##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark one)
    
    þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended March 31, 2008o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from                              to                              .
 Commission File Number: 001-33027
 HOME DIAGNOSTICS, INC.
  DELAWARE
(State or other jurisdiction 
of incorporation or organization)
    
    22-2594392
(I.R.S. Employer
Identification Number)
 2400 NW 55thCourt 
Fort Lauderdale, Florida
(Address of principal executive offices)
    
    33309
(Zip Code)
 954-677-9201
  Title of Each Class
Common Stock, $0.01 par value
    
    Name of Exchange on Which Registered
The NASDAQ Stock Market LLC
 None
 þ o
   Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



HOME DIAGNOSTICS, INC.
INDEX
 PagePart I
    
    FINANCIAL SUMMARYItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of December 31, 2007 and March 31, 2008 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2008 (Unaudited)
    
    
    4Condensed Consolidated Statement of Changes in Stockholders Equity for the Three Months Ended March 31, 2008 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007  and 2008 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    21Part II
    
    OTHER INFORMATIONItem 1.
    
    Legal Matters
    
    
    22Item 1A.
    
    Risk Factors
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 6.
    
    Exhibits
    
    
    24SIGNATURES
    
    
    25EXHIBIT INDEX
    
    
    26CERTIFICATIONSEX-3.1 Amended and Restated Bylaws of the RegistrantEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO
   
 2




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##### Table of Contents



Part I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 (Unaudited)December 31,
    
    
    March 31,2007
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    32,695,803
    
    
    $
    32,180,663Accounts receivable, net
    
    
    18,313,519
    
    
    
    16,361,763Inventory
    
    
    12,379,668
    
    
    
    13,268,271Prepaid expenses and other current assets
    
    
    1,013,025
    
    
    
    2,062,921Income taxes receivable
    
    
    1,241,171
    
    
    
    3,060,931Deferred tax asset
    
    
    4,669,774
    
    
    
    4,474,373Total current assets
    
    
    70,312,960
    
    
    
    71,408,922Property and equipment, net
    
    
    22,560,335
    
    
    
    23,462,683Goodwill
    
    
    35,573,462
    
    
    
    35,573,462Other intangible assets, net
    
    
    660,776
    
    
    
    570,736Deferred tax asset
    
    
    1,004,638
    
    
    
    532,727Other assets, net
    
    
    138,866
    
    
    
    148,014Total assets
    
    $
    130,251,037
    
    
    $
    131,696,544Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    6,103,535
    
    
    $
    7,394,297Accrued liabilities
    
    
    18,048,079
    
    
    
    16,704,545Total current liabilities
    
    
    24,151,614
    
    
    
    24,098,842Contingencies (Note 11)
    
    
    
    
    
    
    Stockholders equity:Common stock, $.01 par value; 60,000,000 shares authorized; 17,878,691
and 17,888,086 shares issued and outstanding at December 31, 2007 and
2008, respectively
    
    
    178,787
    
    
    
    178,881Additional paid-in capital
    
    
    95,017,973
    
    
    
    95,300,196Retained earnings
    
    
    10,858,415
    
    
    
    11,548,905Accumulated other comprehensive income
    
    
    44,248
    
    
    
    569,720Total stockholders equity
    
    
    106,099,423
    
    
    
    107,597,702Total liabilities and stockholders equity
    
    $
    130,251,037
    
    
    $
    131,696,544
 The accompanying notes are an integral part of these consolidated financial statements.
 3




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 Three Months EndedMarch 31,2007
    
    
    2008Net sales
    
    $
    28,100,050
    
    
    $
    25,120,280Cost of sales
    
    
    11,204,337
    
    
    
    10,531,933Gross profit
    
    
    16,895,713
    
    
    
    14,588,347Operating expensesSelling, general and administrative
(including stock-based compensation
expense of $300,944 and $233,001, for the
three months ended March 31, 2007 and 2008,
respectively)
    
    
    11,541,073
    
    
    
    11,870,718Research and development
    
    
    2,012,170
    
    
    
    2,356,848Total operating expenses
    
    
    13,553,243
    
    
    
    14,227,566Income from operations
    
    
    3,342,470
    
    
    
    360,781Other income (expense)Interest income, net
    
    
    345,006
    
    
    
    327,868Other income (expense), net
    
    
    120,698
    
    
    
    (526,581
    )Total other income (expense)
    
    
    465,704
    
    
    
    (198,713
    )Income before provision for income taxes
    
    
    3,808,174
    
    
    
    162,068Provision (benefit)for income taxes
    
    
    1,332,861
    
    
    
    (559,298
    )Net income
    
    $
    2,475,313
    
    
    $
    721,366Earnings per common share:Basic
    
    $
    0.14
    
    
    $
    0.04Diluted
    
    $
    0.13
    
    
    $
    0.04Weighted average shares used in computing
earnings per common share:Basic
    
    
    17,725,786
    
    
    
    17,898,772Diluted
    
    
    19,737,266
    
    
    
    18,996,852
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 AccumulatedCommon Stock
    
    
    Additional
    
    
    
    
    
    
    other
    
    
    TotalNumber of
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    stockholdersshares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    Income
    
    
    equityBalance at December 31, 2007
    
    
    17,878,691
    
    
    $
    178,787
    
    
    $
    95,017,973
    
    
    $
    10,858,415
    
    
    $
    44,248
    
    
    $
    106,099,423Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    233,001
    
    
    
    
    
    
    
    
    
    
    
    233,001Stock options exercised, including tax
benefit of $43,779
    
    
    27,600
    
    
    
    276
    
    
    
    146,050
    
    
    
    
    
    
    
    
    
    
    
    146,326Repurchased common stock
    
    
    (18,205
    )
    
    
    (182
    )
    
    
    (96,828
    )
    
    
    (30,876
    )
    
    
    
    
    
    
    (127,886
    )Comprehensive income:Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    525,472
    
    
    
    525,472Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    721,366
    
    
    
    
    
    
    
    721,366Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    721,366
    
    
    
    525,472
    
    
    
    1,246,838Balance at March 31, 2008
    
    
    17,888,086
    
    
    $
    178,881
    
    
    $
    95,300,196
    
    
    $
    11,548,905
    
    
    $
    569,720
    
    
    $
    107,597,702
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 5




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 Three Months EndedMarch 31,2007
    
    
    2008Cash flows from operating activitiesNet income
    
    $
    2,475,313
    
    
    $
    721,366Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    993,520
    
    
    
    922,481Amortization of deferred financing and debt issuance costs
    
    
    2,254
    
    
    
    Loss on asset disposal
    
    
    
    
    
    
    96,197Bad debt expense
    
    
    12,501
    
    
    
    15,000Deferred income taxes
    
    
    (329,058
    )
    
    
    667,312Stock-based compensation expense
    
    
    300,944
    
    
    
    233,001Changes in assets and liabilities:Accounts receivable
    
    
    (402,811
    )
    
    
    1,936,756Inventories
    
    
    624,858
    
    
    
    (662,714
    )Prepaid expenses and other current and non-current assets
    
    
    (154,234
    )
    
    
    (762,778
    )Income taxes receivable and income taxes payable
    
    
    1,476,726
    
    
    
    (1,775,981
    )Accounts payable
    
    
    1,902,379
    
    
    
    994,466Accrued liabilities
    
    
    (1,579,633
    )
    
    
    (1,431,534
    )Net cash provided by operating activities
    
    
    5,322,759
    
    
    
    953,572Cash flows from investing activitiesCapital expenditures
    
    
    (2,048,790
    )
    
    
    (1,726,361
    )Net cash used in investing activities
    
    
    (2,048,790
    )
    
    
    (1,726,361
    )Cash flows from financing activitiesPayment of debt financing costs
    
    
    (4,317
    )
    
    
    Proceeds from exercise of stock options
    
    
    1,764
    
    
    
    102,547Repurchases of common stock
    
    
    
    
    
    
    (127,886
    )Net cash used in financing activities
    
    
    (2,553
    )
    
    
    (25,339
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (230,795
    )
    
    
    282,988Net increase (decrease) in cash and cash equivalents
    
    
    3,040,621
    
    
    
    (515,140
    )Cash and cash equivalentsBeginning of period
    
    
    26,487,163
    
    
    
    32,695,803End of period
    
    $
    29,527,784
    
    
    $
    32,180,663Supplemental cash flows disclosures:Cash paid during the period for:Income taxes
    
    $
    378,698
    
    
    $
    347,757
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 6




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HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 1. Basis of presentation
    Use of estimates
  Property and equipment
  Category
    
    Useful livesMachinery and equipment
    
    1-8 yearsFurniture, fixtures and office equipment
    
    1-8 yearsComputer software
    
    3 years
  7




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Recent accounting pronouncements
    2. Stock option plans and warrants
  8




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WeightedRange of
    
    
    averageNumber of
    
    
    exercise
    
    
    exerciseoptions
    
    
    prices
    
    
    pricesOutstanding at December 31, 2007
    
    
    3,010,407
    
    
    $
    2.99-12.00
    
    
    $
    5.53Granted
    
    
    15,000
    
    
    $
    6.85
    
    
    $
    6.85Exercised
    
    
    (27,600
    )
    
    $
    2.99-4.27
    
    
    $
    3.71Forfeited/Cancelled
    
    
    (650
    )
    
    $
    12.00
    
    
    $
    12.00Outstanding at March 31, 2008
    
    
    2,997,157
    
    
    $
    2.99-12.00
    
    
    $
    5.55Exercisable at March 31, 2008
    
    
    2,282,101
    
    
    $
    2.99-12.00
    
    
    $
    4.07
  Three Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2008Weighted average expected term of options (using the simplified method in years)
    
    
    6.00
    
    
    
    4.50Expected volatility factor (based on peer group volatility)
    
    
    30.00
    %
    
    
    30.00
    %Expected dividend yield
    
    none
    
    noneWeighted average risk-free interest rate (based on applicable U.S. Treasury rates)
    
    
    4.52
    %
    
    
    2.5
    %
    9




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##### Table of Contents



3. Inventories, net
  December 31,
    
    
    March 31,2007
    
    
    2008Raw materials
    
    $
    7,589,107
    
    
    $
    7,014,877Work-in-process
    
    
    2,780,096
    
    
    
    4,321,865Finished goods
    
    
    2,010,465
    
    
    
    1,931,529$
    12,379,668
    
    
    $
    13,268,271
 4. Property and equipment, net
  December 31,
    
    
    March 31,2007
    
    
    2008Machinery and equipment
    
    $
    15,931,806
    
    
    $
    16,321,729Leasehold improvements
    
    
    4,061,227
    
    
    
    4,161,585Furniture, fixtures, and office equipment
    
    
    3,136,451
    
    
    
    3,520,245Computer software
    
    
    1,912,733
    
    
    
    1,930,251Equipment not yet placed in service
    
    
    15,272,616
    
    
    
    16,089,37440,314,833
    
    
    
    42,023,184Less: Accumulated depreciation and amortization
    
    
    (17,754,498
    )
    
    
    (18,560,501
    )$
    22,560,335
    
    
    $
    23,462,683
   5. Accrued liabilities
  December 31,
    
    
    March 31,2007
    
    
    2008Accrued salaries and benefits
    
    $
    3,975,898
    
    
    $
    3,609,050Sales returns reserve
    
    
    5,385,361
    
    
    
    5,123,296Product warranty and customer liabilities
    
    
    6,600,993
    
    
    
    5,935,204Other accrued liabilities
    
    
    2,085,826
    
    
    
    2,036,995$
    18,048,079
    
    
    $
    16,704,545
 10




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6. Credit facility and long-term debt
  7. Income taxes
   8. Earnings per common share
  11




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Three Months Ended
    
    
    Three Months EndedMarch 31,
    
    
    March 31,2007
    
    
    2008Weighted average
number of common
shares outstanding
for basic earnings
per share
    
    
    17,725,786
    
    
    
    17,898,772Effect of dilutive
securities: stock
options and warrants
    
    
    2,011,480
    
    
    
    1,104,080Weighted average
number of common and
common equivalent
shares outstanding
    
    
    19,737,266
    
    
    
    18,996,852
  9. Common stock repurchase program
  10. Fair Value Measurements
 Fair Value Measurements,
 12




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Level 1:
 Level 2:
 Level 3:
   11. Contingencies
 Litigation
 Roche Litigation
 Brandt Litigation
 13




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14




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Item 2. Managements discussion and analysis of financial condition and results of operations
  Company overview
     
    
    Retail  the retail channel generates the majority of sales of blood
glucose monitoring products in the United States and includes chain
drug stores, food stores and mass merchandisers. We sell our products
into the retail channel on a direct basis or through domestic
distributors. Our retail net sales include products we sell directly
into the retail channel for the larger food and drug retailers.
    
    Domestic distribution  the domestic distribution channel includes
sales to domestic wholesalers, including AmerisourceBergen, Cardinal
Health, McKesson, and Invacare, who sell products to independent and
chain food and drug retailers, primary and long-term care providers,
durable medical equipment suppliers and mail service providers.
    
    Mail service  the mail service channel includes sales to leading
mail service providers, who market their products primarily to the
Medicare population.
    
    International  the international channel consists of sales on a
direct basis in the United Kingdom and Canada and through distributors
in Latin America, Europe, Australia, and China.
 15




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Three Months Ended March 31,2007(1)
    
    
    2008(in thousands)Net sales by channel:Retail
    
    $
    6,535
    
    
    
    23.3
    %
    
    $
    6,478
    
    
    
    25.8
    %Domestic distribution
    
    
    14,227
    
    
    
    50.6
    %
    
    
    11,323
    
    
    
    45.1
    %Mail service
    
    
    4,404
    
    
    
    15.7
    %
    
    
    4,337
    
    
    
    17.3
    %International
    
    
    2,934
    
    
    
    10.4
    %
    
    
    2,982
    
    
    
    11.8
    %Net sales
    
    $
    28,100
    
    
    
    100.0
    %
    
    $
    25,120
    
    
    
    100.0
    %
 
 (1)
    
    Certain prior year amounts have been reclassified to conform with current year
presentation.    16




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Results of operations
  Three Months Ended March 31,2007
    
    
    
    
    
    
    2008Net sales
    
    $
    28,100,050
    
    
    
    100.0
    %
    
    $
    25,120,280
    
    
    
    100.0
    %Cost of sales
    
    
    11,204,337
    
    
    
    39.9
    %
    
    
    10,531,933
    
    
    
    41.9
    %Gross profit
    
    
    16,895,713
    
    
    
    60.1
    %
    
    
    14,588,347
    
    
    
    58.1
    %Operating Expenses:Selling, general and administrative
    
    
    11,541,073
    
    
    
    41.1
    %
    
    
    11,870,718
    
    
    
    47.3
    %Research and development
    
    
    2,012,170
    
    
    
    7.2
    %
    
    
    2,356,848
    
    
    
    9.4
    %Total operating expenses
    
    
    13,553,243
    
    
    
    48.2
    %
    
    
    14,227,566
    
    
    
    56.6
    %Income from operations
    
    
    3,342,470
    
    
    
    11.9
    %
    
    
    360,781
    
    
    
    1.4
    %Interest income, net
    
    
    345,006
    
    
    
    1.2
    %
    
    
    327,868
    
    
    
    1.3
    %Other income (expense), net
    
    
    120,698
    
    
    
    0.4
    %
    
    
    (526,581
    )
    
    
    -2.1
    %Other, net
    
    
    465,704
    
    
    
    1.7
    %
    
    
    (198,713
    )
    
    
    -0.8
    %Income before income taxes
    
    
    3,808,174
    
    
    
    13.6
    %
    
    
    162,068
    
    
    
    0.6
    %Provision for income taxes
    
    
    (1,332,861
    )
    
    
    (4.7
    %)
    
    
    559,298
    
    
    
    2.3
    %Net income
    
    $
    2,475,313
    
    
    
    8.8
    %
    
    $
    721,366
    
    
    
    2.9
    %
 Three months ended March 31, 2007 as compared to three months ended March 31, 2008
    17




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Liquidity and capital resources
  18




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Recent accounting pronouncements
  19




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Caution concerning forward-looking statements
   
 Item 3. Quantitative and qualitative disclosures about market risk
  20




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Item 4. Controls and procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  21




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Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Roche Litigation
 Brandt Litigation
  22




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Item 1A. Risk Factors
  Competitive bidding for durable medical equipment suppliers could negatively affect our business
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Use of Proceeds from Sales of Registered Securities
   
    
    $10.4 million to redeem all outstanding shares of our Series F Preferred Stock;
    
    $2.0 million to repay outstanding indebtedness to Wachovia Bank N.A.; and
 23




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##### Table of Contents




    
    $3.9 million through March 31, 2008 for manufacturing equipment for new product
development ($0.3 million during the three months ended March 31, 2008).
  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  ISSUER PURCHASES OF EQUITY SECURITIES
 Appropriate DollarTotal Number of
    
    Value of SharesShares Purchased as
    
    That May Yet BeTotal Number of
    
    Average Price Paid
    
    Part of the
    
    Purchased Under thePeriod
    
    Shares purchased
    
    Per Share
    
    Repurchase Program
    
    Repurchase ProgramJanuary 1, 2008toJanuary 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    February 1, 2008toFebruary 29, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    March 1, 2008toMarch 31, 2008
    
    
    18,205
    
    
    $
    7.02
    
    
    
    18,205
    
    
    $
    5,365,546Total at March 31, 2008
    
    
    18,205
    
    
    $
    7.02
    
    
    
    18,205
 
 Item 6. Exhibits
  24




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SIGNATURES
  HOME DIAGNOSTICS, INC.Date: May 7, 2008
    By:
    /s/ J. RICHARD DAMRON, JR.J. Richard Damron, Jr.President and Chief Executive Officer
(principal executive officer) and Director Date: May 7, 2008
    By:
    /s/ RONALD L. RUBINRonald L. RubinVice President and Chief Financial Officer
(principal financial and accounting officer) 25




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Exhibit Index
 ExhibitNumber
    
    
    
    Description3.1
    
    
    
    Amended and Restated Bylaws of the Registrant.31.1
    
    
    
    Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934.31.2
    
    
    
    Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934.32.1
    
    
    
    Certification of Chief Executive Officer, pursuant to 18
U.S.C. Section 1350.32.2
    
    
    
    Certification of Chief Financial Officer, pursuant to 18
U.S.C. Section 1350.
 26