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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  KOS PHARMACEUTICALS, INC.
  FLORIDA
    
    65-0670898(State or Other Jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 1 Cedar Brook Drive, Cranbury, New Jersey 08512-3618
  
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  Large Accelerated filer þ
    
    Accelerated filer  ̈
    
    Non-Accelerated filer  ̈
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   Documents Incorporated by Reference




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TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    22Item 1B.
    
    Unresolved Staff Comments
    
    
    42Item 2.
    
    Properties
    
    
    43Item 3.
    
    Legal Proceedings
    
    
    43Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    45PART IIItem 5.
    
    Market for the Companys Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    46Item 6.
    
    Selected Consolidated Financial Data
    
    
    47Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    48Forward-Looking Information: Certain Cautionary Statements
    
    
    69Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    71Item 8.
    
    Consolidated Financial Statements and Supplementary Data
    
    
    71Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
    
    
    113Item 9A.
    
    Controls and Procedures
    
    
    113PART III
    
    
    
    
    115PART IVItem 15.
    
    Exhibits and Financial Schedules
    
    
    116Signatures
    
    
    
    
    121Collaboration and License Agreement2006 Non-Employee Director CompensationEmployment LetterSubsidiaries of the CompanyConsent of Ernst & Young LLPSection 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification2006 Named Executive Officers Compensation
  
 NiaspanÒ, AdvicorÒ, TevetenÒ, Teveten HCTand AzmacortÒ are registered
trademarks of Kos Life Sciences, Inc., a wholly owned subsidiary of Kos Pharmaceuticals, Inc.CardizemÒ
LA is a registered trademark of Biovail Laboratories International SRL. 2




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PART I
 
 ITEM 1. BUSINESS.
  Niaspan ® Advicor ® ,
 Azmacort ® Azmacort Azmacort
   3




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Niaspan Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
 Teveten ® Teveten HCT Teveten Cardizem ® LA Teveten Cardizem LA
 Cardizem LA Cardizem LA
   4




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Kos Business Strategy
   (i)
    
    develop or acquire products with unrealized commercial potential where safety
or patient compliance may be improved or where greater utilization of a product could
be attained through increasing the awareness of the products features and benefits;(ii)
    
    focus on the large, rapidly growing cardiovascular, metabolic and respiratory
markets, which include many chronic diseases requiring long-term therapy;(iii)
    
    develop proprietary formulations of currently approved pharmaceutical
compounds;(iv)
    
    make measured investments in new chemical entity research through sponsored
research programs, scientific in-licensing and corporate development activities;(v)
    
    manage internally the clinical development of its products, or where necessary
or prudent, using contract research organizations;(vi)
    
    manufacture its products internally, or where necessary or prudent, through its
partners or using a third party manufacturer;
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(vii)
    
    market its products directly through the Companys sales forces, which Kos may
supplement with one or more contract sales organizations or other partners and through
co-promotion and other strategic alliances, to extend the marketing reach of the
Company to new patients; and(viii)
    
    leverage its core competencies through corporate and academic alliances.
 Marketed Products
 Niaspan
 Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Advicor Niaspan Advicor Advicor Niaspan Niaspan
 Niaspan Niaspan Niaspan Niaspan
  6




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Niaspan Niaspan Niaspan
  7




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Niaspan Niaspan Niaspan
 Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan
 Niaspan Niaspan
 Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan
  8




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Niaspan
 Niaspan Niaspan Niaspan Niaspan Niaspan Niaspans Niaspans
 Advicor
 Advicor Advicor Advicor Advicor Advicor Niaspan Niaspan
 Advicor Advicor Advicor Niaspan Advicor
 Advicor Advicor Advicors Advicor
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##### Table of Contents



Advicor
 Advicor Advicor
 Niaspan Advicor Advicor Advicor Advicor Niaspan
 Niaspan Advicor Advicor Niaspan Advicor Advicor Advicor Niaspan
 Advicor Advicor Advicor
 10




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Azmacort
 Azmacort Azmacort Azmacort
 Azmacort Azmacort Azmacort Azmacort Azmacort
 Azmacort Azmacort,
  Azmacort Niaspan Advicor Azmacort
 Cardizem LA, Teveten and Teveten HCT
 Cardizem LA Teveten Teveten HCT Cardizem LA Teveten Teveten HCT Teveten
 11




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Cardizem LA, Teveten Teveten
HCT
 Cardizem LA Cardizem LA Teveten Teveten HCT
 Cardizem LA Teveten, Teveten HCT Cardizem LA, Teveten Teveten HCT Cardizem LA
 Products Under Development
 Niaspan Advicor, Azmacort, Cardizem
LA, Teveten Teveten HCT
 12




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Solid-Dose Drug Delivery Systems
 Niaspan Niaspan Niaspan Niaspan Advicor
  Cardizem
LA Cardizem Cardizem Cardizem LA
  13




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Metered-Dose Inhalation Devices and Other Device Products
  14




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Respiratory and Advanced Inhalation Delivery Research
 Azmacort Azmacort Azmacort Azmacort Azmacort
    Sales and Marketing
 Niaspan Advicor
 Niaspan Advicor Azmacort Cardizem LA, Teveten, Teveten HCT
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Niaspan Advicor
    Niaspan Advicor Niaspan Advicor Advicor Niaspan Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
 16




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Niaspan Advicor
 Cardizem LA Teveten Cardizem LA
  Patents and Proprietary Rights
  Existing Patents and Patent Applications
  Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor
 17




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Niaspans Advicors
 Cardizem LA Litigation
 Cardizem LA Cardizem
LA
  Cardizem
LA
  Cardizem LA Cardizem LA
 18




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Protection of Intellectual Property
    Niaspan Advicor, Azmacort, Teveten Kos
 19




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Manufacturing
 Niaspan Advicor Niaspan Advicor Niaspan Niaspan Niaspan Niaspan
 Niaspan Advicor Niaspan Niaspan
 Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
 Cardizem LA Teveten Cardizem LA Cardizem LA Teveten Cardizem LA Teveten Cardizem LA Teveten
 20




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Niaspan Advicor Niaspan Advicor
 Competition
 Niaspan Advicor Azmacort Cardizem LA,
Teveten Teveten HCT
  Employees
  21




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Available Information
  
 ITEM 1A. RISK FACTORS.
 Market Acceptance and Sales Growth of Niaspan and Advicor
 Niaspan Advicor Niaspan Niaspan Advicor Advicor Niaspan Niaspan Advicor Niaspan Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor
 Advicor Advicor Advicor Advicor Advicor
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Niaspan Advicor Advicor
 Advicor Advicor Niaspan Advicor Advicor Advicor Niaspan Advicor Advicor Niaspan Advicor
 Advicor Niaspan Niaspan Niaspan Advicor Advicor Advicor
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Sales Growth of Azmacort; Technological Feasibility of Azmacort HFA formulation
 Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
 Azmacort Azmacort
 Azmacort Azamcort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
 Integration and Sales Growth of Cardizem LA, Teveten, and Teveten HCT Products
 Cardizem LA Teveten, Teveten HCT
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Teveten Teveten HCT
 Patents and Trademarks
 Niaspan Advicor Niaspan Advicor
 
    
    The patent applications licensed to or owned by Kos do not result in issued patents;
    
    Meaningful patent protection is not secured for any particular technology; or
    
    Any patents that have been or may be issued to the Company or the Companys
licensors, including the patents covering the Companys Niaspan, Advicor, Azmacort,
Cardizem LA, Tevetenor Teveten HCT, or Icatibant or any agreements relating to those
patents, are invalid, unenforceable or not infringed.
 Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor
 Niaspans Advicors
  25




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Niaspan Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
   26




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Cardizem LA Cardizem
LA
  Cardizem
LA
  Cardizem LA Cardizem LA
 27




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Future Capital Needs; Uncertainty of Additional Funding
  Niaspan, Advicor, Azmacort, Teveten, Teveten HCT Cardizem LA
 Cardizem
 28




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Registration Rights
  Limited Sales and Marketing Resources
   29




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Control by Existing Shareholder
  Competition and Technological Change
  
    
    Abbott (Tricor)
    
    Bristol-Myers Squibb (Pravachol)
    
    Merck (Zocor and Mevacor)
    
    Novartis (Lescol)
    
    Pfizer (Lipitor, Caduet and Lopid)
    
    Sankyo (Welchol)
    
    Reliant (Antara and Omacor)
    
    Merck/Schering-Plough (Zetia and Vytorin)
    
    AstraZeneca (Crestor)
 Niaspan Advicor Advicor Niaspan Advicor
 Niaspan Niaspan
 30




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Niaspan Niaspan Niaspan Niaspan
 Azmacort Azmacort
 
    
    GlaxoSmithKline (Advairand Flovent)
    
    Forest (Aerobid)
    
    AstraZeneca (Pulmicort)
    
    Schering-Plough (Asmanexand Vanceril)
    
    Ivax (QVAR)
 Cardizem LA, Teveten, Teveten HCT Cardizem LA, Teveten Teveten HCT
 
    
    Pfizer (Norvasc)
    
    Astra Zeneca (Atacand)
    
    Bristol-Myers Squibb (Avapro)
    
    Sankyo/Forest (Benicar)
    
    Merck (Cozaar)
    
    Novartis (Diovan/Diovan HCT)
  31




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International Commercialization Agreement with Merck KGaA
 Niaspan Advicor
 Niaspan Advicor Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Niaspan Niaspan Niaspan Advicor Advicor
 No Assurance of Adequate Third-Party Reimbursement
 Niaspan Advicor, Azmacort Cardizem LA, Teveten Teveten HCT Niaspan Advicor, Azmacort Cardizem LA Teveten Teveten HCT Niaspan Advicor,
Azmacort Cardizem LA, Teveten Teveten HCT Niaspan Advicor, Azmacort Cardizem LA Teveten, Teveten
HCT Niaspan Advicor, Azmacort Cardizem LA, Teveten, Teveten HCT
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Niaspan Advicor, Azmacort Cardizem LA,
Teveten, Teveten HCT
 Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan
 Dependence on Collaborators
  Dependence on Key Personnel
  33




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Products Under Development
  Acquisition of Products
  34




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Government Regulation; No Assurances of Regulatory Approval and Investigation by Federal and State
Agencies
  Niaspan Advicor Niaspan Advicor
   35




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Manufacturing
   
    
    achieving consistent and acceptable production yield and costs;
    
    meeting product release specifications;
    
    quality control and assurance;
    
    shortages of qualified manufacturing personnel;
    
    shortages of raw materials;
    
    shortages of key contractors; and
    
    ongoing compliance with FDA and other regulations.
   Limited Manufacturing Experience; Risk of Scale-Up
 Niaspan Advicor Niaspan Advicor Niaspan
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Dependence on Single Sources of Supply
 Niaspan Advicor Advicor
 Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
 Cardizem LA Teveten, Teveten HCT
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Azmacort Cardizem LA Teveten or
Teveten HCT
 Best Price and Other Potential Price Reporting Issues
  Wholesaler and Distributor Buying Patterns
    39




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Risk of Product Liability Claims; No Assurance of Adequate Insurance
 Advicor, Advicor Advicor
 Possible Stock Price Volatility
  40




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High
    
    
    LowYear Ended December 31, 2002First Quarter
    
    $
    35.27
    
    
    $
    19.30Second Quarter
    
    
    29.16
    
    
    
    15.50Third Quarter
    
    
    20.70
    
    
    
    10.03Fourth Quarter
    
    
    24.16
    
    
    
    10.38Year Ended December 31, 2003First Quarter
    
    $
    20.89
    
    
    $
    15.51Second Quarter
    
    
    27.10
    
    
    
    16.79Third Quarter
    
    
    42.86
    
    
    
    22.50Fourth Quarter
    
    
    47.73
    
    
    
    32.42Year Ended December 31, 2004First Quarter
    
    $
    59.41
    
    
    $
    37.06Second Quarter
    
    
    44.40
    
    
    
    29.55Third Quarter
    
    
    39.41
    
    
    
    28.00Fourth Quarter
    
    
    45.74
    
    
    
    33.45Year Ended December 31, 2005First Quarter
    
    $
    42.66
    
    
    $
    30.30Second Quarter
    
    
    68.60
    
    
    
    41.53Third Quarter
    
    
    78.40
    
    
    
    63.26Fourth Quarter
    
    
    73.56
    
    
    
    49.10
  
    
    the sale by the Companys controlling shareholder or members of the Companys management
of shares of Common Stock;
    
    announcements of technological innovations or new commercial products by the Company or
its competitors;
    
    developments or disputes concerning patent or proprietary rights;
    
    the outcome of the litigation between Biovail and Andrx;
    
    publicity regarding actual or potential medical results relating to products comprising
the Companys Product Portfolio or to products under development by Kos or its competitors;
    
    regulatory developments in either the United States or foreign countries;
    
    public concern as to the safety of pharmaceutical and biotechnology products;
    
    economic and other external factors;
    
    the trend of prescriptions for the products comprising the Companys Product Portfolio
and the period-to-period fluctuations in sales or other financial results;
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
    
    the Companys ability to maintain coverage of its products by government agencies and
the effects of the loss of such coverage with such agencies, such as CMS;
    
    the outcome of the investigation by the Inspector General of the United States
Department of Health and Human Services in conjunction with the United States Department of
Justice; and
    
    the outcome of the Companys review of its price reporting methodologies in connection
with Medicaid rebates.
 Anti-Takeover Provisions
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
  42




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ITEM 2. PROPERTIES.
  Lease Expiration(Including Renewal
    
    Minimum AnnualLocation
    
    Use
    
    Square Feet
    
    Options)
    
    RentCranbury, NJ
    
    Corporate, research and
admin. offices
    
    
    90,000
    
    
    June 2014
    
    $
    2,760,000Hollywood, FL
    
    Manufacturing, research
and admin. offices
    
    
    23,500
    
    
    November 2007
    
    
    381,000Weston, FL*
    
    Research and admin. offices
    
    
    51,900
    
    
    October 2008
    
    
    896,000Edison, NJ
    
    Manufacturing, research,
and admin. offices
    
    
    47,500
    
    
    October 2009
    
    
    341,000Raleigh, NC
    
    Device engineering offices
    
    
    6,000
    
    
    August 2009
    
    
    74,000
   
 ITEM 3. LEGAL PROCEEDINGS.
 Cardizem LA Cardizem
LA
  Cardizem
LA
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Cardizem LA Cardizem LA
    44




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  45




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PART II
 
 ITEM 5.
    
    MARKET FOR THE COMPANYS COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
   Year Ended December 31, 2005
    
    High
    
    
    LowFirst Quarter
    
    $
    42.66
    
    
    $
    30.30Second Quarter
    
    
    68.60
    
    
    
    41.53Third Quarter
    
    
    78.40
    
    
    
    63.26Fourth Quarter
    
    
    73.56
    
    
    
    49.10
 Year Ended December 31, 2004
    
    High
    
    
    LowFirst Quarter
    
    $
    59.41
    
    
    $
    37.06Second Quarter
    
    
    44.40
    
    
    
    29.55Third Quarter
    
    
    39.41
    
    
    
    28.00Fourth Quarter
    
    
    45.74
    
    
    
    33.45
  46




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
  Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands, except share data)Statement of Operations:Net sales(1)
    
    $
    746,197
    
    
    $
    495,545
    
    
    $
    293,907
    
    
    $
    172,693
    
    
    $
    84,227Licensing revenue
    
    
    5,503
    
    
    
    1,559
    
    
    
    
    
    
    
    
    
    
    
    7,220Total revenue
    
    
    751,700
    
    
    
    497,104
    
    
    
    293,907
    
    
    
    172,693
    
    
    
    91,447Cost of sales(2)
    
    
    81,295
    
    
    
    36,926
    
    
    
    20,038
    
    
    
    15,362
    
    
    
    7,646670,405
    
    
    
    460,178
    
    
    
    273,869
    
    
    
    157,331
    
    
    
    83,801Operating expenses:Research and development(3)
    
    
    123,235
    
    
    
    111,064
    
    
    
    52,203
    
    
    
    43,981
    
    
    
    30,974Selling, general and administrative
    
    
    366,137
    
    
    
    235,718
    
    
    
    156,469
    
    
    
    130,145
    
    
    
    83,587Total operating expenses(4)
    
    
    489,372
    
    
    
    346,782
    
    
    
    208,672
    
    
    
    174,126
    
    
    
    114,561Income (loss) from operations
    
    
    181,033
    
    
    
    113,396
    
    
    
    65,197
    
    
    
    (16,795
    )
    
    
    (30,760
    )Other expense (income):Interest income, net
    
    
    (8,385
    )
    
    
    (2,388
    )
    
    
    (614
    )
    
    
    (160
    )
    
    
    (242
    )Interest expense,-related parties
    
    
    520
    
    
    
    1,209
    
    
    
    3,316
    
    
    
    4,038
    
    
    
    6,051Interest expense,-other
    
    
    70
    
    
    
    8
    
    
    
    4
    
    
    
    7
    
    
    
    30Other expense (income)(4)
    
    
    215
    
    
    
    (3,576
    )
    
    
    198
    
    
    
    136
    
    
    
    (38,985
    )Total other expense (income)
    
    
    (7,580
    )
    
    
    (4,747
    )
    
    
    2,904
    
    
    
    4,021
    
    
    
    (33,146
    )Income (loss) before provision for /
(benefit from)
income taxes(1)
    
    
    188,613
    
    
    
    118,143
    
    
    
    62,293
    
    
    
    (20,816
    )
    
    
    2,386Provision for / (benefit from) income taxes
    
    
    70,510
    
    
    
    (24,176
    )
    
    
    2,879
    
    
    
    
    
    
    
    Net income (loss)(1)
    
    $
    118,103
    
    
    $
    142,319
    
    
    $
    59,414
    
    
    $
    (20,816
    )
    
    $
    2,386Earnings (loss) per share(5)Basic
    
    $
    2.71
    
    
    $
    3.76
    
    
    $
    2.71
    
    
    $
    (1.01
    )
    
    $
    0.12Diluted
    
    
    2.46
    
    
    
    3.13
    
    
    
    1.53
    
    
    
    (1.01
    )
    
    
    0.10Weighted average Common Stock and Common
Stock equivalents used in computing
earnings (loss) per share(5)Basic
    
    
    43,528,173
    
    
    
    37,897,597
    
    
    
    21,913,928
    
    
    
    20,582,205
    
    
    
    20,221,089Diluted
    
    
    48,292,906
    
    
    
    45,835,563
    
    
    
    41,033,325
    
    
    
    20,582,205
    
    
    
    22,798,632
 December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)Balance Sheet:Cash and marketable securities
    
    $
    412,736
    
    
    $
    258,703
    
    
    $
    259,958
    
    
    $
    19,572
    
    
    $
    45,319Working capital (deficit)
    
    
    392,193
    
    
    
    254,220
    
    
    
    248,059
    
    
    
    (54,644
    )
    
    
    27,160Total assets
    
    
    909,754
    
    
    
    586,926
    
    
    
    335,521
    
    
    
    69,441
    
    
    
    82,941Total long-term liabilities(6)
    
    
    21,122
    
    
    
    14,996
    
    
    
    30,000
    
    
    
    34,025
    
    
    
    95,082Accumulated earnings (deficit)
    
    
    26,475
    
    
    
    (91,628
    )
    
    
    (233,947
    )
    
    
    (293,361
    )
    
    
    (272,545
    )Shareholders equity (deficit)
    
    
    678,359
    
    
    
    435,142
    
    
    
    239,627
    
    
    
    (74,709
    )
    
    
    (58,439
    )
 
 (1)
    
    For 2003, includes the effect of an $11.1 million revenue benefit and $9.9
million benefit to income before provision for income taxes resulting from a change in
accounting estimate. For 2005, includes a $17.0 million increase in revenue and a $7.9 million
increase in net income resulting from a change in accounting estimate. See Note 2 of Notes to
Consolidated Financial Statements for information concerning these changes in accounting
estimate relating to revenue recognition.(2)
    
    See Note 6 of Notes to Consolidated Financial Statements for information regarding
certain amortization amounts excluded from cost of sales for the
years ended December 31, 2005 and 2004.(3)
    
    For 2004, includes the effect of the $38.0 million AzmacortIn-process R&D
write-off. For 2005, includes the effect of the $14.2 million Jerini Licensing Payment, the
$4.0 million Arisaph write-off, and the $2.8 million CardizemCombination Product In-process
R&D Write-off.(4)
    
    For 2001, includes the effect of a $45.0 million settlement received from
Bristol-Myers Squibb Company, of which $6.0 million was recorded as reimbursement of operating
expenses and $39.0 million as other income. For 2004, includes the effect of a $6.0 million
settlement received from Andrx, of which $2.0 million was recorded as reimbursement of
operating expenses and $4.0 million as other income.(5)
    
    See Note 2 of Notes to Consolidated Financial Statements for information concerning
the computation of earnings (loss) per share. 47




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##### Table of Contents



(6)
    
    For 2004, excludes $19.0 million of debt due to Michael Jaharis, Chairman Emeritus
of the Companys Board of Directors and its principal shareholder, as such debt matured on
June 30, 2005. For 2002, excludes $50.0 million of debt due to Michael Jaharis, as such debt
matured on December 31, 2003. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Executive Overview
 Niaspan ® Advicor ® ,
 Azmacort Azmacort Azmacort Azmacort ® Azmacort
 Niaspan Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
 Teveten ® Teveten HCT Teveten Cardizem ® LA Teveten Cardizem LA
 Cardizem LA
 48




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##### Table of Contents



Cardizem LA
     (i)
    
    develop or acquire products with unrealized commercial potential where safety
or patient compliance may be improved or where greater utilization of a product could
be attained through increasing the awareness of the products features and benefits;(ii)
    
    focus on the large, rapidly growing cardiovascular, metabolic and respiratory
markets, which include many chronic diseases requiring long-term therapy;(iii)
    
    develop proprietary formulations of currently approved pharmaceutical
compounds;(iv)
    
    make measured investments in new chemical entity research through sponsored
research programs, scientific in-licensing and corporate development activities;(v)
    
    manage internally the clinical development of its products, or where necessary
or prudent, using contract research organizations;(vi)
    
    manufacture its products internally, or where necessary or prudent, through its
partners or using a third party manufacturer;(vii)
    
    market its products directly through the Companys sales forces, which Kos may
supplement with one or more contract sales organizations or other partners and through
co-promotion and other strategic alliances, to extend the marketing reach of the
Company to new patients; and
 49




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##### Table of Contents



(viii)
    
    leverage its core competencies through corporate and academic alliances.
 Niaspan, Advicor, Azmacort, Cardizem LA, Teveten Teveten HCT Niaspan Advicor Niaspan Advicor Azmacort Cardizem LA Teveten Teveten HCT Azmacort Cardizem LA, Teveten Teveten HCT
 Niaspan, Advicor, Azmacort, Cardizem LA, Teveten, Teveten HCT
 General
   50




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##### Table of Contents



Niaspan Niaspan Niaspan Niaspan
 Advicor Advicor Advicor Niaspan, Advicor Advicor
 Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
 Azmacort
 Azmacort Azmacort
 51




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##### Table of Contents



Azmacort Azmacort
 Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
   52




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##### Table of Contents



Assets Acquired in a Business Combination to be Used in Research
and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical
Industries
 Niaspan
 Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan
 Teveten Teveten HCT Cardizem LA Teveten Teveten Cardizem LA Cardizem LA Cardizem
 53




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##### Table of Contents



Cardizem Cardizem Cardizem Cardizem LA, Teveten, Teveten HCT
 Cardizem
 Cardizem Cardizem LA
 Cardizem Cardizem Cardizem
 Azmacort Cardizem
  54




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##### Table of Contents



Recent Developments
    Results of Operations
 Critical Accounting Policies
  Revenue Recognition
  55




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56




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##### Table of Contents



Niaspan Advicor, Azmacort, Cardizem
Teveten Teveten HCT  Sensitivity Analysis of Possible Variations in Prescription and AMP Inputs
 Prescription Variance(5%)
    
    
    (3%)
    
    
    (1%)
    
    
    0%
    
    
    1%
    
    
    3%
    
    
    5%AMP Variance
    
    
    (5
    %)
    
    $
    (1.9
    )
    
    $
    (2.0
    )
    
    $
    (2.1
    )
    
    $
    (2.2
    )
    
    $
    (2.2
    )
    
    $
    (2.3
    )
    
    $
    (2.4
    )(3
    %)
    
    
    (1.1
    )
    
    
    (1.2
    )
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (1.4
    )
    
    
    (1.5
    )
    
    
    (1.6
    )(1
    %)
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (0.6
    )
    
    
    (0.7
    )0
    %
    
    
    0.2
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.2
    )1
    %
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.4
    
    
    
    0.33
    %
    
    
    1.9
    
    
    
    1.8
    
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.6
    
    
    
    1.5
    
    
    
    1.45
    %
    
    
    3.0
    
    
    
    2.9
    
    
    
    2.8
    
    
    
    2.8
    
    
    
    2.7
    
    
    
    2.6
    
    
    
    2.5
  Niaspan, Advicor, Azmacort, Cardizem LA,
Teveten Teveten HCT Niaspan Advicor
  57




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##### Table of Contents



Income Taxes
   Azmacort
   58




---



##### Table of Contents



Intangible Assets
     Years Ended December 31, 2005 and 2004
  Years Ended December 31,% of
    
    
    
    
    
    
    % of
    
    
    %2005
    
    
    Revenues
    
    
    2004
    
    
    Revenues
    
    
    Change(in mils.)
    
    
    
    
    
    
    (in mils.)Niaspan
    
    $
    435.2
    
    
    
    57.9
    
    
    $
    319.1
    
    
    
    64.2
    
    
    
    36.4Advicor
    
    
    116.0
    
    
    
    15.4
    
    
    
    108.2
    
    
    
    21.8
    
    
    
    7.2Azmacort
    
    
    103.2
    
    
    
    13.7
    
    
    
    68.3
    
    
    
    13.7
    
    
    
    51.1Cardizem
    
    
    69.7
    
    
    
    9.3
    
    
    
    
    
    
    
    
    
    
    
    N/AAll Teveten
    
    
    22.1
    
    
    
    3.0
    
    
    
    
    
    
    
    
    
    
    
    N/AOther
    
    
    5.5
    
    
    
    0.7
    
    
    
    1.5
    
    
    
    0.3
    
    
    
    266.7$
    751.7
    
    
    
    100.0
    
    
    $
    497.1
    
    
    
    100.0
    
    
    
    51.2
 Niaspan Advicor
 59




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##### Table of Contents



Azmacort Cardizem LA Teveten Niaspan Advicor
    2005Niaspan
    
    
    Advicor
    
    
    Azmacort
    
    
    Cardizem LA
    
    
    AllTevetenProvisions
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % ofFor
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total(in mils.)
    
    
    
    
    (in mils.)
    
    
    (in mils.)
    
    
    (in mils.)
    
    
    (in mils.)Rebates
    
    $
    392.3
    
    
    
    63
    
    
    $
    66.4
    
    
    
    48
    
    
    $
    44.9
    
    
    
    30
    
    
    $
    30.2
    
    
    
    38
    
    
    $
    6.3
    
    
    
    25Chargebacks
    
    
    166.5
    
    
    
    27
    
    
    
    17.7
    
    
    
    13
    
    
    
    30.7
    
    
    
    21
    
    
    
    9.0
    
    
    
    11
    
    
    
    0.5
    
    
    
    2Returns
    
    
    626.7
    
    
    
    100
    
    
    
    139.2
    
    
    
    100
    
    
    
    148.2
    
    
    
    100
    
    
    
    78.8
    
    
    
    100
    
    
    
    25.1
    
    
    
    100Discounts
    
    
    626.7
    
    
    
    100
    
    
    
    139.2
    
    
    
    100
    
    
    
    148.2
    
    
    
    100
    
    
    
    78.8
    
    
    
    100
    
    
    
    25.1
    
    
    
    100IMAs
    
    
    192.8
    
    
    
    31
    
    
    
    45.7
    
    
    
    33
    
    
    
    40.5
    
    
    
    27
    
    
    
    44.5
    
    
    
    56
    
    
    
    14
    
    
    
    56
 60




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##### Table of Contents



2004Niaspan
    
    
    Advicor
    
    
    Azmacort
    
    
    Cardizem LA
    
    
    AllTevetenProvisions
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % ofFor
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total(in mils.)
    
    
    
    
    (in mils.)
    
    
    (in mils.)
    
    
    (in mils.)
    
    
    (in mils.)Rebates
    
    $
    314.6
    
    
    
    70
    
    
    $
    52.5
    
    
    
    41
    
    
    $
    27.0
    
    
    
    28
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AChargebacks
    
    
    90.3
    
    
    
    20
    
    
    
    7.7
    
    
    
    6
    
    
    
    23.9
    
    
    
    25
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AReturns
    
    
    452.4
    
    
    
    100
    
    
    
    127.1
    
    
    
    100
    
    
    
    96.3
    
    
    
    100
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ADiscounts
    
    
    452.4
    
    
    
    100
    
    
    
    127.1
    
    
    
    100
    
    
    
    96.3
    
    
    
    100
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  Niaspan, Azmacort Cardizem LA Teveten Azmacort,
Cardizem LA, Teveten
 Cardizem LA Azmacort
 Azmacort
 61




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Years Ended December 31, 2004 and 2003
  Years Ended December 31,% of
    
    
    
    
    
    
    % of
    
    
    %2004
    
    
    Revenues
    
    

2003
    
    
    Revenues
    
    
    Change(in mils.)
    
    
    
    
    
    
    (in mils.)Niaspan
    
    $
    319.1
    
    
    
    64.2
    
    
    $
    226.5
    
    
    
    77.1
    
    
    
    40.9Advicor
    
    
    108.2
    
    
    
    21.8
    
    
    
    67.4
    
    
    
    22.9
    
    
    
    60.5Azmacort
    
    
    68.3
    
    
    
    13.7
    
    
    
    
    
    
    
    
    
    
    
    N/AOther
    
    
    1.5
    
    
    
    0.3
    
    
    
    
    
    
    
    
    
    
    
    N/A$
    497.1
    
    
    
    100.0
    
    
    $
    293.9
    
    
    
    100.0
    
    
    
    69.1
 Niaspan Advicor Niaspan
 62




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##### Table of Contents



Advicor Azmacort
  2004
    
    
    2003Niaspan
    
    
    Advicor
    
    
    Azmacort
    
    
    Niaspan
    
    
    Advicor
    
    
    AzmacortProvisions
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % of
    
    
    Gross
    
    
    % ofFor
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total
    
    
    Sales
    
    
    Total(in mils.)
    
    
    
    
    (in mils.)
    
    
    (in mils.)
    
    
    (in mils.)
    
    
    (in mils.)
    
    
    
    
    (in mils)Rebates
    
    $
    314.6
    
    
    
    70
    
    
    $
    52.5
    
    
    
    41
    
    
    $
    27.0
    
    
    
    28
    
    
    $
    208.7
    
    
    
    69
    
    
    $
    26.9
    
    
    
    37
    
    
    
    N/A
    
    
    
    N/AChargebacks
    
    
    90.3
    
    
    
    20
    
    
    
    7.7
    
    
    
    6
    
    
    
    23.9
    
    
    
    25
    
    
    
    42.3
    
    
    
    14
    
    
    
    1.1
    
    
    
    1
    
    
    
    N/A
    
    
    
    N/AReturns
    
    
    452.4
    
    
    
    100
    
    
    
    127.1
    
    
    
    100
    
    
    
    96.3
    
    
    
    100
    
    
    
    303.3
    
    
    
    100
    
    
    
    73.0
    
    
    
    100
    
    
    
    N/A
    
    
    
    N/ADiscounts
    
    
    452.4
    
    
    
    100
    
    
    
    127.1
    
    
    
    100
    
    
    
    96.3
    
    
    
    100
    
    
    
    303.3
    
    
    
    100
    
    
    
    73.0
    
    
    
    100
    
    
    
    N/A
    
    
    
    N/A
  Niaspan Advicor Azmacort Azmacort
 Azmacort
 Niaspan, Advicor, Azmacort Azmacort
 63




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Azmacort
   Liquidity and Capital Resources
   Azmacort Azmacort
  64




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65




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##### Table of Contents



Azmacort
 Niaspan Advicor Azmacort Cardizem LA Teveten Teveten HCT Niaspan Advicor Azmacort Cardizem LA Teveten Teveten HCT
 66




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##### Table of Contents



Contractual Obligations
  Payments Due by Period(in millions)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1-3
    
    
    3-5
    
    
    than 51 year
    
    
    years
    
    
    years
    
    
    years
    
    
    TotalOperating lease obligations
    
    $
    10.6
    
    
    $
    18.9
    
    
    $
    10.8
    
    
    $
    16.8
    
    
    $
    57.1Employment agreements
    
    
    1.4
    
    
    
    2.1
    
    
    
    2.0
    
    
    
    0.1
    
    
    
    5.6Capital lease
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    0.2Total contractual obligations
    
    $
    12.1
    
    
    $
    21.1
    
    
    $
    12.8
    
    
    $
    16.9
    
    
    $
    62.9
    Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
 67




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##### Table of Contents



Niaspan Advicor Niaspan Advicor
  68




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##### Table of Contents



FORWARD-LOOKING INFORMATION: CERTAIN CAUTIONARY STATEMENTS
 Niaspan Advicor Azmacort Cardizem LA Teveten Teveten HCT Niaspan Azmacort HFA Niaspan Niaspan Advicor Azmacort Cardizem LA Teveten Teveten HCT Niaspan, Advicor, Azmacort Cardizem LA, Teveten Teveten HCT Advicor Niaspan Niaspan Niaspan/simvastatin Azmacort, Cardizem LA, Teveten, Teveten HCT Niaspan Advicor Azmacort, Cardizem LA Teveten, Teveten HCT
 69




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Cardizem LA
 70




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  
 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  PageFinancial Statements:Managements Annual Report on Internal Control Over Financial Reporting
    
    
    72Report of Independent Registered Public Accounting Firm
    
    
    73Report of Independent Registered Public Accounting Firm
    
    
    75Consolidated Balance Sheets at December 31, 2005 and 2004
    
    
    76Consolidated Statements of Income for the years ended
December 31, 2005, 2004, and 2003
    
    
    77Consolidated Statements of Shareholders Equity and Comprehensive Income for
the years ended December 31, 2005, 2004, and 2003
    
    
    78Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004, and 2003
    
    
    79Notes to Consolidated Financial Statements
    
    
    80Financial Statement Schedule:*Report of Independent Registered Public Accounting Firm
    
    
    112Schedule II Valuation and Qualifying Accounts
    
    
    113
 
 *All other schedules for which provision is made
in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable,
and therefore not included herein. 71




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##### Table of Contents



MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
        72




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      .
 73




---



##### Table of Contents



.
 
 
 74




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      
 
 75




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    412,735,887
    
    
    $
    258,702,556Trade accounts receivable, net
    
    
    111,652,455
    
    
    
    74,567,946Inventories, net
    
    
    20,747,870
    
    
    
    10,649,370Prepaid expenses and other current assets
    
    
    20,554,944
    
    
    
    11,571,944Current deferred tax asset, net
    
    
    36,774,997
    
    
    
    35,515,611Total current assets
    
    
    602,466,153
    
    
    
    391,007,427Fixed Assets, net
    
    
    28,744,959
    
    
    
    23,340,585Investments
    
    
    12,781,494
    
    
    
    Goodwill
    
    
    2,300,000
    
    
    
    Long Term Deferred Tax Asset, net
    
    
    29,489,585
    
    
    
    19,016,389Intangible Assets, net
    
    
    228,530,272
    
    
    
    150,078,880Other Assets
    
    
    5,441,063
    
    
    
    3,482,467Total assets
    
    $
    909,753,526
    
    
    $
    586,925,748LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    25,111,578
    
    
    $
    9,160,532Accrued expenses
    
    
    183,398,172
    
    
    
    104,898,205Advance payment received on license agreement,
current portion net of amortized amount
    
    
    1,625,413
    
    
    
    3,597,281Note payable to shareholder
    
    
    
    
    
    
    19,000,000Current portion of capital lease obligations
    
    
    137,533
    
    
    
    131,820Total current liabilities
    
    
    210,272,696
    
    
    
    136,787,838Long Term Liabilities:Advance payment received on license agreement, net of current portion
    
    
    13,161,798
    
    
    
    14,787,211Other long term liabilities
    
    
    7,889,000
    
    
    
    Capital lease obligations, net of current portion
    
    
    70,985
    
    
    
    208,518Total long term liabilities
    
    
    21,121,783
    
    
    
    14,995,729Commitments and Contingencies (Notes 1, 12 and 16)Shareholders Equity:Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized,
46,861,818 and 40,211,375 shares issued and outstanding as of
December 31, 2005 and 2004, respectively
    
    
    468,618
    
    
    
    402,114Additional paid-in capital
    
    
    650,793,120
    
    
    
    526,462,711Restricted stock grant
    
    
    
    
    
    
    (94,568
    )Retained earnings (accumulated deficit)
    
    
    26,475,059
    
    
    
    (91,628,076
    )Accumulated other comprehensive income
    
    
    622,250
    
    
    
    Total shareholders equity
    
    
    678,359,047
    
    
    
    435,142,181Total liabilities and shareholders equity
    
    $
    909,753,526
    
    
    $
    586,925,748
 The accompanying notes are an integral part of these financial statements.
 76




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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 For the Year Ended December 31,2005
    
    
    2004
    
    
    2003Net sales
    
    $
    746,196,991
    
    
    $
    495,544,530
    
    
    $
    293,907,409Licensing revenue
    
    
    5,502,781
    
    
    
    1,559,359
    
    
    
    Total revenue
    
    
    751,699,772
    
    
    
    497,103,889
    
    
    
    293,907,409Cost of sales (excludes Azmacort developed and core
technology amortization of $15.2 million and $10.3 million of
amortization charges for the years
ended December 31, 2005 and 2004, respectively; see Note 6)
    
    
    81,294,979
    
    
    
    36,925,890
    
    
    
    20,038,529670,404,793
    
    
    
    460,177,999
    
    
    
    273,868,880Operating expenses:Research and development
    
    
    123,234,695
    
    
    
    111,064,304
    
    
    
    52,202,981Selling, general and administrative
    
    
    366,136,640
    
    
    
    235,717,688
    
    
    
    156,469,215Total operating expenses
    
    
    489,371,335
    
    
    
    346,781,992
    
    
    
    208,672,196Income from operations
    
    
    181,033,458
    
    
    
    113,396,007
    
    
    
    65,196,684Other expense (income):Interest income, net
    
    
    (8,384,751
    )
    
    
    (2,387,839
    )
    
    
    (613,984
    )Interest expense, related parties
    
    
    519,757
    
    
    
    1,209,465
    
    
    
    3,316,367Interest expense, other
    
    
    69,733
    
    
    
    8,415
    
    
    
    3,575Other expense (income)
    
    
    215,356
    
    
    
    (3,577,304
    )
    
    
    198,332Total other expense (income)
    
    
    (7,579,905
    )
    
    
    (4,747,263
    )
    
    
    2,904,290Income before provision for / (benefit from) income taxes
    
    
    188,613,363
    
    
    
    118,143,270
    
    
    
    62,292,394Provision for / (benefit from) income taxes
    
    
    70,510,228
    
    
    
    (24,176,058
    )
    
    
    2,878,821Net income
    
    $
    118,103,135
    
    
    $
    142,319,328
    
    
    $
    59,413,573Basic earnings per share of Common Stock
    
    $
    2.71
    
    
    $
    3.76
    
    
    $
    2.71Diluted earnings per share of Common Stock
    
    $
    2.46
    
    
    $
    3.13
    
    
    $
    1.53Weighted average shares of Common Stock and
Common Stock equivalents outstanding:Basic
    
    
    43,528,173
    
    
    
    37,897,597
    
    
    
    21,913,928Diluted
    
    
    48,292,906
    
    
    
    45,835,563
    
    
    
    41,033,325
 The accompanying notes are an integral part of these financial statements.
 77




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
 Retained
    
    
    AccumulatedCommon Stock
    
    
    Additional
    
    
    
    
    
    
    Earnings
    
    
    OtherPain-in
    
    
    Restricted
    
    
    (Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Stock Grant
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance at December 31, 2002
    
    
    20,807,859
    
    
    $
    208,079
    
    
    $
    219,138,285
    
    
    $
    (694,521
    )
    
    $
    (293,360,977
    )
    
    $
    
    
    
    $
    (74,709,134
    )Common Stock issued to employees
under Kos Savings Plan
    
    
    45,449
    
    
    
    454
    
    
    
    1,078,873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,079,327Compensation expense on restricted
Common Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    299,626
    
    
    
    
    
    
    
    
    
    
    
    299,626Compensation cost on Common
Stock warrants and modification of
stock option grant
    
    
    
    
    
    
    
    
    
    
    2,534,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,534,231Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    1,133,431
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,133,431Issuance of Common Stock
    
    
    4,400,000
    
    
    
    44,000
    
    
    
    184,232,585
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,276,585Issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    125,267
    
    
    
    1,253
    
    
    
    1,981,565
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,982,818Exercise of stock options
    
    
    1,229,416
    
    
    
    12,294
    
    
    
    13,604,654
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,616,948Conversion of Note Payable to
Shareholder to Common Stock
    
    
    10,183,299
    
    
    
    101,833
    
    
    
    49,898,167
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,413,573
    
    
    
    
    
    
    
    59,413,573Balance at December 31, 2003
    
    
    36,791,290
    
    
    
    367,913
    
    
    
    473,601,791
    
    
    
    (394,895
    )
    
    
    (233,947,404
    )
    
    
    
    
    
    
    239,627,405Common Stock issued to employees
under Kos Savings Plan
    
    
    41,139
    
    
    
    411
    
    
    
    1,569,215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569,626Compensation expense on restricted
Common Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,327
    
    
    
    
    
    
    
    
    
    
    
    300,327Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    22,248,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,248,000Issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    110,778
    
    
    
    1,108
    
    
    
    2,632,027
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,633,135Exercise of stock options
    
    
    1,068,168
    
    
    
    10,682
    
    
    
    15,433,678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,444,360Conversion of Note Payable to
Shareholder to Common Stock
    
    
    2,200,000
    
    
    
    22,000
    
    
    
    10,978,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,000,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,319,328
    
    
    
    
    
    
    
    142,319,328Balance at December 31, 2004
    
    
    40,211,375
    
    
    
    402,114
    
    
    
    526,462,711
    
    
    
    (94,568
    )
    
    
    (91,628,076
    )
    
    
    
    
    
    
    435,142,181Common Stock issued to employees
under Kos Savings Plan
    
    
    42,215
    
    
    
    422
    
    
    
    2,170,755
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,171,177Compensation expense on restricted
Common Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,568
    
    
    
    
    
    
    
    
    
    
    
    94,568Compensation cost on modification
of stock option award
    
    
    
    
    
    
    
    
    
    
    1,067,845
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,067,845Compensation cost on consultant
stock options
    
    
    
    
    
    
    
    
    
    
    3,853,326
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,853,326Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    42,239,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,239,000Issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    107,470
    
    
    
    1,075
    
    
    
    3,198,364
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,199,439Exercise of stock options
    
    
    2,700,758
    
    
    
    27,007
    
    
    
    52,839,119
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,866,126Conversion of Note Payable to
Shareholder to Common Stock
    
    
    3,800,000
    
    
    
    38,000
    
    
    
    18,962,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,000,000Comprehensive income:Unrealized gains on investments, net
of taxes of $371,719
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    622,250
    
    
    
    622,250Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,103,135
    
    
    
    
    
    
    
    118,103,135Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,725,385Balance at December 31, 2005
    
    
    46,861,818
    
    
    $
    468,618
    
    
    $
    650,793,120
    
    
    $
    
    
    
    $
    26,475,059
    
    
    $
    622,250
    
    
    $
    678,359,047
 The
accompanying notes are an integral part of these financial statements.
 78




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Year Ended December 31,2005
    
    
    2004
    
    
    2003Cash Flows from Operating Activities:Net Income
    
    $
    118,103,135
    
    
    $
    142,319,328
    
    
    $
    59,413,573Adjustments to reconcile net income to net cash
provided by operating activities -
Provision for doubtful accounts
    
    
    308,472
    
    
    
    237,577
    
    
    
    217,143Depreciation
    
    
    6,088,980
    
    
    
    4,311,529
    
    
    
    3,310,964Amortization
    
    
    23,148,608
    
    
    
    10,982,631
    
    
    
    Provision for inventory obsolescence
    
    
    720,539
    
    
    
    959,859
    
    
    
    770,538Recognition of deferred revenue under license agreement
    
    
    (3,347,729
    )
    
    
    (1,136,306
    )
    
    
    Reimbursement recognized under license agreement
    
    
    (249,552
    )
    
    
    (249,996
    )
    
    
    (229,206
    )Loss from disposal of fixed assets
    
    
    153,990
    
    
    
    364,293
    
    
    
    197,606Deferred income tax benefit
    
    
    (15,428,000
    )
    
    
    (52,116,000
    )
    
    
    Common Stock issued to employees under Kos Savings Plan
    
    
    2,171,177
    
    
    
    1,569,626
    
    
    
    1,079,327Compensation expense on restricted stock grant
    
    
    94,568
    
    
    
    300,327
    
    
    
    299,626Compensation cost on Common Stock warrants and options
    
    
    
    
    
    
    
    
    
    
    2,534,231Compensation cost on modification of stock option award
    
    
    1,067,845
    
    
    
    
    
    
    
    Compensation cost on consultant stock options
    
    
    3,853,326
    
    
    
    
    
    
    
    Tax benefit of stock option exercises
    
    
    42,239,000
    
    
    
    22,248,000
    
    
    
    1,133,431Write-off of acquired in-process research and development
    
    
    2,800,000
    
    
    
    38,000,000
    
    
    
    Write-off of investment in Arisaph Pharmaceuticals, Inc.
    
    
    4,000,000
    
    
    
    
    
    
    
    Write-off of generic Niaspaninventory
    
    
    1,326,663
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (37,392,981
    )
    
    
    (37,339,828
    )
    
    
    (15,982,827
    )Inventories
    
    
    (8,848,164
    )
    
    
    1,796,896
    
    
    
    (1,249,649
    )Prepaid expenses and other current assets
    
    
    (8,983,000
    )
    
    
    (1,448,940
    )
    
    
    (4,228,711
    )Deferred tax assets
    
    
    3,326,418
    
    
    
    (2,416,000
    )
    
    
    Other assets
    
    
    2,600
    
    
    
    10,000
    
    
    
    (74,152
    )Accounts payable
    
    
    15,951,046
    
    
    
    1,375,564
    
    
    
    597,447Accrued expenses
    
    
    78,499,967
    
    
    
    61,584,815
    
    
    
    11,152,668Advance payments from customers
    
    
    
    
    
    
    
    
    
    
    (9,128,668
    )Advance payment received on license agreement
    
    
    
    
    
    
    5,000,000
    
    
    
    5,796,875Other liabilities
    
    
    7,889,000
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    237,495,908
    
    
    
    196,353,375
    
    
    
    55,610,216Cash Flows from Investing Activities:Capital expenditures and deposits on fixed
assets to be acquired
    
    
    (13,608,540
    )
    
    
    (9,535,881
    )
    
    
    (11,043,794
    )Product and intangible acquisition
    
    
    (109,997,538
    )
    
    
    (206,061,511
    )
    
    
    Investment in Jerini, Inc.
    
    
    (11,790,244
    )
    
    
    
    
    
    
    Investment in Arisaph Pharmaceuticals, Inc.
    
    
    (4,000,000
    )
    
    
    
    
    
    
    Purchases of marketable securities
    
    
    (5,913,420
    )
    
    
    
    
    
    
    (13,564,297
    )Sales of marketable securities
    
    
    5,913,420
    
    
    
    
    
    
    
    13,564,297Net cash used in investing activities
    
    
    (139,396,322
    )
    
    
    (215,597,392
    )
    
    
    (11,043,794
    )Cash Flows from Financing Activities:Net proceeds from issuance of Common Stock
    
    
    
    
    
    
    
    
    
    
    184,276,585Proceeds from issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    3,199,439
    
    
    
    2,633,135
    
    
    
    1,982,818Net proceeds from exercise of stock options
    
    
    52,866,126
    
    
    
    15,444,360
    
    
    
    13,616,948Borrowings under Notes Payable to Shareholder
    
    
    
    
    
    
    
    
    
    
    Payments of Notes Payable to Shareholder
    
    
    
    
    
    
    
    
    
    
    (4,000,000
    )Payments under capital lease obligations
    
    
    (131,820
    )
    
    
    (88,456
    )
    
    
    (57,285
    )Net cash provided by financing activities
    
    
    55,933,745
    
    
    
    17,989,039
    
    
    
    195,819,066Net increase (decrease) in cash and cash equivalents
    
    
    154,033,331
    
    
    
    (1,254,978
    )
    
    
    240,385,488Cash and Cash Equivalents, beginning of period
    
    
    258,702,556
    
    
    
    259,957,534
    
    
    
    19,572,046Cash and Cash Equivalents, end of period
    
    $
    412,735,887
    
    
    $
    258,702,556
    
    
    $
    259,957,534Supplemental Disclosure of Non-cash Information:Interest paid
    
    $
    673,539
    
    
    $
    1,444,801
    
    
    $
    3,075,218Income taxes paid
    
    
    15,259,000
    
    
    
    5,454,000
    
    
    
    2,459,898Supplemental Disclosure of Non-cash Information:Conversion of Note Payable to Shareholder to Common Stock
(See Note 8)
    
    $
    19,000,000
    
    
    $
    11,000,000
    
    
    $
    50,000,000Acquisition of equipment under capital lease obligations
    
    
    
    
    
    
    404,180
    
    
    
    
 The
accompanying notes are an integral part of these financial statements.
 79




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. General
  Niaspan® Niaspan Niaspan Niaspan
 Advicor® Niaspan Niaspan
 Azmacort ® Azmacort
 Niaspan Niaspan Advicor Niaspan Advicor
 80




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##### Table of Contents



Niaspan Advicor Niaspan Advicor
 Teveten® Teveten HCT Teveten Cardizem® LA Teveten Cardizem LA
 Cardizem LA Cardizem LA
   81




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##### Table of Contents



Cardizem LA
 2. Summary of Significant Accounting Policies
 Basis of Presentation
  Reclassification
  Use of Estimates
  Cash and Cash Equivalents
  Trade Accounts Receivable and Allowance for Doubtful Accounts
  82




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Inventories
  Niaspan Advicor Azmacort Azmacort Azmacort Azmacort Cardizem LA Teveten Teveten Cardizem LA Teveten/Teveten HCT
 Long-Lived Assets
  Azmacort
 Fair Value of Financial Instruments
  83




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##### Table of Contents



Concentration of Credit Risk
   Revenue Recognition
  December 31,2005
    
    
    2004
    
    
    2003Niaspan
    
    $
    435,160,000
    
    
    $
    319,071,000
    
    
    $
    226,541,000Advicor
    
    
    115,961,000
    
    
    
    108,197,000
    
    
    
    67,366,000Azmacort
    
    
    103,245,000
    
    
    
    68,277,000
    
    
    
    Cardizem
LA
    
    
    69,746,000
    
    
    
    
    
    
    
    Teveten
and Teveten HCT
    
    
    22,085,000
    
    
    
    
    
    
    
    Other
    
    
    5,503,000
    
    
    
    1,559,000
    
    
    
    Total
    
    $
    751,700,000
    
    
    $
    497,104,000
    
    
    $
    293,907,000
 Cardizem LA Teveten Niaspan Advicor Azmacort
  84




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##### Table of Contents



Accounting for Product Returns and Inventory Management Agreements  Impact on Revenue Recognition
 Niaspan Advicor Niaspan Advicor
   Shipping and Handling Costs
  International Commercialization Agreements with Merck KGaA and Oryx
 Niaspan Advicor
 85




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##### Table of Contents



Niaspan Advicor Niaspan Advicor Niaspan Advicor
     Niaspan Advicor Niaspan Advicor
 86




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##### Table of Contents



Advicor Niaspan Niaspan Advicor Niaspan Advicor
 Co-Promotion and Strategic Alliance Arrangements
 Niaspan Advicor Niaspan Advicor
 Niaspan Advicor
 Fixed Assets
  YearsFurniture and equipment
    
    5Computer software and hardware
    
    3-5Laboratory and manufacturing equipment
    
    10Leasehold improvements
    
    Shorter of 7-10years or lives ofleases
 Investment
  Research and Development Expenses
  87




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##### Table of Contents



Advertising Expense
  Leases
  Income Taxes
  88




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##### Table of Contents



Earnings Per Share
  2005
    
    
    2004
    
    
    2003Numerator:Net income
    
    $
    118,103,135
    
    
    $
    142,319,328
    
    
    $
    59,413,573Interest expense from convertible debt
    
    
    519,757
    
    
    
    1,209,465
    
    
    
    3,316,367Diluted net income
    
    $
    118,622,892
    
    
    $
    143,528,793
    
    
    $
    62,729,940Denominator:Basic weighted average number of
shares outstanding
    
    
    43,528,173
    
    
    
    37,897,597
    
    
    
    21,913,928Effect of dilutive securities:Stock options
    
    
    2,911,613
    
    
    
    2,372,889
    
    
    
    3,078,860Non-detachable warrants (See Note 8)
    
    
    1,800,000
    
    
    
    5,542,077
    
    
    
    6,000,000Convertible debt (See Note 8)
    
    
    
    
    
    
    
    
    
    
    10,032,113Other Common Stock warrants
shares outstanding (See Note 12)
    
    
    53,120
    
    
    
    23,000
    
    
    
    8,424Diluted weighted average number of
shares outstanding
    
    
    48,292,906
    
    
    
    45,835,563
    
    
    
    41,033,325Basic earnings per share of
Common Stock
    
    $
    2.71
    
    
    $
    3.76
    
    
    $
    2.71Diluted earnings per share of
Common Stock
    
    $
    2.46
    
    
    
    3.13
    
    
    
    1.53
  Reporting of Comprehensive Income
  Accounting for Stock-Based Compensation
  89




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2005
    
    
    2004
    
    
    2003Net income:As reported
    
    $
    118,103,135
    
    
    $
    142,319,328
    
    
    $
    59,413,573Option modification expense
under APB 25, net of taxes
    
    
    667,403
    
    
    
    
    
    
    
    774,368Stock-based employee
compensation expense
under fair value method,
net of taxes
    
    
    (26,762,330
    )
    
    
    (24,990,213
    )
    
    
    (22,373,131
    )Pro forma
    
    $
    92,008,208
    
    
    $
    117,329,115
    
    
    $
    37,814,810Net income per share:As reported:Basic
    
    $
    2.71
    
    
    $
    3.76
    
    
    $
    2.71Diluted
    
    
    2.46
    
    
    
    3.13
    
    
    
    1.53Pro forma:Basic
    
    $
    2.11
    
    
    $
    3.10
    
    
    $
    1.73Diluted
    
    
    1.94
    
    
    
    2.63
    
    
    
    1.02Number of shares used in
calculation:As reported:Basic
    
    
    43,528,173
    
    
    
    37,897,597
    
    
    
    21,913,928Diluted
    
    
    48,292,906
    
    
    
    45,835,563
    
    
    
    41,033,325Pro forma:Basic
    
    
    43,528,173
    
    
    
    37,897,597
    
    
    
    21,913,928Diluted
    
    
    47,623,053
    
    
    
    45,137,279
    
    
    
    40,332,908
 Recent Accounting Pronouncements
  90




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##### Table of Contents



3. Trade Accounts Receivable, net
  December 31,2005
    
    
    2004Trade accounts receivable
    
    $
    115,449,598
    
    
    $
    77,910,655Less: Sales returns and allowances
    
    
    (3,479,491
    )
    
    
    (2,814,709
    )Allowance for doubtful accounts
    
    
    (317,652
    )
    
    
    (528,000
    )Trade accounts receivable, net
    
    $
    111,652,455
    
    
    $
    74,567,946
 4. Inventories
  December 31,2005
    
    
    2004Raw materials
    
    $
    3,294,094
    
    
    $
    2,199,352Work in process
    
    
    4,074,205
    
    
    
    4,160,583Finished goods
    
    
    13,379,571
    
    
    
    4,289,435Total inventories
    
    $
    20,747,870
    
    
    $
    10,649,370
  91




---



##### Table of Contents



5. Fixed Assets, net
  December 31,2005
    
    
    2004Furniture and equipment
    
    $
    3,828,407
    
    
    $
    3,665,108Computer software and hardware
    
    
    14,797,999
    
    
    
    10,548,445Laboratory and manufacturing equipment
    
    
    14,098,283
    
    
    
    12,662,199Leasehold improvements
    
    
    20,136,443
    
    
    
    15,776,388Fixed assets, gross
    
    
    52,861,132
    
    
    
    42,652,140Less accumulated depreciation
    
    
    (24,116,173
    )
    
    
    (19,311,555
    )Fixed assets, net
    
    $
    28,744,959
    
    
    $
    23,340,585
  6. Product Acquisition and Intangible Assets
 Azmacort Azmacort
 Azmacort Azmacort Azmacort.
 92




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##### Table of Contents



Azmacort
 Component
    
    Estimated Value
    
    
    Weighted Average Life(in years)Developed and Core
Technology
    
    $
    154,429,000
    
    
    7Supply Contract
    
    
    4,050,000
    
    
    5Trademark
    
    
    2,341,000
    
    
    IndefiniteOther Intangibles
    
    
    241,000
    
    
    5In-process Research and
Development
    
    
    38,000,000
    
    
    N/AInventory
    
    
    7,000,000
    
    
    N/ATotal
    
    $
    206,061,000
 Azmacort Azmacort
  Azmacort Azmacort Azmacort Azmacort
 Azmacort Azmacort
 93




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##### Table of Contents



Teveten Cardizem LA Cardizem
 Teveten Cardizem Cardizem LA Cardizem Teveten
  Component
    
    Estimated Value
    
    
    Weighted Average Life(in years)Developed and Core
Technology
    
    $
    44,400,000
    
    
    12Trademark
    
    
    4,200,000
    
    
    N/ASales and Marketing Rights
    
    
    49,000,000
    
    
    6Goodwill
    
    
    2,300,000
    
    
    N/AIn-process Research and
Development
    
    
    2,800,000
    
    
    N/AInventory
    
    
    3,297,000
    
    
    N/ATotal
    
    $
    105,997,000
 Cardizem Cardizem Cardizem
  Cardizem Cardizem LA
 94




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##### Table of Contents



Cardizem Cardizem Cardizem
 Azmacort Cardizem
  December 31, 2005
    
    
    December 31, 2004Net
    
    
    
    
    
    
    
    
    
    
    NetGross Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    Amount(in thousands)
    
    
    
    
    
    
    
    
    
    
    (in thousands)Developed and
Core
Technology
    
    $
    198,829
    
    
    $
    (27,622
    )
    
    $
    171,207
    
    
    $
    154,429
    
    
    $
    (10,336
    )
    
    $
    144,093Supply Contract
    
    
    4,050
    
    
    
    (1,418
    )
    
    
    2,632
    
    
    
    4,050
    
    
    
    (608
    )
    
    
    3,442Other Intangibles
    
    
    241
    
    
    
    (88
    )
    
    
    153
    
    
    
    241
    
    
    
    (38
    )
    
    
    203Trademarks*
    
    
    6,541
    
    
    
    
    
    
    
    6,541
    
    
    
    2,341
    
    
    
    
    
    
    
    2,341Sales and Marketing
Rights
    
    
    49,000
    
    
    
    (4,628
    )
    
    
    44,372
    
    
    
    
    
    
    
    
    
    
    
    Manufacturing Rights
    
    
    4,000
    
    
    
    (375
    )
    
    
    3,625
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    262,661
    
    
    $
    (34,131
    )
    
    $
    228,530
    
    
    $
    161,061
    
    
    $
    (10,982
    )
    
    $
    150,079
 
 *
    
    Indefinite-lived intangible assets  Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
 95




---



##### Table of Contents



7. Accrued Expenses
  December 31,2005
    
    
    2004Managed care rebates and chargebacks
    
    $
    70,617,506
    
    
    $
    49,998,035Employee commissions and bonuses
    
    
    15,235,778
    
    
    
    14,780,000Royalties
    
    
    29,669,864
    
    
    
    13,811,276Income taxes payable
    
    
    19,846,314
    
    
    
    2,183,142Inventory and commodity purchases
    
    
    9,481,484
    
    
    
    3,045,907IMA accrual
    
    
    8,720,689
    
    
    
    Employee vacations
    
    
    4,557,878
    
    
    
    3,436,987All other
    
    
    25,268,659
    
    
    
    17,642,858Total accrued expenses
    
    $
    183,398,172
    
    
    $
    104,898,205
 8. Notes Payable to Shareholder
    96




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##### Table of Contents



9. Income Taxes
    December 31,2005
    
    
    2004Current:Reserves and accruals
    
    $
    29,698,865
    
    
    $
    21,193,085Tax net operating loss carryforwards and credits
    
    
    4,128,661
    
    
    
    11,972,768Intangible assets
    
    
    1,552,697
    
    
    
    971,280Advance payment received on license agreement
    
    
    605,954
    
    
    
    1,378,478Other
    
    
    788,820
    
    
    
    Total Current
    
    
    36,774,997
    
    
    
    35,515,611Non-current:Tax net operating loss carryforwards
    
    
    
    
    
    
    4,181,274Intangible assets
    
    
    23,559,559
    
    
    
    15,348,930Advance payment received on license agreement
    
    
    4,906,719
    
    
    
    5,670,144Property and equipment
    
    
    (2,118,911
    )
    
    
    (2,585,414
    )Other
    
    
    3,142,218
    
    
    
    582,870Total Non-current
    
    
    29,489,585
    
    
    
    23,197,80466,264,582
    
    
    
    58,713,415Valuation allowance
    
    
    
    
    
    
    (4,181,415
    )$
    66,264,582
    
    
    $
    54,532,000
 97




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##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003Current provision:Federal
    
    $
    73,024,128
    
    
    $
    21,889,743
    
    
    $
    1,259,821State
    
    
    5,025,100
    
    
    
    6,050,199
    
    
    
    1,619,00078,049,228
    
    
    
    27,939,942
    
    
    
    2,878,821Deferred benefit:Federal
    
    
    (14,551,049
    )
    
    
    (44,034,931
    )
    
    
    State
    
    
    (876,951
    )
    
    
    (8,081,069
    )
    
    
    (15,428,000
    )
    
    
    (52,116,000
    )
    
    
    Changes in liabilities for uncertain
tax positions, net
    
    
    7,889,000
    
    
    
    
    
    
    
    Total
    
    $
    70,510,228
    
    
    $
    (24,176,058
    )
    
    $
    2,878,821
   December 31,2005
    
    
    2004
    
    
    2003Computed expected income tax based
on statutory federal income tax rate
    
    $
    66,014,677
    
    
    $
    41,350,145
    
    
    $
    21,802,338State income taxes, net of federal benefit
    
    
    9,600,924
    
    
    
    3,519,594
    
    
    
    2,614,495Non-deductible expenses
    
    
    2,329,228
    
    
    
    1,787,705
    
    
    
    2,928,564Change in valuation allowance
    
    
    (404,252
    )
    
    
    (69,630,815
    )
    
    
    (25,855,662
    )Research & development credit, net
    
    
    (5,390,268
    )
    
    
    
    
    
    
    Other
    
    
    (1,640,081
    )
    
    
    (1,202,687
    )
    
    
    1,389,086Provision for/(benefit from) income taxes
    
    $
    70,510,228
    
    
    $
    (24,176,058
    )
    
    $
    2,878,821
  98




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##### Table of Contents



10. Major Customers
  December 31,2005
    
    
    2004
    
    
    2003Customer A
    
    $
    295,125,706
    
    
    $
    184,788,262
    
    
    $
    94,496,344Customer B
    
    
    190,651,843
    
    
    
    134,436,596
    
    
    
    75,371,320Customer C
    
    
    119,334,394
    
    
    
    83,482,589
    
    
    
    60,620,703Total
    
    $
    605,111,943
    
    
    $
    402,707,447
    
    
    $
    230,488,367
 11. Selected Quarterly Financial Information (Unaudited)
 (in thousands, except per share data)
 First
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    FullQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Year2005Revenues, net(1)
    
    $
    153,290
    
    
    $
    179,399
    
    
    $
    205,095
    
    
    $
    213,916
    
    
    $
    751,700Cost of sales
    
    
    10,850
    
    
    
    19,057
    
    
    
    25,980
    
    
    
    25,408
    
    
    
    81,295Operating expenses(2)
    
    
    103,310
    
    
    
    120,160
    
    
    
    124,263
    
    
    
    141,638
    
    
    
    489,371Income from operations(1)(2)
    
    
    39,130
    
    
    
    40,182
    
    
    
    54,852
    
    
    
    46,869
    
    
    
    181,033Net income(1)(2)
    
    
    26,324
    
    
    
    28,913
    
    
    
    36,643
    
    
    
    26,223
    
    
    
    118,103Basic income per share(3)
    
    $
    0.65
    
    
    $
    0.70
    
    
    $
    0.80
    
    
    $
    0.56
    
    
    $
    2.71Diluted income per share(3)
    
    
    0.58
    
    
    
    0.61
    
    
    
    0.74
    
    
    
    0.53
    
    
    
    2.462004Revenues, net
    
    $
    94,268
    
    
    $
    120,250
    
    
    $
    131,876
    
    
    $
    150,710
    
    
    $
    497,104Cost of sales
    
    
    6,754
    
    
    
    10,187
    
    
    
    9,561
    
    
    
    10,424
    
    
    
    36,926Operating expenses(4)
    
    
    109,093
    
    
    
    73,387
    
    
    
    77,531
    
    
    
    86,771
    
    
    
    346,782Income from operations(4)
    
    
    (21,579
    )
    
    
    36,676
    
    
    
    44,784
    
    
    
    53,515
    
    
    
    113,396Net income(4)(5)
    
    
    8,048
    
    
    
    38,501
    
    
    
    42,746
    
    
    
    53,024
    
    
    
    142,319Basic income per share(3)
    
    $
    0.22
    
    
    $
    1.03
    
    
    $
    1.14
    
    
    $
    1.34
    
    
    $
    3.76Diluted income per share(3)
    
    
    0.17
    
    
    
    0.83
    
    
    
    0.94
    
    
    
    1.15
    
    
    
    3.13
 
 (1)
    
    For the fourth quarter of 2005 and the year ended December 31, 2005, includes a
$17.0 million increase in net sales and a $7.9 million increase in net income resulting
from the impact of the Change in Inventory Level Estimate(2)
    
    For the first quarter of 2005 and the year ended December 31, 2005, includes the
impact of a $4.0 million write-off of an investment in Arisaph. For the fourth quarter of 2005 and
the year ended December 31, 2005, includes $14.2 million of research and development expense
resulting from the Jerini Licensing Payment.(3)
    
    Quarterly earnings per share are calculated on an individual basis and, because
of rounding and changes in the weighted average shares outstanding during the year, the
summation of each quarter may not equal the amount calculated for the year as a whole.(4)
    
    For the first quarter of 2004 and the year ended December 31, 2004 includes the
impact of the $38.0 million AzmacortIn-process R&D Write-off.(5)
    
    For the year ended December 31, 2004 includes a benefit from income taxes
resulting from the reversal of $71.2 million of valuation allowance, of which $67.3 million
represents the portion reversed through the effective tax rate and $3.9 million relates to
the reversal of valuation allowance on deferred tax assets to be realized through ordinary
income in future years. 99




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##### Table of Contents



12. Commitments and Contingencies
 Letter of Credit Facility
  Purchase Commitments
  Employment and Royalty Agreements
   Year Ending December 31,
    
    Amount2006
    
    $
    1,443,0002007
    
    
    1,124,0002008
    
    
    943,0002009
    
    
    969,0002010
    
    
    997,000Thereafter
    
    
    81,000Total
    
    $
    5,557,000
   100




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##### Table of Contents



Operating Lease Commitments
   Year Ending December 31,
    
    Amount2006
    
    $
    10,563,0002007
    
    
    10,576,0002008
    
    
    8,364,0002009
    
    
    5,539,0002010
    
    
    5,294,000Thereafter
    
    
    16,843,000Total
    
    $
    57,179,000
   Licensing Agreements
   Year Ending December 31,
    
    Amount2006
    
    $
    30,0002007
    
    
    12,530,0002008
    
    
    30,0002009
    
    
    30,0002010
    
    
    200,000Thereafter
    
    
    26,000,000Total
    
    $
    38,820,000
 101




---



##### Table of Contents



Niaspan Advicor
 Sponsored Research
   Development Agreements
   Contract Sales Organization
 Niaspan Advicor
 102




---



##### Table of Contents



Employee Benefit Plans
   13. Shareholders Equity
 Preferred Stock
  103




---



##### Table of Contents



Common Stock
  Stock Option Plan
   Risk-FreeGrant
    
    Volatility
    
    Interest
    
    Expected
    
    ExpectedDate
    
    Rate
    
    Rate
    
    Dividends
    
    Term (Years)2003
    
    61.0%
    
    2.98%
    
    
    
    52004
    
    60.1%
    
    3.15%
    
    
    
    52005
    
    52.1%
    
    3.86%
    
    
    
    5
 104




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##### Table of Contents



Exercise PricesNumber of
    
    
    
    
    
    
    WeightedShares
    
    
    Range
    
    
    AverageOutstanding, December 31, 2002
    
    
    6,544,822
    
    
    $
    0.60      -         $36.50
    
    
    $
    15.46Granted
    
    
    3,103,375
    
    
    
    15.91      -          44.15
    
    
    
    21.87Exercised
    
    
    (1,229,416
    )
    
    
    4.28      -          34.10
    
    
    
    11.09Canceled
    
    
    (330,514
    )
    
    
    5.06      -          34.10
    
    
    
    19.89Outstanding,
December 31, 2003
    
    
    8,088,267
    
    
    
    0.60      -          44.15
    
    
    
    18.38Granted
    
    
    3,334,887
    
    
    
    29.01      -          50.71
    
    
    
    47.26Exercised
    
    
    (1,068,168
    )
    
    
    5.06      -          34.10
    
    
    
    14.46Canceled
    
    
    (247,172
    )
    
    
    10.67      -          50.20
    
    
    
    30.14Outstanding, December 31, 2004
    
    
    10,107,814
    
    
    
    0.60      -          50.71
    
    
    
    28.04Granted
    
    
    3,031,375
    
    
    
    31.03      -          72.46
    
    
    
    40.83Exercised
    
    
    (2,700,758
    )
    
    
    0.60      -          50.20
    
    
    
    19.57Canceled
    
    
    (343,519
    )
    
    
    10.67      -          65.72
    
    
    
    34.44Outstanding, December 31, 2005
    
    
    10,094,912
 Options Outstanding
    
    
    Options ExercisableNumber
    
    
    Weighted
    
    
    Weighted
    
    
    NumberOutstanding
    
    
    Average
    
    
    Average
    
    
    Exercisable
    
    
    WeightedRange of
    
    December 31,
    
    
    Remaining
    
    
    Exercise
    
    
    December 31,
    
    
    AverageExercise Prices
    
    2005
    
    
    Contractual Life
    
    
    Price
    
    
    2005
    
    
    Exercise Price$4.28 to $6.03
    
    
    164,188
    
    
    3.1 years
    
    $
    5.07
    
    
    
    164,188
    
    
    $
    5.077.03 to 10.50
    
    
    79,125
    
    
    2.9 years
    
    
    7.45
    
    
    
    79,125
    
    
    
    7.4510.67 to 16.00
    
    
    496,618
    
    
    4.5 years
    
    
    13.10
    
    
    
    428,994
    
    
    
    12.9916.19 to 24.24
    
    
    3,081,719
    
    
    6.4 years
    
    
    20.13
    
    
    
    1,676,093
    
    
    
    20.0424.68 to 36.50
    
    
    2,548,739
    
    
    8.7 years
    
    
    32.28
    
    
    
    274,320
    
    
    
    29.8438.13 to 56.67
    
    
    3,321,023
    
    
    8.3 years
    
    
    49.12
    
    
    
    676,752
    
    
    
    48.0858.79 to 72.46
    
    
    403,500
    
    
    9.7 years
    
    
    65.06
    
    
    
    
    
    
    
    10,094,912
    
    
    7.6 years
    
    $
    33.86
    
    
    
    3,299,472
    
    
    $
    24.64
  Restricted Common Stock Grant
  105




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##### Table of Contents



14. Co-promotion, Licensing, Manufacturing and Settlement and License Agreement
 Niaspan Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
 15. Collaboration and License Agreement
  106




---



##### Table of Contents



16. Legal Proceedings
 Cardizem LA Cardizem
LA
    Cardizem LA Cardizem LA
   107




---



##### Table of Contents



108




---



##### Table of Contents



17. Related Party Transactions
   Assets Acquired in a Business Combination to be Used
in Research and Development Activities: A Focus on Software, Electronic Devices, and
Pharmaceutical Industries
 109




---



##### Table of Contents



18. Subsequent Events
 Accounting for Product Returns and Inventory Management Agreements  Impact on Revenue
Recognition
  110




---



##### Table of Contents



111




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
 
 112




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
 SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 Balance atBalance at
    
    
    Charged to Costs
    
    
    
    
    
    
    EndDescription
    
    Beginning of Period
    
    
    and Expenses
    
    
    Deductions
    
    
    of PeriodAllowance for Doubtful Accounts:Fiscal year ended December 31, 2003
    
    $
    306
    
    
    $
    217
    
    
    $
    
    
    
    $
    523Fiscal year ended December 31, 2004
    
    
    523
    
    
    
    238
    
    
    
    233
    
    
    
    528Fiscal year ended December 31, 2005
    
    
    528
    
    
    
    309
    
    
    
    519
    
    
    
    318Inventory Reserve:Fiscal year ended December 31, 2003
    
    $
    478
    
    
    $
    770
    
    
    $
    709
    
    
    $
    539Fiscal year ended December 31, 2004
    
    
    539
    
    
    
    960
    
    
    
    1,130
    
    
    
    369Fiscal year ended December 31, 2005
    
    
    369
    
    
    
    721
    
    
    
    451
    
    
    
    639Deferred
Tax Asset Valuation Allowance:Fiscal year ended December 31, 2003
    
    $
    99,668
    
    
    $
    (25,856
    )
    
    $
    
    
    
    $
    73,812Fiscal year ended December 31, 2004
    
    
    73,812
    
    
    
    (69,631
    )
    
    
    
    
    
    
    4,181Fiscal year ended December 31, 2005
    
    
    4,181
    
    
    
    (400
    )
    
    
    3,781
    
    
    
    
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL                DISCLOSURES.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 Disclosure Controls and Procedures
  113




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##### Table of Contents



Managements Annual Report on Internal Control Over Financial Reporting
  Report of Independent Registered Public Accounting Firm
  Changes to the Companys Internal Control Over Financial Reporting
  114




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##### Table of Contents



PART III
  115




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL SCHEDULES.
 (a)
    
    
    1.
    
    
    The Financial Statements filed as part of this report are listed separately
in the index to Financial Statements beginning on page 71 of this report.2.
    
    
    The following Financial Statement Schedules are filed herewith:
 Schedule
    
    DescriptionII
    
    Valuation and Qualifying Accounts for the Year Ended December
31, 2005
 3.
    
    
    The following exhibits are filed herewith:
 ExhibitNumber
    
    Exhibit Description1.1(1)
    
    Underwriting Agreement dated November 19, 2003, among the Company,
the Selling Shareholders named therein, and Goldman, Sachs and Co., Banc of
America Securities LLC, SG Cowen Securities Corporation, Deutsche Bank
Securities, Inc., SunTrust Capital Markets, Inc., Natexis Bleichroeder Inc. and
Ryan, Beck & Co., Inc.2.1(12)+
    
    Product Acquisition Agreement between the Company and Aventis
Pharmaceuticals Holdings Inc., dated March 5, 2004.2.2(12)+
    
    Supply Agreement between the Company and Aventis Pharmaceuticals
Inc., dated March 5, 2004.2.3+
    
    Collaboration and License Agreement, dated as of November 6,
2005, among Kos Life Sciences, Inc., a subsidiary of Kos Pharmaceuticals, Inc.,
and Jerini US Inc., a subsidiary of Jerini AG.3.1(15)
    
    Articles of Amendment to Amended and Restated Articles of
Incorporation dated May 2, 2005.3.2(2)
    
    Amended and Restated Articles of Incorporation of the Company.3.3(18)
    
    Amended and Restated Bylaws of the Company.4.1
    
    
    See Exhibits 3.2 and 3.3 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated Bylaws of the
Company defining the rights of holders of Common Stock of the Company.4.2(3)
    
    Form of Common Stock certificate of the Company.10.1(2)*
    
    Nonqualified Stock Option Agreement by and between the Company
and Daniel M. Bell dated as of June 20, 1996.10.2(2)*
    
    Kos Pharmaceuticals, Inc. 1996 Stock Option Plan.
 116




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.3(4)*
    
    Kos Pharmaceuticals, Inc. 1999 Employee Stock Purchase Plan.10.4(6)
    
    Third Amended and Restated Registration Rights Agreement
effective as of December 19, 2002, by and between the Company, Kos Holdings,
Inc., Kos Investments, Inc., and Michael Jaharis.10.5(6)
    
    Revolving Credit and Loan Agreement dated as of December 19,
2002, between Kos Pharmaceuticals and Michael Jaharis.10.6(6)
    
    Revolving Credit Promissory Note dated December 19, 2002 in favor
of Michael Jaharis.10.7(6)
    
    Non-Detachable Common Stock Purchase Warrant dated December 19,
2002.10.8(6)
    
    Second Amended and Restated Security Agreement dated December 19,
2002, by and between the Company and Michael Jaharis.10.9(7)
    
    Stock Purchase Agreement dated May 3, 2000, between the Company
and DuPont Pharmaceuticals Company.10.10(9)*
    
    Management Agreement dated December 13, 2001, between the
Company and Daniel M. Bell.10.11(9)+
    
    Master Services Agreement effective December 17,
2001, between the Company, Innovex LP and PharmaBio Development, Inc.10.12(9)+
    
    Investment and Royalty Agreement effective December
17, 2001, between the Company, Innovex LP and PharmaBio Development, Inc.10.13(9)
    
    Warrant Agreement dated January 1, 2002, between the
Company and PharmaBio Development, Inc.10.14(10)+
    
    Distribution, Patent & Trademark License, Marketing and Supply
Agreement, dated October 23, 2002, between the Company and Merck KGaA.10.15(11)+
    
    Co-Promotion Agreement dated as of October 29, 2003 between
the Company and Takeda Pharmaceuticals North America, Inc.10.16(14)
    
    Form of Consulting Agreement Between the Company and
Christopher P. Kiritsy.10.17(14)
    
    Securities Purchase Agreement dated February 1, 2005, among
Triad Pharmaceuticals, Inc., Kos Pharmaceuticals, Inc. and 2004 Oikos
Investment Partners, LP.10.18(14)
    
    Stockholders Agreement dated February 1, 2005, among Triad
Pharmaceuticals, Inc., Kos Pharmaceuticals, Inc., 2004 Oikos Investment
Partners, LP and the other stockholders parties thereto.
 117




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description10.19(14)
    
    Registration Rights Agreement dated February 1, 2005, among
Triad Pharmaceuticals, Inc., Kos Pharmaceuticals, Inc., 2004 Oikos Investment
Partners, LP and the other stockholders parties thereto.10.20(16)*
    
    Employment Agreement dated as of February 2, 2005, between
Adrian Adams and the Company.10.21*
    
    Summary Term Sheet of Board Compensation.10.22*
    
    Terms of Employment between Kevin Clarke and the Company dated as
of October 14, 2005.10.23(17)+
    
    Co-promotion Agreement by and between the Company, one
of its subsidiaries, Duramed Pharmaceuticals, Inc. and Barr Laboratories, Inc.
dated April 12, 2005.10.24(17)+
    
    Settlement and License Agreement by and between the
Company, one of its subsidiaries, and Barr Laboratories, Inc. dated April 12,
2005.10.25(17)+
    
    License and Manufacturing Agreement by and between
the Company, one of its subsidiaries, and Barr Laboratories, Inc. dated April
12, 2005.10.26(17)+
    
    Supply and Employee Agreement by and between the
Company and Biovail Pharmaceuticals, Inc. dated May 2, 2005.10.27(17)+
    
    Distribution and Product Acquisition Agreement by
and between the Company and Biovail Laboratories International SRL dated May 2,
2005.14.1(13)
    
    Code of Ethics for Senior Financial Officers.21
    
    
    Subsidiaries of the Company.23.1
    
    
    Consent of Independent Registered Public Accounting Firm, Ernst
& Young LLP.24
    
    
    Powers of Attorney (included on signature page hereto).31.1
    
    
    Certification by Adrian Adams, President and Chief Executive
Officer, pursuant to Exchange Act Rules 13a-14 and 15d-14.31.2
    
    
    Certification by Kevin P. Clarke, Chief Financial Officer,
pursuant to Exchange Act Rules 13a-14 and 15d-14.32.1
    
    
    Certification by Adrian Adams, President and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification by Kevin P. Clarke, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.99.1*
    
    
    Summary Sheet of 2006 Named Executive Officer Compensation.
 118




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##### Table of Contents



(1)
    
    Filed with the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 20, 2003, and incorporated
herein by reference.(2)
    
    Filed with the Companys Registration Statement on
Form S-1/A (File No. 333-17991), filed with the Securities and Exchange
Commission on March 6, 1997, and incorporated herein by reference.(3)
    
    Filed with the Companys Registration Statement on Form 8-A filed
with the Securities and Exchange Commission on February 25, 1997, and
incorporated herein by reference.(4)
    
    Filed with the Companys Registration Statement on Form S-8 (File No.
333-70317), filed with the Securities and Exchange Commission on January 8,
1999, and incorporated herein by reference.(5)
    
    Filed with the Companys Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the Companys year ended
December 31, 1999, and incorporated herein by reference.(6)
    
    Filed with the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the Companys year ended December 31,
2002, and incorporated herein by reference.(7)
    
    Filed with the Companys Quarterly Report on Form 10-Q/A filed with
the Securities and Exchange Commission for the Companys three-month period
ended June 30, 2000, and incorporated herein by reference.(8)
    
    Filed with the Companys Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission for the Companys three-month period ended
September 30, 2001, and incorporated herein by reference.(9)
    
    Filed with the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the Companys year ended December 31,
2001, and incorporated herein by reference.(10)
    
    Filed with the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 4, 2002, and incorporated herein
by reference.(11)
    
    Filed with the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 5, 2003, and incorporated herein
by reference.(12)
    
    Filed with the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on March 26, 2004, and incorporated herein
by reference.(13)
    
    Filed with the Companys Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission for the Companys three-month period
ended March 31, 2003, and incorporated herein by reference.(14)
    
    Filed with the Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 7, 2005, and incorporated herein
by
reference. 119




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##### Table of Contents



(15)
    
    Filed with the Companys Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission for the Companys three-month period
ended March 31, 2005, and incorporated herein by reference.(16)
    
    Filed with the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the Companys year ended December 31,
2004, and incorporated herein by reference.(17)
    
    Filed with the Companys Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission for the Companys three-month period
ended June 30, 2005, and incorporated herein by reference.(18)
    
    Filed with the Companys Quarterly Report on Form 10-Q filed with
the Securities and Exchange Commission for the Companys three-month period
ended September 30, 2005, and incorporated herein by reference.+
    
    Certain confidential material contained in the document has been
omitted and filed separately with the Securities and Exchange Commission
pursuant to Rule 406 of the Securities Act of 1933, as amended.*
    
    Denotes management contract or compensatory plan or
arrangement. 120




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##### Table of Contents



SIGNATURES
  KOS PHARMACEUTICALS, INC.By:
    /s/ Adrian AdamsAdrian AdamsPresident and Chief Executive Officer POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Michael Jaharis

Michael Jaharis
    
    Chairman Emeritus of the Board
of Directors
    
    March 16, 2006/s/ Daniel M. Bell

Daniel M. Bell
    
    Chairman of the Board
of Directors
    
    March 16, 2006/s/ Robert E. Baldini

Robert E. Baldini
    
    Vice Chairman of the Board
    
    March 16, 2006/s/ Adrian Adams

Adrian Adams
    
    President, Chief Executive
Officer, and Director
(Principal Executive Officer)
    
    March 16, 2006/s/ Kevin P. Clarke

Kevin P. Clarke
    
    Executive Vice President, Chief
Financial Officer
(Principal Financial Officer)
    
    March 16, 2006/s/ Juan F. Rodriguez

Juan F. Rodriguez
    
    Senior Vice President, Controller and
Corporate Administration
(Principal Accounting Officer)
    
    March 16, 2006/s/ John Brademas

John Brademas
    
    Director
    
    March 16, 2006/s/ Kevin T. Ferro

Kevin T. Ferro
    
    Director
    
    March 16, 2006/s/ Steven Jaharis

Steven Jaharis
    
    Director
    
    March 16, 2006/s/ Nicolaos E. Madias

Nicolaos E. Madias
    
    Director
    
    March 16, 2006/s/ Mark Novitch

Mark Novitch
    
    Director
    
    March 16, 2006/s/ William D. Pruitt

William D. Pruitt
    
    Director
    
    March 16, 2006/s/ Frederick B. Whittemore

Frederick B. Whittemore
    
    Director
    
    March 16, 2006
 121