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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from to
 Commission file number: 000-51445
 ADAMS RESPIRATORY THERAPEUTICS, INC.
 (Exact Name of Registrant as Specified in Charter)
 Delaware(State or Other Jurisdiction of
    
    75-2725552Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 4 Mill Ridge Lane
Chester, New Jersey 07930
(Address of principal executive offices including zip code)
 (908) 879-1400
(Registrants telephone number, including area code)
 þ o
 o þ
 o þ




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##### 



ADAMS RESPIRATORY THERAPEUTICS, INC.
 INDEX
 Special Note Regarding Forward-looking StatementsPart I. Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets  September 30, 2006 and
June 30, 2006Consolidated Statements of Operations  Three months
ended September 30, 2006 and 2005Consolidated Statement of Stockholders Equity 
September 30, 2006Consolidated Statements of Cash Flows  Three months
ended September 30, 2006 and 2005Notes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and
Results of OperationsItem 3. Quantitative and Qualitative Disclosure of Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 6. ExhibitsSignaturesEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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PART I  FINANCIAL INFORMATION
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    the need for additional inventory reserves;
    
    our involvement in litigation having a material adverse impact on our business,
financial condition, results of operations or cash flows;
    
    our obligations related to product returns;
    
    our ability to obtain sufficient quantities of raw materials, including dextromethorphan;
    
    our reliance on third parties to perform certain aspects of
the manufacturing and packaging of our products;
    
    our expectations of the seasonality of Mucinex sales and related revenue fluctuations;
    
    our intentions to market additional products, grow our
business and expand our product portfolio and our expectation of
increased expenses to do so;
    
    our ability to meet our anticipated operating needs with our
revenues, existing cash and our Credit Facility;
    
    our need for additional capital to acquire and develop new
products;
    
    the timing of the USPTOs reexamination of the patentability of our delivery system for
guaifenesin and our ability to prevail in the reexamination process;
    
    our reliance on and continued consolidation of our top customers;
    
    an increase in stronger and more direct competition,
including generic competition;
    
    the FDAs timing and review of Mutuals ANDA and
our ability to maintain our exclusive market position of Mucinex
SE and Humibid SE;
    
    our expectations of increased pricing pressures;
    
    our ability to leverage our brand name;
    
    our exposure to credit rate, interest rate and exchange rate risk.
   3




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ITEM 1. FINANCIAL STATEMENTS.
 Adams Respiratory Therapeutics, Inc.
 
 Consolidated Balance Sheets
 (Amounts in thousands, except per share amounts)
 September 30,
    
    
    June 30,2006
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,652
    
    
    $
    34,815Short-term investments
    
    
    19,158
    
    
    
    22,223Accounts receivable, net
    
    
    58,670
    
    
    
    19,444Inventories, net
    
    
    26,603
    
    
    
    10,603Prepaid expenses and other assets
    
    
    8,566
    
    
    
    4,857Income taxes receivable
    
    
    
    
    
    
    4,045Deferred tax assets
    
    
    4,700
    
    
    
    3,659Total current assets
    
    
    136,349
    
    
    
    99,646Property, plant and equipment, net of accumulated depreciation
    
    
    15,118
    
    
    
    7,388Deferred tax assets
    
    
    2,057
    
    
    
    2,545Intangible assets, net
    
    
    127,056
    
    
    
    127,128Other assets
    
    
    20,045
    
    
    
    15,883Total assets
    
    $
    300,625
    
    
    $
    252,590LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    26,889
    
    
    $
    15,189Line of credit
    
    
    10,250
    
    
    
    Income taxes payable
    
    
    3,835
    
    
    
    Accrued compensation and related items
    
    
    4,803
    
    
    
    5,769Accrued returns, chargebacks, rebates and other sales allowances
    
    
    6,622
    
    
    
    5,701Other current liabilities
    
    
    3,076
    
    
    
    1,648Total current liabilities
    
    
    55,475
    
    
    
    28,307Long-term liabilities:Deferred gain on sale of plant assets
    
    
    
    
    
    
    1,309Accrued royalties
    
    
    832
    
    
    
    701Total liabilities
    
    
    56,307
    
    
    
    30,317Stockholders equity:Preferred Stock $0.01 par value:Authorized shares  50,000, Issued and outstanding  none
    
    
    
    
    
    
    Common stock, $0.01 par value:Authorized shares  100,000Issued and outstanding shares  35,070 at September 30, 2006 and
34,874 at June 30, 2006, respectively
    
    
    351
    
    
    
    349Additional paid-in capital
    
    
    470,670
    
    
    
    464,877Accumulated deficit
    
    
    (226,664
    )
    
    
    (242,842
    )Accumulated other comprehensive loss
    
    
    (39
    )
    
    
    (111
    )Total stockholders equity
    
    
    244,318
    
    
    
    222,273Total liabilities and stockholders equity
    
    $
    300,625
    
    
    $
    252,590
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Adams Respiratory Therapeutics, Inc.
Consolidated Statements of Income
(Amounts in thousands, except per share amounts)
 Three Months endedSeptember 30,2006
    
    
    2005(unaudited)Net sales
    
    $
    90,142
    
    
    $
    47,017Cost of goods sold
    
    
    29,358
    
    
    
    8,521Gross margin
    
    
    60,784
    
    
    
    38,496Selling, marketing & administrative
    
    
    29,983
    
    
    
    15,869Product development
    
    
    6,287
    
    
    
    3,426Other, net
    
    
    (879
    )
    
    
    (926
    )35,391
    
    
    
    18,369Income before income taxes
    
    
    25,393
    
    
    
    20,127Provision for income taxes
    
    
    9,215
    
    
    
    7,739Net income
    
    $
    16,178
    
    
    $
    12,388Income per common shareBasic
    
    $
    0.46
    
    
    $
    0.44Diluted
    
    $
    0.44
    
    
    $
    0.36Weighted-average of common shares used in income per
share calculationBasic
    
    
    35,014
    
    
    
    27,870Diluted
    
    
    36,965
    
    
    
    34,745
  6




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Adams
Respiratory Therapeutics, Inc.
 
 Consolidated Statement of Stockholders Equity
(Amounts in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    EquityBalance as of June 30, 2006
    
    
    34,874
    
    
    $
    349
    
    
    $
    464,877
    
    
    $
    (242,842
    )
    
    $
    (111
    )
    
    $
    222,273Comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,178
    
    
    
    
    
    
    
    16,178Unrealized gain on marketable
securities, net of tax of $23
(unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    72Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,250Stock compensation expense
(unaudited)
    
    
    
    
    
    
    
    
    
    
    1,983
    
    
    
    
    
    
    
    
    
    
    
    1,983Exercise of stock options (unaudited)
    
    
    196
    
    
    
    2
    
    
    
    1,799
    
    
    
    
    
    
    
    
    
    
    
    1,801Tax benefit of stock options
(unaudited)
    
    
    
    
    
    
    
    
    
    
    2,011
    
    
    
    
    
    
    
    
    
    
    
    2,011Balance as of September 30, 2006
(unaudited)
    
    
    35,070
    
    
    $
    351
    
    
    $
    470,670
    
    
    $
    (226,664
    )
    
    $
    (39
    )
    
    $
    244,318
  7




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Adams Respiratory Therapeutics, Inc.
 
 Consolidated Statements of Cash Flows
 (Amounts in thousands)
 Three months Ended September 30,2006
    
    
    2005(unaudited)Operating ActivitiesNet income
    
    $
    16,178
    
    
    $
    12,388Adjustments to reconcile net income to net cash
(used in) / provided by operating activities:Depreciation and amortization
    
    
    684
    
    
    
    299Stock compensation expense
    
    
    1,983
    
    
    
    1,001Deferred taxes
    
    
    (576
    )
    
    
    1,679Changes in operating assets and liabilities:Accounts receivable
    
    
    (39,226
    )
    
    
    (10,558
    )Inventories
    
    
    (16,000
    )
    
    
    (893
    )Prepaid expenses and other current assets
    
    
    (3,635
    )
    
    
    939Other assets
    
    
    (1,420
    )
    
    
    Accounts payable
    
    
    11,700
    
    
    
    1,894Income taxes
    
    
    7,880
    
    
    
    8,149Accrued expenses and other liabilities
    
    
    205
    
    
    
    1,680Net cash (used in) / provided by operating activities
    
    
    (22,227
    )
    
    
    16,578Investing ActivitiesPurchases of property, plant and equipment
    
    
    (8,151
    )
    
    
    (105
    )Increase in investments and restricted cash
    
    
    (2,087
    )
    
    
    Maturities of investments
    
    
    2,607
    
    
    
    Net cash (used in) investing activities
    
    
    (7,631
    )
    
    
    (105
    )Financing ActivitiesBorrowings on line of credit
    
    
    20,000
    
    
    
    Repayments of line of credit
    
    
    (9,750
    )
    
    
    Debt issuance costs
    
    
    (367
    )
    
    
    Proceeds from exercise of stock options and warrants
    
    
    1,801
    
    
    
    102Net proceeds from issuance of common stock
    
    
    
    
    
    
    107,846Excess tax benefit from exercise of stock options
    
    
    2,011
    
    
    
    866Net cash provided by financing activities
    
    
    13,695
    
    
    
    108,814Net (decrease)/increase in cash and cash equivalents
    
    
    (16,163
    )
    
    
    125,287Cash and cash equivalents at beginning of period
    
    
    34,815
    
    
    
    24,655Cash and cash equivalents at end of period
    
    $
    18,652
    
    
    $
    149,942
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Adams
Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements
(unaudited)
($ in thousands, except per share amounts)
 1. Summary of Significant Accounting Policies
 Basis of Presentation
   Principles of Consolidation
  Use of Estimates
  Manufacturing Assets Repurchase
  Inventories and Cost of Goods Sold
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Adams
Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements
(unaudited)  (continued)
($ in thousands, except per share amounts)
 September 30,
    
    
    June 30,2006
    
    
    2006Raw materials
    
    $
    5,812
    
    
    $
    Work in progress
    
    
    4,693
    
    
    
    Finished goods
    
    
    16,505
    
    
    
    10,62727,010
    
    
    
    10,627Less: reserve for obsolescence
    
    
    (407
    )
    
    
    (24
    )Inventories, net
    
    $
    26,603
    
    
    $
    10,603
   Income Taxes
   Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 10




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Adams
Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements
(unaudited)  (continued)
($ in thousands, except per share amounts)
 2. Supplementary Financial Information
 Allowances for Accounts Receivable
  Intangible Assets
  September 30,
    
    
    June 30,2006
    
    
    2006Intangible Asset with Indefinite Life:Delsym Trademark
    
    $
    122,000
    
    
    $
    122,000Amortizable Intangible Assets:
    
    
    6,954
    
    
    
    6,763Accumulated Amortization
    
    
    (1,898
    )
    
    
    (1,635
    )Net balance
    
    $
    5,056
    
    
    $
    5,128
  Other Assets
  Sales Returns and Allowances
  Other, net
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Adams
Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements
(unaudited)  (continued)
($ in thousands, except per share amounts)
 3. Benefit Plan
   4. Stockholders Equity
 Initial Public Offering
  Secondary Offering
  Stock Compensation Plan
  12




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Adams
Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements
(unaudited)  (continued)
($ in thousands, except per share amounts)
 5 . Income per Common Share
  September 302006
    
    
    2005(Shares in thousands)Net income
    
    $
    16,178
    
    
    $
    12,388Average shares outstanding  basic
    
    
    35,014
    
    
    
    27,870Weighted average dilutive stock options
    
    
    1,933
    
    
    
    2,731Weighted average assumed conversion of redeemable convertible
Preferred stock
    
    
    
    
    
    
    3,812Weighted average dilutive warrants, restricted stock units and
performance shares
    
    
    18
    
    
    
    332Average shares outstanding  diluted
    
    
    36,965
    
    
    
    34,745Income per common share:Basic
    
    $
    0.46
    
    
    $
    0.44Diluted
    
    $
    0.44
    
    
    $
    0.36
  6. Senior Revolving Credit Facility
    13




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Adams
Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements
(unaudited)  (continued)
($ in thousands, except per share amounts)
 7. Commitments and Contingencies
        14




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Adams
Respiratory Therapeutics, Inc.
Notes to Consolidated Financial Statements
(unaudited)  (continued)
($ in thousands, except per share amounts)
  8. Net Sales Information
 Net Sales by Product
  Three Months EndedSeptember 30,Product
    
    2006
    
    
    2005Mucinex SE
    
    $
    40,772
    
    
    $
    36,618Mucinex DM
    
    
    24,259
    
    
    
    10,399Mucinex D
    
    
    6,948
    
    
    
    Childrens Mucinex
    
    
    9,950
    
    
    
    Humibid SE
    
    
    53
    
    
    
    Delsym
    
    
    8,160
    
    
    
    Net Sales
    
    $
    90,142
    
    
    $
    47,017
 Concentration of Credit Risk
  Three months endedSeptember 30,2006
    
    2005Major retailer/mass merchandiser
    
    
    26
    %
    
    
    17
    %Major retailer  A
    
    
    20
    %
    
    
    11
    %Major retailer  B
    
    
    7
    %
    
    
    21
    %Wholesaler
    
    
    4
    %
    
    
    11
    %
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the MD&A, financial statements and related notes included in our
Annual Report on Form 10-K for the year ended June 30, 2006, together with our financial statements
and related notes appearing elsewhere in this Quarterly Report on Form 10-Q . Some of the
information contained in this discussion and analysis or set forth elsewhere in this document,
including information with respect to our plans and strategy for our business and related
financing, includes forward-looking statements that involve risks and uncertainties. You should
review Part II, Item 1A.Risk Factors of this Quarterly Report on Form 10-Q and Part I, Item 1A.Risk
Factors in our Annual Report on Form 10-K for the year ended June 30, 2006 for a discussion of
important factors that could cause our actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the following discussion and
analysis.
 Overview
  Mucinex SE.
 Mucinex DM.
 Mucinex D
 Humibid SE
 Delsym
 Childrens
Mucinex
 Future Products.
 Revenue Growth.
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
    
    The FDAs removal of competitive long-acting, single-ingredient guaifenesin prescription
products in November 2003.This removal resulted in Mucinex SE being the only long-acting,
single-ingredient guaifenesin product available in the United States. Based on data from
IMS HealthNPATM, we estimate that, for the 12 months ended June 30, 2003, there
were approximately 10.5 million prescriptions filled for long-acting, single-ingredient
guaifenesin products. After November 2003, we believe that a majority of prescriptions
written for long-acting, single-ingredient guaifenesin resulted in OTC sales of our Mucinex
SE product. Humibid SE is now also available to meet this demand in a maximum strength
formulation.
    
    Our professional marketing efforts to physicians, pharmacists and other healthcare
professionals.Our professional sales force targets high-prescribers of long-acting
guaifenesin products and encourages them to recommend Mucinex SE, Mucinex DM and Mucinex D
to their patients. Our professional sales force also educates physicians, pharmacists and
other healthcare professionals about the benefits of long-acting guaifenesin. Since
December 2004, we expanded our professional sales force from 50 to 125 sales
representatives.
    
    Expansion of our trade sales department and trade development efforts.Our trade sales
force calls on national and regional retail accounts and wholesale distribution companies.
The primary focus of our trade sales force is to maximize our shelf presence at retail
drug, food and mass merchandise stores to support the efforts of our professional sales
representatives and consumer advertising campaign. Since December 2003, we have grown our
trade sales force from one to ten professionals.
    
    Consumer Advertising Campaign.Prior to the FDAs approval of Mucinex SE as an OTC
drug, long-acting guaifenesin and combination products were available only by prescription.
We launched our consumer advertising campaign in November 2004, and our strategy is to
educate customers about the unique benefits of Mucinex to encourage trial of our products.
 Seasonality
 Manufacturing Assets Repurchase
  Critical Accounting Policies and Estimates
 Inventories.
 17




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Results of Operations
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Net Sales.
  Three Months EndedSeptember 30,
    
    
    Increase/Product
    
    2006
    
    
    2005
    
    
    (Decrease)(In thousands)Mucinex SE
    
    $
    40,772
    
    
    $
    36,618
    
    
    $
    4,154Mucinex DM
    
    
    24,259
    
    
    
    10,399
    
    
    
    13,860Mucinex D
    
    
    6,948
    
    
    
    
    
    
    
    6,948Childrens Mucinex
    
    
    9,950
    
    
    
    
    
    
    
    9,950Delsym
    
    
    8,160
    
    
    
    
    
    
    
    8,160Humibid SE
    
    
    53
    
    
    
    
    
    
    
    53Net Sales
    
    $
    90,142
    
    
    $
    47,017
    
    
    $
    43,125
 Cost of Goods Sold.
 Selling, Marketing and Administrative.
 18




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Product Development.
 Other, net.
 Income Taxes.
 Liquidity and Capital Resources
      19




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Cash Flows
 Three months ended September 30, 2006 compared to three months ended September 30, 2005.
  20




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Commitments and Contractual Obligations
     21




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Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control Over Financial Reporting.
 22




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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
     
 ITEM 1A. RISK FACTORS.
  Risks Relating to Our Business
 An ANDA, for a single-ingredient, extended-release formulation of guaifenesin has been filed with
the FDA.
    23




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We depend heavily on the success of two of our existing products, Mucinex SE and Mucinex DM, and
the strength of the Mucinex brand. If we are unable to continue to successfully commercialize
Mucinex SE and Mucinex DM and build the Mucinex, Humibid and Delsym brands and our Childrens
Mucinex line of products with the introduction of new products, our results of operations and
future prospects will suffer.
  We depend on a limited number of customers for a large portion of our sales, and demands made by,
or the loss of, one or more of these customers could significantly reduce our margins or sales and
adversely affect our business and financial results.
  24




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Risks Related to Intellectual Property
 Our U.S. patent no. 6,372,252 is the subject of a request for reexamination, which the United
States Patent and Trade Mark Office, or USPTO, granted upon petition to the USPTO Director. If the
USPTO cancels our patent or substantially narrows the claims of our patent such that it no longer
protects our products from competition, our business will be materially harmed.
  25




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
   
 ITEM 6. EXHIBITS.
 ExhibitNumber
    
    
    
    Description31.1*
    
    
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    
    
    Certification of the Chief Executive Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2*
    
    
    
    Certification of the Chief Financial Officer pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed with this Quarterly Report. 26




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SIGNATURES
  ADAMS RESPIRATORY THERAPEUTICS, INC.Date November 14, 2006
    /s/ DAVID BECKERBy: David BeckerIts: Chief Financial and
Administrative Officer and Treasurer 27