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

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

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

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

 


Table of Contents

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


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



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

 

Subscriber revenue
$
851,436

 
$
783,342

Advertising revenue
22,214

 
20,211

Equipment revenue
23,978

 
18,156

Other revenue
100,083

 
75,689

Total revenue
997,711

 
897,398

Operating expenses:

 

Cost of services:

 

Revenue share and royalties
195,411

 
148,531

Programming and content
74,870

 
74,610

Customer service and billing
91,069

 
80,394

Satellite and transmission
21,380

 
19,695

Cost of equipment
7,804

 
7,027

Subscriber acquisition costs
123,022

 
116,111

Sales and marketing
76,327

 
65,899

Engineering, design and development
15,911

 
14,842

General and administrative
76,243

 
56,340

Depreciation and amortization
68,267

 
67,018

Total operating expenses
750,304

 
650,467

Income from operations
247,407

 
246,931

Other income (expense):

 

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

 
1,638

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

Other income
95

 
247

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

 
202,642

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

 
$
123,602

Foreign currency translation adjustment, net of tax
118

 
(172
)
Total comprehensive income
$
94,106

 
$
123,430

Net income per common share:

 

Basic
$
0.02

 
$
0.02

Diluted
$
0.02

 
$
0.02

Weighted average common shares outstanding:

 

Basic
6,094,784

 
6,259,803

Diluted
6,173,848

 
6,606,276


See accompanying notes to the unaudited consolidated financial statements.

1

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

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

 
$
134,805

Accounts receivable, net
103,872

 
103,937

Receivables from distributors
89,486

 
88,975

Inventory, net
18,987

 
13,863

Prepaid expenses
123,239

 
110,530

Related party current assets
5,143

 
9,145

Deferred tax asset
896,386

 
937,598

Other current assets
19,501

 
20,160

Total current assets
1,377,785

 
1,419,013

Property and equipment, net
1,571,460

 
1,594,574

Long-term restricted investments
5,718

 
5,718

Deferred financing fees, net
11,988

 
12,604

Intangible assets, net
2,685,978

 
2,700,062

Goodwill
2,203,409

 
2,204,553

Related party long-term assets
33,663

 
30,164

Long-term deferred tax asset
834,663

 
868,057

Other long-term assets
9,511

 
10,035

Total assets
$
8,734,175

 
$
8,844,780

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

 
$
578,333

Accrued interest
57,376

 
42,085

Current portion of deferred revenue
1,623,668

 
1,586,611

Current portion of deferred credit on executory contracts
3,672

 
3,781

Current maturities of long-term debt
497,516

 
496,815

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

 
10,959

Related party current liabilities
47,536

 
20,320

Total current liabilities
2,799,494

 
2,738,904

Deferred revenue
146,830

 
149,026

Deferred credit on executory contracts
558

 
1,394

Long-term debt
2,943,202

 
3,093,821

Related party long-term liabilities
15,627

 
16,337

Other long-term liabilities
103,051

 
99,556

Total liabilities
6,008,762

 
6,099,038

Commitments and contingencies (Note 16)

 

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

 

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

 
6,096

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

 
8,674,129

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

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

 
2,745,742

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

 
$
8,844,780


See accompanying notes to the unaudited consolidated financial statements.

2

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


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

 
$

 
6,096,220,526

 
$
6,096

 
$
(308
)
 
$
8,674,129

 

 
$

 
$
(5,934,175
)
 
$
2,745,742

Comprehensive income, net of tax

 

 

 

 
118

 

 

 

 
93,988

 
94,106

Share-based payment expense

 

 

 

 

 
18,240

 

 

 

 
18,240

Exercise of options and vesting of restricted stock units

 

 
2,070,817

 
2

 

 
257

 

 

 

 
259

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

 

 

 

 

 
(4,252
)
 

 

 

 
(4,252
)
Common stock repurchased

 

 

 

 

 

 
39,500,000

 
(128,682
)
 

 
(128,682
)
Common stock retired

 

 
(24,500,000
)
 
(24
)
 

 
(81,045
)
 
(24,500,000
)
 
81,069

 

 

Balance at March 31, 2014

 
$

 
6,073,791,343

 
$
6,074

 
$
(190
)
 
$
8,607,329

 
15,000,000

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

See accompanying notes to the unaudited consolidated financial statements.

3

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

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

 
$
123,602

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

 

Depreciation and amortization
68,267

 
67,018

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

 
5,442

Provision for doubtful accounts
10,634

 
11,410

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

 
9,674

Loss on disposal of assets
196

 
124

Loss on change in value of derivatives
27,023

 

Share-based payment expense
18,240

 
14,518

Deferred income taxes
74,565

 
83,631

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


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

Inventory
(5,124
)
 
5,242

Related party assets
654

 
26

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

 
1,730

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

 
31,054

Deferred revenue
34,861

 
47,480

Related party liabilities
177

 
5,891

Other long-term liabilities
3,538

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

 
168,915

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

 

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

 
10,946

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

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

 
520,945

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

 
$
206,727

See accompanying notes to the unaudited consolidated financial statements.

4

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

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

 
$
2,928

Non-cash investing and financing activities:

 
 
Capital lease obligations incurred to acquire assets
719

 

Conversion of Series B preferred stock to common stock

 
1,293

Treasury stock not yet settled
47,613

 
27,923

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

 
45,097

See accompanying notes to the unaudited consolidated financial statements.

5

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


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

 
$
783,342

Advertising revenue
22,214

 
20,211

Equipment revenue
23,978

 
18,156

Other revenue
100,083

 
75,689

Total revenue
997,711

 
897,398

Operating expenses:

 

Cost of services:

 

Revenue share and royalties
195,411

 
148,531

Programming and content
74,870

 
74,610

Customer service and billing
91,069

 
80,394

Satellite and transmission
21,380

 
19,695

Cost of equipment
7,804

 
7,027

Subscriber acquisition costs
123,022

 
116,111

Sales and marketing
76,327

 
65,899

Engineering, design and development
15,911

 
14,842

General and administrative
76,243

 
56,340

Depreciation and amortization
68,267

 
67,018

Total operating expenses
750,304

 
650,467

Income from operations
247,407

 
246,931

Other income (expense):

 

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

 
1,638

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

 

Other income
95

 
247

Total other income (expense)
39,462

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

 
202,642

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

 
$
123,602

Foreign currency translation adjustment, net of tax
118

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

 
$
123,430


See accompanying notes to the unaudited consolidated financial statements.

6

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

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

 
$
134,805

Accounts receivable, net
103,872

 
103,937

Receivables from distributors
89,486

 
88,975

Inventory, net
18,987

 
13,863

Prepaid expenses
123,239

 
110,530

Related party current assets
126,295

 
15,861

Deferred tax asset
896,386

 
937,598

Other current assets
19,501

 
20,160

Total current assets
1,498,937

 
1,425,729

Property and equipment, net
1,571,460

 
1,594,574

Long-term restricted investments
5,718

 
5,718

Deferred financing fees, net
11,988

 
12,604

Intangible assets, net
2,685,978

 
2,700,062

Goodwill
2,203,409

 
2,204,553

Related party long-term assets
33,663

 
30,164

Long-term deferred tax asset
834,663

 
868,057

Other long-term assets
9,511

 
10,035

Total assets
$
8,855,327

 
$
8,851,496

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

 
$
578,332

Accrued interest
45,654

 
42,085

Current portion of deferred revenue
1,623,668

 
1,586,611

Current portion of deferred credit on executory contracts
3,672

 
3,781

Current maturities of long-term debt
886,943

 
963,630

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

 
10,959

Related party current liabilities
4,811

 
4,618

Total current liabilities
3,134,474

 
3,190,016

Deferred revenue
146,830

 
149,026

Deferred credit on executory contracts
558

 
1,394

Long-term debt
2,943,202

 
3,093,821

Related party long-term liabilities
15,627

 
16,337

Other long-term liabilities
103,051

 
99,556

Total liabilities
6,343,742

 
6,550,150

Commitments and contingencies (Note 16)

 

Stockholder equity:

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

 

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

 

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

 
8,679,538

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

 
2,301,346

Total liabilities and stockholder equity
$
8,855,327

 
$
8,851,496


See accompanying notes to the unaudited consolidated financial statements.

7

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

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

 
$

 
1,000

 
$

 
$
(308
)
 
$
8,679,538

 
$
(6,377,884
)
 
$
2,301,346

Comprehensive income, net of tax

 

 

 

 
118

 

 
210,121

 
210,239

Balance at March 31, 2014

 
$

 
1,000

 
$

 
$
(190
)
 
$
8,679,538

 
$
(6,167,763
)
 
$
2,511,585

See accompanying notes to the unaudited consolidated financial statements.

8

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

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

 
$
123,602

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

 

Depreciation and amortization
68,267

 
67,018

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

 
5,442

Provision for doubtful accounts
10,634

 
11,410

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

 
9,674

Loss on disposal of assets
196

 
124

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

Share-based payment expense
18,240

 
14,518

Deferred income taxes
74,566

 
83,631

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

Inventory
(5,124
)
 
5,242

Related party assets
(132,022
)
 
26

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

 
1,730

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

 
31,054

Deferred revenue
34,861

 
47,480

Related party liabilities
177

 
5,891

Other long-term liabilities
3,538

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

 
168,915

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

 

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

 
10,946

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

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

 
520,945

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

 
$
206,727

See accompanying notes to the unaudited consolidated financial statements.

9

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

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

 
$
2,928

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

 

Conversion of Series B preferred stock to common stock

 
1,293

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

 
45,097

See accompanying notes to the unaudited consolidated financial statements.


10

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


(1)
Business & Basis of Presentation

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

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

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

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

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


11

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

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

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

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

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

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

(2)
Acquisitions

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


12

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

(3)
Summary of Significant Accounting Policies

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

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

 

 

 
$
369,800

 
$
432,200

 

 

 
$
432,200

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

 

 

 
$

 
$

 

 
3,641

 
$
3,641

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

 

 

 
$

 
$

 

 
57

 
$
57

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt (c)
$

 
3,905,871

 

 
$
3,905,871

 
$

 
4,066,755

 

 
$
4,066,755

Share Repurchase Agreement (d)
$

 
42,725

 

 
$
42,725

 
$

 
15,702

 

 
$
15,702

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


13

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

(4)
Earnings per Share

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

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

 
$
123,602

Less:
 
 
 
Allocation of undistributed income to Series B Preferred Stock

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

 
$
118,697

Add back:
 
 


Allocation of undistributed income to Series B Preferred Stock

 
4,905

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

 
$
123,602

Denominator:
 
 


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

 
6,259,803

Weighted average impact of assumed Series B Preferred Stock conversion

 
258,702

Weighted average impact of other dilutive equity instruments
79,064

 
87,771

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

 
6,606,276

Net income per common share:
 
 
 
Basic
$
0.02

 
$
0.02

Diluted
$
0.02

 
$
0.02


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

(5)
Accounts Receivable, net

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


14

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

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

 
$
113,015

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

 
$
103,937


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

  
$
38,532

Unbilled
49,430

  
50,443

Total
$
89,486

  
$
88,975


(6)
Inventory, net

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

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

 
$
12,358

Finished goods
18,439

 
15,723

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

 
$
13,863


(7)
Goodwill

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

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


15

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

(8)
Intangible Assets

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

 
$

 
$
2,083,654

 
$
2,083,654

 
$

 
$
2,083,654

Trademark
Indefinite
 
250,000

 

 
250,000

 
250,000

 

 
250,000

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

 
(280,298
)
 
99,702

 
380,000

 
(271,372
)
 
108,628

Licensing agreements
9.1 years
 
45,289

 
(20,525
)
 
24,764

 
45,289

 
(19,604
)
 
25,685

Proprietary software
6 years
 
16,552

 
(13,531
)
 
3,021

 
16,552

 
(13,384
)
 
3,168

Developed technology
10 years
 
2,000

 
(1,133
)
 
867

 
2,000

 
(1,083
)
 
917

Leasehold interests
7.4 years
 
132

 
(101
)
 
31

 
132

 
(96
)
 
36

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

 
(6,111
)
 
213,889

 
220,000

 
(2,444
)
 
217,556

Proprietary software
10 years
 
10,663

 
(613
)
 
10,050

 
10,663

 
(245
)
 
10,418

Total intangible assets
 
 
$
3,008,290

 
$
(322,312
)
 
$
2,685,978

 
$
3,008,290

 
$
(308,228
)
 
$
2,700,062


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

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

XM-1
 
2014
XM-2 (2)
 

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


16

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

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

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

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

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

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

2015
  
51,700

2016
  
48,545

2017
  
34,882

2018
  
19,463

Thereafter
  
156,802

Total definite life intangible assets, net
  
$
352,324


(9)
Interest Costs

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

 
$
46,174

Interest costs capitalized
206

 
7,970

Total interest costs incurred
$
54,298

 
$
54,144


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


17

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

(10)
Property and Equipment

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

 
$
2,407,423

Terrestrial repeater network
106,895

 
109,367

Leasehold improvements
47,676

 
46,173

Broadcast studio equipment
59,122

 
59,020

Capitalized software and hardware
310,248

 
298,267

Satellite telemetry, tracking and control facilities
64,143

 
63,944

Furniture, fixtures, equipment and other
67,165

 
67,275

Land
38,411

 
38,411

Building
58,849

 
58,662

Construction in progress
119,523

 
103,148

Total property and equipment
3,279,455

 
3,251,690

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

 
$
1,594,574


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

  
$
11,879

Terrestrial repeater network
37,304

  
30,078

Capitalized software
47,540

 
39,924

Other
22,594

  
21,267

Construction in progress
$
119,523

  
$
103,148


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


18

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

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

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


(11)
Related Party Transactions

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

 
$
278

 
$

 
$

 
$
42,982

 
$
15,766

 
$

 
$

 
$
10,970

 
$
10,959

Sirius XM Canada
4,938

 
8,867

 
31,245

 
27,619

 
4,554

 
4,554

 
15,627

 
16,337

 

 

M-Way

 

 
2,418

 
2,545

 

 

 

 

 

 

Total
$
5,143

 
$
9,145

 
$
33,663

 
$
30,164

 
$
47,536

 
$
20,320

 
$
15,627

 
$
16,337

 
$
10,970

 
$
10,959


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

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


19

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

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

  
$
11,000

Less: discounts
30

  
41

Total carrying value of debt
$
10,970

  
$
10,959


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

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

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

 
$
2,782

Chip set and other services reimbursement
3,786

 
2,387

Fair value of host contract of debenture

 
3,641

Fair value of embedded derivative of debenture

 
57

Total
$
4,938

  
$
8,867


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

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


20

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

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

 
$
376

Investment balance*
30,691

 
26,972

Deferred programming costs and other receivables
190

 
271

Total
$
31,245

  
$
27,619

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

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

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

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

 
$
1,500

Carrying value of deferred revenue
18,272

 
18,966

Deferred revenue for software licensing fees and other
409

 
425

Total
$
20,181

  
$
20,891


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

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

 
$
8,469

Amortization of Sirius XM Canada deferred income
694

 
694

Licensing fee revenue
1,500

 
1,171

Advertising and other reimbursements
106

 
415

Streaming revenue
421

 

Total revenue from Sirius XM Canada
$
11,781

 
$
10,749



21

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

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

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

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

(12)
Investments

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



22

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

(13)
Debt

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

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

 
$
500,979

 
$
500,481

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

 
494,986

 
494,809

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

 
643,128

 
642,914

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

 
594,644

 
594,499

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

 
394,770

 
394,648

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

 
494,767

 
494,653

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

 
310,000

 
460,000

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

 
18,414

 
19,591

Total Debt
 
3,451,688

 
3,601,595

Less: total current maturities (f)
 
508,486

 
507,774

Total long-term debt
 
$
2,943,202

 
$
3,093,821

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







23

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

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

 
$
507,774

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

 
466,815

Total current debt at Sirius XM
$
897,913

 
$
974,589

Total long-term debt
$
2,943,202

 
$
3,093,821

Total debt at Sirius XM
$
3,841,115

 
$
4,068,410

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

Covenants and Restrictions

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

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

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

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


24

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

(14)
Stockholders’ Equity

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

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

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

During the three months ended March 31, 2014, we repurchased 39,500,000 shares of our common stock for $128,682, including fees and commissions, on the open market. Common stock repurchases are retired upon settlement. As of March 31, 2014, $47,613 of common stock repurchases had not settled, nor been retired, and were recorded as Treasury stock within Holdings' unaudited consolidated balance sheets and unaudited consolidated statements of stockholders' equity.

As of March 31, 2014, $2,108,958 remained available under our stock repurchase program.

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 $3,346 and $3,209 for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, the unamortized balance of the debt issuance costs was $9,355, with $9,150 recorded in Other current assets and $205 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.

 Common Stock, Sirius XM, par value $0.001 per share
We were authorized to issue up to 9,000,000,000 shares of common stock as of March 31, 2014 and December 31, 2013. Due to our corporate reorganization in November 2013, 1,000 shares of common stock of Sirius XM were issued and outstanding, and were owned by Holdings as of March 31, 2014 and December 31, 2013.


25

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

Preferred Stock, Holdings and Sirius XM, par value $0.001 per share
We were authorized to issue up to 50,000,000 shares of undesignated preferred stock as of March 31, 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 March 31, 2014 and December 31, 2013.

Warrants
We have issued warrants to purchase shares of our common stock in connection with distribution, programming and satellite purchase agreements. As of March 31, 2014 and December 31, 2013, approximately 18,455,000 warrants to acquire an equal number of shares of common stock were outstanding and fully vested. Warrants were included in our calculation of diluted net income per common share as the effect was dilutive for the three months ended March 31, 2014 and 2013. The warrants expire at various times through 2015. At March 31, 2014 and December 31, 2013, the weighted average exercise price of outstanding warrants was $2.55 per share. We did not incur warrant related expenses during the three months ended March 31, 2014 and 2013.


(15)
Benefit Plans

We recognized share-based payment expense of $18,240 and $14,518 for the three months ended March 31, 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 March 31, 2014, approximately 78,552,000 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 March 31,
 
2014
Risk-free interest rate
1.3%
Expected life of options — years
3.98
Expected stock price volatility
36%
Expected dividend yield
0%

There were no options granted to employees during the three months ended March 31, 2013. There were no options granted to third parties or members of our board of directors during the three months ended March 31, 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.


26

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

The following table summarizes stock option activity under our share-based plans for the three months ended March 31, 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
4,614

 
$
3.67

 
 
 
 
Exercised
(5,471
)
 
$
1.58

 
 
 
 
Forfeited, cancelled or expired
(3,927
)
 
$
4.85

 
 
 
 
Outstanding as of March 31, 2014
259,455

 
$
2.43

 
7.02
 
$
262,756

Exercisable as of March 31, 2014
109,628

 
$
2.15

 
5.18
 
$
154,006


The weighted average grant date fair value of options granted during the three months ended March 31, 2014 was $1.08. The total intrinsic value of stock options exercised during the three months ended March 31, 2014 and 2013 was $11,528 and $13,616, respectively. During the three months ended March 31, 2014, the number of shares which were issued as a result of stock option exercises was 2,070,816.

We recognized share-based payment expense associated with stock options of $16,615 and $14,518 for the three months ended March 31, 2014 and 2013, respectively.

The following table summarizes the nonvested restricted stock unit activity under our share-based plans for the three months ended March 31, 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
(39
)
 
$
3.61

Nonvested as of March 31, 2014
7,215

 
$
3.58


The total intrinsic value of restricted stock units that vested during the three months ended March 31, 2014 and 2013 was $0 and $605, respectively. The weighted average grant date fair value of restricted stock units granted during the three months ended March 31, 2014 was $3.70. We recognized share-based payment expense associated with restricted stock units of $1,625 during the three months ended March 31, 2014. We did not grant any restricted stock units or recognize any share-based payment expense associated with restricted stock units during the three months ended March 31, 2013.

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 March 31, 2014 and December 31, 2013, net of estimated forfeitures, were $152,199 and $164,292, respectively. The total unrecognized compensation costs at March 31, 2014 are expected to be recognized over a weighted-average period of 3 years.


27

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

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. During the three months ended March 31, 2014 and 2013 we contributed $1,879 and $1,419, 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 March 31, 2014:
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Debt obligations
$
508,030

 
$
7,482

 
$
4,265

 
$
310,928

 
$
79

 
$
2,650,000

 
$
3,480,784

Cash interest payments
154,711

 
149,256

 
149,059

 
149,101

 
138,063

 
399,813

 
1,140,003

Satellite and transmission
30,172

 
14,062

 
4,326

 
3,404

 
3,992

 
16,524

 
72,480

Programming and content
166,602

 
223,583

 
101,917

 
74,166

 
60,150

 
108,333

 
734,751

Marketing and distribution
19,571

 
15,793

 
10,053

 
6,724

 
6,186

 
6,639

 
64,966

Satellite incentive payments
9,739

 
11,439

 
12,268

 
13,212

 
14,212

 
55,398

 
116,268

Operating lease obligations
28,417

 
44,158

 
37,667

 
31,232

 
29,312

 
223,660

 
394,446

Other
374,945

 
11,518

 
4,135

 
1,345

 
846

 
80

 
392,869

Total (1)
$
1,292,187

 
$
477,291

 
$
323,690

 
$
590,112

 
$
252,840

 
$
3,460,447

 
$
6,396,567


(1)
The table does not include our reserve for uncertain tax positions, which at March 31, 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 four of our in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two satellites used in the XM system, XM-3 and XM-4, based on the expected operating performance exceeding their fifteen-year design life. Boeing may also be entitled

28

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

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 six of our in-orbit satellites, may be entitled to future in-orbit performance payments with respect to three of our satellites, XM-5, FM-5 and FM-6, based on their expected operating performance exceeding their fifteen-year design life.

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.

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

Holdings files a consolidated federal income tax return with its wholly-owned subsidiaries. Income tax expense for the three months ended March 31, 2014 and 2013 was $76,748 and $79,040, respectively.

We estimate Holdings' annual effective tax rate for the year ending December 31, 2014 will be 39.0%. Our effective tax rate for the three months ended March 31, 2014 was 45.0% due to the impact of the loss on the change in fair value of the derivative related to the share repurchase agreement.

As of March 31, 2014, there remained a valuation allowance related to deferred tax assets of $7,699 that were not likely to be realized due to certain state net operating loss limitations and acquired net operating losses that we were not more likely than not going to utilize.


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

The increased ownership in us by Liberty Media to over 50% of our outstanding common stock did not create a change of control under Section 382 of the Internal Revenue Code.

(18)
Subsequent Events

Stock Repurchase Program
For the period from April 1, 2014 to April 25, 2014, we repurchased 25,247,342 shares of our common stock for an aggregate purchase price of $81,318, including fees and commissions, on the open market.

Stock Repurchase Agreement with Liberty Media
On April 25, 2014, pursuant to the terms of the share repurchase agreement with Liberty Media, as amended, we repurchased 92,888,561 shares of our common stock for $340,000 from Liberty Media at a price of $3.66 per share.

As of April 25, 2014, $1,687,640 remained available under our stock repurchase program.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)

The terms “we,” “us,” “our,” and “our company” as used herein and unless otherwise stated or indicated by context, refer to Sirius XM Radio Inc. and its subsidiaries prior to our corporate reorganization and to Sirius XM Holdings Inc. and its subsidiaries after our corporate reorganization.

Special Note Regarding Forward-Looking Statements

The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intend,” “plan,” “projection” and “outlook.” Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time, particularly the risk factors described under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 and “Management’s Discussion and Analysis of Financial Condition and Results or Operations” herein and in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.

Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:

we face substantial competition and that competition is likely to increase over time;
our ability to attract and retain subscribers in the future is uncertain;
our business depends in large part upon the auto industry;
general economic conditions can affect our business;
failure of our satellites would significantly damage our business;
interruption or failure of our information technology and communications systems could negatively impact our results and our brand;
if we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer;
royalties for music rights have increased and there can be no assurance they will not continue to increase in the future;
the unfavorable outcome of pending or future litigation could have a material adverse effect;
we may not realize the benefits of acquisitions or other strategic initiatives, including the acquisition of Agero’s connected vehicle business;
rapid technological and industry changes could adversely impact our services;
failure of third parties to perform could adversely affect our business;
changes in consumer protection laws and their enforcement could damage our business;
failure to comply with FCC requirements could damage our business;
other existing or future government laws and regulations could harm our business;
we may from time to time modify our business plan, and these changes could adversely affect us and our financial condition;
our indebtedness could adversely affect our operations and could limit our ability to react to changes in the economy or our industry;
our broadcast studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities;
Holdings’ principal stockholder has significant influence over our management and over actions requiring general stockholder approval and its interests may differ from the interests of other holders of Holdings’ common stock;
Holdings is a “controlled company” within the meaning of the NASDAQ listing rules and, as a result, qualifies for, and relies on, exemptions from certain corporate governance requirements; and
our business may be impaired by third-party intellectual property rights.

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date

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on which the statement is made, to reflect the occurrence of unanticipated events or otherwise, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


Executive Summary

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.

As of March 31, 2014, we had 25,826,109 subscribers of which 21,255,297 were self-pay subscribers and 4,570,812 were paid promotional subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers for subscriptions included in the sale or lease price of a vehicle; subscribers to our Internet services who do not also have satellite radio subscriptions; and certain subscribers to our weather, traffic, data and Backseat TV services.

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 vehicles 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 beneficially owns, directly and indirectly, over 50% of the outstanding shares of our common stock. Liberty Media owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries, Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its interests in Charter Communications, Live Nation Entertainment and minority equity investments in Time Warner Inc., Time Warner Cable and Viacom.

On January 3, 2014, Holdings' Board of Directors received a non-binding letter from Liberty Media proposing a transaction pursuant to which all outstanding shares of common stock of Holdings not owned by Liberty Media would be converted into the right to receive 0.0760 of a new share of Liberty Series C common stock, which would have no voting rights. On March 13, 2014, Liberty Media announced that its proposal was no longer applicable.

We also have a 37% equity interest in Sirius XM Canada which offers satellite radio services in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count.







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Results of Operations

Set forth below are our results of operations for the three months ended March 31, 2014 compared with the three months ended March 31, 2013.
 
Unaudited
 
 
 
 

For the Three Months Ended March 31,
 
2014 vs 2013 Change
(in thousands)
2014
 
2013
 
Amount
 
%
Revenue:
 
 
 
 
 
 
 
Subscriber revenue
$
851,436

 
$
783,342

 
$
68,094

 
9
 %
Advertising revenue
22,214

 
20,211

 
2,003

 
10
 %
Equipment revenue
23,978

 
18,156

 
5,822

 
32
 %
Other revenue
100,083

 
75,689

 
24,394

 
32
 %
Total revenue
997,711

 
897,398

 
100,313

 
11
 %
Operating expenses:
 
 
 
 
 
 
 
Cost of services:
 
 
 
 
 
 
 
Revenue share and royalties
195,411

 
148,531

 
46,880

 
32
 %
Programming and content
74,870

 
74,610

 
260

 
 %
Customer service and billing
91,069

 
80,394

 
10,675

 
13
 %
Satellite and transmission
21,380

 
19,695

 
1,685

 
9
 %
Cost of equipment
7,804

 
7,027

 
777

 
11
 %
Subscriber acquisition costs
123,022

 
116,111

 
6,911

 
6
 %
Sales and marketing
76,327

 
65,899

 
10,428

 
16
 %
Engineering, design and development
15,911

 
14,842

 
1,069

 
7
 %
General and administrative
76,243

 
56,340

 
19,903

 
35
 %
Depreciation and amortization
68,267

 
67,018

 
1,249

 
2
 %
Total operating expenses
750,304

 
650,467

 
99,837

 
15
 %
Income from operations
247,407

 
246,931

 
476

 
 %
Other income (expense):
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized
(54,092
)
 
(46,174
)
 
(7,918
)
 
(17
)%
Interest and investment income
4,349

 
1,638

 
2,711

 
166
 %
Loss on change in value of derivatives
(27,023
)
 

 
(27,023
)
 
(100
)%
Other income
95

 
247

 
(152
)
 
(62
)%
Total other expense
(76,671
)
 
(44,289
)
 
(32,382
)
 
(73
)%
Income before income taxes
170,736

 
202,642

 
(31,906
)
 
(16
)%
Income tax expense
(76,748
)
 
(79,040
)
 
2,292

 
3
 %
Net income
$
93,988

 
$
123,602

 
$
(29,614
)
 
(24
)%
 
 
 
 
 
 
 
 



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Our results of operations discussed below include Sirius XM Connected Vehicle Services Inc. activity in 2014, as well as the impact of purchase price accounting adjustments associated with the July 2008 merger between our wholly owned subsidiary, Vernon Merger Corporation, and XM Satellite Radio Holdings Inc. (the "Merger"). The purchase price accounting adjustments related to the Merger, include the: (i) elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. The deferred credits on executory contracts attributable to third party arrangements with an OEM included in revenue share and royalties, subscriber acquisition costs, and sales and marketing concluded with the expiration of the acquired contract during 2013. The impact of these purchase price accounting adjustments is detailed in our Adjusted Revenues and Operating Expenses tables on pages 44 through 45 of our glossary.

Total Revenue

Subscriber Revenue includes subscription, activation and other fees.

For the three months ended March 31, 2014 and 2013, subscriber revenue was $851,436 and $783,342, respectively, an increase of 9%, or $68,094. The increase was primarily attributable to a 7% increase in the daily weighted average number of subscribers, the inclusion of subscription revenue generated by our connected vehicle business and the increase in certain of our subscription rates beginning in January 2014. These increases were partially offset by growth in subscription discounts offered through customer acquisition and retention programs, an increasing number of lifetime subscription plans that have reached full revenue recognition and a change in an agreement with an automaker.

We expect subscriber revenues to increase based on the growth of our subscriber base, including connected vehicle subscribers, the effects of an increase in certain of our subscription rates in January 2014 and the sale of additional subscription services to subscribers.

Advertising Revenue includes the sale of advertising on certain non-music channels, net of agency fees. Agency fees are based on a contractual percentage of the gross advertising revenue.

For the three months ended March 31, 2014 and 2013, advertising revenue was $22,214 and $20,211, respectively, an increase of 10%, or $2,003. The increase was primarily due to a greater number of advertising spots sold and broadcast.

We expect our advertising revenue to grow as more advertisers are attracted to our national platform and growing subscriber base and as we launch additional non-music channels.

Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.

For the three months ended March 31, 2014 and 2013, equipment revenue was $23,978 and $18,156, respectively, an increase of 32%, or $5,822. The increase was driven by royalties from higher OEM production and sales to distributors, partially offset by lower per unit revenue on direct to consumer sales.

We expect equipment revenue to increase based on OEM production for which we receive royalty payments for our technology and, to a lesser extent, on the volume and mix of equipment sales in our aftermarket and direct to consumer business.

Other Revenue includes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our Canadian affiliate and ancillary revenues.

For the three months ended March 31, 2014 and 2013, other revenue was $100,083 and $75,689, respectively, an increase of 32%, or $24,394. The increase was driven by revenues from the U.S. Music Royalty Fee as the number of subscribers on the 12.5% rate increased along with an increase in subscribers, and higher royalty revenue from Sirius XM Canada.

We expect other revenue to increase as our subscriber base drives higher U.S. Music Royalty Fees and as the revenue of our Canadian affiliate grows.


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Operating Expenses

Revenue Share and Royalties include distribution and content provider revenue share, advertising revenue share, and broadcast and web streaming royalties. Advertising revenue share is recognized in revenue share and royalties in the period in which the advertising is broadcast.

For the three months ended March 31, 2014 and 2013, revenue share and royalties were $195,411 and $148,531, respectively, an increase of 32%, or $46,880, and increased as a percentage of total revenue. The increase was due, in part, to greater revenues subject to royalty and revenue sharing arrangements and a 5.6% increase in the statutory royalty rate for the performance of sound recordings; partially offset by improved OEM revenue share rates due to a change in a contract with an automaker. Revenue share and royalties was also negatively impacted by the absence of a benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger. For the three months ended March 31, 2013, revenue share and royalties was positively impacted by a $39,761 benefit to earnings from the amortization of these deferred credits on executory contracts.

We expect our revenue share and royalty costs to increase as our revenues grow, our royalty rates increase and as a result of the discontinued deferred credits on executory contracts associated with the Merger.

Programming and Content includes costs to acquire, create, promote and produce content. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees and other amounts.

For the three months ended March 31, 2014 and 2013, programming and content expenses were $74,870 and $74,610, respectively, an increase of less than 1%, or $260, but decreased as a percentage of total revenue. The increase was primarily due to a $1,533 reduction in the benefit to earnings from the purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts and increased personnel costs. The increase was partially offset by the renewal of certain agreements at more cost effective terms.

We expect our programming and content expenses to fluctuate as we offer additional programming, and renew or replace expiring agreements.

Customer Service and Billing includes costs associated with the operation and management of internal and third party customer service centers, and our subscriber management systems as well as billing and collection costs, transaction fees and bad debt expense.

For the three months ended March 31, 2014 and 2013, customer service and billing expenses were $91,069 and $80,394, respectively, an increase of 13%, or $10,675, but remained flat as a percentage of total revenue. The increase was primarily due to the inclusion of costs associated with our connected vehicle services business for the first quarter of 2014 and higher subscriber volume driving increased subscriber contacts.

We expect our customer service and billing expenses to increase as our subscriber base grows and as we attempt to improve the customer service experience for our subscribers.

Satellite and Transmission consists of costs associated with the operation and maintenance of our satellites; satellite telemetry, tracking and control systems; terrestrial repeater networks; satellite uplink facilities; broadcast studios; and delivery of our Internet streaming service.

For the three months ended March 31, 2014 and 2013, satellite and transmission expenses were $21,380 and $19,695, respectively, an increase of 9%, or $1,685, but remained flat as a percentage of total revenue. The increase was primarily due to increased satellite insurance expense and costs associated with our Internet streaming operations.

We expect overall satellite and transmission expenses to increase as we enhance our Internet-based service and add functionality, and expand our terrestrial repeater network.


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Cost of Equipment includes costs from the sale of satellite radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels.

For the three months ended March 31, 2014 and 2013, cost of equipment was $7,804 and $7,027, respectively, an increase of 11%, or $777, and decreased as a percentage of equipment revenue. The increase was primarily due to higher sales to distributors, partially offset by lower costs per unit on direct to consumer sales.

We expect cost of equipment to increase with changes in sales, supply chain management and inventory valuations.

Subscriber Acquisition Costs include hardware subsidies paid to radio manufacturers, distributors and automakers; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios and chip sets; commissions paid to automakers and retailers; product warranty obligations; freight; and provisions for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios.

For the three months ended March 31, 2014 and 2013, subscriber acquisition costs were $123,022 and $116,111, respectively, an increase of 6%, or $6,911, but decreased as a percentage of total revenue. The increase was primarily due to eliminating the benefit to earnings in 2014 from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger and an increase in satellite radio installations in new vehicles, partially offset by improved OEM subsidy rates per vehicle and a change in a contract with an automaker. For the three months ended March 31, 2013, the benefit to earnings from amortization of deferred credits was $22,005.

We expect subscriber acquisition costs to fluctuate with OEM installations and aftermarket volume; however, OEM subsidy rates and the cost of subsidized radio components are expected to decline.  We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.

Sales and Marketing includes costs for advertising, media and production, including promotional events and sponsorships; cooperative marketing; customer acquisition and retention, and personnel. Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and other product awareness activities performed on our behalf. Customer acquisition and retention costs include expenses related to direct mail, outbound telemarketing and email communications.

For the three months ended March 31, 2014 and 2013, sales and marketing expenses were $76,327 and $65,899, respectively, an increase of 16%, or $10,428, and increased as a percentage of total revenue. The increase was primarily due to additional subscriber communications and retention programs associated with a greater number of subscribers and promotional trials, costs associated with our connected vehicle services business, and not receiving the benefit to earnings in 2014 from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the Merger.

We anticipate that sales and marketing expenses will increase as changes in certain contractual marketing agreements become effective and as we expand programs to retain our existing subscribers, win back former subscribers, and attract new subscribers. We expect the increase in sales and marketing costs to be partially offset by the impact of the expiration of the acquired executory contracts.

Engineering, Design and Development includes costs to develop chip sets and new products and services, research and development for broadcast information systems and costs associated with the incorporation of our radios into new vehicles manufactured by automakers.

For the three months ended March 31, 2014 and 2013, engineering, design and development expenses were $15,911 and $14,842, respectively, an increase of 7%, or $1,069, but remained flat as a percentage of total revenue. The increase was driven primarily by costs associated with our connected vehicle services business, higher product development costs, and expenses related to enhanced subscriber features and functionality for our service.

We expect engineering, design and development expenses to increase in future periods as we continue to develop our products and services.
                

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General and Administrative includes executive management, rent and occupancy, finance, legal, human resources, information technology, and insurance costs.

For the three months ended March 31, 2014 and 2013, general and administrative expenses were $76,243 and $56,340, respectively, an increase of 35% or $19,903, and increased as a percentage of total revenue. The increase was primarily driven by personnel costs associated with our connected vehicle services business for the first quarter of 2014, legal fees and costs, particularly legal and investment banking expenses, related to the Liberty Media proposal.

We expect our general and administrative expenses to increase in future periods as a result of, among other things, enhanced information technology, on-going legal costs and personnel costs to support the growth of our business.

Depreciation and Amortization represents the recognition in earnings of the acquisition cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives.

For the three months ended March 31, 2014 and 2013, depreciation and amortization expense was $68,267 and $67,018, respectively, an increase of 2%, or $1,249, and decreased as a percentage of total revenue. The increase was driven by the inclusion of costs associated with our connected vehicle services business, and additional assets placed in-service, including our FM-6 satellite, offset by a reduction of amortization associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, satellites, property and equipment) through the end of their estimated service lives and certain satellites reaching the end of their estimated service lives.

We expect depreciation expense to decrease in future periods due to reduced amortization associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, satellites, property and equipment) through the end of their estimated service lives, principally through 2017. These decreases will be partially offset by increased depreciation resulting from our FM-6 satellite being placed into service. Our XM-1 and XM-2 satellites, which are fully depreciated, are expected to be decommissioned by the end of 2015.

Other Income (Expense)

Interest Expense, Net of Amounts Capitalized, includes interest on outstanding debt, reduced by interest capitalized in connection with the construction of satellites and related launch vehicles.

For the three months ended March 31, 2014 and 2013, interest expense was $54,092 and $46,174, respectively, an increase of 17%, or $7,918. The increase was primarily due to higher average debt and a reduction in interest capitalized following the launch of our FM-6 satellite. The increase was partially offset by lower average interest rates resulting from the redemption or repayment of higher interest rate debt throughout 2013.

We expect interest expense to increase in future periods to the extent our total debt outstanding increases.

Interest and Investment Income includes realized gains and losses, interest income, and our share of the income of Sirius XM Canada.

For the three months ended March 31, 2014, interest and investment income was $4,349 compared to $1,638 in 2013. The increase in interest and investment income was primarily due to our share of Sirius XM Canada's net income, and the conversion of the Canadian debentures into shares of Sirius XM Canada, partially offset by the amortization expense related to our equity method intangible assets.

Loss on Change In Value of Derivatives represents the change in fair value of the commitments under the share repurchase agreement with Liberty Media, which are accounted for as a derivative.

For the three months ended March 31, 2014, net loss on change in value of derivatives was $27,023 which resulted from a change in the market value of our common stock to be purchased under the share repurchase agreement with Liberty Media.   We repurchased 92,888,561 shares of common stock from Liberty Media on April 25, 2014 at a price of $3.66 per share.

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Income Taxes

Income Tax Expense includes the change in our deferred tax assets, foreign withholding taxes and current federal and state tax expenses.

For the three months ended March 31, 2014, income tax expense was $76,748 compared to income tax expense of $79,040 for the three months ended March 31, 2013. For the three months ended March 31, 2014, we estimate our annual effective tax rate for the year ended December 31, 2014 will be 39.0%. Our effective tax rate for the three months ended March 31, 2014 was 45.0% due to the impact of the loss on the change in fair value of the derivative related to the share repurchase agreement with Liberty Media.


Key Operating Metrics

In this section, we present certain financial performance measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States (“Non-GAAP”). These Non-GAAP financial measures include: average monthly revenue per subscriber, or ARPU; customer service and billing expenses, per average subscriber; subscriber acquisition cost, or SAC, per installation; free cash flow; and adjusted EBITDA. These measures exclude the impact of certain purchase price accounting adjustments related to the Merger, which include the: (i) elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. We use these Non-GAAP financial measures to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees.

We believe the exclusion of share-based payment expense from functional operating expenses is useful given the significant variation in expense that can result from changes in the fair value as determined by the Black-Scholes-Merton model, which varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our operating costs.

Free cash flow is a metric that our management and board of directors use to evaluate the cash generated by our operations, net of capital expenditures and other investment activity. In a capital intensive business, with significant investments in satellites, we look at our operating cash flow, net of these investing cash outflows, to determine cash available for future subscriber acquisition and capital expenditures, to repurchase or retire debt, to acquire other companies and to evaluate our ability to return capital to stockholders. We believe free cash flow is an indicator of the long-term financial stability of our business. Free cash flow, which is reconciled to “Net cash provided by operating activities”, is a Non-GAAP financial measure. This measure can be calculated by deducting amounts under the captions "Additions to property and equipment" and deducting or adding Restricted and other investment activity from "Net cash provided by operating activities" from the unaudited consolidated statements of cash flows. Free cash flow should be used in conjunction with other GAAP financial performance measures and may not be comparable to free cash flow measures presented by other companies. Free cash flow should be viewed as a supplemental measure rather than an alternative measure of cash flows from operating activities, as determined in accordance with GAAP. Free cash flow is limited and does not represent remaining cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt maturities. We believe free cash flow provides useful supplemental information to investors regarding our current and projected cash flow, along with other GAAP measures (such as cash flows from operating and investing activities), to determine our financial condition, and to compare our operating performance to other communications, entertainment and media companies.

We believe these Non-GAAP financial measures provide useful information to investors regarding our financial condition and results of operations. We believe investors find these Non-GAAP financial performance measures useful in evaluating our core trends because it provides a direct view of our underlying contractual costs. We believe investors use our current and projected adjusted EBITDA to estimate our current or prospective enterprise value and to make investment decisions. By providing these Non-GAAP financial measures, together with the reconciliations to the most directly comparable GAAP measure, we believe we are enhancing investors' understanding of our business and our results of operations.

These Non-GAAP financial measures should be viewed in addition to, and not as an alternative for or superior to, our reported results prepared in accordance with GAAP. In addition, these Non-GAAP financial measures may not be comparable

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to similarly-titled measures by other companies. Please refer to the glossary (pages 43 through 47) for a further discussion of such Non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure.
The following table contains our key operating metrics based on our adjusted results of operations for the three months ended March 31, 2014 and 2013, respectively. Subscribers to our connected vehicle services are not included in our subscriber count:
 
 
Unaudited
 
 
For the Three Months Ended March 31,
(in thousands, except for subscriber, per subscriber and per installation amounts)
 
2014
 
2013
Self-pay
 
21,255,297

 
19,874,660

Paid promotional
 
4,570,812

 
4,478,566

Ending subscribers
 
25,826,109

 
24,353,226

Self-pay
 
173,480

 
304,386

Paid promotional
 
93,319

 
148,504

Net additions
 
266,799

 
452,890

Daily weighted average number of subscribers
 
25,602,139

 
24,008,472

Average self-pay monthly churn
 
1.9
%
 
2.0
%
New vehicle consumer conversion rate
 
42
%
 
44
%
 
 
 
 
 
ARPU
 
$
12.18

 
$
12.05

SAC, per installation
 
$
35

 
$
47

Customer service and billing expenses, per average subscriber
 
$
1.09

 
$
1.11

Free cash flow
 
$
222,789

 
$
142,481

Adjusted EBITDA
 
$
334,782

 
$
261,871

Note: See pages 43 through 47 for glossary.
 
 
 
 

Subscribers. At March 31, 2014, we had 25,826,109 subscribers, an increase of 1,472,883 subscribers, or 6%, from the 24,353,226 subscribers as of March 31, 2013.

For the three months ended March 31, 2014 and 2013, net additions were 266,799 and 452,890, respectively, a decrease of 41%, or 186,091. The increase in self-pay subscribers was primarily due to increases in trial conversions partially offset by a decline in aftermarket additions, increased churn associated with our larger subscriber base, and increased vehicle turnover. Paid promotional subscribers increased due to higher new vehicle sales.

Average Self-pay Monthly Churn is derived by dividing the monthly average of self-pay deactivations for the period divided by the average number of self-pay subscribers for the period. (See accompanying glossary on pages 43 through 47 for more details.)

For the three months ended March 31, 2014 and 2013, our average self-pay monthly churn rate was 1.9% and 2.0%, respectively. The decrease was due to improvements in non-pay and voluntary churn partially offset by increased migrations of existing self-pay subscribers to unpaid vehicle trials.

New Vehicle Consumer Conversion Rate is the percentage of owners and lessees of new vehicles that receive our service and convert to become self-paying subscribers after an initial promotional period. The metric excludes rental and fleet vehicles. (See accompanying glossary on pages 43 through 47 for more details).

For the three months ended March 31, 2014 and 2013, the new vehicle consumer conversion rate was 42% and 44%, respectively. The decrease in the new vehicle consumer conversion rate for the three month period was due to increased penetration in new, lower priced, vehicle lines and an increase in mix of lower income buyers.


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ARPU is derived from total earned subscriber revenue, excluding revenue derived from our connected vehicle services business, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (For a reconciliation to GAAP see the accompanying glossary on pages 43 through 47 for more details.)

For the three months ended March 31, 2014 and 2013, ARPU was $12.18 and $12.05, respectively. The increase was driven primarily by the contribution of the U.S. Music Royalty Fee, and the impact of the increase in certain of our subscription rates beginning in January 2014. The positive result was partially offset by growth in subscription discounts offered through customer acquisition and retention programs, lifetime subscription plans that have reached full revenue recognition and a change in a contract with an automaker.

SAC, Per Installation, is derived from subscriber acquisition costs and margins from the sale of radios, components and accessories, excluding purchase price accounting adjustments, divided by the number of satellite radio installations in new vehicles and shipments of aftermarket radios for the period. (For a reconciliation to GAAP see the accompanying glossary on pages 43 through 47 for more details.)

For the three months ended March 31, 2014 and 2013, SAC, per installation, was $35 and $47, respectively. The decrease was primarily due to improvements in contractual OEM rates.

Customer Service and Billing Expenses, Per Average Subscriber, is derived from total customer service and billing expenses, excluding connected vehicle customer service and billing expenses and share-based payment expense, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (For a reconciliation to GAAP see the accompanying glossary on pages 43 through 47 for more details.)

For the three months ended March 31, 2014 and 2013, customer service and billing expenses, per average subscriber, were $1.09 and $1.11, respectively. The decrease was primarily driven by lower bad debt expense and efficiencies in customer billing.

Free Cash Flow includes the net cash provided by operations, additions to property and equipment, and restricted and other investment activity. (For a reconciliation to GAAP see the accompanying glossary on pages 43 through 47 for more details.)

For the three months ended March 31, 2014 and 2013, free cash flow was $222,789 and $142,481, respectively, an increase of $80,308. The increase was primarily driven by higher net cash provided by operating activities from improved operating performance, and higher collections from subscribers and distributors, partially offset by payments related to improvements to our repeater network and higher interest payments.

Adjusted EBITDA. EBITDA is defined as net income before interest and investment income (loss); interest expense, net of amounts capitalized; income tax benefit (expense) and depreciation and amortization. Adjusted EBITDA excludes the impact of other income and expense, losses on extinguishment of debt, loss on change in value of derivatives as well as certain other charges, such as goodwill impairment, certain purchase price accounting adjustments and share-based payment expense. (For a reconciliation to GAAP see the accompanying glossary on pages 43 through 47 for more details.)

For the three months ended March 31, 2014 and 2013, adjusted EBITDA was $334,782 and $261,871, respectively, an increase of 28%, or $72,911. The increase was primarily due to increases in adjusted revenues primarily due to the increase in our subscriber base and certain of our subscription rates, as well as the inclusion of the results of our connected vehicle services business. The revenue growth was partially offset by increases in expenses primarily due to the inclusion of connected vehicle services business, higher legal costs and costs correlated to the growth in our revenues and subscriber base.



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Liquidity and Capital Resources

Cash Flows for the three months ended March 31, 2014 compared with the three months ended March 31, 2013.

As of March 31, 2014 and December 31, 2013, we had $121,171 and $134,805, respectively, of cash and cash equivalents. The following table presents a summary of our cash flow activity for the periods set forth below:
 
For the Three Months Ended March 31,
 
 
 (in thousands)
2014
 
2013
 
2014 vs. 2013
Net cash provided by operating activities
$
251,390

 
$
168,915

 
$
82,475

Net cash used in investing activities
(27,457
)
 
(26,434
)
 
(1,023
)
Net cash used in financing activities
(237,567
)
 
(456,699
)
 
219,132

Net decrease in cash and cash equivalents
(13,634
)
 
(314,218
)
 
300,584

Cash and cash equivalents at beginning of period
134,805

 
520,945

 
(386,140
)
Cash and cash equivalents at end of period
$
121,171

 
$
206,727

 
$
(85,556
)

Cash Flows Provided by Operating Activities

Cash flows provided by operating activities increased by $82,475 to $251,390 for the three months ended March 31, 2014 from $168,915 for the three months ended March 31, 2013.

Our largest source of cash provided by operating activities is generated by subscription and subscription-related revenues. We also generate cash from the sale of advertising on certain non-music channels and the sale of satellite radios, components and accessories. Our primary uses of cash from operating activities include revenue share and royalty payments to distributors and content providers, and payments to radio manufacturers, distributors and automakers. In addition, uses of cash from operating activities include payments to vendors to service, maintain and acquire subscribers, general corporate expenditures, and compensation and related costs.
Cash Flows Used in Investing Activities
Cash flows used in investing activities consists of capital expenditures for property and equipment. We expect to continue to incur significant costs to improve our terrestrial repeater network and broadcast and administrative infrastructure.
The increase in cash flows used in investing activities was primarily due to an increase in spending to improve our terrestrial repeater network and for capitalized software.

Cash Flows Used in Financing Activities

Cash flows used in financing activities consists of the issuance and repayment of long-term debt, cash flows resulting from the exercise of stock options and the purchase of common stock under our share repurchase program. Proceeds from long-term debt, related party debt and equity issuances have been used to fund our operations, acquire the connected vehicle business of Agero, Inc., construct and launch new satellites and invest in other infrastructure improvements.

Cash flows used in financing activities in 2014 were primarily due to repayments under the Credit Facility and the repurchase and retirement of approximately 24,500,000 shares of common stock under our repurchase program. Cash flows used in financing activities during 2013 were due to the repurchase and retirement of approximately 148,113,483 shares of common stock under our repurchase program, partially offset by proceeds from exercises of stock options.
  
Future Liquidity and Capital Resource Requirements
    
Based upon our current business plans, we expect to fund operating expenses, capital expenditures, working capital requirements, interest payments, taxes and scheduled maturities of our debt with existing cash, cash flow from operations and borrowings under our Credit Facility. We believe that we have sufficient cash and cash equivalents as well as debt capacity to cover our estimated short-term and long-term funding needs, stock repurchases and strategic opportunities.


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Our ability to meet our debt and other obligations depends on our future operating performance and on economic, financial, competitive and other factors. We continually review our operations for opportunities to adjust the timing of expenditures to ensure that sufficient resources are maintained.

We regularly evaluate our business plans and strategy. These evaluations often result in changes to our business plans and strategy, some of which may be material and significantly change our cash requirements. These changes in our business plans or strategy may include: the acquisition of unique or compelling programming; the introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions, including acquisitions that are not directly related to our satellite radio business.

Stock Repurchase Program
Since December 2012, our board of directors has approved $4,000,000 for repurchases of our common stock. Our board of directors did not establish an end date for this stock repurchase program. Shares of common stock may be purchased from time to time on the open market and in privately negotiated transactions, including transactions with Liberty Media and its affiliates.

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

During the three months ended March 31, 2014, we repurchased 39,500,000 shares of our common stock for $128,682, including fees and commissions, on the open market. Common stock repurchases are retired upon settlement. As of March 31, 2014, $47,613 of common stock repurchases had not settled, nor been retired, and were recorded as Treasury stock within Holdings' unaudited consolidated balance sheets and unaudited consolidated statements of stockholders' equity. As of March 31, 2014, $2,108,958 remained available under our stock repurchase program. We expect to fund future repurchases through a combination of cash on hand, cash generated by operations and future borrowings.

Debt Covenants
The indentures governing our senior notes and the agreement governing our Credit Facility include restrictive covenants. As of March 31, 2014, we were in compliance with such indentures and agreement. For a discussion of our “Debt Covenants,” refer to Note 13 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We do not have any significant off-balance sheet arrangements other than those disclosed in Note 16 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual Cash Commitments

For a discussion of our “Contractual Cash Commitments,” refer to Note 16 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.

Related Party Transactions

For a discussion of “Related Party Transactions,” refer to Note 11 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.

Critical Accounting Policies and Estimates

For a discussion of our "Critical Accounting Policies and Estimates," refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no material changes to our critical accounting policies and estimates since December 31, 2013.

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Glossary

Adjusted EBITDA - EBITDA is defined as net income before interest and investment income (loss); interest expense, net of amounts capitalized; income tax expense and depreciation and amortization. We adjust EBITDA to exclude the impact of other income and expense, loss on extinguishment of debt, loss on change in value of derivatives as well as certain other charges discussed below. This measure is one of the primary Non-GAAP financial measures on which we (i) evaluate the performance of our businesses, (ii) base our internal budgets and (iii) compensate management. Adjusted EBITDA is a Non-GAAP financial performance measure that excludes (if applicable): (i) certain adjustments as a result of the purchase price accounting for the Merger, (ii) depreciation and amortization and (iii) share-based payment expense. The purchase price accounting adjustments include: (i) the elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. We believe adjusted EBITDA is a useful measure of the underlying trend of our operating performance, which provides useful information about our business apart from the costs associated with our physical plant, capital structure and purchase price accounting. We believe investors find this Non-GAAP financial measure useful when analyzing our results and comparing our operating performance to the performance of other communications, entertainment and media companies. We believe investors use current and projected adjusted EBITDA to estimate our current and prospective enterprise value and to make investment decisions. Because we fund and build-out our satellite radio system through the periodic raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation expense. The exclusion of depreciation and amortization expense is useful given significant variation in depreciation and amortization expense that can result from the potential variations in estimated useful lives, all of which can vary widely across different industries or among companies within the same industry. We also believe the exclusion of share-based payment expense is useful given the significant variation in expense that can result from changes in the fair value as determined using the Black-Scholes-Merton model which varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates.     

Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statements of comprehensive income of certain expenses, including share-based payment expense and certain purchase price accounting for the Merger. We endeavor to compensate for the limitations of the Non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the Non-GAAP measure. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net income as disclosed in our consolidated statements of comprehensive income. Since adjusted EBITDA is a Non-GAAP financial performance measure, our calculation of adjusted EBITDA may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation of net income to the adjusted EBITDA is calculated as follows (in thousands):

 
Unaudited
 
For the Three Months Ended March 31,
 
2014
 
2013
Net income (GAAP):
$
93,988

 
$
123,602

Add back items excluded from Adjusted EBITDA:
 
 
 
Purchase price accounting adjustments:
 
 
 
Revenues (see pages 44-45)
1,813

 
1,813

Operating expenses (see pages 44-45)
(945
)
 
(68,409
)
Share-based payment expense (GAAP)
18,240

 
14,518

Depreciation and amortization (GAAP)
68,267

 
67,018

Interest expense, net of amounts capitalized (GAAP)
54,092

 
46,174

Interest and investment income (GAAP)
(4,349
)
 
(1,638
)
Loss on change in value of derivatives (GAAP)
27,023

 

Other income (GAAP)
(95
)
 
(247
)
Income tax expense (GAAP)
76,748

 
79,040

Adjusted EBITDA
$
334,782


$
261,871


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Adjusted Revenues and Operating Expenses - We define this Non-GAAP financial measure as our actual revenues and operating expenses adjusted to exclude the impact of certain purchase price accounting adjustments from the Merger and share-based payment expense. We use this Non-GAAP financial measure to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees. The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses for the three months ended March 31, 2014 and 2013:
 
Unaudited For the Three Months Ended March 31, 2014
(in thousands)
As Reported
 
Purchase Price Accounting Adjustments
 
Allocation of Share-based Payment Expense
 
Adjusted
Revenue:
 
 
 
 
 
 
 
Subscriber revenue
$
851,436

 
$

 
$

 
$
851,436

Advertising revenue
22,214

 

 

 
22,214

Equipment revenue
23,978

 

 

 
23,978

Other revenue
100,083

 
1,813

 

 
101,896

Total revenue
$
997,711

 
$
1,813

 
$

 
$
999,524

Operating expenses
 
 
 
 
 
 
 
Cost of services:
 
 
 
 
 
 
 
Revenue share and royalties
$
195,411

 
$

 
$

 
$
195,411

Programming and content
74,870

 
945

 
(2,215
)
 
73,600

Customer service and billing
91,069

 

 
(577
)
 
90,492

Satellite and transmission
21,380

 

 
(946
)
 
20,434

Cost of equipment
7,804

 

 

 
7,804

Subscriber acquisition costs
123,022

 

 

 
123,022

Sales and marketing
76,327

 

 
(3,566
)
 
72,761

Engineering, design and development
15,911

 

 
(1,926
)
 
13,985

General and administrative
76,243

 

 
(9,010
)
 
67,233

Depreciation and amortization (a)
68,267

 

 

 
68,267

Share-based payment expense

 

 
18,240

 
18,240

Total operating expenses
$
750,304

 
$
945

 
$

 
$
751,249

 
 
 
 
 
 
 
 
(a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended March 31, 2014 was $10,000.



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Unaudited For the Three Months Ended March 31, 2013
(in thousands)
As Reported
 
Purchase Price Accounting Adjustments
 
Allocation of Share-based Payment Expense
 
Adjusted
Revenue:
 
 
 
 
 
 
 
Subscriber revenue
$
783,342

 
$

 
$

 
$
783,342

Advertising revenue
20,211

 

 

 
20,211

Equipment revenue
18,156

 

 

 
18,156

Other revenue
75,689

 
1,813

 

 
77,502

Total revenue
$
897,398

 
$
1,813

 
$

 
$
899,211

Operating expenses
 
 
 
 
 
 
 
Cost of services:
 
 
 
 
 
 
 
Revenue share and royalties
$
148,531

 
$
39,761

 
$

 
$
188,292

Programming and content
74,610

 
2,478

 
(1,642
)
 
75,446

Customer service and billing
80,394

 

 
(470
)
 
79,924

Satellite and transmission
19,695

 

 
(850
)
 
18,845

Cost of equipment
7,027

 

 

 
7,027

Subscriber acquisition costs
116,111

 
22,005

 

 
138,116

Sales and marketing
65,899

 
4,165

 
(3,061
)
 
67,003

Engineering, design and development
14,842

 

 
(1,647
)
 
13,195

General and administrative
56,340

 

 
(6,848
)
 
49,492

Depreciation and amortization (a)
67,018

 

 

 
67,018

Share-based payment expense

 

 
14,518

 
14,518

Total operating expenses
$
650,467

 
$
68,409

 
$

 
$
718,876

 
 
 
 
 
 
 
 
(a) Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for three months ended March 31, 2013 was $13,000.


ARPU - is derived from total earned subscriber revenue, advertising revenue and other subscription-related revenue, excluding revenue associated with our connected vehicle business, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. Other subscription-related revenue includes the U.S. Music Royalty Fee. ARPU is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
 
Unaudited
 
For the Three Months Ended March 31,
 
2014
 
2013
Subscriber revenue, excluding connected vehicle (GAAP)
$
832,804

 
$
783,342

Add: advertising revenue (GAAP)
22,214

 
20,211

Add: other subscription-related revenue (GAAP)
80,768

 
64,137

 
$
935,786

 
$
867,690

Daily weighted average number of subscribers
25,602,139

 
24,008,472

ARPU
$
12.18


$
12.05


Average self-pay monthly churn - is defined as the monthly average of self-pay deactivations for the period divided by the average number of self-pay subscribers for the period.

Customer service and billing expenses, per average subscriber - is derived from total customer service and billing expenses, excluding connected vehicle customer service and billing expenses and share-based payment expense, divided

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by the number of months in the period, divided by the daily weighted average number of subscribers for the period. We believe the exclusion of share-based payment expense in our calculation of customer service and billing expenses, per average subscriber, is useful given the significant variation in expense that can result from changes in the fair market value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our customer service and billing expenses. Customer service and billing expenses, per average subscriber, is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
 
Unaudited
 
For the Three Months Ended March 31,
 
2014
 
2013
Customer service and billing expenses, excluding connected vehicle (GAAP)
$
84,103

 
$
80,394

Less: share-based payment expense (GAAP)
(577
)
 
(470
)
 
$
83,526

 
$
79,924

Daily weighted average number of subscribers
25,602,139


24,008,472

Customer service and billing expenses, per average subscriber
$
1.09


$
1.11


Free cash flow - is derived from cash flow provided by operating activities, capital expenditures and restricted and other investment activity. Free cash flow is calculated as follows (in thousands):

 
Unaudited
 
For the Three Months Ended March 31,
 
2014

2013
Cash Flow information
 
 
 
Net cash provided by operating activities
$
251,390

 
$
168,915

Net cash used in investing activities
$
(27,457
)
 
$
(26,434
)
Net cash used in financing activities
$
(237,567
)
 
$
(456,699
)
Free Cash Flow
 
 
 
Net cash provided by operating activities
$
251,390

 
$
168,915

Additions to property and equipment
(28,601
)
 
(26,434
)
Free cash flow
$
222,789


$
142,481


New vehicle consumer conversion rate - is defined as the percentage of owners and lessees of new vehicles that receive our satellite radio service and convert to become self-paying subscribers after the initial promotion period. At the time satellite radio enabled vehicles are sold or leased, the owners or lessees generally receive trial subscriptions ranging from three to twelve months. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. We measure conversion rate three months after the period in which the trial service ends. The metric excludes rental and fleet vehicles.

Subscriber acquisition cost, per installation - or SAC, per installation, is derived from subscriber acquisition costs and margins from the sale of radios and accessories, excluding purchase price accounting adjustments, divided by the number of satellite radio installations in new vehicles and shipments of aftermarket radios for the period. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit of amortization of deferred credits on executory contracts recognized at the Merger date attributable to an OEM. SAC, per installation, is calculated as follows (in thousands, except for installation amounts):


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Unaudited
 
For the Three Months Ended March 31,
 
2014
 
2013
Subscriber acquisition costs (GAAP)
$
123,022

 
$
116,111

Less: margin from direct sales of radios and accessories (GAAP)
(16,174
)
 
(11,129
)
Add: purchase price accounting adjustments

 
22,005

 
$
106,848

 
$
126,987

Installations
3,078,510

 
2,710,893

SAC, per installation
$
35


$
47


Supplementary discussion for Sirius XM:

The unaudited consolidated statements of comprehensive income of Sirius XM are essentially identical to the unaudited consolidated statements of comprehensive income of Holdings, except for the following:
 
Unaudited
 
For the Three Months Ended March 31,
(in thousands)
2014

2013
Net income attributable to Holdings
$
93,988

 
$
123,602

Loss on change in value of derivative for forward contract with Liberty Media included in Holdings' unaudited consolidated statements of comprehensive income (a)
27,023

 

Gain on change in fair value of 7% Exchangeable Senior Subordinated Notes due 2014 included in Sirius XM's unaudited consolidated statements of comprehensive income (b)
89,110

 

Net income attributable to Sirius XM's sole stockholder
$
210,121

 
$
123,602

(a)
The fair value of the share repurchase agreement with Liberty Media is recorded in Holdings' unaudited consolidated balance sheets, with changes in fair value recorded in Holdings' unaudited consolidated statements of comprehensive income. The impact of the share repurchase agreement is excluded from Sirius XM's financial statements as the publicly traded common stock being repurchased from Liberty Media resides at Holdings, effective November 15, 2013.
(b)
The fair value in excess of the carrying amount associated with the 7% Exchangeable Senior Subordinated Notes due 2014 is recorded to Sirius XM's unaudited consolidated balance sheets in Current maturities of long-term debt, with changes in fair value recorded in Sirius XM's unaudited consolidated statements of comprehensive income. This is eliminated in Holdings' unaudited consolidated balance sheets and unaudited consolidated statements of comprehensive income.

For a discussion and analysis of Sirius XM's financial condition and results, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Item.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
As of March 31, 2014, we did not hold or issue any free-standing derivatives. We hold investments in marketable securities consisting of money market funds, certificates of deposit and investments in debt and equity securities of other entities. We classify our investments in marketable securities as available-for-sale. These securities are consistent with the objectives contained within our investment policy. The basic objectives of our investment policy are the preservation of capital, maintaining sufficient liquidity to meet operating requirements and maximizing yield.
Our debt includes fixed rate instruments and the fair market value of our debt is sensitive to changes in interest rates. Our borrowings under the Credit Facility carry a variable interest rate based on LIBOR plus an applicable rate based on our debt to operating cash flow ratio. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate fluctuations.


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ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.

As of March 31, 2014, an evaluation was performed under the supervision and with the participation of our management, including James E. Meyer, our Chief Executive Officer, and David J. Frear, our Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of March 31, 2014.
    
There has been no change in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we are a defendant or party to various claims and lawsuits, including those discussed below. These claims are at various stages of arbitration or adjudication.
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.
ITEM 1A.
RISK FACTORS

There have been no material changes to the risk factors previously disclosed in response to Part 1, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2013.


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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about our purchases of equity securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended March 31, 2014:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share (1)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1, 2014 - January 31, 2014
 

 
$

 

 
$
2,237,639,895

February 1, 2014 - February 28, 2014
 

 
$

 

 
$
2,237,639,895

March 1, 2014 - March 31, 2014
 
39,500,000

 
$
3.26

 
39,500,000

 
$
2,108,957,821

Total
 
39,500,000

 
$
3.26

 
39,500,000

 
$
2,108,957,821

(1)
These amounts include fees and commissions associated with the shares repurchased.
(2)
In December 2012, our board of directors approved a $2.0 billion common stock repurchase program. In October 2013, our board of directors approved an additional $2.0 billion common stock repurchase program. Our board of directors did not establish an end date for this stock repurchase program. Shares of Holdings’ common stock may be purchased from time to time on the open market and in privately negotiated transactions, including in transactions with Liberty Media and its affiliates. The size and timing of these purchases will be based on a number of factors, including price and business and market conditions.
On October 9, 2013, we entered into an agreement with Liberty Media to repurchase $500 million of our common stock from Liberty Media. Pursuant to the agreement with Liberty Media, we repurchased $160 million of our common stock from Liberty Media in 2013. On January 23, 2014, we entered into an amendment to the agreement with Liberty Media to defer the previously scheduled $240 million repurchase of shares of our common stock from Liberty Media from January 27, 2014 to April 25, 2014, the date of the final purchase installment under the agreement. On April 25, 2014, we repurchased $340 million of our shares of common stock from Liberty Media at a price of $3.66 per share.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

See Exhibit Index attached hereto.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 25th day of April 2014.
 
 
 
SIRIUS XM HOLDINGS INC.
 
 
By:
/s/     DAVID J. FREAR
 
David J. Frear
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial Officer and Authorized Signatory)
    
    



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EXHIBIT INDEX

Exhibit

 
Description
 

 
 
*10.1


 
Employment Agreement, dated as of January 10, 2014, between Sirius XM Radio Inc. and Patrick L. Donnelly (incorporated by reference to Exhibit 10.1 to Sirius XM Holdings Inc.’s Current Report on Form 8-K filed on January 14, 2014).
 
 
 
31.1

 
Certificate of James E. Meyer, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
31.2

 
Certificate of David J. Frear, Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
32.1

 
Certificate of James E. Meyer, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
32.2

 
Certificate of David J. Frear, Executive Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
 
101.1

 
The following financial information from Sirius XM Holdings Inc. and Sirius XM Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2014 and 2013; (ii) Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013; (iii) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2014 (Unaudited); (iv) Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2014 and 2013; and (v) Combined Notes to Consolidated Financial Statements (Unaudited).
 ____________________
*    This document has been identified as a management contract or compensatory plan or arrangement.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.


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