


599,939


467,017

Programming and content
74,920


72,322


219,360


217,313

Customer service and billing
93,013


76,322


274,174


237,006

Satellite and transmission
21,794


19,853


64,446


59,041

Cost of equipment
9,485


5,340


29,319


17,809

Subscriber acquisition costs
119,778


125,457


367,207


371,560

Sales and marketing
83,906


75,638


237,992


209,594

Engineering, design and development
16,136


13,007


47,677


42,901

General and administrative
75,170


67,881


223,995


184,613

Depreciation and amortization
64,550


58,533


200,021


192,966

Total operating expenses
763,059


676,980


2,264,130


1,999,820

Income from operations
294,028


284,529


826,013


799,197

Other income (expense):







Interest expense, net of amounts capitalized
(75,416
)

(54,629
)

(197,029
)

(150,531
)
Loss on extinguishment of debt and credit facilities, net
—


(107,971
)

—


(124,348
)
Interest and investment income
6,305


1,716


9,588


3,648

Loss on change in value of derivatives
—


—


(34,485
)

—

Other income (loss)
297


407


(1,354
)

909

Total other expense
(68,814
)

(160,477
)

(223,280
)

(270,322
)
Income before income taxes
225,214


124,052


602,733


528,875

Income tax expense
(89,044
)

(61,158
)

(252,614
)

(216,857
)
Net income
$
136,170


$
62,894


$
350,119


$
312,018

Foreign currency translation adjustment, net of tax
(58
)

(11
)

20


(292
)
Total comprehensive income
$
136,112


$
62,883


$
350,139


$
311,726

Net income per common share:

 

 
 
 
 
Basic
$
0.02

 
$
0.01

 
$
0.06

 
$
0.05

Diluted
$
0.02

 
$
0.01

 
$
0.06

 
$
0.05

Weighted average common shares outstanding:

 

 
 
 
 
Basic
5,626,078

 
6,184,216

 
5,860,248

 
6,265,981

Diluted
5,974,047

 
6,287,353

 
6,208,569

 
6,446,082


See accompanying notes to the unaudited consolidated financial statements.

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


 
September 30, 2014
 
December 31, 2013
(in thousands, except share and per share data)
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
103,585


$
134,805

Accounts receivable, net
102,646


103,937

Receivables from distributors
104,147


88,975

Inventory, net
24,350


13,863

Prepaid expenses
126,131


110,530

Related party current assets
4,006


9,145

Deferred tax asset
784,143


937,598

Other current assets
10,444


20,160

Total current assets
1,259,452


1,419,013

Property and equipment, net
1,522,635


1,594,574

Long-term restricted investments
5,922


5,718

Deferred financing fees, net
12,679


12,604

Intangible assets, net
2,658,476


2,700,062

Goodwill
2,205,107


2,204,553

Related party long-term assets
1,679


30,164

Long-term deferred tax asset
775,147


868,057

Other long-term assets
8,260


10,035

Total assets
$
8,449,357


$
8,844,780

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
Current liabilities:
 

 
Accounts payable and accrued expenses
$
552,412


$
578,333

Accrued interest
75,984


42,085

Current portion of deferred revenue
1,612,388


1,586,611

Current portion of deferred credit on executory contracts
2,339


3,781

Current maturities of long-term debt
498,433


496,815

Current maturities of long-term related party debt
10,992


10,959

Related party current liabilities
3,268


20,320

Total current liabilities
2,755,816


2,738,904

Deferred revenue
148,474


149,026

Deferred credit on executory contracts
—


1,394

Long-term debt
4,259,646


3,093,821

Related party long-term liabilities
14,345


16,337

Other long-term liabilities
97,661


99,556

Total liabilities
7,275,942


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 September 30, 2014 and December 31, 2013
—


—

Common stock, par value $0.001; 9,000,000,000 shares authorized; 5,542,621,493 and 6,096,220,526 shares issued; 5,538,190,736 and 6,096,220,526 outstanding at September 30, 2014 and December 31, 2013, respectively
5,543


6,096

Accumulated other comprehensive loss, net of tax
(288
)

(308
)
Additional paid-in capital
6,767,781


8,674,129

Treasury stock, at cost; 4,430,757 and 0 shares of common stock at September 30, 2014 and December 31, 2013, respectively
(15,565
)

—

Accumulated deficit
(5,584,056
)

(5,934,175
)
Total stockholders’ equity
1,173,415


2,745,742

Total liabilities and stockholders’ equity
$
8,449,357


$
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
—

 
—

 
—

 
—

 
20

 
—

 
—

 
—

 
350,119

 
350,139

Share-based payment expense
—

 
—

 
—

 
—

 
—

 
57,832

 
—

 
—

 
—

 
57,832

Exercise of options and vesting of restricted stock units
—

 
—

 
11,922,805

 
12

 
—

 
319

 
—

 
—

 
—

 
331

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

 
—

 
—

 
—

 
—

 
(24,809
)
 
—

 
—

 
—

 
(24,809
)
Conversion of Exchangeable Notes to common stock
—

 
—

 
3,259

 
—

 
—

 
6

 
—

 
—

 
—

 
6

Issuance of common stock upon exercise of warrants
—

 
—

 
99,349

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Common stock repurchased
—

 
—

 
—

 
—

 
—

 
(68,118
)
 
570,055,203

 
(1,887,708
)
 
—

 
(1,955,826
)
Common stock retired
—

 
—

 
(565,624,446
)
 
(565
)
 
—

 
(1,871,578
)
 
(565,624,446
)
 
1,872,143

 
—

 
—

Balance at September 30, 2014
—

 
$
—

 
5,542,621,493

 
$
5,543

 
$
(288
)
 
$
6,767,781

 
4,430,757

 
$
(15,565
)
 
$
(5,584,056
)
 
$
1,173,415

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 Nine Months Ended September 30,
(in thousands)
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
350,119

 
$
312,018

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

 

Depreciation and amortization
200,021

 
192,966

Non-cash interest expense, net of amortization of premium
16,515

 
16,506

Provision for doubtful accounts
32,875

 
28,571

Amortization of deferred income related to equity method investment
(2,081
)
 
(2,082
)
Loss on extinguishment of debt and credit facilities, net
—

 
124,348

Gain on unconsolidated entity investments, net
(2,677
)
 
(2,831
)
Dividend received from unconsolidated entity investment
12,873

 
17,707

Loss on disposal of assets
217

 
128

Loss on change in value of derivatives
34,485

 
—

Share-based payment expense
57,832

 
49,774

Deferred income taxes
244,667

 
219,184

Other non-cash purchase price adjustments
(2,836
)
 
(206,786
)
Changes in operating assets and liabilities:
 
 


Accounts receivable
(31,584
)
 
(25,207
)
Receivables from distributors
(15,172
)
 
23,606

Inventory
(10,487
)
 
11,095

Related party assets
(995
)
 
2,077

Prepaid expenses and other current assets
(16,319
)
 
(6,665
)
Other long-term assets
1,567

 
(363
)
Accounts payable and accrued expenses
(36,861
)
 
(58,680
)
Accrued interest
33,899

 
19,964

Deferred revenue
25,225

 
34,530

Related party liabilities
(1,261
)
 
(635
)
Other long-term liabilities
(1,854
)
 
(4,968
)
Net cash provided by operating activities
888,168

 
744,257

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(87,244
)
 
(118,235
)
Purchases of restricted and other investments
—

 
(1,719
)
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
(61,922
)
 
(119,954
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
331

 
21,819

Taxes paid in lieu of shares issued for stock-based compensation
(24,781
)
 
(27,913
)
Proceeds from long-term borrowings and revolving credit facility, net of costs
2,151,205

 
2,532,137

Payment of premiums on redemption of debt
—

 
(116,410
)
Repayment of long-term borrowings and revolving credit facility
(993,772
)
 
(1,085,737
)
Repayment of related party long-term borrowings
—

 
(150,000
)
Common stock repurchased and retired
(1,990,449
)
 
(1,602,360
)
Net cash used in financing activities
(857,466
)
 
(428,464
)
Net (decrease) increase in cash and cash equivalents
(31,220
)
 
195,839

Cash and cash equivalents at beginning of period
134,805

 
520,945

Cash and cash equivalents at end of period
$
103,585

 
$
716,784

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 Nine Months Ended September 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
$
138,388

 
$
109,476

Non-cash investing and financing activities:

 
 
Capital lease obligations incurred to acquire assets
$
719

 
$
8,870

Conversion of Series B preferred stock to common stock
$
—

 
$
1,293

Treasury stock not yet settled
$
15,565

 
$
—

Conversion of 7% Exchangeable Notes to common stock, net of debt issuance and deferred financing costs
$
6

 
$
45,097

Purchase price accounting adjustments to goodwill
$
1,698

 
$
—

See accompanying notes to the unaudited consolidated financial statements.

5
Table of Contents
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.

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 September 30, 2014 and for the three and nine months ended September 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 nine months ended September 30, 2014 and have determined that no events have occurred that would

6
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

require 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 nine months ended September 30, 2014, the purchase price allocation associated with the connected vehicle business of Agero was adjusted resulting in a net increase to Goodwill of $554, of which $1,144 related to the finalization of the working capital calculation.

As of September 30, 2014, our Goodwill balance associated with the acquisition was $390,016. No other assets or liabilities have been adjusted as a result of the final working capital calculation and adjusted purchase price allocation.

(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 September 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:
 
September 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)
$
303,500

 
—

 
—

 
$
303,500

 
$
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)
$
—

 
5,270,623

 
—

 
$
5,270,623

 
$
—

 
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 $1,292 and $26,972 as of September 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 September 30, 2014 and December 31, 2013.

7
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

(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 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 Loss
Accumulated other comprehensive loss of $288 at September 30, 2014 was primarily comprised of the cumulative foreign currency translation adjustments related to our interest in Sirius XM Canada. During the three and nine months ended September 30, 2014, we recorded other comprehensive (loss) income related to foreign currency translation adjustments, of $(58) and $20, respectively. In addition, during the nine months ended September 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 ("FASB") 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 nine months ended September 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 143,697,000 and 323,615,000 for the three months ended September 30, 2014 and 2013, respectively, and 123,234,000 and 354,938,000 for the nine months ended September 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.

8
Table of Contents
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 September 30,
 
For the Nine Months Ended September 30,
(in thousands, except per share data)
2014

2013
 
2014
 
2013
Numerator:


 


 
 
 
 
Net income
$
136,170

 
$
62,894

 
$
350,119

 
$
312,018

Less:


 


 
 
 
 
Allocation of undistributed income to Series B Preferred Stock
—

 
—

 
—

 
(4,190
)
Net income available to common stockholders for basic net income per common share
$
136,170

 
$
62,894

 
$
350,119

 
$
307,828

Add back:


 


 
 
 
 
Allocation of undistributed income to Series B Preferred Stock
—

 
—

 
—

 
4,190

Effect of interest on assumed conversions of convertible debt
5,363

 
—

 
16,088

 
—

Net income available to common stockholders for diluted net income per common share
$
141,533

 
$
62,894

 
$
366,207

 
$
312,018

Denominator:


 


 
 
 
 
Weighted average common shares outstanding for basic net income per common share
5,626,078

 
6,184,216

 
5,860,248

 
6,265,981

Weighted average impact of assumed Series B Preferred Stock conversion
—

 
—

 
—

 
85,286

Weighted average impact of assumed convertible debt
272,853

 
—

 
272,853

 
—

Weighted average impact of other dilutive equity instruments
75,116

 
103,137

 
75,468

 
94,815

Weighted average shares for diluted net income per common share
5,974,047

 
6,287,353

 
6,208,569

 
6,446,082

Net income per common share:


 


 
 
 
 
Basic
$
0.02

 
$
0.01

 
$
0.06

 
$
0.05

Diluted
$
0.02


$
0.01

 
$
0.06

 
$
0.05



(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:
 
September 30,
2014
 
December 31,
2013
Gross accounts receivable
$
110,290

 
$
113,015

Allowance for doubtful accounts
(7,644
)
 
(9,078
)
Total accounts receivable, net
$
102,646

 
$
103,937



9
Table of Contents
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:
 
September 30,
2014
 
December 31,
2013
Billed
$
58,361

  
$
38,532

Unbilled
45,786

  
50,443

Total
$
104,147

  
$
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:
 
September 30,
2014
 
December 31,
2013
Raw materials
$
11,978

 
$
12,358

Finished goods
23,375

 
15,723

Allowance for obsolescence
(11,003
)
 
(14,218
)
Total inventory, net
$
24,350

 
$
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 September 30, 2014, there were no indicators of impairment and no impairment loss was recorded for goodwill during the three and nine months ended September 30, 2014 and 2013. During the nine months ended September 30, 2014, the purchase price allocation and working capital calculation associated with the connected vehicle business we purchased from Agero were adjusted. These adjustments resulted in a net increase to Goodwill of $554. As of September 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.


10
Table of Contents
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:
 
 
 
September 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

 
(297,483
)
 
82,517

 
380,000

 
(271,372
)
 
108,628

Licensing agreements
9.1 years
 
45,289

 
(22,369
)
 
22,920

 
45,289

 
(19,604
)
 
25,685

Proprietary software
6 years
 
16,552

 
(13,825
)
 
2,727

 
16,552

 
(13,384
)
 
3,168

Developed technology
10 years
 
2,000

 
(1,233
)
 
767

 
2,000

 
(1,083
)
 
917

Leasehold interests
7.4 years
 
132

 
(110
)
 
22

 
132

 
(96
)
 
36

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

 
(13,444
)
 
206,556

 
220,000

 
(2,444
)
 
217,556

Proprietary software
10 years
 
10,663

 
(1,350
)
 
9,313

 
10,663

 
(245
)
 
10,418

Total intangible assets
 
 
$
3,008,290

 
$
(349,814
)
 
$
2,658,476

 
$
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 (2)
 

XM-3
 
2021
XM-4
 
2022
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 this satellite has expired.   The FCC has granted us special temporary authority to operate this satellite and prepare it for deorbiting maneuvers.


11
Table of Contents
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, including temporary 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. The FCC license for our XM-4 satellite, which would have expired in December 2014, was renewed and extended until 2022.

In connection with the Merger, $250,000 of the purchase price was allocated to the XM trademark. As of September 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 of September 30, 2014, there were no indicators of impairment, and no impairment loss was recorded for intangible assets with indefinite lives during the three and nine months ended September 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 $13,642 and $12,107 for the three months ended September 30, 2014 and 2013, respectively, and $41,586 and $37,043 for the nine months ended September 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)
  
$
13,430

2015
  
51,700

2016
  
48,545

2017
  
34,882

2018
  
19,463

Thereafter
  
156,802

Total definite life intangible assets, net
  
$
324,822


(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. 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 September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Interest costs charged to expense
$
75,416

 
$
54,629

 
$
197,029

 
$
150,531

Interest costs capitalized
70

 
7,915

 
480

 
23,923

Total interest costs incurred
$
75,486

 
$
62,544

 
$
197,509

 
$
174,454


Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees, of $5,736 and $5,574 for the three months ended September 30, 2014 and 2013, respectively, and $16,515 and $16,506 for the nine months ended September 30, 2014 and 2013, respectively.


12
Table of Contents
SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
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:
 
September 30,
2014
 
December 31,
2013
Satellite system
$
2,397,611

 
$
2,407,423

Terrestrial repeater network
107,796

 
109,367

Leasehold improvements
48,514

 
46,173

Broadcast studio equipment
60,045

 
59,020

Capitalized software and hardware
321,312

 
298,267

Satellite telemetry, tracking and control facilities
66,206

 
63,944

Furniture, fixtures, equipment and other
77,188

 
67,275

Land
38,411

 
38,411

Building
59,091

 
58,662

Construction in progress
147,650

 
103,148

Total property and equipment
3,323,824

 
3,251,690

Accumulated depreciation and amortization
(1,801,189
)
 
(1,657,116
)
Property and equipment, net
$
1,522,635

 
$
1,594,574


Construction in progress consists of the following:
 
September 30,
2014
 
December 31,
2013
Satellite system
$
12,912

  
$
11,879

Terrestrial repeater network
46,554

  
30,078

Capitalized software
73,050

 
39,924

Other
15,134

  
21,267

Construction in progress
$
147,650

  
$
103,148


Depreciation expense on property and equipment was $50,908 and $46,426 for the three months ended September 30, 2014 and 2013, respectively, and $158,435 and $155,923 for the nine months ended September 30, 2014 and 2013, respectively. We retired property and equipment of $14,802 and $13,130 during the nine months ended September 30, 2014 and 2013, respectively, which included the retirement of our XM-2 satellite in 2014.

13
Table of Contents
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 nine 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-1*
 
2001
 
2013
XM-3
 
2005
 
2020
XM-4
 
2006
 
2021
XM-5
 
2010
 
2025
* Satellite was fully depreciated as of September 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 nine months ended September 30, 2014, we evaluated our investment in M-Way Solutions GmbH ("M-Way") and determined that there was an other than temporary decline in its fair value. As a result, we reduced our investment balance to zero and recognized a loss of $2,342 in Other income (loss) in our unaudited consolidated statements of comprehensive income during the nine months ended September 30, 2014.

We had the following related party balances at September 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
$
53

 
$
278

 
$
—

 
$
—

 
$
257

 
$
15,766

 
$
10,992

 
$
10,959

 
$
—

 
$
—

Sirius XM Canada
3,953

 
8,867

 
1,679

 
27,619

 
3,011

 
4,554

 
—

 
—

 
14,345

 
16,337

M-Way
—

 
—

 
—

 
2,545

 
—

 
—

 
—

 
—

 
—

 
—

Total
$
4,006

 
$
9,145

 
$
1,679

 
$
30,164

 
$
3,268

 
$
20,320

 
$
10,992

 
$
10,959

 
$
14,345

 
$
16,337



14
Table of Contents
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 $34,485 to Loss on change in value of derivatives in our unaudited consolidated statements of comprehensive income related to this agreement during the nine months ended September 30, 2014.
    
We understand that Liberty Media held $11,000 in principal amount of our 7% Exchangeable Senior Subordinated Notes due 2014 at September 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 balances primarily include our investment balance in Sirius XM Canada. As of September 30, 2014, $1,292 of our investment balance in Sirius XM Canada related to equity method goodwill and as of December 31, 2013, $26,161 of our investment balance related to equity method goodwill and intangible assets. Our related party liabilities as of September 30, 2014 and December 31, 2013 include $2,776 for the current portion of deferred revenue and $14,109 and $16,190, respectively, for the long-term portion of deferred revenue recorded as of the Merger date related to agreements with XM Canada, now Sirius XM Canada. 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 September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Sirius XM Canada:
 
 
 
 
 
 
 
Revenue (a)
$
11,963

 
$
10,669

 
$
36,303

 
$
33,980

Share of net earnings (b)
$
6,302

 
$
1,449

 
$
9,610

 
$
2,831

Liberty Media:
 
 
 
 
 
 
 
Expenses (c)
$
(281
)
 
$
(3,619
)
 
$
(837
)
 
$
(12,978
)
(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 earnings is recorded to Interest and investment income in our unaudited consolidated statements of comprehensive income on a one month lag. During the nine months ended September 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. Sirius XM Canada declared dividends to us of $4,591 and $4,727 during the three months ended September 30, 2014 and 2013, respectively, and $39,046 and $12,209 during the nine months ended September 30, 2014 and 2013, respectively. These dividends were recorded as a reduction to our investment balance in Sirius XM Canada through the second quarter of 2014 and as Interest and investment income beginning in the third quarter of 2014. This amount includes amortization related to the equity method intangible assets of $0 and $364 for the three months ended September 30, 2014 and 2013, respectively, and $363 and $1,091 for the nine months ended September 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.

15
Table of Contents
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 September 30, 2014 and December 31, 2013 our Long-term restricted investments were $5,922 and $5,718, respectively.

(13)Debt

Our debt as of September 30, 2014 and December 31, 2013 consisted of the following:
 
 
 
 
 
 
 
 
 
 
 
 
 Carrying value at
Issuer / Borrower
 
Issued
 
Debt
 
Maturity Date
 
Interest Payable
 
Principal Amount
 
September 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
 
$
502,364

 
$
502,007

 
$
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

 
495,346

 
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

 
643,566

 
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

 
594,940

 
594,499

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

 
494,998

 
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

 
1,483,611

 
—

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

 
395,020

 
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

 
145,000

 
460,000

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

 
14,583

 
19,591

Total Debt
 
4,769,071

 
3,601,595

Less: total current maturities non-related party
 
498,433

 
496,815

Less: total current maturities related party
 
10,992

 
10,959

Total long-term debt
 
$
4,259,646

 
$
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 September 30, 2014, $6 of the Exchangeable Notes were converted into shares of our common stock. During the three and nine months ended September 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 three and nine months ended September 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)
In April 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

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

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 September 30, 2014. As of September 30, 2014, $1,105,000 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 and nine months ended September 30, 2013, we purchased $770,987 and $800,000, respectively, of our then outstanding 8.75% Senior Notes due 2015, for an aggregate purchase price, including premium and interest, of $894,883 and $927,860, respectively. We recognized $101,063 and $104,818, respectively, to Loss on extinguishment of debt and credit facilities, net, consisting primarily of unamortized discount, deferred financing fees and repayment premium, as a result of these transactions.

During the three and nine months ended September 30, 2013, we purchased $59,799 and $160,449, respectively, of our then outstanding 7.625% Senior Notes due 2018, for an aggregate purchase price, including premium and interest, of $66,782 and $179,351, respectively. We recognized $6,908 and $19,530, respectively, to Loss on extinguishment of debt and credit facilities, net, consisting primarily of unamortized discount, deferred financing fees and repayment premium, as a result of these transactions.

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 governing 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 September 30, 2014 and December 31, 2013, we were in compliance with our debt covenants.


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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

(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 September 30, 2014 and December 31, 2013. There were 5,542,621,493 and 6,096,220,526 shares of common stock issued and 5,538,190,736 and 6,096,220,526 shares outstanding on September 30, 2014 and December 31, 2013, respectively.

As of September 30, 2014, approximately 582,655,000 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
As of September 30, 2014, our board of directors had approved $6,000,000 in aggregate 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. As of September 30, 2014, our cumulative repurchases since December 2012 totaled 1,090,313,069 shares for $3,768,374, and $2,231,626 remained available under our stock repurchase program.

The following table summarizes our share repurchase activity for the nine months ended September 30, 2014:
Share Repurchase Type
Shares
 
Amount
Open Market and Privately Negotiated Repurchases (a)
273,435,722

 
$
909,609

Liberty Media (b)
92,888,561

 
340,000

May 2014 ASR Agreement (c)
151,846,125

 
506,404

August 2014 ASR Agreement (d)
51,884,795

 
250,000

Total Repurchases
570,055,203

 
$
2,006,013

(a)
As of September 30, 2014, $15,565 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.
(b)
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 $34,485 to Loss on change in value of derivatives in our unaudited consolidated statements of comprehensive income during the nine months ended September 30, 2014.
(c)
In May 2014, we entered into an accelerated share repurchase agreement (the "May ASR Agreement") and prepaid $600,000 to a third-party financial institution to repurchase our common stock. Under the May ASR Agreement, we received 151,846,125 shares of our common stock that were retired upon receipt. Upon settlement of the May ASR Agreement in August 2014, we received $93,596 for the unused portion of the original prepayment.
(d)
In August 2014, we entered into a second accelerated share repurchase agreement (the "August ASR Agreement") with a third-party financial institution to repurchase up to $250,000 of our common stock. Under the August ASR Agreement, we prepaid $250,000 to the financial institution, of which $68,118 related to repurchases that settled on October 1, 2014. During the three months ended September 30, 2014, we received 51,884,795 shares of our common stock that were retired upon receipt. Upon settlement of the August ASR Agreement on October 1, 2014, we received an additional 19,431,708 shares of our common stock that were retired upon receipt. The aggregate purchase price we paid and the total aggregate number of shares repurchased under the August ASR Agreement were determined based on the VWAP of our common stock minus a discount.

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 $3,524 and $3,178 for the three months ended September 30, 2014 and

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

2013, respectively, and $10,303 and $9,484 for the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, the unamortized balance of the debt issuance costs was $2,398, with $2,345 recorded in Other current assets and $53 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 December 1, 2014.

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 September 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 September 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 nine months ended September 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 September 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 nine months ended September 30, 2014 and 2013. The outstanding warrants expire in the first quarter of 2015. At September 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 nine months ended September 30, 2014 and 2013.

(15)
Benefit Plans

We recognized share-based payment expense of $21,805 and $19,762 for the three months ended September 30, 2014 and 2013, respectively, and $57,832 and $49,774 for the nine months ended September 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 September 30, 2014, approximately 20,896,000 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.


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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

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 September 30,
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Risk-free interest rate
1.7%
 
1.5%
 
1.6%
 
1.4%
Expected life of options — years
4.78
 
4.73
 
4.72
 
4.72
Expected stock price volatility
33%
 
47%
 
33%
 
48%
Expected dividend yield
0%
 
0%
 
0%
 
0%

There were no options granted to third parties during the three and nine months ended September 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 was zero for all periods.

The following table summarizes stock option activity under our share-based plans for the nine months ended September 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
59,534

 
$
3.39

 
 
 
 
Exercised
(33,878
)
 
$
1.67

 
 
 
 
Forfeited, cancelled or expired
(8,297
)
 
$
4.22

 
 
 
 
Outstanding as of September 30, 2014
281,598

 
$
2.67

 
7.24
 
$
269,957

Exercisable as of September 30, 2014
134,344

 
$
2.21

 
5.52
 
$
204,055


The weighted average grant date fair value of options granted during the nine months ended September 30, 2014 and 2013 was $1.05 and $1.48, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2014 and 2013 was $62,650 and $104,785, respectively. During the nine months ended September 30, 2014, the number of shares which were issued as a result of stock option exercises was 11,212,077.

We recognized share-based payment expense associated with stock options of $19,318 and $18,860 for the three months ended September 30, 2014 and 2013, respectively, and $52,126 and $48,661 for the nine months ended September 30, 2014 and 2013, respectively.

The following table summarizes the nonvested restricted stock unit activity under our share-based plans for the nine months ended September 30, 2014 (shares in thousands):
 
Shares
 
Grant Date Fair Value
Nonvested as of December 31, 2013
6,984

 
$
3.58

Granted
5,883

 
$
3.39

Vested restricted stock units
(1,105
)
 
$
3.61

Forfeited
(224
)
 
$
3.56

Nonvested as of September 30, 2014
11,538

 
$
3.48


The weighted average grant date fair value of restricted stock units granted during the nine months ended September 30, 2014 and 2013 was $3.39 and $3.58, respectively. The total intrinsic value of restricted stock units that vested during the nine months ended September 30, 2014 and 2013 was $3,924 and $605, respectively. We recognized share-based

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SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)

payment expense associated with restricted stock units of $2,487 and $902 during the three months ended September 30, 2014 and 2013, respectively, and $5,706 and $1,113 during the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, the number of shares which were issued as a result of restricted stock units that vested were 710,728.

Total unrecognized compensation costs related to unvested share-based payment awards for stock options and restricted stock units granted to employees and members of our board of directors at September 30, 2014 and December 31, 2013, net of estimated forfeitures, were $182,649 and $164,292, respectively. The total unrecognized compensation costs at September 30, 2014 are expected to be recognized over a weighted-average period of 3 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 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 $1,190 and $944 during the three months ended September 30, 2014 and 2013, respectively, and $4,323 and $3,331, during the nine months ended September 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 September 30, 2014:
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Debt obligations
$
504,195

 
$
7,482

 
$
4,265

 
$
145,928

 
$
77

 
$
4,150,000

 
$
4,811,947

Cash interest payments
60,818

 
235,826

 
235,619

 
236,213

 
228,063

 
939,813

 
1,936,352

Satellite and transmission
6,433

 
22,598

 
4,524

 
3,558

 
4,171

 
16,863

 
58,147

Programming and content
46,758

 
231,759

 
106,304

 
74,629

 
60,150

 
108,333

 
627,933

Marketing and distribution
10,414

 
19,750

 
11,441

 
7,860

 
6,978

 
5,810

 
62,253

Satellite incentive payments
2,752

 
11,511

 
12,367

 
13,296

 
14,302

 
54,178

 
108,406

Operating lease obligations
9,528

 
47,272

 
40,632

 
34,199

 
32,061

 
227,108

 
390,800

Other
28,038

 
26,825

 
9,954

 
1,602

 
885

 
140

 
67,444

Total (1)
$
668,936

 
$
603,023

 
$
425,106

 
$
517,285