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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 
 FORM 10-K/A
 (Amendment No. 1 to Form 10-K)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 000-22171
 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
  
 o þ
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TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    4Item 1A.
    
    Risk Factors
    
    
    22Item 1B.
    
    Unresolved Staff Comments
    
    
    41Item 2.
    
    Properties
    
    
    42Item 3.
    
    Legal Proceedings
    
    
    42Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    44PART IIItem 5.
    
    Market for the Companys Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities
    
    
    45Item 6.
    
    Selected Consolidated Financial Data
    
    
    46Item 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
    
    
    122Item 9A.
    
    Controls and Procedures
    
    
    122PART III
    
    
    
    
    125PART IVItem 15.
    
    Exhibits and Financial Schedules
    
    
    126Signatures
    
    
    
    
    131EX-2.3 Collaboration and License AgreementEX-10.21 Summary Term SheetEX-10.22 Terms of Employment/Kevin ClarkeEX-21 Subsidiaries of the CompanyEX-23.1 Consent of Ernst & Young LLPEX-31.1 Section 302 Chief Executive Officer CertificationEX-31.2 Section 302 Chief Financial Officer CertificationEX-32.1 Section 906 Chief Executive Officer CertificationEX-32.2 Section 906 Chief Financial Officer CertificationEX-99.1 Summary Sheet of 2006 Executive Officer Compensation
  
 Niaspan® , Advicor ®, Teveten ®, Teveten HCTand Azmacort®
are registered trademarks of Kos Life Sciences, Inc., a wholly owned subsidiary of Kos
Pharmaceuticals, Inc.Cardizem®LAis a registered trademark of Biovail Laboratories International SRL. 2




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Explanatory Note:
   Impact on Managements Assessment of Internal Control over Financial Reporting:
 Remediation of Material Weakness:
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PART I
 
 ITEM 1. BUSINESS.
  Niaspan ® Advicor ® ,
 Azmacort ® Azmacort Azmacort
   4




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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
  5




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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
  7




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Niaspan Niaspan Niaspan
  8




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Niaspan Niaspan Niaspan
 Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan
 Niaspan Niaspan
 Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan
  9




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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
 11




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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
 12




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




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Cardizem
LA Cardizem Cardizem Cardizem LA
  14




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Metered-Dose Inhalation Devices and Other Device Products
  Respiratory and Advanced Inhalation Delivery Research
 Azmacort Azmacort Azmacort Azmacort Azmacort
   15




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Sales and Marketing
 Niaspan Advicor
 Niaspan Advicor Azmacort Cardizem LA, Teveten, Teveten HCT
 Niaspan Advicor
   16




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Niaspan Advicor Niaspan Advicor Advicor Niaspan Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
 Niaspan Advicor
 Cardizem LA Teveten Cardizem LA
  17




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Patents and Proprietary Rights
  Existing Patents and Patent Applications
  Niaspan Advicor Niaspan Advicor Niaspan Advicor Niaspan Advicor
 Niaspans Advicors
 Cardizem LA Litigation
 Cardizem LA Cardizem
LA
  18




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Cardizem
LA
  Cardizem LA Cardizem LA
 Protection of Intellectual Property
   19




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Niaspan Advicor, Azmacort, Teveten Kos
 Manufacturing
 Niaspan Advicor Niaspan Advicor Niaspan Niaspan Niaspan Niaspan
 Niaspan Advicor Niaspan Niaspan
 Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
 20




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Cardizem LA Teveten Cardizem LA Cardizem LA Teveten Cardizem LA Teveten Cardizem LA Teveten
 Niaspan Advicor Niaspan Advicor
 Competition
 Niaspan Advicor Azmacort Cardizem LA,
Teveten Teveten HCT
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Employees
  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
 22




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Advicor Advicor Advicor Advicor Advicor Niaspan Advicor Advicor
 Advicor Advicor Niaspan Advicor Advicor Advicor Niaspan Advicor Advicor Niaspan Advicor
 Advicor Niaspan Niaspan
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Niaspan Advicor Advicor Advicor
 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
 24




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Integration and Sales Growth of Cardizem LA, Teveten, and Teveten HCT Products
 Cardizem LA Teveten, Teveten HCT
 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
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Niaspans Advicors
  Niaspan Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
  26




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Cardizem LA Cardizem
LA
  Cardizem
LA
 27




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




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Cardizem
  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
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Niaspan Advicor
 Niaspan Niaspan Niaspan Niaspan Niaspan Niaspan
 Azmacort Azmacort
 
    
    GlaxoSmithKline (Advair and 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
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Niaspan Advicor, Azmacort Cardizem LA,
Teveten, Teveten HCT 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
  Government Regulation; No Assurances of Regulatory Approval and Investigation by Federal and State
Agencies
  34




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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;
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§
    
    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
 Dependence on Single Sources of Supply
 Niaspan Advicor Advicor
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Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort Azmacort
 Cardizem LA Teveten, Teveten HCT
 Azmacort Cardizem LA Teveten or
Teveten HCT
 Best Price and Other Potential Price Reporting Issues
  38




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Wholesaler and Distributor Buying Patterns
    Risk of Product Liability Claims; No Assurance of Adequate Insurance
 Advicor,
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Advicor Advicor
 Possible Stock Price Volatility
   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
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
    
    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;
    
    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.
  41




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ITEM 2. PROPERTIES.
  Lease Expiration
    
    Minimum(Including Renewal
    
    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
 42




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Cardizem LA Cardizem LA
    43




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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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
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
  Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands, except per share data)(as restated, see Note 2 of Item 8)Statement of Operations:Net sales(1)
    
    $
    746,197
    
    
    $
    495,544
    
    
    $
    293,907
    
    
    $
    172,693
    
    
    $
    84,227Licensing revenue
    
    
    5,503
    
    
    
    1,559
    
    
    
    
    
    
    
    
    
    
    
    7,220Total revenue
    
    
    751,700
    
    
    
    497,103
    
    
    
    293,907
    
    
    
    172,693
    
    
    
    91,447Cost of sales(2)
    
    
    81,543
    
    
    
    37,070
    
    
    
    20,546
    
    
    
    15,389
    
    
    
    7,833670,157
    
    
    
    460,033
    
    
    
    273,361
    
    
    
    157,304
    
    
    
    83,614Operating expenses:Research and development(3)
    
    
    124,603
    
    
    
    111,746
    
    
    
    54,549
    
    
    
    44,200
    
    
    
    31,901Selling, general and administrative
    
    
    370,397
    
    
    
    237,750
    
    
    
    160,851
    
    
    
    130,972
    
    
    
    84,888Total operating expenses(4)
    
    
    495,000
    
    
    
    349,496
    
    
    
    215,400
    
    
    
    175,172
    
    
    
    116,789Income (loss) from operations
    
    
    175,157
    
    
    
    110,537
    
    
    
    57,961
    
    
    
    (17,868
    )
    
    
    (33,175
    )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
    
    
    
    8
    
    
    
    29Other expense (income)(4)
    
    
    215
    
    
    
    (3,577
    )
    
    
    198
    
    
    
    136
    
    
    
    (38,985
    )Total other expense (income)
    
    
    (7,580
    )
    
    
    (4,748
    )
    
    
    2,904
    
    
    
    4,022
    
    
    
    (33,147
    )Income (loss) before provision for /
(benefit from)
income taxes(1)
    
    
    182,737
    
    
    
    115,285
    
    
    
    55,057
    
    
    
    (21,890
    )
    
    
    (28
    )Provision for / (benefit from) income taxes
    
    
    68,662
    
    
    
    (29,555
    )
    
    
    2,879
    
    
    
    
    
    
    
    Net income (loss)(1)
    
    $
    114,075
    
    
    $
    144,840
    
    
    $
    52,178
    
    
    $
    (21,890
    )
    
    $
    (28
    )Earnings (loss) per share(5)Basic
    
    $
    2.62
    
    
    $
    3.82
    
    
    $
    2.38
    
    
    $
    (1.06
    )
    
    $
    0.00Diluted
    
    
    2.38
    
    
    
    3.20
    
    
    
    1.36
    
    
    
    (1.06
    )
    
    
    0.00Weighted average Common Stock and CommonStock equivalents used in computing
earnings (loss) per share(5)Basic
    
    
    43,528
    
    
    
    37,898
    
    
    
    21,914
    
    
    
    20,582
    
    
    
    20,221Diluted
    
    
    48,236
    
    
    
    45,680
    
    
    
    40,805
    
    
    
    20,582
    
    
    
    20,221
 December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)(as restated, see Note 2 of Item 8)Balance Sheet:Cash and marketable securities
    
    $
    412,736
    
    
    $
    258,703
    
    
    $
    259,958
    
    
    $
    19,572
    
    
    $
    45,319Working capital (deficit)
    
    
    391,827
    
    
    
    254,220
    
    
    
    248,060
    
    
    
    (54,644
    )
    
    
    27,160Total assets
    
    
    913,855
    
    
    
    590,059
    
    
    
    335,521
    
    
    
    69,441
    
    
    
    82,941Total long-term liabilities(6)
    
    
    21,122
    
    
    
    14,996
    
    
    
    30,000
    
    
    
    34,025
    
    
    
    95,082Accumulated earnings (deficit)
    
    
    13,435
    
    
    
    (100,640
    )
    
    
    (245,480
    )
    
    
    (297,658
    )
    
    
    (275,769
    )Shareholders equity (deficit)
    
    
    682,094
    
    
    
    438,275
    
    
    
    239,628
    
    
    
    (74,708
    )
    
    
    (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 3 of Notes to
Consolidated Financial Statements for information concerning these changes in accounting
estimate relating to revenue recognition.(2)
    
    See Note 7 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. 46




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(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 3 of Notes to Consolidated Financial Statements for information concerning
the computation of earnings (loss) per share.(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. 47




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##### Table of Contents



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
 48




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##### Table of Contents



Cardizem LA 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-
 49




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##### Table of Contents



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.
 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
  55




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##### Table of Contents



Revenue Recognition
     56




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##### Table of Contents



Impact on Niaspan, Advicor, Azmacort, CardizemTevetenand Teveten HCTRevenueSensitivity Analysis of Possible Variations in Prescription and AMP Inputs(in millions, except % variance)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
     Accounting
for Share-Based Payments
   Total
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001
    
    1997-2000Gross compensation expense
    
    $
    20,267
    
    
    $
    5,876
    
    
    $
    2,858
    
    
    $
    7,236
    
    
    $
    1,074
    
    
    $
    2,414
    
    
    $
    809Compensation expense (benefit), net
of tax
    
    $
    13,040
    
    
    $
    4,028
    
    
    $
    (2,521
    )
    
    $
    7,236
    
    
    $
    1,074
    
    
    $
    2,414
    
    
    $
    809
 59




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##### Table of Contents



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 Azmacort Cardizem LA Teveten Niaspan Advicor
    60




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##### Table of Contents



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
 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
 61




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Azmacort
 Azmacort
    Years Ended December 31, 2004 and 2003
  62




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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 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
  63




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Azmacort
 Niaspan, Advicor, Azmacort Azmacort
 Azmacort
   Liquidity and Capital Resources
   64




---



##### Table of Contents



Azmacort Azmacort
    65




---



##### 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 5year
    
    
    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
    67




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##### Table of Contents



Niaspan Advicor
 Niaspan Advicor Niaspan Advicor 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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##### Table of Contents



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 (As Revised)
    
    
    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
    
    
    121Schedule II Valuation and Qualifying Accounts
    
    
    122
 
 *
    
    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 (AS REVISED)
        72




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
       73




---



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74




---



##### 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
 (in thousands)
 (as restated, see Note 2)
 December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    412,736
    
    
    $
    258,703Trade accounts receivable, net
    
    
    111,652
    
    
    
    74,568Inventories, net
    
    
    20,748
    
    
    
    10,649Prepaid expenses and other current assets
    
    
    20,555
    
    
    
    11,572Current deferred tax asset, net
    
    
    36,775
    
    
    
    35,516Total current assets
    
    
    602,466
    
    
    
    391,008Fixed Assets, net
    
    
    28,745
    
    
    
    23,341Investments
    
    
    12,782
    
    
    
    Goodwill
    
    
    2,300
    
    
    
    Long Term Deferred Tax Asset, net
    
    
    33,591
    
    
    
    22,149Intangible Assets, net
    
    
    228,530
    
    
    
    150,079Other Assets
    
    
    5,441
    
    
    
    3,482Total assets
    
    $
    913,855
    
    
    $
    590,059LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    25,112
    
    
    $
    9,161Accrued expenses
    
    
    183,764
    
    
    
    104,898Advance payment received on license agreement,
current portion net of amortized amount
    
    
    1,625
    
    
    
    3,597Note payable to shareholder
    
    
    
    
    
    
    19,000Current portion of capital lease obligations
    
    
    138
    
    
    
    132Total current liabilities
    
    
    210,639
    
    
    
    136,788Long Term Liabilities:Advance payment received on license agreement, net of current portion
    
    
    13,162
    
    
    
    14,787Other long term liabilities
    
    
    7,889
    
    
    
    Capital lease obligations, net of current portion
    
    
    71
    
    
    
    209Total long term liabilities
    
    
    21,122
    
    
    
    14,996Commitments and Contingencies (Notes 1, 13 and 17)Shareholders Equity:Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 100,000,000 shares authorized,
46,861,818 and 40,211,375 shares issued and outstanding as of
December 31, 2005 and 2004, respectively
    
    
    469
    
    
    
    402Additional paid-in capital
    
    
    667,568
    
    
    
    538,608Restricted stock grant
    
    
    
    
    
    
    (95
    )Retained earnings (accumulated deficit)
    
    
    13,435
    
    
    
    (100,640
    )Accumulated other comprehensive income
    
    
    622
    
    
    
    Total shareholders equity
    
    
    682,094
    
    
    
    438,275Total liabilities and shareholders equity
    
    $
    913,855
    
    
    $
    590,059
 The accompanying notes are an integral part of these financial statements.
 76




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share data)
 (as restated, see Note 2)
 For the Year Ended December 31,2005
    
    
    2004
    
    
    2003Net sales
    
    $
    746,197
    
    
    $
    495,544
    
    
    $
    293,907Licensing revenue
    
    
    5,503
    
    
    
    1,559
    
    
    
    Total revenue
    
    
    751,700
    
    
    
    497,103
    
    
    
    293,907Cost of sales (excludes Azmacort developed and core
technology amortization charges of $15.2 million and $10.3 million for the years
ended December 31, 2005 and 2004, respectively; see Note 7)
    
    
    81,543
    
    
    
    37,070
    
    
    
    20,546670,157
    
    
    
    460,033
    
    
    
    273,361Operating expenses:Research and development
    
    
    124,603
    
    
    
    111,746
    
    
    
    54,549Selling, general and administrative
    
    
    370,397
    
    
    
    237,750
    
    
    
    160,851Total operating expenses
    
    
    495,000
    
    
    
    349,496
    
    
    
    215,400Income from operations
    
    
    175,157
    
    
    
    110,537
    
    
    
    57,961Other expense (income):Interest income, net
    
    
    (8,385
    )
    
    
    (2,388
    )
    
    
    (614
    )Interest expense, related parties
    
    
    520
    
    
    
    1,209
    
    
    
    3,316Interest expense, other
    
    
    70
    
    
    
    8
    
    
    
    4Other expense (income)
    
    
    215
    
    
    
    (3,577
    )
    
    
    198Total other expense (income)
    
    
    (7,580
    )
    
    
    (4,748
    )
    
    
    2,904Income before provision for / (benefit from) income taxes
    
    
    182,737
    
    
    
    115,285
    
    
    
    55,057Provision for / (benefit from) income taxes
    
    
    68,662
    
    
    
    (29,555
    )
    
    
    2,879Net income
    
    $
    114,075
    
    
    $
    144,840
    
    
    $
    52,178Basic earnings per share of Common Stock
    
    $
    2.62
    
    
    $
    3.82
    
    
    $
    2.38Diluted earnings per share of Common Stock
    
    $
    2.38
    
    
    $
    3.20
    
    
    $
    1.36Weighted average shares of Common Stock and
Common Stock equivalents outstanding:Basic
    
    
    43,528
    
    
    
    37,898
    
    
    
    21,914Diluted
    
    
    48,236
    
    
    
    45,680
    
    
    
    40,805
 The accompanying notes are an integral part of these financial statements.
 77




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KOS
PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands)
(as restated, see Note 2)
 Retained
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Earnings
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Restricted
    
    
    (Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Stock Grant
    
    
    Deficit)
    
    
    Income
    
    
    TotalBalance at December 31, 2002
    
    
    20,808
    
    
    $
    208
    
    
    $
    223,436
    
    
    $
    (694
    )
    
    $
    (297,658
    )
    
    $
    -
    
    
    $
    (74,708
    )Common Stock issued to employees
under Kos Savings Plan
    
    
    45
    
    
    
    1
    
    
    
    1,078
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,079Compensation expense on restricted
Common Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    299
    
    
    
    
    
    
    
    
    
    
    
    299Compensation cost on Common
Stock options and warrants
    
    
    
    
    
    
    
    
    
    
    9,770
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,770Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    1,135
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,135Issuance of Common Stock
    
    
    4,400
    
    
    
    44
    
    
    
    184,232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    184,276Issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    126
    
    
    
    1
    
    
    
    1,982
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,983Exercise of stock options
    
    
    1,229
    
    
    
    12
    
    
    
    13,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,617Conversion of Note Payable to
Shareholder to Common Stock
    
    
    10,183
    
    
    
    102
    
    
    
    49,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,178
    
    
    
    
    
    
    
    52,178Balance at December 31, 2003
    
    
    36,791
    
    
    
    368
    
    
    
    485,136
    
    
    
    (395
    )
    
    
    (245,480
    )
    
    
    
    
    
    
    239,629Common Stock issued to employees
under Kos Savings Plan
    
    
    41
    
    
    
    
    
    
    
    1,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,569Compensation expense on restricted
Common Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    300Compensation cost on Common
Stock options
    
    
    
    
    
    
    
    
    
    
    2,856
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,856Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    20,003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,003Issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    111
    
    
    
    1
    
    
    
    2,632
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,633Exercise of stock options
    
    
    1,068
    
    
    
    11
    
    
    
    15,434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,445Conversion of Note Payable to
Shareholder to Common Stock
    
    
    2,200
    
    
    
    22
    
    
    
    10,978
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    144,840
    
    
    
    
    
    
    
    144,840Balance at December 31, 2004
    
    
    40,211
    
    
    
    402
    
    
    
    538,608
    
    
    
    (95
    )
    
    
    (100,640
    )
    
    
    
    
    
    
    438,275Common Stock issued to employees
under Kos Savings Plan
    
    
    42
    
    
    
    1
    
    
    
    2,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,171Compensation expense on restricted
Common Stock grant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    95Compensation cost on Common Stock Options
    
    
    
    
    
    
    
    
    
    
    6,944
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,944Compensation cost on consultant
stock options
    
    
    
    
    
    
    
    
    
    
    3,853
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,853Tax benefit of stock option exercises
    
    
    
    
    
    
    
    
    
    
    40,993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,993Issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    107
    
    
    
    1
    
    
    
    3,199
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,200Exercise of stock options
    
    
    2,701
    
    
    
    27
    
    
    
    52,839
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,866Conversion of Note Payable to
Shareholder to Common Stock
    
    
    3,800
    
    
    
    38
    
    
    
    18,962
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,000Comprehensive income:Unrealized gains on investments, net
of taxes of $370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    622
    
    
    
    622Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,075
    
    
    
    
    
    
    
    114,075Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,697Balance at December 31, 2005
    
    
    46,861
    
    
    
    $469
    
    
    $
    667,568
    
    
    $
    -
    
    
    $
    13,435
    
    
    $
    622
    
    
    $
    682,094
 The accompanying notes are an integral part of these financial statements.
 78




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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 (as restated, see Note 2)
 For the Year Ended December 31,2005
    
    
    2004
    
    
    2003Cash Flows from Operating Activities:Net Income
    
    $
    114,075
    
    
    $
    144,840
    
    
    $
    52,178Adjustments to reconcile net income to net cash
provided by operating activities -
Provision for doubtful accounts
    
    
    308
    
    
    
    238
    
    
    
    217Depreciation
    
    
    6,089
    
    
    
    4,312
    
    
    
    3,311Amortization
    
    
    23,148
    
    
    
    10,983
    
    
    
    Provision for inventory obsolescence
    
    
    721
    
    
    
    960
    
    
    
    771Recognition of deferred revenue under license agreement
    
    
    (3,348
    )
    
    
    (1,136
    )
    
    
    Reimbursement recognized under license agreement
    
    
    (250
    )
    
    
    (250
    )
    
    
    (230
    )Loss from disposal of fixed assets
    
    
    154
    
    
    
    364
    
    
    
    198Deferred income tax benefit
    
    
    (16,397
    )
    
    
    (57,495
    )
    
    
    Common Stock issued to employees under Kos Savings Plan
    
    
    2,171
    
    
    
    1,569
    
    
    
    1,079Compensation expense on restricted stock grant
    
    
    95
    
    
    
    300
    
    
    
    299Compensation cost on Common Stock warrants and options
    
    
    5,876
    
    
    
    2,856
    
    
    
    9,770Compensation cost on modification of stock option award
    
    
    1,068
    
    
    
    
    
    
    
    Compensation cost on consultant stock options
    
    
    3,853
    
    
    
    
    
    
    
    Tax benefit of stock option exercises
    
    
    40,993
    
    
    
    20,003
    
    
    
    1,135Write-off of acquired in-process research and development
    
    
    2,800
    
    
    
    38,000
    
    
    
    Write-off of investment in Arisaph Pharmaceuticals, Inc.
    
    
    4,000
    
    
    
    
    
    
    
    Write-off of generic Niaspaninventory
    
    
    1,327
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (37,392
    )
    
    
    (37,340
    )
    
    
    (13,595
    )Inventories
    
    
    (8,848
    )
    
    
    1,797
    
    
    
    (1,250
    )Prepaid expenses and other current assets
    
    
    (8,983
    )
    
    
    (1,449
    )
    
    
    (4,229
    )Deferred tax assets
    
    
    3,326
    
    
    
    (170
    )
    
    
    Other assets
    
    
    3
    
    
    
    10
    
    
    
    (73
    )Accounts payable
    
    
    15,951
    
    
    
    1,376
    
    
    
    598Accrued expenses
    
    
    78,866
    
    
    
    61,586
    
    
    
    8,763Advance payments from customers
    
    
    
    
    
    
    
    
    
    
    (9,129
    )Advance payment received on license agreement
    
    
    
    
    
    
    5,000
    
    
    
    5,797Other liabilities
    
    
    7,890
    
    
    
    
    
    
    
    Net cash provided by operating activities
    
    
    237,496
    
    
    
    196,354
    
    
    
    55,610Cash Flows from Investing Activities:Capital expenditures and deposits on fixed
assets to be acquired
    
    
    (13,609
    )
    
    
    (9,536
    )
    
    
    (11,044
    )Product and intangible acquisition
    
    
    (109,998
    )
    
    
    (206,062
    )
    
    
    Investment in Jerini, Inc.
    
    
    (11,790
    )
    
    
    
    
    
    
    Investment in Arisaph Pharmaceuticals, Inc.
    
    
    (4,000
    )
    
    
    
    
    
    
    Purchases of marketable securities
    
    
    (5,913
    )
    
    
    
    
    
    
    (13,564
    )Sales of marketable securities
    
    
    5,913
    
    
    
    
    
    
    
    13,564Net cash used in investing activities
    
    
    (139,397
    )
    
    
    (215,598
    )
    
    
    (11,044
    )Cash Flows from Financing Activities:Net proceeds from issuance of Common Stock
    
    
    
    
    
    
    
    
    
    
    184,276Proceeds from issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    3,200
    
    
    
    2,633
    
    
    
    1,983Net proceeds from exercise of stock options
    
    
    52,866
    
    
    
    15,445
    
    
    
    13,617Payments of Notes Payable to Shareholder
    
    
    
    
    
    
    
    
    
    
    (4,000
    )Payments under capital lease obligations
    
    
    (132
    )
    
    
    (89
    )
    
    
    (56
    )Net cash provided by financing activities
    
    
    55,934
    
    
    
    17,989
    
    
    
    195,820Net increase (decrease) in cash and cash equivalents
    
    
    154,033
    
    
    
    (1,255
    )
    
    
    240,386Cash and Cash Equivalents, beginning of period
    
    
    258,703
    
    
    
    259,958
    
    
    
    19,572Cash and Cash Equivalents, end of period
    
    $
    412,736
    
    
    $
    258,703
    
    
    $
    259,958Supplemental Disclosure of Cash Flow Information:Interest paid
    
    $
    674
    
    
    $
    1,445
    
    
    $
    3,075Income taxes paid
    
    
    15,259
    
    
    
    5,454
    
    
    
    2,460Supplemental Disclosure of Non-cash Information:Conversion of Note Payable to Shareholder to Common Stock
(See Note 9
    
    $
    19,000
    
    
    $
    11,000
    
    
    $
    50,000Acquisition of equipment under capital lease obligations
    
    
    
    
    
    
    404
    
    
    
    
 The accompanying notes are an integral part of these financial statements.
 79




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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. Restatement
   Total
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001
    
    1997-2000Compensation expense
    
    $
    20,267
    
    
    $
    5,876
    
    
    $
    2,858
    
    
    $
    7,236
    
    
    $
    1,074
    
    
    $
    2,414
    
    
    $
    809Compensation expense, net
of tax
    
    $
    13,040
    
    
    $
    4,028
    
    
    $
    (2,521
    )
    
    $
    7,236
    
    
    $
    1,074
    
    
    $
    2,414
    
    
    $
    809
  82




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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 December 31, 2005As previously
    
    
    Restatementreported
    
    
    adjustments
    
    
    RestatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    412,736
    
    
    $
    
    
    
    $
    412,736Trade accounts receivable, net
    
    
    111,652
    
    
    
    
    
    
    
    111,652Inventories, net
    
    
    20,748
    
    
    
    
    
    
    
    20,748Prepaid expenses and other current assets
    
    
    20,555
    
    
    
    
    
    
    
    20,555Current deferred tax asset, net
    
    
    36,775
    
    
    
    
    
    
    
    36,775Total current assets
    
    
    602,466
    
    
    
    
    
    
    
    602,466Fixed Assets, net
    
    
    28,745
    
    
    
    
    
    
    
    28,745Investments
    
    
    12,782
    
    
    
    
    
    
    
    12,782Goodwill
    
    
    2,300
    
    
    
    
    
    
    
    2,300Long Term Deferred Tax Asset, net
    
    
    29,490
    
    
    
    4,101
    
    
    
    33,591Intangible Assets, net
    
    
    228,530
    
    
    
    
    
    
    
    228,530Other Assets
    
    
    5,441
    
    
    
    
    
    
    
    5,441Total assets
    
    $
    909,754
    
    
    $
    4,101
    
    
    $
    913,855LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    25,112
    
    
    $
    
    
    
    $
    25,112Accrued expenses
    
    
    183,398
    
    
    
    366
    
    
    
    183,764Advance payment received on license agreement, current portion
net of amortized amount
    
    
    1,625
    
    
    
    
    
    
    
    1,625Note payable to shareholder
    
    
    
    
    
    
    
    
    
    
    Current portion of capital lease obligations
    
    
    138
    
    
    
    
    
    
    
    138Total current liabilities
    
    
    210,273
    
    
    
    366
    
    
    
    210,639Long Term Liabilities:Advance payment received on license agreement, net of current
portion net of current portion
    
    
    13,162
    
    
    
    
    
    
    
    13,162Other long term liabilities
    
    
    7,889
    
    
    
    
    
    
    
    7,889Capital lease obligations, net of current portion
    
    
    71
    
    
    
    
    
    
    
    71Total long term liabilities
    
    
    21,122
    
    
    
    
    
    
    
    21,122Commitments and Contingencies (Notes 1, 13 and 17)Shareholders Equity:Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued and outstanding
    
    
    
    
    
    
    
    
    
    
    Common stock, $.01 par value, 100,000,000 shares authorized,
46,861,818 and 40,211,375 shares issued and outstanding as of
December 31, 2005 and 2004, respectively
    
    
    469
    
    
    
    
    
    
    
    469Additional paid-in capital
    
    
    650,793
    
    
    
    16,775
    
    
    
    667,568Restricted stock grant
    
    
    
    
    
    
    
    
    
    
    Retained earnings (accumulated deficit)
    
    
    26,475
    
    
    
    (13,040
    )
    
    
    13,435Accumulated other comprehensive income
    
    
    622
    
    
    
    
    
    
    
    622Total shareholders equity
    
    
    678,359
    
    
    
    3,735
    
    
    
    682,094Total liabilities and shareholders equity
    
    $
    909,754
    
    
    $
    4,101
    
    
    $
    913,855
 83




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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
 December 31, 2004As previously
    
    
    Restatementreported
    
    
    adjustments
    
    
    RestatedASSETSCurrent Assets:Cash and cash equivalents
    
    $
    258,703
    
    
    $
    
    
    
    $
    258,703Trade accounts receivable, net
    
    
    74,568
    
    
    
    
    
    
    
    74,568Inventories, net
    
    
    10,649
    
    
    
    
    
    
    
    10,649Prepaid expenses and other current assets
    
    
    11,572
    
    
    
    
    
    
    
    11,572Current deferred tax asset, net
    
    
    35,516
    
    
    
    
    
    
    
    35,516Total current assets
    
    
    391,008
    
    
    
    
    
    
    
    391,008Fixed Assets, net
    
    
    23,341
    
    
    
    
    
    
    
    23,341Investments
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    
    
    
    
    
    
    
    
    Long Term Deferred Tax Asset, net
    
    
    19,016
    
    
    
    3,133
    
    
    
    22,149Intangible Assets, net
    
    
    150,079
    
    
    
    
    
    
    
    150,079Other Assets
    
    
    3,482
    
    
    
    
    
    
    
    3,482Total assets
    
    $
    586,926
    
    
    $
    3,133
    
    
    $
    590,059LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    9,161
    
    
    $
    
    
    
    $
    9,161Accrued expenses
    
    
    104,898
    
    
    
    
    
    
    
    104,898Advance payment received on license agreement,
current portion net of amortized amount
    
    
    3,597
    
    
    
    
    
    
    
    3,597Note payable to shareholder
    
    
    19,000
    
    
    
    
    
    
    
    19,000Current portion of capital lease obligations
    
    
    132
    
    
    
    
    
    
    
    132Total current liabilities
    
    
    136,788
    
    
    
    
    
    
    
    136,788Long Term Liabilities:Advance payment received on license agreement, net of current
portion
net of current portion
    
    
    14,787
    
    
    
    
    
    
    
    14,787Other long term liabilities
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations, net of current portion
    
    
    209
    
    
    
    
    
    
    
    209Total long term liabilities
    
    
    14,996
    
    
    
    
    
    
    
    14,996Commitments and Contingencies (Notes 1, 13 and 17)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
    
    
    402
    
    
    
    
    
    
    
    402Additional paid-in capital
    
    
    526,463
    
    
    
    12,145
    
    
    
    538,608Restricted stock grant
    
    
    (95
    )
    
    
    
    
    
    
    (95
    )Retained earnings (accumulated deficit)
    
    
    (91,628
    )
    
    
    (9,012
    )
    
    
    (100,640
    )Accumulated other comprehensive income
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    435,142
    
    
    
    3,133
    
    
    
    438,275Total liabilities and shareholders equity
    
    $
    586,926
    
    
    $
    3,133
    
    
    $
    590,059
 84




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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 For the Year Ended December 31, 2005As previously
    
    
    Restatementreported
    
    
    adjustments
    
    
    RestatedNet sales
    
    $
    746,197
    
    
    $
    
    
    
    $
    746,197Licensing revenue
    
    
    5,503
    
    
    
    
    
    
    
    5,503Total revenue
    
    
    751,700
    
    
    
    
    
    
    
    751,700Cost of sales (excludes Azmacort developed and core
technology amortization of $15.2 million; see Note 7)
    
    
    81,295
    
    
    
    248
    
    
    
    81,543670,405
    
    
    
    (248
    )
    
    
    670,157Operating expenses:Research and development
    
    
    123,235
    
    
    
    1,368
    
    
    
    124,603Selling, general and administrative
    
    
    366,137
    
    
    
    4,260
    
    
    
    370,397Total operating expenses
    
    
    489,372
    
    
    
    5,628
    
    
    
    495,000Income from operations
    
    
    181,033
    
    
    
    (5,876
    )
    
    
    175,157Other expense (income):Interest income, net
    
    
    (8,385
    )
    
    
    
    
    
    
    (8,385
    )Interest expense, related parties
    
    
    520
    
    
    
    
    
    
    
    520Interest expense, other
    
    
    70
    
    
    
    
    
    
    
    70Other expense (income)
    
    
    215
    
    
    
    
    
    
    
    215Total other expense (income)
    
    
    (7,580
    )
    
    
    
    
    
    
    (7,580
    )Income before provision for / (benefit from) income taxes
    
    
    188,613
    
    
    
    (5,876
    )
    
    
    182,737Provision for / (benefit from) income taxes
    
    
    70,510
    
    
    
    (1,848
    )
    
    
    68,662Net income
    
    $
    118,103
    
    
    $
    (4,028
    )
    
    $
    114,075Basic earnings per share of Common Stock
    
    $
    2.71
    
    
    $
    (0.09
    )
    
    $
    2.62Diluted earnings per share of Common Stock
    
    $
    2.46
    
    
    $
    (0.08
    )
    
    $
    2.38Weighted average shares of Common Stock and
Common Stock equivalents outstanding:Basic
    
    
    43,528
    
    
    
    
    
    
    
    43,528Diluted
    
    
    48,293
    
    
    
    
    
    
    
    48,236
 85




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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 For the Year Ended December 31, 2004As previously
    
    
    Restatementreported
    
    
    adjustments
    
    
    RestatedNet sales
    
    $
    495,544
    
    
    $
    
    
    
    $
    495,544Licensing revenue
    
    
    1,559
    
    
    
    
    
    
    
    1,559Total revenue
    
    
    497,103
    
    
    
    
    
    
    
    497,103Cost of sales (excludes Azmacort developed and core
technology amortization of $10.3 million; see Note 7)
    
    
    36,926
    
    
    
    144
    
    
    
    37,070460,177
    
    
    
    (144
    )
    
    
    460,033Operating expenses:Research and development
    
    
    111,064
    
    
    
    682
    
    
    
    111,746Selling, general and administrative
    
    
    235,718
    
    
    
    2,032
    
    
    
    237,750Total operating expenses
    
    
    346,782
    
    
    
    2,714
    
    
    
    349,496Income from operations
    
    
    113,395
    
    
    
    (2,858
    )
    
    
    110,537Other expense (income):Interest income, net
    
    
    (2,388
    )
    
    
    
    
    
    
    (2,388
    )Interest expense, related parties
    
    
    1,209
    
    
    
    
    
    
    
    1,209Interest expense, other
    
    
    8
    
    
    
    
    
    
    
    8Other income
    
    
    (3,577
    )
    
    
    
    
    
    
    (3,577
    )Total other income
    
    
    (4,748
    )
    
    
    
    
    
    
    (4,748
    )Income before provision for / (benefit from) income taxes
    
    
    118,143
    
    
    
    (2,858
    )
    
    
    115,285Provision for / (benefit from) income taxes
    
    
    (24,176
    )
    
    
    (5,379
    )
    
    
    (29,555
    )Net income
    
    $
    142,319
    
    
    $
    2,521
    
    
    $
    144,840Basic earnings per share of Common Stock
    
    $
    3.76
    
    
    $
    0.06
    
    
    $
    3.82Diluted earnings per share of Common Stock
    
    $
    3.13
    
    
    $
    0.07
    
    
    $
    3.20Weighted average shares of Common Stock and
Common Stock equivalents outstanding:Basic
    
    
    37,898
    
    
    
    
    
    
    
    37,898Diluted
    
    
    45,836
    
    
    
    
    
    
    
    45,680
 86




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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 For the Year Ended December 31, 2003As previously
    
    
    Restatementreported
    
    
    adjustments
    
    
    RestatedNet sales
    
    $
    293,907
    
    
    $
    
    
    
    $
    293,907Cost of sales
    
    
    20,038
    
    
    
    508
    
    
    
    20,546273,869
    
    
    
    (508
    )
    
    
    273,361Operating expenses:Research and development
    
    
    52,203
    
    
    
    2,346
    
    
    
    54,549Selling, general and administrative
    
    
    156,469
    
    
    
    4,382
    
    
    
    160,851Total operating expenses
    
    
    208,672
    
    
    
    6,728
    
    
    
    215,400Income from operations
    
    
    65,197
    
    
    
    (7,236
    )
    
    
    57,961Other expense (income):Interest income, net
    
    
    (614
    )
    
    
    
    
    
    
    (614
    )Interest expense, related parties
    
    
    3,316
    
    
    
    
    
    
    
    3,316Interest expense, other
    
    
    4
    
    
    
    
    
    
    
    4Other expense (income)
    
    
    198
    
    
    
    
    
    
    
    198Total other expense
    
    
    2,904
    
    
    
    
    
    
    
    2,904Income before provision for / (benefit from) income taxes
    
    
    62,293
    
    
    
    (7,236
    )
    
    
    55,057Provision for income taxes
    
    
    2,879
    
    
    
    
    
    
    
    2,879Net income
    
    $
    59,414
    
    
    $
    (7,236
    )
    
    $
    52,178Basic earnings per share of Common Stock
    
    $
    2.71
    
    
    $
    (0.33
    )
    
    $
    2.38Diluted earnings per share of Common Stock
    
    $
    1.53
    
    
    $
    (0.17
    )
    
    $
    1.36Weighted average shares of Common Stock and
Common Stock equivalents outstanding:Basic
    
    
    21,914
    
    
    
    
    
    
    
    21,914Diluted
    
    
    41,033
    
    
    
    
    
    
    
    40,805
 87




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands)
 Retained
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    Earnings
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Restricted
    
    
    (Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Stock Grant
    
    
    Deficit)
    
    
    Income
    
    
    TotalBalance at December 31, 2002,
as previously reported
    
    
    20,808
    
    
    $
    208
    
    
    $
    219,138
    
    
    $
    (694
    )
    
    $
    (293,360
    )
    
    $
    
    
    
    $
    (74,708
    )Restatement adjustments
    
    
    
    
    
    
    
    
    
    
    4,298
    
    
    
    
    
    
    
    (4,298
    )
    
    
    
    
    
    
    Restated Balances at
December 31, 2002
    
    
    20,808
    
    
    $
    208
    
    
    $
    223,436
    
    
    $
    (694
    )
    
    $
    (297,658
    )
    
    $
    
    
    
    $
    (74,708
    )Balance at December 31, 2003,
as previously reported
    
    
    36,791
    
    
    $
    368
    
    
    $
    473,604
    
    
    $
    (395
    )
    
    $
    (233,948
    )
    
    $
    
    
    
    $
    239,629Restatement adjustments
    
    
    
    
    
    
    
    
    
    
    11,532
    
    
    
    
    
    
    
    (11,532
    )
    
    
    
    
    
    
    Restated Balances at
December 31, 2003
    
    
    36,791
    
    
    $
    368
    
    
    $
    485,136
    
    
    $
    (395
    )
    
    $
    (245,480
    )
    
    $
    
    
    
    $
    239,629Balance at December 31, 2004,
as previously reported
    
    
    40,211
    
    
    $
    402
    
    
    $
    526,463
    
    
    $
    (95
    )
    
    $
    (91,628
    )
    
    $
    
    
    
    $
    435,142Restatement adjustments
    
    
    
    
    
    
    
    
    
    
    12,145
    
    
    
    
    
    
    
    (9,012
    )
    
    
    
    
    
    
    3,133Restated Balances at
December 31, 2004
    
    
    40,211
    
    
    $
    402
    
    
    $
    538,608
    
    
    $
    (95
    )
    
    $
    (100,640
    )
    
    $
    
    
    
    $
    438,275Balance at December 31, 2005,
as previously reported
    
    
    46,862
    
    
    $
    469
    
    
    $
    650,793
    
    
    $
    
    
    
    $
    26,475
    
    
    $
    622
    
    
    $
    678,359Restatement adjustments
    
    
    
    
    
    
    
    
    
    
    16,775
    
    
    
    
    
    
    
    (13,040
    )
    
    
    
    
    
    
    3,735Restated Balances at
December 31, 2005
    
    
    46,862
    
    
    $
    469
    
    
    $
    667,568
    
    
    $
    
    
    
    $
    13,435
    
    
    $
    622
    
    
    $
    682,094




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 For the Year Ended December 31, 2005As previously
    
    
    Restatementreported
    
    
    adjustments
    
    
    RestatedCash Flows from Operating Activities:Net Income
    
    $
    118,103
    
    
    
    (4,028
    )
    
    $
    114,075Adjustments to reconcile net income to net cash
provided by operating activities -Provision for doubtful accounts
    
    
    308
    
    
    
    
    
    
    
    308Depreciation
    
    
    6,089
    
    
    
    
    
    
    
    6,089Amortization
    
    
    23,148
    
    
    
    
    
    
    
    23,148Provision for inventory obsolescence
    
    
    721
    
    
    
    
    
    
    
    721Recognition of deferred revenue under license agreement
    
    
    (3,348
    )
    
    
    
    
    
    
    (3,348
    )Reimbursement recognized under license agreement
    
    
    (250
    )
    
    
    
    
    
    
    (250
    )Loss from disposal of fixed assets
    
    
    154
    
    
    
    
    
    
    
    154Deferred income tax benefit
    
    
    (15,428
    )
    
    
    (969
    )
    
    
    (16,397
    )Common Stock issued to employees under Kos Savings Plan
    
    
    2,171
    
    
    
    
    
    
    
    2,171Compensation expense on restricted stock grant
    
    
    95
    
    
    
    
    
    
    
    95Compensation cost on Common Stock warrants and options
    
    
    
    
    
    
    5,876
    
    
    
    5,876Compensation cost on modification of stock option award
    
    
    1,068
    
    
    
    
    
    
    
    1,068Compensation cost on consultant stock options
    
    
    3,853
    
    
    
    
    
    
    
    3,853Tax benefit of stock option exercises
    
    
    42,238
    
    
    
    (1,245
    )
    
    
    40,993Write-off of acquired in-process research and development
    
    
    2,800
    
    
    
    
    
    
    
    2,800Write-off of investment in Arisaph Pharmaceuticals, Inc.
    
    
    4,000
    
    
    
    
    
    
    
    4,000Write-off of generic Niaspaninventory
    
    
    1,327
    
    
    
    
    
    
    
    1,327Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (37,392
    )
    
    
    
    
    
    
    (37,392
    )Inventories
    
    
    (8,848
    )
    
    
    
    
    
    
    (8,848
    )Prepaid expenses and other current assets
    
    
    (8,983
    )
    
    
    
    
    
    
    (8,983
    )Deferred tax assets
    
    
    3,326
    
    
    
    
    
    
    
    3,326Other assets
    
    
    3
    
    
    
    
    
    
    
    3Accounts payable
    
    
    15,951
    
    
    
    
    
    
    
    15,951Accrued expenses
    
    
    78,500
    
    
    
    366
    
    
    
    78,866Other liabilities
    
    
    7,890
    
    
    
    
    
    
    
    7,890Net cash provided by operating activities
    
    
    237,496
    
    
    
    
    
    
    
    237,496Cash Flows from Investing Activities:Capital expenditures and deposits on fixed
assets to be acquired
    
    
    (13,609
    )
    
    
    
    
    
    
    (13,609
    )Product and intangible acquisition
    
    
    (109,998
    )
    
    
    
    
    
    
    (109,998
    )Investment in Jerini, Inc.
    
    
    (11,790
    )
    
    
    
    
    
    
    (11,790
    )Investment in Arisaph Pharmaceuticals, Inc.
    
    
    (4,000
    )
    
    
    
    
    
    
    (4,000
    )Purchases of marketable securities
    
    
    (5,913
    )
    
    
    
    
    
    
    (5,913
    )Sales of marketable securities
    
    
    5,913
    
    
    
    
    
    
    
    5,913Net cash used in investing activities
    
    
    (139,397
    )
    
    
    
    
    
    
    (139,397
    )Cash Flows from Financing Activities:Proceeds from issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    3,200
    
    
    
    
    
    
    
    3,200Net proceeds from exercise of stock options
    
    
    52,866
    
    
    
    
    
    
    
    52,866Payments under capital lease obligations
    
    
    (132
    )
    
    
    
    
    
    
    (132
    )Net cash provided by financing activities
    
    
    55,934
    
    
    
    
    
    
    
    55,934Net increase in cash and cash equivalents
    
    
    154,033
    
    
    
    
    
    
    
    154,033Cash and Cash Equivalents, beginning of period
    
    
    258,703
    
    
    
    
    
    
    
    258,703Cash and Cash Equivalents, end of period
    
    $
    412,736
    
    
    $
    
    
    
    $
    412,736Supplemental Disclosure of Cash Flow Information:Interest paid
    
    $
    674
    
    
    
    
    
    
    $
    674Income taxes paid
    
    
    15,259
    
    
    
    
    
    
    
    15,259Supplemental Disclosure of Non-cash Information:Conversion of Note Payable to Shareholder to Common Stock
(See Note 9)
    
    $
    19,000
    
    
    
    
    
    
    $
    19,000Acquisition of equipment under capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
 The accompanying notes are an integral part of these financial statements.
 89




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##### Table of Contents



KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 For the Year Ended December 31, 2004As previously
    
    
    Restatementreported
    
    
    adjustments
    
    
    RestatedCash Flows from Operating Activities:Net Income
    
    $
    142,319
    
    
    $
    2,521
    
    
    $
    144,840Adjustments to reconcile net income to net cash
provided by operating activities -Provision for doubtful accounts
    
    
    238
    
    
    
    
    
    
    
    238Depreciation
    
    
    4,312
    
    
    
    
    
    
    
    4,312Amortization
    
    
    10,983
    
    
    
    
    
    
    
    10,983Provision for inventory obsolescence
    
    
    960
    
    
    
    
    
    
    
    960Recognition of deferred revenue under license agreement
    
    
    (1,136
    )
    
    
    
    
    
    
    (1,136
    )Reimbursement recognized under license agreement
    
    
    (250
    )
    
    
    
    
    
    
    (250
    )Loss from disposal of fixed assets
    
    
    364
    
    
    
    
    
    
    
    364Deferred income tax benefit
    
    
    (52,116
    )
    
    
    (5,379
    )
    
    
    (57,495
    )Common Stock issued to employees under Kos Savings Plan
    
    
    1,569
    
    
    
    
    
    
    
    1,569Compensation expense on restricted stock grant
    
    
    300
    
    
    
    
    
    
    
    300Compensation cost on Common Stock warrants and options
    
    
    
    
    
    
    2,856
    
    
    
    2,856Tax benefit of stock option exercises
    
    
    22,247
    
    
    
    (2,244
    )
    
    
    20,003Write-off of acquired in-process research and development
    
    
    38,000
    
    
    
    
    
    
    
    38,000Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (37,340
    )
    
    
    
    
    
    
    (37,340
    )Inventories
    
    
    1,797
    
    
    
    
    
    
    
    1,797Prepaid expenses and other current assets
    
    
    (1,449
    )
    
    
    
    
    
    
    (1,449
    )Deferred tax assets
    
    
    (2,416
    )
    
    
    2,246
    
    
    
    (170
    )Other assets
    
    
    10
    
    
    
    
    
    
    
    10Accounts payable
    
    
    1,376
    
    
    
    
    
    
    
    1,376Accrued expenses
    
    
    61,586
    
    
    
    
    
    
    
    61,586Advance payment received on license agreement
    
    
    5,000
    
    
    
    
    
    
    
    5,000Net cash provided by operating activities
    
    
    196,354
    
    
    
    
    
    
    
    196,354Cash Flows from Investing Activities:Capital expenditures and deposits on fixed
assets to be acquired
    
    
    (9,536
    )
    
    
    
    
    
    
    (9,536
    )Product and intangible acquisition
    
    
    (206,062
    )
    
    
    
    
    
    
    (206,062
    )Net cash used in investing activities
    
    
    (215,598
    )
    
    
    
    
    
    
    (215,598
    )Cash Flows from Financing Activities:Proceeds from issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    2,633
    
    
    
    
    
    
    
    2,633Net proceeds from exercise of stock options
    
    
    15,445
    
    
    
    
    
    
    
    15,445Payments under capital lease obligations
    
    
    (89
    )
    
    
    
    
    
    
    (89
    )Net cash provided by financing activities
    
    
    17,989
    
    
    
    
    
    
    
    17,989Net decrease in cash and cash equivalents
    
    
    (1,255
    )
    
    
    
    
    
    
    (1,255
    )Cash and Cash Equivalents, beginning of period
    
    
    259,958
    
    
    
    
    
    
    
    259,958Cash and Cash Equivalents, end of period
    
    $
    258,703
    
    
    $
    
    
    
    $
    258,703Supplemental Disclosure of Cash Flow Information:Interest paid
    
    $
    1,445
    
    
    $
    
    
    
    $
    1,445Income taxes paid
    
    
    5,454
    
    
    
    
    
    
    
    5,454Supplemental Disclosure of Non-cash Information:Conversion of Note Payable to Shareholder to Common Stock
(See Note 9)
    
    $
    11,000
    
    
    $
    
    
    
    $
    11,000Acquisition of equipment under capital lease obligations
    
    
    404
    
    
    
    
    
    
    
    404
 The accompanying notes are an integral part of these financial statements.
 90




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KOS PHARMACEUTICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 For the Year Ended December 31, 2003As previously
    
    
    Restatementreported
    
    
    adjustments
    
    
    RestatedCash Flows from Operating Activities:Net Income
    
    $
    59,414
    
    
    $
    (7,236
    )
    
    $
    52,178Adjustments to reconcile net income to net cash
provided by operating activities -Provision for doubtful accounts
    
    
    217
    
    
    
    
    
    
    
    217Depreciation
    
    
    3,311
    
    
    
    
    
    
    
    3,311Provision for inventory obsolescence
    
    
    771
    
    
    
    
    
    
    
    771Reimbursement recognized under license agreement
    
    
    (230
    )
    
    
    
    
    
    
    (230
    )Loss from disposal of fixed assets
    
    
    198
    
    
    
    
    
    
    
    198Common Stock issued to employees under Kos Savings Plan
    
    
    1,079
    
    
    
    
    
    
    
    1,079Compensation expense on restricted stock grant
    
    
    299
    
    
    
    
    
    
    
    299Compensation cost on Common Stock warrants and options
    
    
    2,534
    
    
    
    7,236
    
    
    
    9,770Tax benefit of stock option exercises
    
    
    1,135
    
    
    
    
    
    
    
    1,135Changes in operating assets and liabilities:Trade accounts receivable
    
    
    (13,595
    )
    
    
    
    
    
    
    (13,595
    )Inventories
    
    
    (1,250
    )
    
    
    
    
    
    
    (1,250
    )Prepaid expenses and other current assets
    
    
    (4,229
    )
    
    
    
    
    
    
    (4,229
    )Other assets
    
    
    (73
    )
    
    
    
    
    
    
    (73
    )Accounts payable
    
    
    598
    
    
    
    
    
    
    
    598Accrued expenses
    
    
    8,763
    
    
    
    
    
    
    
    8,763Advance payments from customers
    
    
    (9,129
    )
    
    
    
    
    
    
    (9,129
    )Advance payment received on license agreement
    
    
    5,797
    
    
    
    
    
    
    
    5,797Net cash provided by operating activities
    
    
    55,610
    
    
    
    
    
    
    
    55,610Cash Flows from Investing Activities:Capital expenditures and deposits on fixed
assets to be acquired
    
    
    (11,044
    )
    
    
    
    
    
    
    (11,044
    )Purchases of marketable securities
    
    
    (13,564
    )
    
    
    
    
    
    
    (13,564
    )Sales of marketable securities
    
    
    13,564
    
    
    
    
    
    
    
    13,564Net cash used in investing activities
    
    
    (11,044
    )
    
    
    
    
    
    
    (11,044
    )Cash Flows from Financing Activities:Net proceeds from issuance of Common Stock
    
    
    184,276
    
    
    
    
    
    
    
    184,276Proceeds from issuance of Common Stock to employees
under Stock Purchase Plan
    
    
    1,983
    
    
    
    
    
    
    
    1,983Net proceeds from exercise of stock options
    
    
    13,617
    
    
    
    
    
    
    
    13,617Payments of Notes Payable to Shareholder
    
    
    (4,000
    )
    
    
    
    
    
    
    (4,000
    )Payments under capital lease obligations
    
    
    (56
    )
    
    
    
    
    
    
    (56
    )Net cash provided by financing activities
    
    
    195,820
    
    
    
    
    
    
    
    195,820Net increase in cash and cash equivalents
    
    
    240,386
    
    
    
    
    
    
    
    240,386Cash and Cash Equivalents, beginning of period
    
    
    19,572
    
    
    
    
    
    
    
    19,572Cash and Cash Equivalents, end of period
    
    $
    259,958
    
    
    $
    
    
    
    $
    259,958Supplemental Disclosure of Cash Flow Information:Interest paid
    
    $
    3,075
    
    
    $
    
    
    
    $
    3,075Income taxes paid
    
    
    2,460
    
    
    
    
    
    
    
    2,460Supplemental Disclosure of Non-cash Information:Conversion of Note Payable to Shareholder to Common Stock
(See Note 9)
    
    $
    50,000
    
    
    $
    
    
    
    $
    50,000Acquisition of equipment under capital lease obligations
    
    
    
    
    
    
    
    
    
    
    
 The accompanying notes are an integral part of these financial statements.
 91




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3. Summary of Significant Accounting Policies
 Basis of Presentation
  Reclassification
  Use of Estimates
  Cash and Cash Equivalents
  Trade Accounts Receivable and Allowance for Doubtful Accounts
  Inventories
  Niaspan Advicor Azmacort Azmacort
 92




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##### Table of Contents



Azmacort Azmacort Cardizem LA Teveten Teveten Cardizem LA Teveten/Teveten HCT
 Long-Lived Assets
  Azmacort
 Fair Value of Financial Instruments
  Concentration of Credit Risk
   93




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##### Table of Contents



Revenue Recognition
  December 31,2005
    
    
    2004
    
    
    2003(in thousands)Niaspan
    
    $
    435,160
    
    
    $
    319,071
    
    
    $
    226,541Advicor
    
    
    115,961
    
    
    
    108,196
    
    
    
    67,366Azmacort
    
    
    103,245
    
    
    
    68,277
    
    
    
    Cardizem LA
    
    
    69,746
    
    
    
    
    
    
    
    Teveten and Teveten HCT
    
    
    22,085
    
    
    
    
    
    
    
    Other
    
    
    5,503
    
    
    
    1,559
    
    
    
    Total
    
    $
    751,700
    
    
    $
    497,103
    
    
    $
    293,907
 Cardizem LA Teveten Niaspan Advicor Azmacort
  Accounting for Product Returns and Inventory Management Agreements  Impact on Revenue Recognition
 Niaspan Advicor
 94




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##### Table of Contents



Niaspan Advicor
   Shipping and Handling Costs
  International Commercialization Agreements with Merck KGaA and Oryx
 Niaspan Advicor Niaspan Advicor
 95




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##### Table of Contents



Niaspan Advicor Niaspan Advicor
     Niaspan Advicor Niaspan Advicor Advicor Niaspan Niaspan Advicor Niaspan Advicor
 Co-Promotion and Strategic Alliance Arrangements
 Niaspan Advicor Niaspan Advicor
 96




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##### Table of Contents



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
  Advertising Expense
  Leases
  97




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##### Table of Contents



Income Taxes
  Earnings Per Share
  2005
    
    
    2004
    
    
    2003(in thousands)Numerator:Net income
    
    $
    114,075
    
    
    $
    144,840
    
    
    $
    52,178Interest expense from convertible debt
    
    
    520
    
    
    
    1,209
    
    
    
    3,316Diluted net income
    
    $
    114,595
    
    
    $
    146,049
    
    
    $
    55,494Denominator:Basic weighted average number of
shares outstanding
    
    
    43,528
    
    
    
    37,898
    
    
    
    21,914Effect of dilutive securities:Stock options
    
    
    2,855
    
    
    
    2,217
    
    
    
    2,851Non-detachable warrants (See Note 9)
    
    
    1,800
    
    
    
    5,542
    
    
    
    6,000Convertible debt (See Note 9)
    
    
    
    
    
    
    
    
    
    
    10,032Other Common Stock warrants
shares outstanding (See Note 13)
    
    
    53
    
    
    
    23
    
    
    
    8Diluted weighted average number of
shares outstanding
    
    
    48,236
    
    
    
    45,680
    
    
    
    40,805Basic earnings per share of
Common Stock
    
    $
    2.62
    
    
    $
    3.82
    
    
    $
    2.38Diluted earnings per share of
Common Stock
    
    
    2.38
    
    
    
    3.20
    
    
    
    1.36
  Reporting of Comprehensive Income
  98




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##### Table of Contents



Accounting for Stock-Based Compensation
  2005
    
    
    2004
    
    
    2003(in thousands, except per share data)Net income:As reported
    
    $
    114,075
    
    
    $
    144,840
    
    
    $
    52,178Compensation expense
under APB 25, net of taxes
    
    
    4,695
    
    
    
    (2,521
    )
    
    
    8,010Stock-based employee
compensation expense
under fair value method,
net of taxes
    
    
    (28,434
    )
    
    
    (26,427
    )
    
    
    (24,615
    )Pro forma
    
    $
    90,336
    
    
    $
    115,892
    
    
    $
    35,573Net income per share:As reported:Basic
    
    $
    2.62
    
    
    $
    3.82
    
    
    $
    2.38Diluted
    
    
    2.38
    
    
    
    3.20
    
    
    
    1.36Pro forma:Basic
    
    $
    2.08
    
    
    $
    3.06
    
    
    $
    1.62Diluted
    
    
    1.91
    
    
    
    2.60
    
    
    
    0.97Number of shares used in
calculation:As reported:Basic
    
    
    43,528
    
    
    
    37,898
    
    
    
    21,914Diluted
    
    
    48,236
    
    
    
    45,680
    
    
    
    40,805Pro forma:Basic
    
    
    43,528
    
    
    
    37,898
    
    
    
    21,914Diluted
    
    
    47,614
    
    
    
    45,107
    
    
    
    40,291
 99




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##### Table of Contents



Recent Accounting Pronouncements
   4. Trade Accounts Receivable, net
  December 31,2005
    
    
    2004(in thousands)Trade accounts receivable
    
    $
    115,449
    
    
    $
    77,911Less: Sales returns and allowances
    
    
    (3,479
    )
    
    
    (2,815
    )Allowance for doubtful accounts
    
    
    (318
    )
    
    
    (528
    )Trade accounts receivable, net
    
    $
    111,652
    
    
    $
    74,568
 5. Inventories
  December 31,2005
    
    
    2004(in thousands)Raw materials
    
    $
    3,294
    
    
    $
    2,199Work in process
    
    
    4,074
    
    
    
    4,161Finished goods
    
    
    13,380
    
    
    
    4,289Total inventories
    
    $
    20,748
    
    
    $
    10,649
 100




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##### Table of Contents



6. Fixed Assets, net
  December 31,2005
    
    
    2004(in thousands)Furniture and equipment
    
    $
    3,828
    
    
    $
    3,665Computer software and hardware
    
    
    14,798
    
    
    
    10,548Laboratory and manufacturing equipment
    
    
    14,099
    
    
    
    12,663Leasehold improvements
    
    
    20,136
    
    
    
    15,776Fixed assets, gross
    
    
    52,861
    
    
    
    42,652Less accumulated depreciation
    
    
    (24,116
    )
    
    
    (19,311
    )Fixed assets, net
    
    $
    28,745
    
    
    $
    23,341
  7. Product Acquisition and Intangible Assets
 Azmacort Azmacort
 Azmacort Azmacort Azmacort.
 Azmacort
 WeightedAverageComponent
    
    Estimated Value
    
    
    Life(in thousands)
    
    
    (in years)Developed and Core
Technology
    
    $
    154,429
    
    
    7Supply Contract
    
    
    4,050
    
    
    5Trademark
    
    
    2,341
    
    
    IndefiniteOther Intangibles
    
    
    241
    
    
    5In-process Research and
Development
    
    
    38,000
    
    
    N/AInventory
    
    
    7,000
    
    
    N/ATotal
    
    $
    206,061
 101




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##### Table of Contents



Azmacort Azmacort
  Azmacort Azmacort Azmacort Azmacort
 Azmacort Azmacort
 Teveten Cardizem LA Cardizem
 Teveten Cardizem Cardizem LA Cardizem Teveten
 102




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##### Table of Contents



WeightedAverageComponent
    
    Estimated Value
    
    
    Life(in thousands)
    
    
    (in years)Developed and Core Technology
    
    $
    44,400
    
    
    
    12Trademark
    
    
    4,200
    
    
    
    N/ASales and Marketing Rights
    
    
    49,000
    
    
    
    6Goodwill
    
    
    2,300
    
    
    
    N/AIn-process Research and Development
    
    
    2,800
    
    
    
    N/AInventory
    
    
    3,297
    
    
    
    N/ATotal
    
    $
    105,997
 Cardizem Cardizem Cardizem
  Cardizem Cardizem LA
 Cardizem Cardizem Cardizem
 Azmacort Cardizem
 103




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##### Table of Contents



December 31, 2005
    
    
    December 31, 2004Gross
    
    
    
    
    
    
    Net
    
    
    
    
    
    
    
    
    
    
    NetCarrying
    
    
    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
 104




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##### Table of Contents



8. Accrued Expenses
  December 31,2005
    
    
    2004(in thousands)Managed care rebates and chargebacks
    
    $
    70,618
    
    
    $
    49,998Employee commissions and bonuses
    
    
    15,236
    
    
    
    14,780Royalties
    
    
    29,670
    
    
    
    13,811Income taxes payable
    
    
    20,212
    
    
    
    2,183Inventory and commodity purchases
    
    
    9,481
    
    
    
    3,046IMA accrual
    
    
    8,721
    
    
    
    Employee vacations
    
    
    4,558
    
    
    
    3,437All other
    
    
    25,268
    
    
    
    17,643Total accrued expenses
    
    $
    183,764
    
    
    $
    104,898
 9. Notes Payable to Shareholder
    105




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##### Table of Contents



10. Income Taxes
    December 31,2005
    
    
    2004(in thousands)Current:Reserves and accruals
    
    $
    29,699
    
    
    $
    21,193Tax net operating loss carryforwards and credits
    
    
    4,129
    
    
    
    11,973Intangible assets
    
    
    1,553
    
    
    
    971Advance payment received on license agreement
    
    
    606
    
    
    
    1,379Other
    
    
    788
    
    
    
    Total Current
    
    
    36,775
    
    
    
    35,516Non-current:Tax net operating loss carryforwards
    
    
    
    
    
    
    4,181Intangible assets
    
    
    23,560
    
    
    
    15,349Advance payment received on license agreement
    
    
    4,907
    
    
    
    5,670Property and equipment
    
    
    (2,119
    )
    
    
    (2,585
    )Share-based
compensation
    
    
    5,972
    
    
    
    3,132Other
    
    
    1,271
    
    
    
    583Total Non-current
    
    
    33,591
    
    
    
    26,33070,366
    
    
    
    61,846Valuation allowance
    
    
    
    
    
    
    (4,181
    )$
    70,366
    
    
    $
    57,665
 106




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##### Table of Contents



Years Ended December 31,2005
     

    
    2004
    
    
    2003(in thousands)Current provision:Federal
    
    $
    72,258
    
    
    $
    21,890
    
    
    $
    1,260State
    
    
    4,912
    
    
    
    6,050
    
    
    
    1,61977,170
    
    
    
    27,940
    
    
    
    2,879Deferred benefit:Federal
    
    
    (15,393
    )
    
    
    (48,714
    )
    
    
    State
    
    
    (1,004
    )
    
    
    (8,781
    )
    
    
    (16,397
    )
    
    
    (57,495
    )
    
    
    Changes in liabilities for uncertain
tax positions, net
    
    
    7,889
    
    
    
    
    
    
    
    Total
    
    $
    68,662
    
    
    $
    (29,555
    )
    
    $
    2,879
   December 31,2005
    
    
    2004
    
    
    2003(in thousands)Computed expected income tax based
on statutory federal income tax rate
    
    $
    63,955
    
    
    $
    40,351
    
    
    $
    19,270State income taxes, net of federal benefit
    
    
    9,445
    
    
    
    3,065
    
    
    
    2,614Non-deductible expenses
    
    
    2,329
    
    
    
    1,787
    
    
    
    2,929Change in valuation allowance
    
    
    (404
    )
    
    
    (72,208
    )
    
    
    (24,463
    )Research & development credit, net
    
    
    (5,390
    )
    
    
    
    
    
    
    Other
    
    
    (1,273
    )
    
    
    (2,550
    )
    
    
    2,529Provision for/(benefit from) income taxes
    
    $
    68,662
    
    
    $
    (29,555
    )
    
    $
    2,879
  107




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##### Table of Contents



11. Major Customers
  December 31,2005
    
    
    2004
    
    
    2003(in thousands)Customer A
    
    $
    295,126
    
    
    $
    184,788
    
    
    $
    94,496Customer B
    
    
    190,652
    
    
    
    134,437
    
    
    
    75,371Customer C
    
    
    119,334
    
    
    
    83,483
    
    
    
    60,621Total
    
    $
    605,112
    
    
    $
    402,708
    
    
    $
    230,488
 12. 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
    
    
    10,912
    
    
    
    19,119
    
    
    
    26,042
    
    
    
    25,470
    
    
    
    81,543Operating expenses(2)
    
    
    104,718
    
    
    
    121,568
    
    
    
    125,670
    
    
    
    143,044
    
    
    
    495,000Income from operations(1)(2)
    
    
    37,660
    
    
    
    38,712
    
    
    
    53,383
    
    
    
    45,402
    
    
    
    175,157Net income(1)(2)
    
    
    25,317
    
    
    
    27,906
    
    
    
    35,636
    
    
    
    25,216
    
    
    
    114,075Basic income per share(3)
    
    $
    0.63
    
    
    $
    0.68
    
    
    $
    0.77
    
    
    $
    0.54
    
    
    $
    2.62Diluted income per share(3)
    
    
    0.56
    
    
    
    0.59
    
    
    
    0.72
    
    
    
    0.51
    
    
    
    2.382004Revenues, net
    
    $
    94,268
    
    
    $
    120,250
    
    
    $
    131,876
    
    
    $
    150,709
    
    
    $
    497,103Cost of sales
    
    
    6,790
    
    
    
    10,223
    
    
    
    9,597
    
    
    
    10,460
    
    
    
    37,070Operating expenses(4)
    
    
    109,771
    
    
    
    74,065
    
    
    
    78,209
    
    
    
    87,451
    
    
    
    349,496Income from operations(4)
    
    
    (22,293
    )
    
    
    35,962
    
    
    
    44,070
    
    
    
    52,798
    
    
    
    110,537Net income(4)(5)
    
    
    11,907
    
    
    
    38,055
    
    
    
    42,300
    
    
    
    52,578
    
    
    
    144,840Basic income per share(3)
    
    $
    0.32
    
    
    $
    1.02
    
    
    $
    1.12
    
    
    $
    1.32
    
    
    $
    3.82Diluted income per share(3)
    
    
    0.26
    
    
    
    0.82
    
    
    
    0.93
    
    
    
    1.14
    
    
    
    3.20
 
 (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. 108




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##### Table of Contents



13. Commitments and Contingencies
 Letter of Credit Facility
  Purchase Commitments
  Employment and Royalty Agreements
   Year Ending December 31,
    
    Amount(in thousands)2006
    
    $
    1,4432007
    
    
    1,1242008
    
    
    9432009
    
    
    9692010
    
    
    997Thereafter
    
    
    81Total
    
    $
    5,557
   109




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##### Table of Contents



Operating Lease Commitments
   Year Ending December 31,
    
    Amount(in thousands)2006
    
    $
    10,5632007
    
    
    10,5762008
    
    
    8,3642009
    
    
    5,5392010
    
    
    5,294Thereafter
    
    
    16,843Total
    
    $
    57,179
   Licensing Agreements
   Year Ending December 31,
    
    Amount(in thousands)2006
    
    $
    302007
    
    
    12,5302008
    
    
    302009
    
    
    302010
    
    
    200Thereafter
    
    
    26,000Total
    
    $
    38,820
 110




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##### Table of Contents



Niaspan Advicor
 Sponsored Research
   Development Agreements
   Contract Sales Organization
 Niaspan Advicor
 111




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##### Table of Contents



Employee Benefit Plans
   14. Shareholders Equity
 Preferred Stock
  Common Stock
  112




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##### Table of Contents



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
 113




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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
    
    
    Number
    
    
    WeightedOutstanding
    
    
    Average
    
    
    Average
    
    
    Exercisable
    
    
    AverageRange of
    
    December 31,
    
    
    Remaining
    
    
    Exercise
    
    
    December 31,
    
    
    ExerciseExercise Prices
    
    2005
    
    
    Contractual Life
    
    
    Price
    
    
    2005
    
    
    Price$4.28to$ 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
  114




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##### Table of Contents



Restricted Common Stock Grant
  15. Co-promotion, Licensing, Manufacturing and Settlement and License Agreement
 Niaspan Niaspan Advicor Niaspan Advicor
 Niaspan Advicor Niaspan Advicor
 16. Collaboration and License Agreement
  115




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##### Table of Contents



17. Legal Proceedings
 Cardizem LA Cardizem
LA
    Cardizem LA Cardizem LA
   116




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##### Table of Contents



18. Related Party Transactions
  117




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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
 118




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##### Table of Contents



19. Subsequent Events
 Accounting for Product Returns and Inventory Management Agreements  Impact on Revenue
Recognition
  119




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##### Table of Contents



120




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
 
 
 121




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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 at
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    
    
    
    
    EndDescription
    
    of Period
    
    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
    
    $
    100,852
    
    
    $
    (24,463
    )
    
    $
    
    
    
    $
    76,389Fiscal year ended December 31, 2004
    
    
    76,389
    
    
    
    (72,208
    )
    
    
    
    
    
    
    4,181Fiscal year ended December 31, 2005
    
    
    4,181
    
    
    
    (400
    )
    
    
    3,781
    
    
    
    Sales Returns And Allowances:Fiscal year ended December 31, 2003
    
    $
    2,388
    
    
    $
    8,412
    
    
    $
    8,707
    
    
    $
    2,093Fiscal year ended December 31, 2004
    
    
    2,093
    
    
    
    16,065
    
    
    
    15,343
    
    
    
    2,815Fiscal year ended December 31, 2005
    
    
    2,815
    
    
    
    24,180
    
    
    
    23,516
    
    
    
    3,479
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 Disclosure Controls and Procedures
  122




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Description of Material Weakness
  Remediation of Material Weakness
  123




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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
  124




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##### Table of Contents



PART III
  125




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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, 20053.
    
    
    The following exhibits are filed herewith:
 Exhibit Number
    

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.
 126




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##### Table of Contents



Exhibit
Number
    

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.
 127




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##### Table of Contents



Exhibit Number
    
    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.
 128




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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. 129




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##### Table of Contents



(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.(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. 130




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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
    
    September 13, 2006/s/ Daniel M. Bell

Daniel M. Bell
    
    Chairman of the Board
of Directors
    
    September 13, 2006/s/ Robert E. Baldini

Robert E. Baldini
    
    Vice Chairman of the Board
    
    September 13, 2006/s/ Adrian Adams

Adrian Adams
    
    President, Chief Executive
Officer, and Director(Principal Executive Officer)
    
    September 13, 2006/s/ Kevin P. Clarke

Kevin P. Clarke
    
    Executive Vice President, Chief
Financial Officer
    
    September 13, 2006(Principal Financial Officer)/s/ Juan F. Rodriguez

Juan F. Rodriguez
    
    Senior Vice President, Controller and
Corporate Administration
    
    September 13, 2006(Principal Accounting Officer)/s/ John Brademas

John Brademas
    
    Director
    
    September 13, 2006/s/ Kevin T. Ferro

Kevin T. Ferro
    
    Director
    
    September 13, 2006/s/ Steven Jaharis

Steven Jaharis
    
    Director
    
    September 13, 2006/s/ Nicolaos E. Madias

Nicolaos E. Madias
    
    Director
    
    September 13, 2006/s/ Mark Novitch

Mark Novitch
    
    Director
    
    September 13, 2006/s/ William D. Pruitt

William D. Pruitt
    
    Director
    
    September 13, 2006/s/ Frederick B. Whittemore

Frederick B. Whittemore
    
    Director
    
    September 13, 2006
 131




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Exhibit Description2.3+
    
    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.10.21*
    
    Summary Term Sheet of Board Compensation.10.22*
    
    Terms of Employment between Kevin Clarke and the Company dated as of October 14,
2005.21
    
    Subsidiaries of the Company.23.1
    
    Consent of Independent Registered Public Accounting Firm, Ernst & Young LLP.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.
 
 +
    
    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.