UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
 
FORM 10-Q
_________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

Commission file number 0-24710

_________________

SIRIUS SATELLITE RADIO INC.
(Exact name of registrant as specified in its charter)

_________________
 Delaware   52-1700207
(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)

212-584-5100
(Registrant’s telephone number, including area code)

            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 S   No £

            Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

  Yes S   No £

            Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $0.001 par value
(Class)
  1,331,477,962 shares
(Outstanding as of November 4, 2005)
     

 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
  
   
Page
Part I—Financial Information
     
           
Item 1.   Consolidated Statements of Operations for the three and nine months ended
      September 30, 2005 and 2004 (Unaudited)
  1  
    Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and
      December 31, 2004
  2  
    Consolidated Statement of Stockholders’ Equity for the nine months ended
      September 30, 2005 (Unaudited)
  3  
    Consolidated Statements of Cash Flows for the nine months ended
      September 30, 2005 and 2004 (Unaudited)
  4  
    Notes to Consolidated Financial Statements (Unaudited)   5  
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   15  
Item 3.   Quantitative and Qualitative Disclosures About Market Risks   32  
Item 4.   Controls and Procedures   32  
  
  
Part II—Other Information
     
  
Item 6.   Exhibits   33  
    Signatures   34  
           


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
      For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
 
 
 
      2005   2004   2005   2004  
 
 
 
 
 
Revenue:                            
   Subscriber revenue, including effects of mail-in rebates     $ 64,273   $ 18,025   $ 155,799   $ 40,177  
   Advertising revenue, net of agency fees       1,508     249     3,094     399  
   Equipment revenue       1,030     823     3,300     1,013  
   Other revenue       20     19     48     48  
 
 
 
 
 
Total revenue       66,831     19,116     162,241     41,637  
Operating expenses:                            
   Cost of services (excludes depreciation shown separately below):                            
       Satellite and transmission       7,228     7,620     20,709     24,215  
       Programming and content       23,542     18,732     63,589     37,550  
       Customer service and billing       9,416     5,329     26,646     13,718  
       Cost of equipment       1,453     1,146     4,381     1,615  
   Sales and marketing       38,181     42,645     107,543     103,670  
   Subscriber acquisition costs       68,675     47,066     204,461     108,758  
   General and administrative       13,966     11,808     42,918     31,009  
   Engineering, design and development       9,784     10,444     33,232     22,090  
   Depreciation       24,559     23,811     73,640     71,082  
   Equity granted to third parties and employees(1)       36,946     17,752     116,882     47,660  
 
 
 
 
 
Total operating expenses       233,750     186,353     694,001     461,367  
 
 
 
 
 
       Loss from operations       (166,919 )   (167,237 )   (531,760 )   (419,730 )
Other income (expense):                            
   Interest and investment income       7,645     2,291     16,922     5,906  
   Interest expense       (13,693 )   (5,267 )   (28,219 )   (34,235 )
   Loss from redemption of debt       (6,214 )       (6,214 )    
   Income (expense) from affiliate       (739 )       (739 )    
   Other income       30     1,340     82     1,411  
 
 
 
 
 
Total other income (expense)       (12,971 )   (1,636 )   (18,168 )   (26,918 )
 
 
 
 
 
   Loss before income taxes       (179,890 )   (168,873 )   (549,928 )   (446,648 )
   Income tax expense       (560 )   (560 )   (1,680 )   (3,641 )
 
 
 
 
 
       Net loss     $ (180,450 ) $ (169,433 ) $ (551,608 ) $ (450,289 )
 
 
 
 
 
Net loss per share (basic and diluted)     $ (0.14 ) $ (0.14 ) $ (0.42 ) $ (0.37 )
 
 
 
 
 
Weighted average common shares outstanding (basic and diluted)       1,328,458     1,236,845     1,322,399     1,230,149  
 
 
 
 
 
                             
(1) Allocation of equity granted to third parties and employees to other operating expenses:                  
          Satellite and transmission     $ 467   $ 202   $ 1,455   $ 797  
          Programming and content       4,855     5,520     14,793     8,397  
          Customer service and billing       140     53     405     185  
          Sales and marketing       9,642     6,246     30,348     21,629  
          Subscriber acquisition costs       12,354     3,030     31,115     7,097  
          General and administrative       6,137     2,159     21,746     7,415  
          Engineering, design and development       3,351     542     17,020     2,140  
 
 
 
 
 
              Total equity granted to third parties and employees     $ 36,946   $ 17,752   $ 116,882   $ 47,660  
 
 
 
 
 

See Notes to Unaudited Consolidated Financial Statements.

1


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
 
      September 30, 2005   December 31, 2004
 
     
 
 
      (Unaudited)        
A S S E T S                
Current assets:    
   Cash and cash equivalents     $ 810,333   $ 753,891  
   Marketable securities       124,050     5,277  
   Prepaid expenses       20,546     12,956  
   Restricted investments       25,165     4,706  
   Other current assets       52,799     34,210  


       Total current assets       1,032,893     811,040  
Property and equipment, net       822,004     881,280  
FCC license       83,654     83,654  
Restricted investments, net of current portion       67,450     92,615  
Deferred financing fees       17,333     13,140  
Other long-term assets       69,055     75,884  


       Total assets     $ 2,092,389   $ 1,957,613  


     
L I A B I L I T I E S  A N D  S T O C K H O L D E R S ’  E Q U I T Y
               
Current liabilities:                
   Accounts payable and accrued expenses     $ 218,420   $ 182,933  
   Accrued interest       12,075     5,758  
   Deferred revenue       149,896     80,823  


   Total current liabilities       380,391     269,514  
Long-term debt       1,096,789     656,274  
Deferred revenue, net of current portion       28,541     15,691  
Other long-term liabilities       11,862     15,501  


       Total liabilities       1,517,583     956,980  
Stockholders’ equity:                
   Common stock, $0.001 par value: 2,500,000,000 shares authorized,
       1,330,777,459 and 1,276,922,634 shares issued and outstanding at
       September 30, 2005 and December 31, 2004, respectively
      1,331     1,277  
   Additional paid-in capital       3,025,800     2,916,199  
   Deferred compensation       (34,861 )   (50,963 )
   Accumulated other comprehensive loss           (24 )
   Accumulated deficit       (2,417,464 )   (1,865,856 )


       Total stockholders’ equity       574,806     1,000,633  


       Total liabilities and stockholders’ equity     $ 2,092,389   $ 1,957,613  


See Notes to Unaudited Consolidated Financial Statements.

2


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share amounts)
(Unaudited)
 
            Common Stock     Additional
Paid-In
Capital
    Deferred
Compensation
    Accumulated
Other
Comprehensive
Loss
    Accumulated
Deficit
    Total
   

Shares   Amount
     
 
 
 
 
 
 
 
Balances, December 31, 2004       1,276,922,634   $ 1,277   $ 2,916,199   $ (50,963 ) $ (24 ) $ (1,865,856 ) $ 1,000,633  
Net loss                           (551,608 )   (551,608 )
Change in unrealized gain on available-
   for-sale securities
                      24         24  
             
 
Total comprehensive loss             $ (551,584 )
             
 
Issuance of common stock to employees
   and employee benefit plans
      2,740,297     3     3,151                 3,154  
Issuance of common stock to third parties       38,580         360                 360  
Compensation in connection with the
   issuance of stock-based awards
              1,354                 1,354  
Issuance of stock-based awards               17,706     (17,706 )            
Cancellation of stock-based awards               (818 )   818              
Amortization of deferred compensation                   32,990             32,990  
Equity granted to third parties               74,604                 74,604  
Exercise of options, $0.67 to $5.17 per
    share
      8,088,194     8     11,110                 11,118  
Exchange of 3½% Convertible Notes due
   2008, including accrued interest
      1,597,826     2     2,175                 2,177  
Exercise of warrants, $0.92 to $2.392
   per share
      41,389,928     41     (41 )                
 
 
 
 
 
 
 
 
Balances, September 30, 2005       1,330,777,459   $ 1,331   $ 3,025,800   $ (34,861 ) $   $ (2,417,464 ) $ 574,806  
 
 
 
 
 
 
 
 

See Notes to Unaudited Consolidated Financial Statements.

3


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
For the Nine Months
Ended September 30,

2005 2004
 
 
 
Cash flows from operating activities:            
     Net loss $ (551,608 ) $ (450,289 )
     Adjustments to reconcile net loss to net cash used in operating activities:            
         Depreciation   73,640     71,082  
         Non-cash interest expense   2,365     21,168  
         Non-cash loss from redemption of debt   712      
         Loss on disposal of property and equipment   286     19  
         Equity granted to third parties and employees   116,882     47,660  
         Deferred income taxes   1,680     3,641  
     Changes in operating assets and liabilities:            
         Marketable securities   16     (92 )
         Prepaid expenses and other current assets   (26,187 )   (7,869 )
         Other long-term assets   3,131     (3,406 )
         Accrued interest   6,341     3,848  
         Accounts payable and accrued expenses   36,213     44,721  
         Deferred revenue   81,923     33,306  
         Other long-term liabilities   (3,522 )   691  
 
 
 
             Net cash used in operating activities   (258,128 )   (235,520 )
 
 
 
Cash flows from investing activities:            
     Additions to property and equipment   (17,949 )   (22,316 )
     Sales of property and equipment   65     237  
     Purchases of restricted investments   (6,291 )   (90,104 )
     Release of restricted investments   10,997      
     Purchases of available-for-sale securities   (128,700 )    
     Sales of available-for-sale securities   5,100      
     Maturities of available-for-sale securities   4,835     25,000  
 
 
 
             Net cash used in investing activities   (131,943 )   (87,183 )
 
 
 
Cash flows from financing activities:            
     Proceeds from issuance of long-term debt, net   493,005     293,600  
     Redemption of debt   (57,609 )    
     Proceeds from exercise of stock options   11,125     6,004  
     Proceeds from exercise of warrants       19,850  
     Other   (8 )   (99 )
 
 
 
             Net cash provided by financing activities   446,513     319,355  
 
 
 
Net increase (decrease) in cash and cash equivalents   56,442     (3,348 )
Cash and cash equivalents at the beginning of period   753,891     520,979  
 
 
 
Cash and cash equivalents at the end of period $ 810,333   $ 517,631  
 
 
 

See Notes to Unaudited Consolidated Financial Statements.

4


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

1. Business

            We are a provider of satellite radio service in the United States. We currently offer more than 120 channels-65 channels of commercial-free music and over 55 channels of sports, news, talk, entertainment, traffic and weather programming for a monthly subscription fee of $12.95. We offer discounts for pre-paid, long-term and multiple subscriptions.

            Since inception, we have used substantial resources to develop our satellite radio system. Our satellite radio system consists of our FCC license, satellites, national broadcast studio, terrestrial repeater network, satellite uplink facility and satellite telemetry, tracking and control facilities. On July 1, 2002, we launched our service nationwide.

            As of September 30, 2005, we had 2,173,920 subscribers as compared with 1,143,258 subscribers as of December 31, 2004 and 662,289 subscribers as of September 30, 2004. Our subscriber totals include subscribers under our regular pricing plans, as well as subscribers currently in promotional periods; subscribers that have prepaid, including payments from automakers for prepaid bundled subscriptions included in the sale or lease price of a new vehicle; and active SIRIUS radios under our agreement with Hertz.

            Our primary source of revenue is subscription fees. We also derive revenues from activation fees, the sale of advertising on our non-music channels and the direct sale of SIRIUS radios and accessories.

2. Principles of Consolidation and Basis of Presentation

            The accompanying unaudited consolidated financial statements of Sirius Satellite Radio Inc. and its subsidiary have been prepared in accordance with U.S. generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. All intercompany transactions have been eliminated in consolidation.

            In presenting unaudited consolidated financial statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Actual results could differ from those estimates. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the consolidated financial statements as of September 30, 2005 and December 31, 2004, and for the three and nine months ended September 30, 2005 and 2004, have been recorded. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the full year. Our unaudited consolidated financial statements should be read together with our consolidated financial statements and footnotes contained in our Annual Report on Form 10-K for the year ended December 31, 2004.

3. Summary of Significant Accounting Policies

            Stock-Based Compensation

            We have adopted the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123.” The measure of fair value most often employed under SFAS No. 123, “Accounting for Stock-Based Compensation,” and used by us, is the Black-Scholes option valuation model (“Black-Scholes”). Black-Scholes was developed for use in estimating the fair market value of traded options, which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because our stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective assumptions can materially affect the fair market value estimate, in our opinion, the existing option valuation models do not necessarily provide a reliable single measure of the fair value of our stock-based awards.

5


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

            The following table illustrates the effect on net loss and net loss per share had stock-based compensation for employees been recorded based on the fair value method under SFAS No. 123:

For the Three Months
Ended September 30,
For the Nine Months
Ended September 30,


2005 2004 2005 2004




Net loss—as reported $ (180,450 ) $ (169,433 ) $ (551,608 ) $ (450,289 )
Stock-based compensation to employees— included in equity
   granted to third parties and employees
  11,027     4,967     38,331     17,828  
Stock-based compensation to employees—pro forma   (22,066 )   (9,821 )   (72,617 )   (41,697 )
 
 
 
 
 
Net loss—pro forma $ (191,489 ) $ (174,287 ) $ (585,894 ) $ (474,158 )
 
 
 
 
 
Net loss per share:                        
     Basic and diluted—as reported $     (0.14 ) $     (0.14 ) $     (0.42 ) $     (0.37 )
     Basic and diluted—pro forma $     (0.14 ) $     (0.14 ) $     (0.44 ) $     (0.39 )

            The pro forma stock-based compensation to employees was estimated using Black-Scholes with the following assumptions for each period:

    For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
   
 
    2005   2004   2005   2004
   
 
 
 
  Risk-free interest rate 4.12 %   4.12 %   4.05 %   3.83 %
  Expected life of options—years 5.59     6.49     5.54     5.77  
  Expected stock price volatility 112 %   110 %   112 %   112 %
  Expected dividend yield N/A     N/A     N/A     N/A  
   
  Research and Development Costs

            Research and development costs are expensed as incurred. Research and development costs for the three months ended September 30, 2005 and 2004 were $6,291 and $5,661, respectively, and $22,119 and $15,702 for the nine months ended September 30, 2005 and 2004, respectively. These costs are included in engineering, design and development expenses in our accompanying unaudited consolidated statements of operations.

  Net (Loss) Income Per Share

            We compute net (loss) income per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic net (loss) income per share is calculated using the weighted average common shares outstanding during each reporting period. Diluted net (loss) income per share adjusts the weighted average 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. Common stock equivalents of approximately 239,000,000 and 235,000,000 for the three and nine months ended September 30, 2005, respectively, and 175,000,000 and 172,000,000 for the three and nine months ended September 30, 2004, respectively, were not considered in the calculation of diluted net loss per share as the effect would have been anti-dilutive.

  Comprehensive (Loss) Income

            We report comprehensive (loss) income in accordance with SFAS No. 130, “Reporting Comprehensive Income.” SFAS No. 130 established a standard for reporting and displaying other comprehensive (loss) income and its components within financial statements. Unrealized gains and losses on available-for-sale securities are the only component of our other comprehensive loss. Comprehensive loss for the three months ended September 30, 2005 and 2004 was $180,450 and $169,432, respectively, and $551,584 and $450,340 for the nine months ended September 30, 2005 and 2004, respectively.

6


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

            Marketable Securities

            We account for marketable securities in accordance with the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Marketable securities consist of United States government notes, certificates of deposit and auction rate securities. We classify our marketable securities as available-for-sale securities. Available-for-sale securities are carried at fair market value. Unrealized gains and losses are included as a component of stockholders’ equity. Realized gains and losses, dividends and interest income, including amortization of the premium and discount arising at purchase, are included in interest and investment income. While the underlying securities of auction rate securities have contractual maturities of more than 20 years, the interest rates on such securities reset at intervals of 28 or 35 days. Therefore, these auction rate securities are priced and subsequently trade as short-term investments because of such interest rate reset feature.

            We received proceeds from sales and/or maturities of marketable securities of $9,935 and $25,000 for the nine months ended September 30, 2005 and 2004, respectively. There were no unrealized holding gains or losses on marketable securities as of September 30, 2005. We had unrealized holding losses on marketable securities of $24 as of December 31, 2004.

  Restricted Investments

            Restricted investments consist of United States government notes, certificates of deposit and money market funds. As of September 30, 2005 and December 31, 2004, long-term restricted investments were $67,450 and $92,615, respectively, and short-term restricted investments were $25,165 and $4,706, respectively. Long-term restricted investments for both periods primarily included certificates of deposit for the escrow fund in connection with our National Football League (“NFL”) agreement which are invested under our direction and will be drawn by the NFL to pay the rights fees due for certain NFL seasons and certificates of deposits for amounts pledged to secure our reimbursement obligations under letters of credit issued for the benefit of the lessor of our headquarters. As of September 30, 2005, short-term restricted investments included certificates of deposit to pay the rights fees due for the 2006-2007 NFL season. As of December 31, 2004, short-term restricted investments included monies deposited in escrow to secure our obligation to reimburse Ford for certain costs incurred in connection with the introduction of SIRIUS radios as a factory option. This escrow for Ford was terminated in June 2005.

  Recently Issued Accounting Pronouncements

            In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R revises SFAS No. 123 and supersedes Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees.” In April 2005, the SEC announced SFAS No. 123R would be effective no later than the first fiscal year beginning after June 15, 2005. We will adopt the provisions of SFAS No. 123R effective January 1, 2006.

            SFAS No. 123R requires all share-based payments to employees to be recognized in the financial statements based on fair value. We currently account for share-based payments to employees using APB No. 25’s intrinsic value method. We will be required to follow a fair value approach, such as the Black-Scholes or lattice option valuation models, at the date of a stock-based award grant. SFAS No. 123R permits one of two methods of adoption: (1) modified prospective method or (2) modified retrospective method. We plan to adopt SFAS No. 123R using the modified prospective method. This method requires that we recognize compensation expense for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remain unvested on January 1, 2006. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including guidance related to share-based payment transactions with non-employees, expected volatility, expected term and the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS No. 123R.

            The adoption of SFAS No. 123R is expected to have a material impact on our equity granted to third parties and employees expense included in our consolidated statements of operations in future periods. The actual impact will depend on levels and terms of future share-based

7


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

payments granted, as well as other variables. Had we adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per share in Note 3 to our unaudited consolidated financial statements.

Reclassifications

            Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation.

4. Subscriber Revenue

            Subscriber revenue consists of subscription fees, non-refundable activation fees and the effects of mail-in rebates. Revenues received from automakers for prepaid subscriptions included in the sale or lease price of a new vehicle are also included in subscriber revenue over the service period.

            Subscriber revenue consists of the following:

    For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
   
 
 
    2005   2004   2005   2004  
   
 
 
 
 
  Subscription fees $  63,920   17,550   154,575   40,475  
  Activation fees   1,858     571     4,742     1,302  
  Effect of mail-in rebates   (1,505 )   (96 )   (3,518 )   (1,600 )
   
 
 
 
 
          Total subscriber revenue 64,273   18,025   155,799   $  40,177  
   
 
 
 
 

5. Supplemental Cash Flow Disclosures

            The following represents supplemental cash flow information:

For the Nine Months
Ended September 30,

2005 2004


Cash paid for interest $ 19,511   $ 9,359  
Supplemental non-cash operating activities:            
     Common stock issued in satisfaction of accrued compensation   2,557     913  
Supplemental non-cash investing and financing activities:            
     Common stock issued to the NFL       40,967  
     Common stock issued in exchange of 3½% Convertible Notes due 2008, including
       accrued interest
  2,177     86,568  

8


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

6. Long-Term Debt

            Our long-term debt consists of the following:

Conversion
Price
(per share)
As of

September 30,
2005
December 31,
2004
   
 
 
 
  9 5/8% Senior Notes due 2013 $ N/A   $ 500,000   $  
  3¼% Convertible Notes due 2011   5.30     230,000     230,000  
  2½% Convertible Notes due 2009   4.41     300,000     300,000  
  3½% Convertible Notes due 2008   1.38     65,045     67,250  
  8¾% Convertible Subordinated Notes due 2009   28.4625     1,744     1,744  
  14½% Senior Secured Notes due 2009   N/A         28,080  
  15% Senior Secured Discount Notes due 2007   N/A         29,200  
         
 
 
        Total long-term debt       $ 1,096,789   $ 656,274  
         
 
 

            9 5/8% Senior Notes due 2013

            In August 2005, we issued $500,000 in aggregate principal amount of our 9 5/8% Senior Notes due 2013 resulting in net proceeds of $493,005. Our 9 5/8% Senior Notes due 2013 mature on August 1, 2013 and interest is payable semi-annually on February 1 and August 1 of each year. The obligations under our 9 5/8% Senior Notes due 2013 are not secured by any of our assets.

           In September 2005, we redeemed our outstanding 15% Senior Secured Discount Notes due 2007 and our 14½% Senior Secured Notes due 2009, including accrued interest. We recognized a loss from redemption of debt of $6,214 in connection with this redemption, including a redemption premium of $5,502 and the write-off of unamortized debt issuance costs of $712. The obligations under our 15% Senior Secured Discount Notes due 2007 and 14½% Senior Secured Notes due 2009 were secured by liens on certain of our assets which were released in connection with the redemption of the notes.

            3¼% Convertible Notes due 2011

            In October 2004, we issued $230,000 in aggregate principal amount of our 3¼% Convertible Notes due 2011 resulting in net proceeds of $224,813. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 188.6792 shares of common stock for each $1,000.00 principal amount, or $5.30 per share of common stock, subject to certain adjustments. Our 3¼% Convertible Notes due 2011 mature on October 15, 2011 and interest is payable semi-annually on April 15 and October 15 of each year. The obligations under our 3¼% Convertible Notes due 2011 are not secured by any of our assets.

            2½% Convertible Notes due 2009

            In February 2004, we issued $250,000 in aggregate principal amount of our 2½% Convertible Notes due 2009 resulting in net proceeds of $244,625. In March 2004, we issued an additional $50,000 in aggregate principal amount of our 2½% Convertible Notes due 2009 pursuant to an option granted in connection with the initial offering of the notes, resulting in net proceeds of $48,975. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 226.7574 shares of common stock for each $1,000.00 principal amount, or $4.41 per share of common stock, subject to certain adjustments. Our 2½% Convertible Notes due 2009 mature on February 15, 2009 and interest is payable semi-annually on February 15 and August 15 of each year. The obligations under our 2½% Convertible Notes due 2009 are not secured by any of our assets.

9


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

            3½% Convertible Notes due 2008

            In May 2003, we issued $201,250 in aggregate principal amount of our 3½% Convertible Notes due 2008 resulting in net proceeds of $194,224. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 724.6377 shares of common stock for each $1,000.00 principal amount, or $1.38 per share of common stock, subject to certain adjustments. Our 3½% Convertible Notes due 2008 mature on June 1, 2008 and interest is payable semi-annually on June 1 and December 1 of each year. The obligations under our 3½% Convertible Notes due 2008 are not secured by any of our assets.

            During the nine months ended September 30, 2005, we issued 1,597,826 shares of our common stock in exchange for $2,177 in aggregate principal amount of our 3½% Convertible Notes due 2008, including accrued interest. In January 2004, we issued 56,409,853 shares of our common stock in exchange for $69,000 in aggregate principal amount of our 3½% Convertible Notes due 2008, including accrued interest. We recorded debt conversion costs of $19,592 for the nine months ended September 30, 2004. No debt conversion costs were recognized for the three and nine months ended September 30, 2005.

7. Stockholders’ Equity

            Common Stock, par value $0.001 per share

            We are authorized to issue 2,500,000,000 shares of our common stock. As of September 30, 2005, approximately 500,946,000 shares of our common stock were reserved for issuance in connection with outstanding convertible debt, warrants and incentive stock plans.

            During the nine months ended September 30, 2005, employees exercised 8,088,194 stock options at exercise prices ranging from $0.67 to $5.17 per share, resulting in proceeds to us of $11,118.

            In January 2004, we signed a seven-year agreement with the NFL. We delivered to the NFL 15,173,070 shares of our common stock valued at $40,967 upon execution of this agreement. These shares of common stock are subject to transfer restrictions which lapse over time. We recognized expense associated with these shares of $1,641 during each of the three months ended September 30, 2005 and 2004, and $3,501 and $1,933 during the nine months ended September 30, 2005 and 2004, respectively. Of the remaining $33,181 in common stock value, $5,852 and $27,329 are included in other current assets and other long-term assets, respectively, on our accompanying unaudited consolidated balance sheet as of September 30, 2005.

            Warrants

            In June 2004, we issued DaimlerChrysler AG warrants to purchase up to 21,500,000 shares of our common stock at an exercise price of $1.04 per share. These warrants vest based on the achievement of various performance milestones, including the volume thresholds contained in our agreement with DaimlerChrysler. These warrants replaced warrants issued to DaimlerChrysler AG in October 2002.

            In February 2004, we announced an agreement with RadioShack Corporation to distribute, market and sell SIRIUS radios. In connection with this agreement, we issued RadioShack warrants to purchase up to 10,000,000 shares of our common stock. These warrants have an exercise price of $5.00 per share and vest and become exercisable if RadioShack achieves activation targets during the five-year term of the agreement.

            In January 2004, we signed an agreement with Penske Automotive Group, Inc., United Auto Group, Inc., Penske Truck Leasing Co. L.P. and Penske Corporation (collectively, the “Penske companies”). In connection with this agreement, we agreed to issue the Penske companies warrants to purchase up to 38,000,000 shares of our common stock at an exercise price of $2.392 per share. Two million of these warrants vested upon issuance. The balance of these warrants vest over time and upon achievement of certain milestones by the Penske companies. During the nine months ended September 30, 2005, Penske exercised 2,700,000 vested warrants in a series of cashless exercises. In connection with these transactions, we issued 1,851,423 shares of our common stock.

            In January 2004, we issued the NFL warrants to purchase 50,000,000 shares of our common stock at an exercise price of $2.50 per share. Of these warrants, 16,666,665 vest upon the delivery to us of media assets by the

10


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

NFL and its member clubs, and 33,333,335 of these warrants will be earned by the NFL or its member clubs as we acquire subscribers which are directly trackable through their efforts.

            In March 2003, we issued warrants to purchase 45,416,690 shares of our common stock in exchange for all of our outstanding 9.2% Series A Junior Cumulative Convertible Preferred Stock and 9.2% Series B Junior Cumulative Convertible Preferred Stock held by affiliates of Apollo Management, L.P. (“Apollo”). Apollo exercised all of these warrants prior to their expiration on March 7, 2005 in a series of cashless exercises. In connection with these transactions, we issued 39,538,505 shares of our common stock.

            Warrants to acquire shares of our common stock were outstanding as follows (shares in thousands):

Average
Exercise
Price
Expiration
Date
Number of Warrants
Outstanding as of

September 30,
2005
December 31,
2004
 
 
 
 
 
NFL $ 2.50   March 2008–March 2010     50,000     50,000  
Apollo   0.99   March 2005         45,417  
Penske companies   2.392   July 2009     35,300     38,000  
DaimlerChrysler   1.04   May 2012     21,500     21,500  
RadioShack   5.00   December 2010     10,000     10,000  
Ford   3.00   September 2011     4,000     4,000  
Other distribution and programming partners   3.16   January 2008—June 2014     9,133     9,363  
Other   20.33   June 2005—April 2011     4,533     6,333  
           
 
 
  Total $ 3.08         134,466     184,613  
           
 
 

            We recognized expense of $22,763 and $7,960 in connection with warrants for the three months ended September 30, 2005 and 2004, respectively, and $68,787 and $23,339 for the nine months ended September 30, 2005 and 2004, respectively.

8. Benefit Plans

            In January 2003, our board of directors adopted the Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan (the “2003 Plan”), and on March 4, 2003 our stockholders approved this plan. On May 25, 2004, our stockholders approved an amendment to the 2003 Plan to include members of our board of directors as eligible participants. Employees, consultants and members of our board of directors are eligible to receive awards under the 2003 Plan. The 2003 Plan provides for the grant of stock options, restricted stock, 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 2003 Plan are generally subject to a vesting requirement that includes one or all of the following: (1) over time, generally three to five years from the date of grant; (2) on a specific date in future periods, with acceleration to earlier periods if performance criteria are satisfied; or (3) as certain performance targets set at the time of grant are achieved. Stock-based awards generally expire ten years from the date of grant. Each restricted stock unit entitles the holder to receive one share of our common stock upon vesting.

            As of September 30, 2005, approximately 113,134,000 stock options, shares of restricted stock and restricted stock units were outstanding. As of September 30, 2005, approximately 94,221,000 shares of our common stock were available for grant under the 2003 Plan.

  Stock Options

            During the nine months ended September 30, 2005, we granted 3,245,817 non-qualified stock options at fair market value on the date of grant with an average exercise price of $6.20 per share.

11


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

            We recorded additional deferred compensation of $207 during the nine months ended September 30, 2005 in connection with stock options granted. As of September 30, 2005 and December 31, 2004, we had $3,164 and $7,363, respectively, of deferred compensation in connection with stock options granted to employees below fair market value at the date of grant and stock options granted to members of our board of directors. Such deferred compensation is being amortized to expense over the vesting period. We also record expense for stock options granted to consultants based on fair value at the date of grant as determined in accordance with SFAS No. 123. We recognized stock compensation expense associated with stock options of $2,589 and $4,734 for the three months ended September 30, 2005 and 2004, respectively, and $11,297 and $12,048 for the nine months ended September 30, 2005 and 2004, respectively. Stock compensation expense associated with stock options for the nine months ended September 30, 2005 included a charge of $479 for an employee that was deemed to benefit from the modification of a stock-based award resulting in a new measurement date. Expense associated with stock options is recorded as a component of equity granted to third parties and employees in our accompanying unaudited consolidated statements of operations.

  Restricted Stock Units and Restricted Stock

During the nine months ended September 30, 2005, we granted 1,870,875 restricted stock units with a grant date fair value of $6.32 per share.

            In November 2004, we granted 3,000,000 shares of restricted common stock. The restrictions applicable to these shares lapse in equal installments on November 18 of each of the next five years beginning on November 18, 2005.

            We recorded additional deferred compensation of $17,499 during the nine months ended September 30, 2005 in connection with restricted stock units granted. As of September 30, 2005 and December 31, 2004, we had $31,697 and $43,600, respectively, of deferred compensation associated with restricted stock and restricted stock units. Such deferred compensation is being amortized to expense over the vesting period and is recorded as a component of equity granted to third parties and employees in our accompanying unaudited consolidated statements of operations. We recognized stock compensation expense associated with these restricted stock units and shares of restricted stock of $7,862 and $3,231 for the three months ended September 30, 2005 and 2004, respectively, and $26,958 and $9,790 for the nine months ended September 30, 2005 and 2004, respectively. For the three and nine months ended September 30, 2005, we also recognized stock compensation expense of $811 and $2,422, respectively, for restricted stock units expected to be granted in February 2006 for services performed in 2005.

  401(k) Savings Plan

            We sponsor the Sirius Satellite Radio 401(k) Savings Plan (the “Plan”) for eligible employees. The Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax salary subject to certain defined limits. Currently we match 50% of employee voluntary contributions, up to 6% of an employee’s pre-tax salary, in the form of shares of our common stock. Our matching contribution vests at a rate of 33 1/3% for each year of employment and is fully vested after three years of employment. Expense resulting from our matching contribution to the Plan was $162 and $186 for the three months ended September 30, 2005 and 2004, respectively, and $710 and $550 for the nine months ended September 30, 2005 and 2004, respectively.

            We may also elect to contribute to the profit sharing portion of the Plan based upon the total compensation of all participants eligible to receive an allocation. These additional contributions, referred to as profit-sharing contributions, are determined by the compensation committee of our board of directors. Employees are only eligible to receive profit-sharing contributions during any year in which they are employed on the last day of the year. Profit-sharing contribution expense was $1,118 and $3,207 for the three and nine months ended September 30, 2005, respectively.

9. Income Taxes

            We recorded income tax expense of $560 for each of the three months ended September 30, 2005 and 2004 and $1,680 and $3,641 for the nine months ended September 30, 2005 and 2004, respectively. Such expense

12


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

represents the recognition of a deferred tax liability related to the difference in accounting for our FCC license, which is amortized over 15 years for tax purposes but not amortized for book purposes.

10. Commitments and Contingencies

            We have entered into various contracts, which have resulted in significant cash obligations in future periods. The following table summarizes our expected contractual cash commitments as of September 30, 2005:

    Remaining
2005
  2006   2007   2008   2009   Thereafter   Total  
   
 
 
 
 
 
 
 
Lease obligations   $ 2,092   $ 8,488   $ 7,764   $ 7,569   $ 7,527   $ 33,258   $ 66,698  
Satellite and transmission     855     3,335     3,155     3,155     3,155     15,027     28,682  
Programming and content     14,939     129,252     99,050     100,207     127,002     149,951     620,401  
Customer service and billing     660     5,674     3,138                 9,472  
Marketing and distribution     33,902     63,060     21,959     9,470     13,750     22,875     165,016  
Chip set development and
   production
    22,020     9,281     3,000                 34,301  
   
 
 
 
 
 
 
 
     Total contractual cash
       commitments
  $ 74,468   $ 219,090   $ 138,066   $ 120,401   $ 151,434   $ 221,111   $ 924,570  
   
 
 
 
 
 
 
 
   
  Lease Obligations

            We have entered into operating leases related to our national broadcast studio, office space, terrestrial repeaters and equipment.

  Satellite and Transmission

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

  Programming and Content

            We have entered into agreements with licensors of programming and other content providers and, in certain instances, are obligated to pay license fees and guarantee minimum advertising revenue share. In addition, we have agreements with various rights organizations pursuant to which we pay royalties for public performances of music.

  Customer Service and Billing

            We have entered into agreements with third parties to provide customer service, billing and subscriber management services.

  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. In addition, certain programming and content agreements require us to purchase advertising on properties owned or controlled by the licensors. We have also agreed to reimburse automakers for certain engineering and development costs associated with the incorporation of SIRIUS radios into vehicles they manufacture.

  Chip Set Development and Production

            We have entered into agreements with third parties to develop, produce and supply chip sets, and in certain instances to license intellectual property related to such chip sets. Certain of these agreements require that we purchase a minimum quantity of chip sets.

13


 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollar amounts in thousands, unless otherwise stated)
(Unaudited)

  Joint Development Agreement

            Under the terms of a joint development agreement with XM Radio, the other holder of a FCC satellite radio license, each party is obligated to fund one half of the development cost for a unified standard for satellite radios. The costs related to the joint development agreement are being expensed as incurred to engineering, design and development expense in our accompanying unaudited consolidated statements of operations. We are currently unable to determine the expenditures necessary to complete this process, but they may be significant.

  Other Commitments

            In addition to the contractual cash commitments described above, we have entered into agreements with automakers, radio manufacturers and others that include per-radio and per-subscriber payments and revenue share arrangements. These future costs are dependent upon many factors 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 provisions.

            We are required under the terms of certain agreements to provide letters of credit and deposit monies in escrow, which place restrictions on our cash and cash equivalents. As of September 30, 2005 and December 31, 2004, $92,615 and $97,321, respectively, were classified as restricted investments as a result of our reimbursement obligations under these letters of credit and escrow arrangements.

            As of September 30, 2005, we have not entered into any off-balance sheet arrangements or transactions.

            In September 2005, SIRIUS Canada Inc., our Canadian affiliate, received notice that Canada’s Federal Cabinet had declined to reverse a decision to issue SIRIUS Canada a license to broadcast in Canada. This decision affirmed the earlier licensing ruling of the Canadian Radio-television and Telecommunications Commission (the “CRTC”) that authorized SIRIUS Canada to offer a satellite radio service in Canada. SIRIUS Canada is a Canadian corporation owned by Canadian Broadcasting Corporation, Standard Radio Inc. and us. SIRIUS Canada anticipates offering a satellite radio service in Canada in late 2005. For the nine months ended September 30, 2005, we recorded $739 for our share of SIRIUS Canada’s net loss.

14


   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 (All dollar amounts are in thousands, unless otherwise stated)

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,” “intends,” “plans,” “projection” and “outlook.” Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout our Annual Report on Form 10-K for the year ended December 31, 2004 (the “Form 10-K”) and in other reports and documents published by us from time to time, particularly the risk factors described under “Business—Risk Factors” in Part I of the Form 10-K.

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

Ÿ the useful life of our satellites, which have experienced circuit failures on their solar arrays and other component failures and are not insured;
 
Ÿ our dependence upon third parties, including manufacturers of SIRIUS radios, retailers, automakers and programming partners; and
 
Ÿ our competitive position versus XM Radio, the other satellite radio service provider in the United States, which has substantially more subscribers than we do and may have certain competitive advantages, and versus other forms of audio and video entertainment.

            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 on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. 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 currently broadcast more than 120 channels of programming to listeners across the country. We offer 65 channels of 100% commercial-free music and feature over 55 channels of sports, news, talk, entertainment, traffic and weather for a monthly subscription fee of $12.95. We offer discounts for pre-paid, long-term and multiple subscriptions.

            Since inception, we have used substantial resources to develop our satellite radio system. Our satellite radio system consists of our FCC license, satellites, national broadcast studio, terrestrial repeater network, satellite uplink facility and satellite telemetry, tracking and control facilities. On July 1, 2002, we launched our service nationwide.

            Our primary source of revenue is subscription fees. We also derive revenue from activation fees, the sale of advertising on our non-music channels and from the direct sale of SIRIUS radios and accessories. Currently we receive an average of approximately nine months of prepaid revenue per subscriber upon activation.

            Our cost of services includes expenses for satellite and transmission, programming and content, customer service and billing, and costs associated with the sale of equipment. Satellite and transmission expenses consist of costs associated with the operation and maintenance of our satellite telemetry, tracking and control system, terrestrial repeater network, satellite uplink facility and national broadcast studio. Programming and content expenses include costs to acquire, create and produce content, on-air talent costs and broadcast royalties. Customer

15


service and billing expenses include costs associated with the operation of our customer service centers and subscriber management system.

            As of September 30, 2005, we had 2,173,920 subscribers compared with 1,143,258 subscribers as of December 31, 2004 and 662,289 subscribers as of September 30, 2004. Our subscriber totals include subscribers under our regular pricing plans, as well as subscribers currently in promotional periods; subscribers that have prepaid, including payments from automakers for prepaid subscriptions included in the sale or lease price of a new vehicle; and active SIRIUS radios under our agreement with Hertz.

            The following tables contain a breakdown of our subscribers and other metrics which we use to measure our operating performance:

Subscribers:

    As of  
   
 
    September 30,
2005
  June 30,
2005
  March 31,
2005
  December 31,
2004
  September 30,
2004
 
   
 
 
 
 
 
Retail     1,564,718     1,354,798     1,109,813     911,255     534,871  
OEM     581,988     432,988     311,324     203,469     100,261  
Hertz     27,214     26,840     27,558     28,534     27,157  
   
 
 
 
 
 
        Total subscribers     2,173,920     1,814,626     1,448,695     1,143,258     662,289  
   
 
 
 
 
 

Metrics:

  For the Three Months Ended  
 
 
  September 30,
2005
  June 30,
2005
  March 31,
2005
  December 31,
2004
  September 30,
2004
 
 
 
 
 
 
 
Gross subscriber additions—including
      Hertz subscribers
465,228   432,687   354,708   521,479   207,181  
Deactivated subscribers 105,934   66,756   49,271   40,510   25,233  
Average monthly churn(1)(5) 1.8 % 1.4 % 1.3 % 1.5 % 1.5 %
ARPU(2)(5) $ 11.15   $ 10.50   $ 10.72   $ 9.57   $ 10.84  
Subscriber acquisition costs per gross
      subscriber addition(3)(5)
$ 149   $ 160   $ 190   $ 124   $ 229  
Loss from operations, as reported $ (166,919 ) $ (174,582 ) $ (190,259 ) $ (258,574 ) $ (167,237 )
        Depreciation 24,559   24,580   24,501   24,288   23,811  
        Equity granted to third parties and employees 36,946   41,230   38,706   79,065   17,752  

 
 
 
 
Adjusted loss from operations(4)(5) $ (105,414 ) $ (108,772 ) $ (127,052 ) $ (155,221 ) $ (125,674 )

 
 
 
 
_____________
    
(1) Average monthly churn represents the number of deactivated subscribers divided by average quarterly subscribers.
    
(2) Average monthly revenue per subscriber, or ARPU, is derived from total earned subscriber revenue and net advertising revenue divided by the daily weighted average number of subscribers for the period.
    
(3) Subscriber acquisition costs per gross subscriber addition is derived from total subscriber acquisition costs and negative margins from the direct sale of SIRIUS radios and accessories divided by the number of gross subscriber additions for the period. Figures are rounded to the nearest whole dollar.
    
(4) Adjusted loss from operations represents the loss from operations before depreciation and equity granted to third parties and employees. We believe adjusted loss from operations is useful because it represents operating expenses excluding the effects of non-cash items. This measure most closely resembles EBITDA, defined as net loss before interest income, interest expense, income taxes, depreciation and amortization. EBITDA is a common financial measure used in analyzing the performance of companies.
    
(5) Average monthly churn, ARPU, subscriber acquisition costs per gross subscriber addition and adjusted loss from operations are not measures of financial performance under U.S. generally accepted accounting principles and are used by us as a measure of operating performance. As a result, these metrics 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 or as a substitute for measures of financial performance prepared in accordance with U.S. generally accepted accounting principles.

16


            Costs associated with acquiring subscribers are generally incurred and expensed in advance of acquiring a subscriber and are recognized as subscriber acquisition costs. We acquire a large percentage of our annual gross subscriber additions in the fourth quarter of our fiscal year in connection with holiday sales. As a result, our subscriber acquisition costs per gross subscriber addition are generally higher in the first three quarters of our fiscal year and decline in the fourth quarter as we experience higher activation rates.

            SIRIUS radios are primarily distributed through retailers and automakers. SIRIUS radios can be purchased at major retailers, including Best Buy, Circuit City, Crutchfield, Costco, RadioShack, Sam’s Club, Target and Wal-Mart. Sirius is also available at heavy truck dealer, truck stops and travel centers nationwide. On September 30, 2005, SIRIUS radios were available at over 25,000 retail locations. We also have agreements with Ford Motor Company (“Ford”), DaimlerChrysler Corporation (“DaimlerChrysler”), Mitsubishi Motors North America, BMW of North America, LLC, Nissan North America, Inc., Volkswagen of America, Inc. and Porsche Cars North America, Inc. that contemplate the manufacture and sale of vehicles that include SIRIUS radios. We recently extended each of our exclusive agreements with Ford, DaimlerChrysler and BMW. In October 2005, we extended our exclusive agreement with DaimlerChrysler to September 2012. This agreement includes all Chrysler Group and Mercedes-Benz vehicles as well as Freightliner trucks. In September 2005, we extended our exclusive relationship with BMW through August 2008. All BMW models are covered by the agreement. During the second quarter of 2005, we also extended our agreement with Ford through September 2011. All Ford brands in the U.S. are covered by the agreement. SIRIUS radios are also offered to renters of Hertz vehicles at many airport locations nationwide.

            We believe our ability to attract and retain subscribers depends in large part on creating and sustaining distribution channels for SIRIUS radios and on the quality and entertainment value of our programming. We expect to concentrate our future efforts on enhancing and refining our programming, whether through additional agreements with third parties or our own creative efforts; introducing SIRIUS radios with new features and functions; and expanding the distribution of SIRIUS radios through arrangements with automakers and through additional retail points-of-sale.

            In September 2005, SIRIUS Canada Inc., our Canadian affiliate, received notice that Canada’s Federal Cabinet had declined to reverse a decision to issue SIRIUS Canada a license to broadcast in Canada. This decision affirmed the earlier licensing ruling of the Canadian Radio-television and Telecommunications Commission (the “CRTC”) that authorized SIRIUS Canada to offer a satellite radio service in Canada. SIRIUS Canada is a Canadian corporation owned by Canadian Broadcasting Corporation, Standard Radio Inc. and us. SIRIUS Canada anticipates offering a satellite radio service in Canada in late 2005.

            We have principally funded our operations through the sale of debt and equity securities. In August 2005, we sold $500,000 in aggregate principal amount of our 9 5/8% Senior Notes due 2013 resulting in net proceeds of $493,005. In 2004, we raised net proceeds of $614,438 through the offering of 25,000,000 shares of our common stock, $230,000 in aggregate principal amount of our 3¼% Convertible Notes due 2011 and $300,000 in aggregate principal amount of our 2½% Convertible Notes due 2009.

          

17


Results of Operations

Three Months Ended September 30, 2005 Compared with the Three Months Ended September 30, 2004

  Total Revenue

            Subscriber Revenue. Subscriber revenue includes subscription fees, activation fees and the effects of mail-in rebates.

            As of September 30, 2005, we had 2,173,920 subscribers compared with 1,143,258 subscribers at December 31, 2004 and 662,289 subscribers as of September 30, 2004. Our subscriber totals include subscribers under our regular pricing plans, as well as subscribers currently in promotional periods; subscribers that have prepaid, including payments from automakers for subscriptions included in the sale or lease price of a new vehicle; and active SIRIUS radios under our agreement with Hertz.

            Subscriber revenue increased $46,248 to $64,273 for the three months ended September 30, 2005 from $18,025 for the three months ended September 30, 2004. The increase in subscriber revenue was attributable to the growth of subscribers to our service. We added 1,511,631 net new subscribers since September 30, 2004.

            The following table contains a breakdown of our subscriber revenue:

For the Three Months
Ended September 30,

2005 2004 Variance
 
 
 
 
Subscription fees $ 63,920   $ 17,550   $ 46,370  
Activation fees   1,858     571     1,287  
Effects of mail-in rebates   (1,505 )   (96 )   (1,409 )



     Total subscriber revenue $ 64,273   $ 18,025   $ 46,248  



            Future subscriber revenue will be dependent upon, among other things, the growth of our subscriber base, promotions and mail-in rebates offered to subscribers and the identification of additional revenue streams from subscribers.

            Advertising Revenue. Advertising revenue includes the sale of advertising on our non-music channels, net of agency fees. Agency fees are based on a stated percentage per the advertising agreements applied to gross billing revenue for our advertising inventory.

            Advertising revenue increased $1,259 to $1,508 for the three months ended September 30, 2005 from $249 for the three months ended September 30, 2004. The increase was a result of an increase in rates per spot, more spots due to new and more attractive programming and increased advertiser interest as we continue to build brand awareness.

            We expect advertising revenue to grow as our subscribers increase and we continue to improve brand awareness and content.

            ARPU. Average monthly revenue per subscriber, or ARPU, is derived from total earned subscriber revenue and net advertising revenue divided by the daily weighted average number of subscribers for the period. Set forth below is a table showing the calculation of ARPU:

For the Three
Months Ended
September 30,
 
 
  2005   2004  
 
 
 
Average monthly subscriber revenue per subscriber before effects of Hertz
   subscribers and mail-in rebates 
$ 11.08   $ 10.92  
Effects of Hertz subscribers   0.06     (0.18 )
Effects of mail-in rebates   (0.25 )   (0.05 )


Average monthly subscriber revenue per subscriber   10.89     10.69  

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Average monthly net advertising revenue per subscriber   0.26     0.15  


ARPU $ 11.15   $ 10.84  


            The increase in ARPU to $11.15 for the three months ended September 30, 2005 from $10.84 for the three months ended September 30, 2004 was primarily attributable to the effects of improvement in our Hertz program, increased advertising revenue and promotional activity in the third quarter of 2004 that provided an effective first year price of $9.99 per month for new subscribers, offset by the dilutive effects of mail-in rebates and the timing of commencement of revenue recognition for prepaid subscriptions.

            Future ARPU will be dependent upon the amount and timing of promotions, mail-in rebates offered to subscribers, the identification of additional revenue streams from subscribers and the sale of advertising on our non-music channels.

            Equipment Revenue. Equipment revenue includes revenue from the direct sale of SIRIUS radios and accessories.

            Equipment revenue increased $207 to $1,030 for the three months ended September 30, 2005 from $823 for the three months ended September 30, 2004. The increase was the result of increased sales through our direct to consumer distribution channel.

            We expect equipment revenue to increase in the future as we continue to introduce new products and as sales through our direct to consumer distribution channel grow.

  Operating Expenses

            Satellite and Transmission. Satellite and transmission expenses consist of in-orbit satellite insurance and costs associated with the operation and maintenance of our satellite telemetry, tracking and control system, terrestrial repeater network, satellite uplink facility and national broadcast studio.

            Satellite and transmission expenses decreased $392 to $7,228 for the three months ended September 30, 2005 from $7,620 for the three months ended September 30, 2004. The decrease was primarily attributable to a $737 reduction in satellite insurance costs. Effective August 2004, we discontinued our in-orbit satellite insurance. This decision was made after a review of the health of our satellite constellation; the exclusions from coverage contained in the available insurance; the costs of the available insurance; and the practices of other satellite companies as to in-orbit insurance. Such decrease was offset by increased costs associated with additions to our personnel. As of September 30, 2005, we had 140 terrestrial repeaters in operation as compared with 135 terrestrial repeaters as of September 30, 2004.

            Future increases in satellite and transmission expenses will primarily be attributable to the addition of new terrestrial repeaters and maintenance costs of existing terrestrial repeaters. In addition, such expenses may also increase in future periods if we decide to reinstate our in-orbit satellite insurance or launch new satellites.

            Programming and Content. Programming and content expenses include costs to acquire, create and produce content, on-air talent costs and broadcast royalties. We have entered into various agreements with third parties for music and non-music programming. These agreements require us to share advertising revenue, pay license fees, purchase advertising on media properties owned or controlled by the licensor and pay certain other guaranteed amounts. Purchased advertising is recorded as a sales and marketing expense in the period the advertising is broadcast.

            Programming and content expenses increased $4,810 to $23,542 for the three months ended September 30, 2005 from $18,732 for the three months ended September 30, 2004. The increase was primarily attributable to license fees associated with new content agreements; compensation related costs for additions to headcount; additional on-air talent costs due to the expansion of the programming lineup; and broadcast royalties as a result of the increase in our subscriber base.

            Our programming and content expenses will increase as we continue to develop and enhance our channels. Our agreements with Howard Stern and NASCAR beginning in 2006 and 2007, respectively, will significantly increase our programming and content expenses. We regularly evaluate programming opportunities and may choose to acquire and develop new content or renew current programming agreements in the future at substantial cost.

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            Customer Service and Billing. Customer service and billing expenses include costs associated with the operation of our customer service centers and subscriber management system.

            Customer service and billing expenses increased $4,087 to $9,416 for the three months ended September 30, 2005 from $5,329 for the three months ended September 30, 2004. The increase was primarily due to increased customer service representative costs and credit card fees necessary to support the growth of our subscriber base and telecommunications charges as a result of the expansion and growth of our call centers to accommodate our subscriber base. Customer service and billing expenses increased 77% compared with an increase in our end of period subscribers of 228%. Customer service and billing expenses per average subscriber per month declined 50% to $1.59 for the three months ended September 30, 2005 from $3.16 for the three months ended September 30, 2004.

            We expect our customer care and billing expenses to increase and our costs per subscriber to decrease on an annual basis as our subscriber base grows.

            Cost of Equipment. Cost of equipment includes costs for SIRIUS radios and accessories sold through our direct to consumer distribution channel.

            Cost of equipment increased $307 to $1,453 for the three months ended September 30, 2005 from $1,146 for the three months ended September 30, 2004. The increase was attributable to higher sales from our direct to consumer distribution channel, offset by reductions in the per unit costs of SIRIUS radios and accessories.

            We expect cost of equipment to increase in the future as we introduce new products and as sales through our direct to consumer distribution channel grow.

            Sales and Marketing. Sales and marketing expenses include advertising media and production costs and distribution costs. Advertising media and production costs primarily include promotional events, sponsorships, media, advertising production and market research. Distribution costs primarily include the costs of residuals, market development funds, revenue share and in-store merchandising. Residuals are monthly fees paid based upon the number of subscribers using a SIRIUS radio purchased from a retailer. Market development funds are fixed and variable payments to reimburse retailers and radio manufacturers for the cost of advertising and other product awareness activities.

            Sales and marketing expenses decreased $4,464 to $38,181 for the three months ended September 30, 2005 from $42,645 for the three months ended September 30, 2004. The decrease was primarily attributable to lower advertising media and production costs as a result of the expiration of certain sponsorships and higher costs incurred in 2004 for our NFL marketing campaign. Distribution costs in total remained relatively consistent, decreasing as a result of costs associated with the rollout of our sales efforts with RadioShack in the third quarter of 2004, offset by increased retail residuals and OEM revenue share in the third quarter of 2005.

            We expect sales and marketing expenses to increase as we continue to build brand awareness through national advertising and promotional activities and expand the distribution of SIRIUS radios. Beginning in 2007, our agreement with NASCAR will increase our sponsorship costs included in sales and marketing expense.

            Subscriber Acquisition Costs. Subscriber acquisition costs include hardware subsidies paid to radio manufacturers and automakers, including subsidies paid to automakers who include a SIRIUS radio and a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies paid to chip set manufacturers; and commissions paid to retailers and automakers as incentives to purchase, install and activate SIRIUS radios. The majority of subscriber acquisition costs are incurred and expensed in advance of acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of SIRIUS radios and revenue share payments to automakers and retailers of SIRIUS radios which are included in sales and marketing expense. Subscriber acquisition costs also do not include amounts capitalized in connection with our agreement with Hertz, as we retain ownership of the SIRIUS radios used by Hertz.

            Subscriber acquisition costs increased $21,609 to $68,675 for the three months ended September 30, 2005 from $47,066 for the three months ended September 30, 2004, an increase of 46%. Over the same period, gross subscriber additions increased 125% from 207,181 for the three months ended September 30, 2004 to 465,228 for the three months ended September 30, 2005. The increase in subscriber acquisition costs was attributable to subsidies for higher shipments of SIRIUS radios and chip sets to accommodate the growth of our subscriber base and commissions resulting from the increase in gross subscriber additions, offset by decreases in our average hardware and chip set subsidy rates.

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            Subscriber acquisition costs per gross subscriber addition were $149 and $229 for the three months ended September 30, 2005 and 2004, respectively. The decline was primarily attributable to the reduction in subsidy rates as we continued to reduce manufacturing and chip set costs.

            We expect total subscriber acquisition costs to increase in the future as our gross subscriber additions increase and we continue to offer subsidies, commissions and other incentives to acquire subscribers. However, we anticipate that the costs of certain subsidized components of SIRIUS radios will decrease in the future as manufacturers experience economies of scale in production and we secure additional manufacturers of these components. We expect subscriber acquisition costs per gross subscriber addition to decline in the fourth quarter of 2005, reflecting the effects of reductions in hardware subsidy rates for future generation product and the impact of inventory sell-through for holiday sales. If competitive forces require us to increase hardware subsidies or promotions, subscriber acquisition costs per gross subscriber addition could increase.

            General and Administrative. General and administrative expenses include rent and occupancy, accounting, legal, human resources, information technology and investor relations costs.

            General and administrative expenses increased $2,158 to $13,966 for the three months ended September 30, 2005 from $11,808 for the three months ended September 30, 2004. The increase was primarily attributable to additional personnel-related costs to support the growth of our business and bad debt expense. The increase was offset in part by a decrease in consulting fees.

            We expect our general and administrative expenses to increase in future periods for personnel-related, services and facility costs to support our growth.

            Engineering, Design and Development. Engineering, design and development expenses include costs to develop our future generation of chip sets and new products and costs associated with the incorporation of SIRIUS radios into vehicles manufactured by automakers.

            Engineering, design and development expenses decreased $660 to $9,784 for the three months ended September 30, 2005 from $10,444 for the three months ended September 30, 2004. The decline was primarily attributable to decreased chip set development costs, offset by product development costs for our next generation of radios.

            We expect our engineering, design and development expenses to increase in future periods as automakers continue their efforts to incorporate SIRIUS radios across a broader range of their vehicles and as we develop future generations of chip sets and new products and services.

            Equity Granted to Third Parties and Employees. Equity granted to third parties and employees expense includes the costs associated with warrants, stock options, restricted stock, restricted stock units and other stock-based awards granted to third parties pursuant to programming, sales and marketing and distribution agreements; employees; members of our board of directors; consultants; and employee benefit plans.

            Equity granted to third parties and employees expense for warrants increased $14,803 to $22,763 for the three months ended September 30, 2005 from $7,960 for the three months ended September 30, 2004. This increase was primarily attributable to expense accrued based on certain distribution partners’ performance toward achieving eligible vehicle, subscriber activation and delivery milestones and as a result of increases in the fair market value of our stock. Expense associated with warrants that have not yet vested may change in future periods as a result of price changes in our common stock.

            Equity granted to third parties and employees expense for stock options, restricted stock, restricted stock units and other stock-based awards increased $4,391 to $12,542 for the three months ended September 30, 2005 from $8,151 for the three months ended September 30, 2004. The increase was primarily attributable to expense associated with restricted stock units which accelerate to earlier periods as performance targets for fiscal periods are met, new grants of restricted stock units and modifications of existing stock-based awards. The remaining increase was primarily related to expense accrued for 2005 profit sharing and restricted stock units granted, or that we expect to grant, for services performed in 2004 and 2005, respectively.

            Equity granted to third parties and employees expense for the three months ended September 30, 2005 and 2004 also included $1,641 of expense associated with the 15,173,070 shares of our common stock granted to the NFL.

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            Future expense associated with equity granted to third parties and employees is contingent upon a number of factors, including the amount of stock-based awards granted, the price of our common stock, valuation assumptions, vesting provisions and the timing as to when certain performance criteria are met, and could materially change. Beginning January 1, 2006, we are required to adopt Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment.” We plan to adopt SFAS No. 123R using the modified prospective method. This method requires that we recognize compensation expense for all share-based payments granted on or after January 1, 2006 and for all awards granted to employees prior to January 1, 2006 that remain unvested on January 1, 2006. The adoption of SFAS No. 123R is expected to have a material impact on our equity granted to third parties and employees expense included in our consolidated statements of operations, although such impact cannot be quantified at this time because it will depend on share-based payments granted in the future.

  Other Income (Expense)

            Interest and Investment Income. Interest and investment income includes interest on our cash and cash equivalents, marketable securities, and restricted investments and net gains or losses on the sale of marketable securities.

            Interest and investment income increased $5,354 to $7,645 for the three months ended September 30, 2005 from $2,291 for the three months ended September 30, 2004. The increase was primarily attributable to the increase in our average cash, cash equivalents and marketable securities balance resulting from funds raised through offerings of debt securities and an increase in the average interest rate.

            Interest Expense. Interest expense includes interest on outstanding debt and debt conversion costs. Debt conversion costs represent the loss associated with debt exchanged and are calculated as the difference between the fair market value of additional shares issued in excess of the fair market value of the amount of shares that would have been issued under original conversion ratios.

            Interest expense increased $8,426 to $13,693 for the three months ended September 30, 2005 from $5,267 for the three months ended September 30, 2004. The increase was primarily due to the issuance of our 9 5/8 % Senior Notes due 2013 in August 2005 and our 3¼% Convertible Notes due 2011 in October 2004.

            Loss from Redemption of Debt. For the three months ended September 30, 2005, a loss from redemption of debt of $6,214 was recognized in connection with the redemption of our 15% Senior Secured Discount Notes due 2007 and our 14½% Senior Secured Notes due 2009, including a redemption premium of $5,502 and the write-off of unamortized debt issuance costs of $712.

            Income (Expense) from Affiliate. For the three months ended September 30, 2005, we recorded $739 for our share of SIRIUS Canada Inc.’s net loss.

            Other Income. Other income for the three months ended September 30, 2004 was primarily related to a legal settlement in our favor of $1,333.

            Income Taxes

            Income Tax Expense. We recorded income tax expense of $560 for the three months ended September 30, 2005 and 2004. This expense represents the recognition of a deferred tax liability related to the difference in accounting for our FCC license, which is amortized over 15 years for tax purposes but not amortized for book purposes under U.S. generally accepted accounting principles.

Nine Months Ended September 30, 2005 Compared with the Nine Months Ended September 30, 2004

            Total Revenue

            Subscriber Revenue. Subscriber revenue increased $115,622 to $155,799 for the nine months ended September 30, 2005 from $40,177 for the nine months ended September 30, 2004. The increase in subscriber revenue was attributable to the growth of subscribers to our service. We added 1,511,631 net new subscribers since September 30, 2004.

            The following table contains a breakdown of our subscriber revenue:

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    For the Nine Months
Ended September 30,
       
   
       
    2005   2004   Variance  
   
 
 
 
  Subscription fees $ 154,575   $ 40,475   $ 114,100  
  Activation fees   4,742     1,302     3,440  
  Effects of mail-in rebates   (3,518 )   (1,600 )   (1,918 )
   
 
 
 
       Total subscriber revenue $ 155,799   $ 40,177   $ 115,622  
   
 
 
 

            Advertising Revenue. Advertising revenue increased $2,695 to $3,094 for the nine months ended September 30, 2005 from $399 for the nine months ended September 30, 2004. The increase was a result of an increase in rates per spot, more spots due to new and more attractive programming and increased advertiser interest as we continue to build brand awareness.

            ARPU. Set forth below is a table showing the calculation of ARPU:

    For the Nine Months
Ended September 30,
 
   
 
    2005   2004  
   
 
 
  Average monthly subscriber revenue per subscriber before effects of Hertz
   subscribers and mail-in rebates
$ 10.78   $ 11.15  
  Effects of Hertz subscribers   0.04     (0.29 )
  Effects of mail-in rebates   (0.24 )   (0.42 )
   
 
 
  Average monthly subscriber revenue per subscriber   10.58     10.44  
  Average monthly net advertising revenue per subscriber   0.21     0.10  
   
 
 
  ARPU $ 10.79   $ 10.54  
   
 
 

            The increase in ARPU to $10.79 for the nine months ended September 30, 2005 from $10.54 for the nine months ended September 30, 2004 was primarily attributable to the reduced impact of mail-in rebates, which resulted from an increase in our average subscriber base and the reduction of our first and third quarter 2005 rebate offer to $30 from $50 per eligible activation; the effects of improvement in our Hertz program; the effects of plan mix; and increased advertising revenue. These positive trends were offset, in part, by the effects of the timing of the commencement of revenue recognition for prepaid subscriptions.

            Equipment Revenue. Equipment revenue increased $2,287 to $3,300 for the nine months ended September 30, 2005 from $1,013 for the nine months ended September 30, 2004. The increase was the result of increased sales through our direct to consumer distribution channel.

            Operating Expenses

            Satellite and Transmission. Satellite and transmission expenses decreased $3,506 to $20,709 for the nine months ended September 30, 2005 from $24,215 for the nine months ended September 30, 2004. The decrease was primarily attributable to a $5,159 reduction in satellite insurance costs, offset by increased costs associated with the use of security software to prevent the theft of our service and additions to our personnel.

            Programming and Content. Programming and content expenses increased $26,039 to $63,589 for the nine months ended September 30, 2005 from $37,550 for the nine months ended September 30, 2004. The increase was primarily attributable to license fees associated with sports related programming; compensation related costs for additions to headcount; additional on-air talent costs due to the expansion of the programming lineup; and broadcast royalties as a result of the increase in our subscribers.

            Customer Service and Billing. Customer service and billing expenses increased $12,928 to $26,646 for the nine months ended September 30, 2005 from $13,718 for the nine months ended September 30, 2004. The increase was primarily due to increased customer service representative costs and credit card fees necessary to support the growth of our subscriber base, increased telecommunication charges as a result of the expansion and growth of our call centers to accommodate our subscriber base and increased operation and maintenance costs associated with our new billing system implemented in the fourth quarter of 2004. Customer service and billing expenses increased 94% compared with an increase in our end of period subscribers of 228%. Customer service and billing expenses per

23


average subscriber per month declined 49% to $1.81 for the nine months ended September 30, 2005 from $3.57 for the nine months ended September 30, 2004.

            Cost of Equipment. Cost of equipment increased $2,766 to $4,381 for the nine months ended September 30, 2005 from $1,615 for the nine months ended September 30, 2004. The increase was attributable to higher sales through our direct to consumer distribution channel, offset by reductions in the per unit costs of SIRIUS radios and accessories.

            Sales and Marketing. Sales and marketing expenses increased $3,873 to $107,543 for the nine months ended September 30, 2005 from $103,670 for the nine months ended September 30, 2004. Distribution costs increased primarily due to higher retail residuals and OEM revenue share as a result of the increase in subscribers, offset by decreased costs associated with our retail channel, partially as a result of sales efforts with the RadioShack rollout in 2004. In addition, personnel-related costs increased to support our growth. Such increases were offset by decreased advertising media and production costs primarily due to the expiration of certain sponsorships and higher costs incurred in 2004 for our NFL marketing campaign.

            Subscriber Acquisition Costs. Subscriber acquisition costs increased $95,703 to $204,461 for the nine months ended September 30, 2005 from $108,758 for the nine months ended September 30, 2004, an increase of 88%. Over the same period, gross subscriber additions increased 169% from 465,077 for the nine months ended September 30, 2004 to 1,252,623 for the nine months ended September 30, 2005. The increase in subscriber acquisition costs was attributable to subsidies for higher shipments of SIRIUS radios and chip sets to accommodate the growth of our subscriber base and increases in commissions resulting from the increase in gross subscriber additions, offset by reductions in hardware and chip set subsidy rates as we continued to reduce manufacturing and chip set costs.

            Subscriber acquisition costs per gross subscriber addition were $164 and $235 for the nine months ended September 30, 2005 and 2004, respectively. The decline was primarily attributable to the reduction in hardware and chip set subsidy rates as we continued to reduce manufacturing and chip set costs.

            General and Administrative. General and administrative expenses increased $11,909 to $42,918 for the nine months ended September 30, 2005 from $31,009 for the nine months ended September 30, 2004. The increase was primarily a result of additional personnel-related costs and rent and occupancy costs to support the growth of our business and bad debt expense.

            Engineering, Design and Development. Engineering, design and development expenses increased $11,142 to $33,232 for the nine months ended September 30, 2005 from $22,090 for the nine months ended September 30, 2004. The increase was primarily attributable to additional personnel-related costs to support research and development efforts, costs associated with tooling and manufacturing upgrades at DaimlerChrysler and Ford to support factory installations of SIRIUS radios, and product development costs for our next generation of radios. These increases were offset by decreases in chip set development costs.

            Equity Granted to Third Parties and Employees. Equity granted to third parties and employees expense for warrants increased $45,448 to $68,787 for the nine months ended September 30, 2005 from $23,339 for the nine months ended September 30, 2004. This increase was primarily attributable to expense accrued based on certain distribution partners’ performance toward achieving eligible vehicle, subscriber activation and delivery milestones and higher prices as a result of increases in the fair market value of our stock. In addition, we recognized approximately $23,000 of higher expense based on the fair market value of our common stock on the final measurement date as a result of certain distribution partners’ satisfaction of performance commitments.

            Equity granted to third parties and employees expense for stock options, restricted stock, restricted stock units and other stock-based awards increased $22,206 to $44,594 for the nine months ended September 30, 2005 from $22,388 for the nine months ended September 30, 2004. The increase was primarily attributable to expense associated with restricted stock units which accelerate to earlier periods as performance targets for fiscal periods are met, new grants of restricted stock units, and modifications of existing stock-based awards. The remaining increase was primarily related to expense accrued for 2005 profit sharing and restricted stock units we expect to grant for services performed in 2005. Such increases were offset in part by lower expense associated with performance options that vested in March 2005.

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            Equity granted to third parties and employees expense for the nine months ended September 30, 2005 and 2004 also included $3,501 and $1,933, respectively, of expense associated with the 15,173,070 shares of our common stock granted to the NFL.

            Other Income (Expense)

            Interest and Investment Income. Interest and investment income increased $11,016 to $16,922 for the nine months ended September 30, 2005 from $5,906 for the nine months ended September 30, 2004. The increase was primarily attributable to the increase in our average cash, cash equivalents and marketable securities balance resulting from funds raised through offerings of debt securities and an increase in the average interest rate.

            Interest Expense. Interest expense decreased $6,016 to $28,219 for the nine months ended September 30, 2005 from $34,235 for the nine months ended September 30, 2004. The decrease was primarily due to debt conversion costs of $19,592 as a result of the issuance of 56,409,853 shares of our common stock in exchange for $69,000 in aggregate principal amount of our 3½% Convertible Notes due 2008, including accrued interest, in 2004. This decrease was offset by an increase in interest expense resulting from the issuance of our 9 5/8% Senior Notes due 2013 in August 2005, our 3¼% Convertible Notes due 2011 in October 2004 and a full nine month impact of our 2½% Convertible Notes due 2009 issued in the first quarter of 2004.

            Loss from Redemption of Debt. For the nine months ended September 30, 2005, a loss from redemption of debt of $6,214 was recognized in connection with the redemption of our 15% Senior Secured Discount Notes due 2007 and our 14½% Senior Secured Notes due 2009, including a redemption premium of $5,502 and the write-off of unamortized debt issuance costs of $712.

           Income (Expense) from Affiliate. For the nine months ended September 30, 2005, we recorded $739 for our share of SIRIUS Canada Inc.’s net loss.

            Other Income. Other income for the nine months ended September 30, 2004 was primarily related to a legal settlement in our favor of $1,333.

            Income Taxes

            Income Tax Expense. We recorded income tax expense of $1,680 and $3,641 for the nine months ended September 30, 2005 and 2004, respectively. This expense represents the recognition of a deferred tax liability related to the difference in accounting for our FCC license, which is amortized over 15 years for tax purposes but not amortized for book purposes under U.S. generally accepted accounting principles.

Liquidity and Capital Resources

Cash Flows for the Nine Months Ended September 30, 2005 Compared with the Nine Months Ended September 30, 2004

            As of September 30, 2005, we had $810,333 in cash and cash equivalents compared with $517,631 as of September 30, 2004, an increase of $292,702. Cash and cash equivalents increased $56,442 during the nine months ended September 30, 2005. The increase was a result of net cash provided by financing activities of $446,513 offset by net cash used in operating activities and investing activities of $258,128 and $131,943, respectively.

            Net Cash Used in Operating Activities. The following table contains a breakdown of our net loss adjusted for non-cash items and our changes in operating assets and liabilities:

    For the Nine Months
Ended September 30,
       
   
       
    2005   2004   Variance  
   
 
 
 
  Net loss adjusted for non-cash items:                  
       Net loss $ (551,608 ) $ (450,289 ) $ (101,319 )
       Depreciation   73,640     71,082     2,558  
       Non-cash interest expense   2,365     21,168     (18,803 )

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       Non-cash loss from redemption of debt   712         712  
       Loss on disposal of assets   286     19     267  
       Equity granted to third parties and employees   116,882     47,660     69,222  
       Deferred income taxes   1,680     3,641     (1,961 )
   
 
 
 
           Total net loss adjusted for non-cash items   (356,043 )   (306,719 )   (49,324 )
   
 
 
 
  Changes in operating assets and liabilities:                  
       Marketable securities   16     (92 )   108  
       Prepaid expenses and other current assets   (26,187 )   (7,869 )   (18,318 )
       Other long-term assets   3,131     (3,406 )   6,537  
       Accrued interest   6,341     3,848     2,493  
       Accounts payable and accrued expenses   36,213     44,721     (8,508 )
       Deferred revenue   81,923     33,306     48,617  
       Other long-term liabilities   (3,522 )   691     (4,213 )
   
 
 
 
       Total changes in operating assets and liabilities   97,915     71,199     26,716  
   
 
 
 
           Net cash used in operating activities $ (258,128 ) $ (235,520 ) $ (22,608 )
   
 
 
 

            Net cash used in operating activities increased $22,608 to $258,128 for the nine months ended September 30, 2005 from $235,520 for the nine months ended September 30, 2004. Such increase was attributable to the $49,324 increase in the net loss adjusted for non-cash items, from $306,719 for the nine months ended September 30, 2004 to $356,043 for the nine months ended September 30, 2005, offset by an increase of $26,716 for changes in operating assets and liabilities.

            The increase in the net loss adjusted for non-cash items was primarily a result of an 88%, or $95,703, increase in subscriber acquisition costs reflecting higher shipments of SIRIUS radios and chip sets and increased commissions to support a 169% increase in gross subscribers, offset by reductions in average subsidy rates as we continued to reduce manufacturing and chip set costs. Increases in other operating expenses were also required to support the 228% increase in our subscriber base; the growth of our operations; and to acquire content, primarily sports programming. Such increases were offset by a 288%, or $115,622, increase in subscriber revenue.

            The net inflow of cash from changes in operating assets and liabilities was primarily attributable to an increase of $48,617 in deferred revenue for subscribers electing annual and other prepaid subscription programs. We currently receive an average of approximately nine months of prepaid revenue per subscriber upon activation. This increase was offset in part by the increase of $18,318 in prepaid expenses and other current assets primarily for increases in accounts receivable and chip set inventory to support the growth of our business.

            We expect to continue to have net outflows of cash for 2005 to fund the growth of our operations. These cash outflows will be partially offset by cash received from subscribers on prepaid subscription plans.

            Net Cash Used in Investing Activities. Net cash used in investing activities increased $44,760 to $131,943 for the nine months ended September 30, 2005 from $87,183 for the nine months ended September 30, 2004. For the nine months ended September 30, 2005, we purchased $128,700 of auction rate securities with a portion of the proceeds from our offering of 9 5/8% Senior Notes due 2013. Of this amount, we sold $5,100 in September 2005. We also released funds which were originally placed in escrow to support our obligation to reimburse Ford for certain costs it incurs in connection with the introduction of SIRIUS radios as a factory option. Additional cash inflows of $4,835 for the nine months ended September 30, 2005 were a result of the maturity of available-for-sale securities. During the nine months ended September 30, 2004, we deposited $85,000 in escrow to fund the rights fees for the 2006-2007, 2007-2008 and 2008-2009 NFL seasons. These deposits were offset by cash inflows of $25,000 as a result of the maturity of available-for-sale securities. Capital expenditures were $17,949 and $22,316 for the nine months ended September 30, 2005 and 2004, respectively.

            Net Cash Provided by Financing Activities. Net cash provided by financing activities increased $127,158 to $446,513 for the nine months ended September 30, 2005 from $319,355 for the nine months ended September 30, 2004. We raised net proceeds of $493,005 during the nine months ended September 30, 2005 through the offering of $500,000 in aggregate principal amount of our 9 5/8% Senior Notes due 2013. We raised net proceeds of $293,600 during the nine months ended September 30, 2004 through the offering of $300,000 in aggregate principal amount of our 2½% Convertible Notes due 2009. We also received proceeds from the exercise of options of $11,125 and

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$6,004 for the nine months ended September 30, 2005 and 2004, respectively, and proceeds from the exercise of warrants of $19,850 for the nine months ended September 30, 2004.

Financings and Capital Requirements

            We have financed our operations through the sale of debt and equity securities.

Ÿ In August 2005, we sold $500,000 in aggregate principal amount of our 9 5/8% Senior Notes due 2013 resulting in net proceeds of $493,005.
 
Ÿ In October 2004, we sold 25,000,000 shares of our common stock and issued $230,000 in aggregate principal amount of our 31/4% Convertible Notes due 2011 resulting in aggregate net proceeds of $320,838.
 
Ÿ In the first quarter of 2004, we issued $300,000 in aggregate principal amount of our 21/2% Convertible Notes due 2009 resulting in net proceeds of $293,600. We also issued 21,027,512 shares of our common stock for $19,850 in net proceeds in connection with the exercise of warrants held by affiliates of The Blackstone Group L.P.

Future Liquidity and Capital Resource Requirements

            Based upon our current plans, we believe that our cash, cash equivalents and marketable securities will be sufficient to cover our estimated funding needs through cash flow breakeven, the point at which our revenues are sufficient to fund expected operating expenses, capital expenditures, working capital requirements, interest and principal payments and taxes. We expect to generate positive free cash flow for the full year 2007, and our first quarter of positive free cash flow could be reached as early as the fourth quarter of 2006. Our financial projections are based on assumptions, which we believe are reasonable but contain significant uncertainties.

            Our business is in its early stages, and we regularly evaluate our plans and strategy. These evaluations often result in changes to our plans and strategy, some of which may be material and significantly change our cash requirements or cause us to achieve cash flow breakeven at a later date. These changes in our 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 of third parties that own programming, distribution, infrastructure, assets, or any combination of the foregoing.

            To fund incremental cash requirements, or as market opportunities arise, we may choose to raise additional funds through the sale of additional debt securities, equity securities or a combination of debt and equity securities. The incurrence of indebtedness would result in increased fiscal obligations and could contain restrictive covenants. The sale of additional equity or convertible debt securities may result in dilution to our stockholders. These additional sources of funds may not be available or, if available, may not be available on terms favorable to us.

2003 Long-Term Stock Incentive Plan

            In January 2003, our board of directors adopted the Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan (the “2003 Plan”), and on March 4, 2003 our stockholders approved this plan. On May 25, 2004, our stockholders approved an amendment to the 2003 Plan to include members of our board of directors as eligible participants. Employees, consultants and members of our board of directors are eligible to receive awards under the 2003 Plan. The 2003 Plan provides for the grant of stock options, restricted stock, 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 2003 Plan are generally subject to a vesting requirement that includes one or all of the following: (1) over time, generally three to five years from the date of grant; (2) on a specific date in future periods, with acceleration to earlier periods if performance criteria are satisfied; or (3) as certain performance targets set at the time of grant are achieved. Stock-based awards generally expire ten years from date of grant. Each restricted stock unit entitles the holder to receive one share of our common stock upon vesting.

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            As of September 30, 2005, approximately 113,134,000 stock options, shares of restricted stock and restricted stock units were outstanding. As of September 30, 2005, approximately 94,221,000 shares of our common stock were available for grant under the 2003 Plan. During the nine months ended September 30, 2005, employees exercised 8,088,194 stock options at exercise prices ranging from $0.67 to $5.17 per share, resulting in proceeds to us of $11,118. The exercise of vested options could result in an inflow of cash in future periods.

Contractual Cash Commitments

            We have entered into various contracts that have resulted in significant cash obligations in future periods. These cash obligations could vary in future periods if we change our business plan or strategy, which could include significant additions to our programming, infrastructure or distribution. The following table summarizes our expected contractual cash commitments as of September 30, 2005:

  Remaining
2005
  2006   2007   2008   2009   Thereafter   Total  
 
 
 
 
 
 
 
 
Long-term debt obligations $ 4,876   $ 68,375   $ 65,528   $ 129,435   $ 361,246   $ 934,453   $ 1,563,913  
Lease obligations   2,092     8,488     7,764     7,569     7,527     33,258     66,698  
Satellite and transmission   855     3,335     3,155     3,155     3,155     15,027     28,682  
Programming and content   14,939     129,252     99,050     100,207     127,002     149,951     620,401  
Customer service and billing   660     5,674     3,138                 9,472  
Marketing and distribution   33,902     63,060     21,959     9,470     13,750     22,875     165,016  
Chip set development and
   production
  22,020     9,281     3,000                 34,301  
 
 
 
 
 
 
 
 
     Total contractual cash
       commitments
$ 79,344   $ 287,465   $ 203,594   $ 249,836   $ 512,680   $ 1,155,564   $ 2,488,483  
 
 
 
 
 
 
 
 

Long-Term Debt Obligations

            Long-term debt obligations include principal and interest payments. As of September 30, 2005, we had $1,096,789 in aggregate principal amount of outstanding debt.

Lease Obligations

            We have entered into operating leases related to our national broadcast studio, office space, terrestrial repeaters and equipment.

Satellite and Transmission

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

Programming and Content

            We have entered into agreements with licensors of programming and other content providers and, in certain instances, are obligated to pay license fees and guarantee minimum advertising revenue share. In addition, we have agreements with various rights organizations pursuant to which we pay royalties for public performances of music.

Customer Service and Billing

            We have entered into agreements with third parties to provide customer service, billing and subscriber management services.

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.

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In addition, certain programming and content agreements require us to purchase advertising on properties owned or controlled by the licensors. We have also agreed to reimburse automakers for certain engineering and development costs associated with the incorporation of SIRIUS radios into vehicles they manufacture.

Chip Set Development and Production

            We have entered into agreements with third parties to develop, produce and supply chip sets, and in certain instances to license intellectual property related to such chip sets. Certain of these agreements require that we purchase a minimum quantity of chip sets.

Joint Development Agreement

            Under the terms of a joint development agreement with XM Radio, the other holder of a FCC satellite radio license, each party is obligated to fund one half of the development cost for a unified standard for satellite radios. The costs related to the joint development agreement are being expensed as incurred to engineering, design and development expense. We are currently unable to determine the expenditures necessary to complete this process, but they may be significant.

Other Commitments

            In addition to the contractual cash commitments described above, we have entered into agreements with automakers, radio manufacturers and others that include per-radio and per-subscriber payments and revenue share arrangements. These future costs are dependent upon many factors 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 provisions.

            We are required under the terms of certain agreements to provide letters of credit and deposit monies in escrow, which place restrictions on our cash and cash equivalents. As of September 30, 2005 and December 31, 2004, $92,615 and $97,321, respectively, were classified as restricted investments as a result of our reimbursement obligations under these letters of credit and escrow arrangements.

            As of September 30, 2005, we have not entered into any off-balance sheet arrangements or transactions.

           In September 2005, SIRIUS Canada Inc., our Canadian affiliate, received notice that Canada’s Federal Cabinet had declined to reverse a decision to issue SIRIUS Canada a license to broadcast in Canada. This decision affirmed the earlier licensing ruling of the Canadian Radio-television and Telecommunications Commission (the “CRTC”) that authorized SIRIUS Canada to offer a satellite radio service in Canada. SIRIUS Canada is a Canadian corporation owned by Canadian Broadcasting Corporation, Standard Radio Inc. and us. SIRIUS Canada anticipates offering a satellite radio service in Canada in late 2005.

Critical Accounting Policies and Estimates

            Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods. We have disclosed all significant accounting policies in Note 3 to the unaudited consolidated financial statements included in this report. We have identified the following policies, which were discussed with the audit committee of our board of directors, as critical to our business and understanding our results of operations.

            Subscriber Revenue Recognition. Revenue from subscribers consists of subscription fees, including revenues associated with prepaid subscriptions included in the sale or lease price of a new vehicle; revenue derived from our agreement with Hertz; and non-refundable activation fees.

            We recognize subscription fees as our service is provided to a subscriber. We record deferred revenue for prepaid subscription fees and amortize these prepayments to revenue ratably over the term of the respective subscription plan. At the time of sale, vehicle owners purchasing or leasing a vehicle with a subscription typically receive between a six-month and one-year prepaid subscription. We receive payment from automakers for these subscriptions in advance of our service being activated. We also reimburse the automakers for certain costs associated with the SIRIUS radio installed in the applicable vehicle at the time the vehicle is manufactured. The

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associated payments to the automakers are included in subscriber acquisition costs. Although we receive payments from the automakers, they do not resell our service; rather, automakers facilitate the sale of our service to our customers similar to an agent. We believe this is the appropriate characterization of our relationship since we are responsible for providing services to our customers including being obligated to the customer if there were interruption of service.

            Activation fees are recognized ratably over the estimated term of a subscriber relationship, currently estimated to be 3.5 years. The estimated term of a subscriber relationship is based on market research and management’s judgment and, if necessary, will be refined in the future as historical data becomes available.

            As required by Emerging Issues Task Force (“EITF”) No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” an estimate of mail-in rebates that are paid by us directly to subscribers is recorded as a reduction to subscriber revenue in the period the subscriber activates our service. We estimate the effects of mail-in rebates based on actual take-rates for rebate incentives offered in prior periods. In subsequent periods, estimates are adjusted when necessary.

            Stock-Based Compensation. In accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” we use the intrinsic value method to measure the compensation costs of stock-based awards granted to employees and members of our board of directors. Accordingly, we record compensation expense for stock-based awards granted to employees and members of our board of directors over the vesting period equal to the excess of the market price of the underlying common stock at the date of grant over the exercise price of the stock-based award. The intrinsic value of restricted stock units as of the date of grant is amortized to expense over the vesting period. These charges are recorded as a component of equity granted to third parties and employees in our accompanying unaudited consolidated statements of operations.

            We account for modifications to stock-based awards in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN No. 44”). FIN No. 44 provides that when the modification of a stock-based award occurs, a new measurement date results because the modification may allow an employee to vest in an award that would have otherwise been forfeited pursuant to the original terms. A new measurement of potential compensation is measured as of the date of the modification. While measurement of the potential compensation is made as of that date, the recognition of the compensation expense depends on whether the employee ultimately retains the stock-based award that otherwise would have been forfeited under the award’s original vesting terms.

            We granted stock-based awards which vest July 1, 2008 with acceleration to earlier time periods as performance targets for fiscal periods are met. The performance targets are established annually and may be modified by our board of directors. As these targets are set new measurement dates result. We recognize expense resulting from a new measurement date only if such employees voluntarily resign or are terminated for cause and had exercised or exercise such stock-based awards during the period of the accelerated vest date through July 1, 2008, the original vest date. Under these conditions, employees are deemed to benefit from the accelerated vest date. Stock-based awards with new measurement dates could result in the recognition of additional stock compensation expense of up to $23,372 through July 1, 2008 if during such period all of the affected employees were to voluntarily resign or were terminated for cause and had exercised or exercise such awards. Stock compensation expense associated with stock options for the nine months ended September 30, 2005 includes a charge of $479 for an employee that was deemed to benefit from the modification of a stock-based award resulting in a new measurement date.

            In accordance with FIN No. 44, we record compensation charges or benefits related to repriced stock options based on the market value of our common stock until the repriced stock options are exercised, forfeited or expire.

            We account for stock-based awards granted to non-employees at fair value in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.” In accordance with EITF No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” we record expense based upon performance using the fair value of equity instruments issued to non-employees, other than non-employee members of our board of directors, at each reporting date. The final measurement date of equity instruments with performance criteria is the date that each performance commitment for such equity instrument is satisfied. Fair value is determined using the Black-Scholes option valuation model and varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates. Since we do not have sufficient historical information regarding the life expectancy of stock-based awards granted to non-employees, we currently use an expected life based on the term of the stock-

30


based award as specified in each agreement. Expected stock price volatility is calculated over a period equal to the expected life and the risk-free interest rate represents the daily treasury yield curve rate at the reporting date based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term. Our assumptions may change in future periods as the life expectancy of the stock-based awards may shorten based on exercise activity. In addition, expected stock price volatility is subject to change based on fluctuations in our stock price. These costs are classified in our accompanying unaudited consolidated statements of operations as a component of equity granted to third parties and employees.

            Subscriber Acquisition Costs. Subscriber acquisition costs include hardware subsidies paid to radio manufacturers and automakers, including subsidies paid to automakers who include a SIRIUS radio and a prepaid subscription to our service in the sale or lease price of a new vehicle; subsidies paid to chip set manufacturers; and commissions paid to retailers and automakers as incentives to purchase, install and activate SIRIUS radios. The majority of subscriber acquisition costs are incurred in advance of acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of SIRIUS radios and revenue share payments to automakers and retailers of SIRIUS radios which are included in sales and marketing expense. Subscriber acquisition costs also do not include amounts capitalized in connection with our agreement with Hertz, as we retain ownership of the SIRIUS radios used by Hertz.

            Subsidies paid to radio manufacturers and automakers are expensed upon shipment or installation. Commissions paid to retailers and automakers are expensed either upon activation or sale of the SIRIUS radio. Chip sets that are shipped to radio manufacturers and held on consignment are recorded as inventory and expensed as subscriber acquisition costs when placed into production by radio manufacturers. Costs for chip sets not held on consignment are expensed as subscriber acquisition costs when the chip sets are shipped to radio manufacturers.

            Long-Lived Assets. We carry our long-lived assets at cost less accumulated depreciation. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. At the time an impairment in value of a long-lived asset is identified, the impairment will be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. To determine fair value, we would employ an expected present value technique, which utilizes multiple cash flow scenarios that reflect the range of possible outcomes and an appropriate discount rate.

            Useful Life of Satellite System. Our satellite system includes the cost of satellite construction, launch vehicles, launch insurance, capitalized interest, our spare satellite and our terrestrial repeater network. In accordance with SFAS No. 144, we monitor our satellites for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset is not recoverable. The expected useful lives of our in-orbit satellites are 15 years from the date they were placed into orbit. We are depreciating our three in-orbit satellites over their respective remaining useful lives beginning February 14, 2002 or, in the case of our spare satellite, from the date it was delivered to ground storage in April 2002. Our spare satellite is expected to operate effectively for 15 years from the date of launch. Space Systems/Loral, the manufacturer of our satellites, has identified circuit failures in solar arrays on satellites since 1997, including our satellites. We continue to monitor these failures, which we believe have not affected the expected useful lives of our satellites. If events or circumstances indicate that the useful lives of our satellites have changed, we will modify the depreciable life accordingly.

            FCC License. We carry our FCC license at cost. Our FCC license has an indefinite life and is evaluated for impairment on an annual basis or more frequently if there are indicators of impairment. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we completed an impairment analysis of our FCC license as of December 31, 2004, and determined that there was no impairment. We use projections regarding estimated future cash flows and other factors in assessing the fair value of our FCC license. If these estimates or projections change in the future, we may be required to record an impairment charge related to our FCC license.

            Income Taxes. We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Operating losses in prior periods have generated significant state and federal tax net operating losses, or NOL carryforwards. We are required to record a valuation allowance against the deferred tax asset associated with these NOL carryforwards if it is “more likely than not” that we will not be able to utilize it to offset future taxes. Due to our history of unprofitable operations and our expected future losses, we have recorded a valuation allowance equal to 100% of these deferred tax assets. We could be profitable in the future at levels which would cause management to conclude that it is more likely than not that we will realize all or a portion of these NOL

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carryforwards. Upon reaching such a conclusion, we would record the estimated net realizable value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of these NOL carryforwards is utilized.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

             We hold investments in marketable securities, which consist of United States government notes, certificates of deposit and auction rate securities. We classify our marketable securities as available-for-sale. These securities are consistent with the investment 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. Despite the underlying long-term maturity of auction rate securities, from the investor’s perspective, such securities are priced and subsequently traded as short-term investments because of the interest rate reset feature. Interest rates are reset through an auction process at predetermined periods of 28 or 35 days. Failed auctions rarely occur. As of September 30, 2005, we held approximately $123,600 in auction rate securities.

Item 4. Controls and Procedures

            As of September 30, 2005, an evaluation was performed under the supervision and with the participation of our management, including Mel Karmazin, 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. 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 September 30, 2005. There have been no significant changes in our internal control over financial reporting or in other factors that could significantly affect our internal control over financial reporting subsequent to September 30, 2005.

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Part II

Other Information

Item 6. Exhibits

           See Exhibit Index attached hereto.

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SIGNATURES

            Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  SIRIUS SATELLITE RADIO INC.
       
       
  By:                         /S/ DAVID J. FREAR                             
      David J. Frear
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

November 8, 2005

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EXHIBIT INDEX

Exhibit   Description
      
3.1 Amended and Restated Certificate of Incorporation dated March 4, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
      
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
      
4.1 Form of certificate for shares of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 (File No. 33-74782)).
      
4.2 Warrant Agreement, dated as of May 15, 1999, between the Company and United States Trust Company of New York, as warrant agent (incorporated by reference to Exhibit 4.4.4 to the Company’s Registration Statement on Form S-4 (File No. 333-82303)).
      
4.3 Indenture, dated as of September 29, 1999, between the Company and United States Trust Company of Texas, N.A., as trustee, relating to the Company’s 8¾% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on October 13, 1999).
      
4.4 First Supplemental Indenture, dated as of September 29, 1999, between the Company and United States Trust Company of Texas, N.A., as trustee, relating to the Company’s 8¾% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.01 to the Company’s Current Report on Form 8-K filed on October 1, 1999).
      
4.5 Second Supplemental Indenture, dated as of March 4, 2003, among the Company, The Bank of New York (as successor to United States Trust Company of Texas, N.A.), as resigning trustee, and HSBC Bank USA, as successor trustee, relating to the Company’s 8¾% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.16 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
      
4.6 Third Supplemental Indenture, dated as of March 7, 2003, between the Company and HSBC Bank USA, as trustee, relating to the Company’s 8¾% Convertible Subordinated Notes due 2009 (incorporated by reference to Exhibit 4.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).
      
4.7 Form of 8¾% Convertible Subordinated Note due 2009 (incorporated by reference to Article VII of Exhibit 4.01 to the Company’s Current Report on Form 8-K filed on October 1, 1999).
      
4.8 Indenture, dated as of May 23, 2003, between the Company and The Bank of New York, as trustee (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K dated May 30, 2003).
      
4.9 Supplemental Indenture, dated as of May 23, 2003, between the Company and The Bank of New York, as trustee, relating to the Company’s 3½% Convertible Notes due 2008 (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K dated May 30, 2003).
      
4.10 Second Supplemental Indenture, dated as of February 20, 2004, between the Company and The Bank of New York, as trustee, relating to the Company’s 2½% Convertible Notes due 2009 ( incorporated by reference to Exhibit 4.20 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
      
4.11 Third Supplemental Indenture, dated as of October 13, 2004, between the Company and The Bank of New York, as trustee, relating to the Company’s 3¼% Convertible Notes due 2011 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated October 13, 2004).
      
4.12 Indenture, dated as of August 9, 2005, between the Company and The Bank of New York, as trustee, relating to the Company’s 9 5/8 % Senior Notes due 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 12, 2005).
      
4.13 Common Stock Purchase Warrant granted by the Company to DaimlerChrysler AG dated October 4, 2005 (filed herewith).
      
4.14 Common Stock Purchase Warrant granted by the Company to Ford Motor Company dated October 7, 2002 (incorporated by reference to Exhibit 4.16 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).
      

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Exhibit   Description
      
   4.15 Form of Media-Based Incentive Warrant dated February 3, 2004 issued by the Company to NFL Enterprises LLC ( incorporated by reference to Exhibit 4.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
      
   4.16 Bounty-Based Incentive Warrant dated February 3, 2004 issued by the Company to NFL Enterprises LLC ( incorporated by reference to Exhibit 4.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
      
   4.17 Amended and Restated Warrant Agreement, dated as of December 27, 2000, between the Company and United States Trust Company of New York, as warrant agent and escrow agent (incorporated by reference to Exhibit 4.27 to the Company’s Registration Statement on Form S-3 (File No. 333-65602)).
      
   10.1.1 Lease Agreement, dated as of March 31, 1998, between Rock-McGraw, Inc. and the Company (incorporated by reference to Exhibit 10.1.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
      
   10.1.2 Supplemental Indenture, dated as of March 22, 2000, between Rock-McGraw, Inc. and the Company (incorporated by reference to Exhibit 10.1.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
      
    *10.2 Employment Agreement dated November 18, 2004 between the Company and Mel Karmazin (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
      
    *10.3 Employment Agreement, dated as of June 3, 2003, between the Company and David J. Frear (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
      
    *10.4 First Amendment, dated as of August 10, 2005, to the Employment Agreement, dated as of June 3, 2003, between the Company and David Frear (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated August 12, 2005).
      
    *10.5 Employment Agreement, dated as of May 5, 2004, between the Company and Scott A. Greenstein (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
      
    *10.6 First Amendment, dated as of August 8, 2005, to the Employment Agreement, dated as of May 5, 2004, between the Company and Scott Greenstein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated August 12, 2005).
      
    *10.7 Amended and Restated Employment Agreement, dated as of March 11, 2005, between the Company and James E. Meyer (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004).
      
    *10.8 Restricted Stock Unit Agreement, dated as of August 9, 2005, between the Company and James E. Meyer (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated August 12, 2005).
      
    *10.9 Employment Agreement, dated as of November 8, 2004, between the Company and Patrick L. Donnelly (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
      
    *10.10 CD Radio Inc. 401(k) Savings Plan (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (File No. 333-65473)).
      
    *10.11 Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
     
    *10.12 Form of Option Agreement, dated as of December 29, 1997, between the Company and each Optionee (incorporated by reference to Exhibit 10.16.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
      
†10.13 Joint Development Agreement, dated as of February 16, 2000, between the Company and XM Satellite Radio Inc. (incorporated by reference to Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).
      

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Exhibit   Description
      
31.1 Certificate of Mel Karmazin, 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 Mel Karmazin, 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).
     
______________
* This document has been identified as a management contract or compensatory plan or arrangement.
 
Portions of this exhibit have been omitted pursuant to Applications for Confidential treatment filed by the Company with the Securities and Exchange Commission.

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