##### Table of Contents



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
 Commission File Number 001-33027
 HOME DIAGNOSTICS, INC.
  Delaware(State or other jurisdiction of incorporation
    
    22-2594392or organization)
    
    (I.R.S. Employer Identification No.)
 2400 Northwest 55 th Court
Fort Lauderdale, Florida 33309    (954) 677-9201
  o þ
  o o þ
 o þ




---



##### 



HOME DIAGNOSTICS, INC.
INDEX
 PagePart I
    
    FINANCIAL SUMMARYItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of December 31, 2005 and September 30, 2006 (Unaudited)
    
3Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2005 and 2006 (Unaudited)
    
4Condensed Consolidated Statement of Changes in Stockholders Equity for the Nine Months Ended September 30, 2006 (Unaudited)
    
5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2006 (Unaudited)
    
6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
22Item 4.
    
    Controls and Procedures
    
22Part II
    
    OTHER INFORMATIONItem 1.
    
    Legal Matters
    
25Item 1A.
    
    Risk Factors
    
25Item 2.
    

Unregistered
Sales of Equity Securities and Use of Proceeds
    
25Item 6.
    
    Exhibits
    
27SIGNATURES
    
    
    
28EXHIBIT INDEX
    
    
    
    29EX-10.6 Form of Stock Option AgreementEX-31.1 Section 302 CEO CertificationEX-31.2 Section 302 CFO CertificationEX-32.1 Section 906 CEO CertificationEX-32.2 Section 906 CFO Certification
  2




---



##### Table of Contents



HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 
  December 31,
    
    
    September 30 ,2005
    
    
    2006(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,483,424
    
    
    $
    28,050,423Accounts receivable, net
    
    
    12,307,473
    
    
    
    15,504,706Inventories, net
    
    
    14,954,934
    
    
    
    13,770,124Prepaid expenses and other current assets
    
    
    788,265
    
    
    
    912,576Deferred tax asset
    
    
    3,614,337
    
    
    
    5,040,121Total current assets
    
    
    35,148,433
    
    
    
    63,277,950Property and equipment, net
    
    
    13,261,627
    
    
    
    17,805,954Other intangible assets, net
    
    
    1,403,195
    
    
    
    1,030,227Goodwill
    
    
    35,573,462
    
    
    
    35,573,462Other assets, net
    
    
    228,048
    
    
    
    133,597Total assets
    
    $
    85,614,765
    
    
    $
    117,821,190Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    7,117,257
    
    
    $
    7,362,541Accrued liabilities
    
    
    12,866,572
    
    
    
    15,287,591Income taxes payable
    
    
    2,001,077
    
    
    
    1,040,689Promissory notes payable to related party
    
    
    1,300,000
    
    
    
    Current portion of long-term debt
    
    
    2,499,866
    
    
    
    Total current liabilities
    
    
    25,784,772
    
    
    
    23,690,821Warrant put option
    
    
    7,430,344
    
    
    
    Deferred tax liability
    
    
    851,565
    
    
    
    472,896Long-term debt, less current portion
    
    
    1,250,000
    
    
    
    Total liabilities
    
    
    35,316,681
    
    
    
    24,163,717Mandatorily redeemable preferred stock, Class F, $10 par value; 165,000 shares
authorized; 115,238 shares issued and outstanding at December 31, 2005
    
    
    1,152,380
    
    
    
    Contingencies (Note 10)
    
    
    
    
    
    
    Stockholders equity:Common stock, $.01 par value; 60,000,000 shares authorized; 14,708,212 and
17,603,384 shares issued and outstanding (including shares held in treasury and
after giving retroactive effect to the common stock recapitalization and stock split
as discussed in Note 1) at December 31, 2005 and September 30, 2006, respectively
    
    
    147,082
    
    
    
    176,034Additional paid-in capital
    
    
    49,252,021
    
    
    
    91,398,281Retained earnings
    
    
    435,394
    
    
    
    2,187,379Accumulated other comprehensive loss
    
    
    (224,531
    )
    
    
    (104,221
    )Treasury stock, Common stock  1,045,673 shares, at cost, at December 31, 2005
(after giving retroactive effect to the common stock recapitalization and stock
split as discussed in Note 1)
    
    
    (464,262
    )
    
    
    Total stockholders equity
    
    
    49,145,704
    
    
    
    93,657,473Total liabilities, mandatorily redeemable preferred stock and stockholders equity
    
    $
    85,614,765
    
    
    $
    117,821,190
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 3




---



##### Table of Contents



HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Net sales
    
    $
    29,490,059
    
    
    $
    30,059,915
    
    
    $
    76,451,173
    
    
    $
    85,761,369Cost of sales
    
    
    11,539,185
    
    
    
    11,052,625
    
    
    
    31,082,502
    
    
    
    33,517,762Gross profit
    
    
    17,950,874
    
    
    
    19,007,290
    
    
    
    45,368,671
    
    
    
    52,243,607Operating expensesSelling, general and administrative (including
stock-based compensation expense of $761,925 and
$145,251, and $1,306,227 and $1,335,125 for the three
and nine months ended September 30, 2005 and 2006,
respectively)
    
    
    10,210,815
    
    
    
    10,647,742
    
    
    
    28,058,497
    
    
    
    32,726,928Research and development
    
    
    1,783,634
    
    
    
    2,086,096
    
    
    
    4,980,269
    
    
    
    5,832,944Total operating expenses
    
    
    11,994,449
    
    
    
    12,733,838
    
    
    
    33,038,766
    
    
    
    38,559,872Income from operations
    
    
    5,956,425
    
    
    
    6,273,452
    
    
    
    12,329,905
    
    
    
    13,683,735Other income (expense)(Increase)/decrease in fair value of warrant put option
    
    
    (1,071,987
    )
    
    
    1,334,151
    
    
    
    ( 2,782,438
    )
    
    
    58,700Interest expense, net
    
    
    ( 177,732
    )
    
    
    (33,128
    )
    
    
    (581,077
    )
    
    
    (194,063
    )Other, net
    
    
    205,500
    
    
    
    129,917
    
    
    
    219,007
    
    
    
    28,936Total other income/(expense)
    
    
    (1,044,219
    )
    
    
    1,430,940
    
    
    
    (3,144,508
    )
    
    
    (106,427
    )Income before provision for income taxes
    
    
    4,912,206
    
    
    
    7,704,392
    
    
    
    9,185,397
    
    
    
    13,577,308Provision for income taxes
    
    
    (2,466,516
    )
    
    
    (1,336,366
    )
    
    
    (4,612,171
    )
    
    
    (4,020,876
    )Net income
    
    $
    2,445,690
    
    
    $
    6,368,026
    
    
    $
    4,573,226
    
    
    $
    9,556,432Earnings per common share:Basic
    
    $
    0.18
    
    
    $
    0.45
    
    
    $
    0.33
    
    
    $
    0.69Diluted
    
    $
    0.16
    
    
    $
    0.30
    
    
    $
    0.31
    
    
    $
    0.57Weighted average shares used in computing earnings per
common share:Basic
    
    
    13,703,517
    
    
    
    14,150,876
    
    
    
    13,750,461
    
    
    
    13,857,902Diluted
    
    
    15,533,816
    
    
    
    16,899,801
    
    
    
    14,892,243
    
    
    
    16,585,288
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




---



##### Table of Contents



HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 
   AccumulatedCommon Stock

    
    
    Additional
    
    
    
    
    
    
    other
    
    
    
    
    
    
    TotalNumber of
    
    
    
    
    
    
    paid-in
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    stockholdersshares
    
    
    Amount
    
    
    capital
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    EquityBalance at December 31, 2005
    
    
    14,708,212
    
    
    $
    147,082
    
    
    $
    49,252,021
    
    
    $
    435,394
    
    
    $
    (224,531
    )
    
    $
    (464,262
    )
    
    $
    49,145,704Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1,335,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,335,125Exchange of warrant put option
    
    
    614,303
    
    
    
    6,143
    
    
    
    7,365,501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,371,644Issuance of common stock, net
    
    
    3,300,000
    
    
    
    33,000
    
    
    
    35,072,684
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,105,684Issuance of common shares in distribution
of deferred compensation obligation
    
    
    22,418
    
    
    
    224
    
    
    
    228,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    228,340Redemption of mandatorily redeemable
preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,515,243
    )
    
    
    (7,703,797
    )
    
    
    
    
    
    
    
    
    
    
    (9,219,040
    )Stock options exercised
    
    
    4,124
    
    
    
    41
    
    
    
    13,233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,274Treasury stock retired
    
    
    (1,045,673
    )
    
    
    (10,456
    )
    
    
    (353,156
    )
    
    
    (100,650
    )
    
    
    
    
    
    
    464,262
    
    
    
    Comprehensive income:Foreign currency translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,310
    
    
    
    
    
    
    
    120,310Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,556,432
    
    
    
    
    
    
    
    
    
    
    
    9,556,432Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,676,742Balance at September 30, 2006
    
    
    17,603,384
    
    
    $
    176,034
    
    
    $
    91,398,281
    
    
    $
    2,187,379
    
    
    $
    (104,221
    )
    
    $
    
    
    
    $
    93,657,473
 The accompanying notes are an integral part of these condensed consolidated financial
statements.
 5




---



##### Table of Contents



HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 
   Nine Months EndedSeptember 30,2005
    
    
    2006Cash flows from operating activitiesNet income
    
    $
    4,573,226
    
    
    $
    9,556,432Adjustments to reconcile net income to net cash provided by operationsDepreciation and amortization
    
    
    2,632,862
    
    
    
    3,163,010Amortization of deferred financing and debt issuance costs
    
    
    33,053
    
    
    
    64,634Loss on asset disposal
    
    
    
    
    
    
    53,903Bad debt expense
    
    
    
    
    
    
    45,000Deferred income taxes
    
    
    1,822,442
    
    
    
    (1,804,453
    )Change in fair value of warrant put option
    
    
    2,782,438
    
    
    
    (58,700
    )Stock-based compensation expense
    
    
    1,306,229
    
    
    
    1,335,125Payment of litigation settlement
    
    
    (5,000,000
    )
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (1,640,550
    )
    
    
    (3,242,233
    )Inventories
    
    
    (561,611
    )
    
    
    1,152,894Prepaid expenses and other current and non-current assets
    
    
    (221,563
    )
    
    
    (95,119
    )Accounts payable
    
    
    2,328,732
    
    
    
    245,284Accrued liabilities and income taxes payable
    
    
    3,072,667
    
    
    
    1,688,971Net cash provided by operating activities
    
    
    11,127,925
    
    
    
    12,104,748Cash flows from investing activitiesCapital expenditures
    
    
    (3,792,018
    )
    
    
    (7,388,714
    )Acquisition of business, net of cash acquired
    
    
    (1,202,914
    )
    
    
    Net cash used in investing activities
    
    
    (4,994,932
    )
    
    
    (7,388,714
    )Cash flows from financing activitiesRepayment of term loans and notes payable
    
    
    (5,249,999
    )
    
    
    (3,749,866
    )Repayment of debt assumed in acquisition
    
    
    (858,375
    )
    
    
    Repayment of notes payable to related party
    
    
    
    
    
    
    (1,300,000
    )Redemption of mandatorily redeemable preferred stock
    
    
    
    
    
    
    (10,371,420
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    35,105,684Purchases of treasury stock
    
    
    (445,122
    )
    
    
    Exercise of stock options
    
    
    
    
    
    
    13,274Net cash (used in) provided by financing activities
    
    
    (6,553,496
    )
    
    
    19,697,672Effect of exchange rate changes on cash and cash equivalents
    
    
    (432,017
    )
    
    
    153,293Net (decrease) increase in cash and cash equivalents
    
    
    (852,520
    )
    
    
    24,566,999Cash and cash equivalentsBeginning of period
    
    
    6,939,183
    
    
    
    3,483,424End of period
    
    $
    6,086,663
    
    
    $
    28,050,423Supplemental cash flows disclosures:Cash paid during the period for:Interest
    
    $
    603,143
    
    
    $
    202,721Income taxes
    
    $
    990,000
    
    
    $
    6,030,000Non-cash supplemental information:Issuance of common shares in distribution of deferred compensation
obligation
    
    $
    
    
    
    $
    228,340Exchange of warrant put option
    
    $
    
    
    
    $
    7,371,644
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 6




---



##### Table of Contents



HOME DIAGNOSTICS, INC. AND SUBSIDIARIES
 
 
 1. Basis of presentation
       Use of estimates
  7




---



##### Table of Contents



Product warranties
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2006
    
    2005
    
    2006Balance at beginning of period
    
    $
    250,000
    
    
    $
    363,340
    
    
    $
    250,000
    
    
    $
    363,340Provision charged to warranty expense
    
    
    67,056
    
    
    
    17,740
    
    
    
    133,753
    
    
    
    61,636Less: actual warranty claims
    
    
    (17,056
    )
    
    
    (17,740
    )
    
    
    (83,753
    )
    
    
    (61,636
    )Balance at end of period
    
    $
    300,000
    
    
    $
    363,340
    
    
    $
    300,000
    
    
    $
    363,340
 Recent accounting pronouncements
    2. Stock option plans
  8




---



##### Table of Contents



WeightedRange of
    
    averageNumber of
    
    exercise
    
    exerciseshares
    
    prices
    
    pricesOutstanding at December 31, 2005
    
    
    2,985,227
    
    
    $
    2.99-4.49
    
    
    $
    3.46Granted
    
    
    464,266
    
    
    $
    9.51-12.00
    
    
    $
    11.21Exercised
    
    
    (4,124
    )
    
    $
    2.99-3.85
    
    
    $
    3.22Forfeited/ Cancelled
    
    
    (16,611
    )
    
    $
    3.42-3.85
    
    
    $
    3.73Outstanding at September 30, 2006
    
    
    3,428,758
    
    
    $
    2.99-12.00
    
    
    $
    4.50Exercisable at September 30, 2006
    
    
    2,581,432
    
    
    $
    2.99-4.49
    
    
    $
    3.39
   9




---



##### Table of Contents



WeightedWeighted
    
    average
    
    
    
    
    
    Weightedaverage
    
    remaining
    
    
    
    
    
    averageRange of
    
    
    
    
    
    exercise
    
    contractual
    
    
    
    
    
    exerciseexercise price
    
    Outstanding
    
    price
    
    life
    
    Exercisable
    
    price$2.99  3.29
    
    
    1,401,541
    
    
    $
    3.02
    
    
    
    4.47
    
    
    
    1,401,541
    
    
    $
    3.02$3.42  3.76
    
    
    662,516
    
    
    
    3.58
    
    
    
    6.66
    
    
    
    583,572
    
    
    
    3.57$3.85  4.23
    
    
    652,395
    
    
    
    3.95
    
    
    
    7.99
    
    
    
    348,279
    
    
    
    3.95$4.27  4.49
    
    
    248,040
    
    
    
    4.29
    
    
    
    1.79
    
    
    
    248,040
    
    
    
    4.29$9.51  12.00
    
    
    464,266
    
    
    
    11.21
    
    
    
    9.79
    
    
    
    
    
    
    
    3,428,758
    
    
    $
    4.50
    
    
    
    6.09
    
    
    
    2,581,432
    
    
    $
    3.39
  10




---



##### Table of Contents



3. Inventory, net
  December 31,
    
    September 30,2005
    
    2006Raw materials
    
    $
    9,482,247
    
    
    $
    7,472,176Work-in-process
    
    
    3,887,192
    
    
    
    5,096,411Finished goods
    
    
    2,296,661
    
    
    
    2,516,96515,666,100
    
    
    
    15,085,552Less: Allowance for obsolescence
    
    
    (711,166
    )
    
    
    (1,315,428
    )$
    14,954,934
    
    
    $
    13,770,124
 4. Property and equipment, net
  December 31,
    
    September 30,2005
    
    2006Machinery and equipment
    
    $
    15,593,354
    
    
    $
    16,095,176Leasehold improvements
    
    
    2,255,718
    
    
    
    2,925,390Furniture, fixtures, and office equipment
    
    
    2,960,611
    
    
    
    2,837,160Computer software
    
    
    1,951,300
    
    
    
    2,019,927Equipment not yet placed in service
    
    
    4,797,991
    
    
    
    10,305,59727,558,974
    
    
    
    34,183,250Less: Accumulated depreciation and amortization
    
    
    (14,297,347
    )
    
    
    (16,377,296
    )$
    13,261,627
    
    
    $
    17,805,954
   5. Accrued liabilities
  December 31,
    
    September 30,2005
    
    2006Accrued salaries and benefits
    
    $
    3,617,979
    
    
    $
    3,747,345Sales returns reserve
    
    
    6,206,847
    
    
    
    7,100,483Product warranty and customer liabilities
    
    
    2,734,073
    
    
    
    3,186,076Other accrued liabilities
    
    
    307,673
    
    
    
    1,253,687$
    12,866,572
    
    
    $
    15,287,591
 11




---



##### Table of Contents



6. Credit Facility and Long-term debt
  December 31,
    
    September 30,2005
    
    2006Credit facility consisting of: Term loan payable
in consecutive
monthly payments of
principal equal to
$83,333 over the
term ending October
31, 2006, repaid in
September 2006
    
    $
    833,199
    
    
    $
     Term
loan payable in consecutive
monthly payments of
principal equal to
$138,889 over the
term ending
September 3, 2007,
repaid in September
2006
    
    
    2,916,667
    
    
    
    
Revolving credit facility due
October 31, 2006,
or upon lenders
demand
    
    
    
    
    
    
    Promissory notes  related party
    
    
    1,300,000
    
    
    
    5,049,866
    
    
    
    Less: Current portion
    
    
    (3,799,866
    )
    
    
    $
    1,250,000
    
    
    $
    
 Credit facility
      12




---



##### Table of Contents



Promissory notes
  7. Warrant put option
  8. Income taxes
   9. Earnings per common share
   13




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Basic:Net income applicable to common stock
    
    $
    2,445,690
    
    
    $
    6,368,026
    
    
    $
    4,573,226
    
    
    $
    9,556,432Weighted average number of common shares
outstanding
    
    
    13,703,517
    
    
    
    14,150,876
    
    
    
    13,750,461
    
    
    
    13,857,902Basic net income per share
    
    $
    0.18
    
    
    $
    0.45
    
    
    $
    0.33
    
    
    $
    0.69Diluted:Net income applicable to common stock
    
    $
    2,445,690
    
    
    $
    6,368,026
    
    
    $
    4,573,226
    
    
    $
    9,556,432Change in fair value of the warrant put option
    
    
    
    
    
    
    (1,334,151
    )
    
    
    
    
    
    
    (58,700
    )Adjusted net income applicable to common stock
    
    $
    2,445,690
    
    
    $
    5,033,875
    
    
    $
    4,573,226
    
    
    $
    9,497,732Weighted average number of common shares
outstanding
    
    
    13,703,517
    
    
    
    14,150,876
    
    
    
    13,750,461
    
    
    
    13,857,902Effect of dilutive securities: stock options and warrants
    
    
    1,830,299
    
    
    
    2,748,925
    
    
    
    1,141,782
    
    
    
    2,727,386Weighted average number of common and common
equivalent shares outstanding
    
    
    15,533,816
    
    
    
    16,899,801
    
    
    
    14,892,243
    
    
    
    16,585,288Diluted net income per share
    
    $
    0.16
    
    
    $
    0.30
    
    
    $
    0.31
    
    
    $
    0.57
 10. Contingencies
 Litigation
   14




---



##### Table of Contents



15




---



##### Table of Contents



ITEM 2. Managements discussion and analysis of financial condition and results of operations
     Company overview
   16




---



##### Table of Contents




    
    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. The mail service channel was our primary distribution
channel until 2003, when we expanded our distribution in the retail
and domestic distribution channels with the introduction of our
TrueTrack Smart System.
 
    
    Internationalthe international channel consists primarily of sales to
distributors in Latin America, the United Kingdom, Australia and
China. In May 2005 we acquired our United Kingdom distributor, and we
continually evaluate opportunities to partner with or acquire
distributors in other international markets.
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    
    
    
    
    2006
    
    
    
    
    
    2005
    
    
    
    
    
    2006Net sales by channel:Retail
    
    $
    6,294,906
    
    
    
    21.3
    %
    
    $
    5,476,177
    
    
    
    18.2
    %
    
    $
    15,649,352
    
    
    
    20.5
    %
    
    $
    17,508,584
    
    
    
    20.4
    %Domestic distribution
    
    
    16,116,574
    
    
    
    54.7
    %
    
    
    19,013,959
    
    
    
    63.2
    %
    
    
    41,145,006
    
    
    
    53.8
    %
    
    
    50,300,184
    
    
    
    58.6
    %Mail service
    
    
    4,488,565
    
    
    
    15.2
    %
    
    
    2,968,047
    
    
    
    9.9
    %
    
    
    11,827,108
    
    
    
    15.5
    %
    
    
    9,417,049
    
    
    
    11.0
    %International
    
    
    2,590,014
    
    
    
    8.8
    %
    
    
    2,601,732
    
    
    
    8.7
    %
    
    
    7,829,707
    
    
    
    10.2
    %
    
    
    8,535,552
    
    
    
    10.0
    %Net sales
    
    $
    29,490,059
    
    
    
    100.0
    %
    
    $
    30,059,915
    
    
    
    100.0
    %
    
    $
    76,451,173
    
    
    
    100.0
    %
    
    $
    85,761,369
    
    
    
    100.0
    %
    17




---



##### Table of Contents



Results of operations
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2005
    
    
    
    
    
    2006
    
    
    
    
    
    2005
    
    
    
    
    
    2006Net sales
    
    $
    29,490,059
    
    
    
    100.0
    %
    
    $
    30,059,915
    
    
    
    100.0
    %
    
    $
    76,451,173
    
    
    
    100.0
    %
    
    $
    85,761,369
    
    
    
    100.0
    %Cost of sales
    
    
    11,539,185
    
    
    
    39.1
    %
    
    
    11,052,625
    
    
    
    36.8
    %
    
    
    31,082,502
    
    
    
    40.7
    %
    
    
    33,517,762
    
    
    
    39.1
    %Gross profit
    
    
    17,950,874
    
    
    
    60.9
    %
    
    
    19,007,290
    
    
    
    63.2
    %
    
    
    45,368,671
    
    
    
    59.3
    %
    
    
    52,243,607
    
    
    
    60.9
    %Operating Expenses:Selling, general and administrative
    
    
    10,210,815
    
    
    
    34.6
    %
    
    
    10,647,742
    
    
    
    35.4
    %
    
    
    28,058,497
    
    
    
    36.7
    %
    
    
    32,726,928
    
    
    
    38.2
    %Research and development
    
    
    1,783,634
    
    
    
    6.0
    %
    
    
    2,086,096
    
    
    
    6.9
    %
    
    
    4,980,269
    
    
    
    6.5
    %
    
    
    5,832,944
    
    
    
    6.8
    %Total operating expenses
    
    
    11,994,449
    
    
    
    40.7
    %
    
    
    12,733,838
    
    
    
    42.4
    %
    
    
    33,038,766
    
    
    
    43.2
    %
    
    
    38,559,872
    
    
    
    45.0
    %Income from operations
    
    
    5,956,425
    
    
    
    20.2
    %
    
    
    6,273,452
    
    
    
    20.9
    %
    
    
    12,329,905
    
    
    
    16.1
    %
    
    
    13,683,735
    
    
    
    16.0
    %(Increase) decrease in fair value of warrant put option
    
    
    (1,071,987
    )
    
    
    (3.6
    %)
    
    
    1,334,151
    
    
    
    4.4
    %
    
    
    (2,782,438
    )
    
    
    (3.6
    %)
    
    
    58,700
    
    
    
    0.1
    %Interest expense, net
    
    
    (177,732
    )
    
    
    (0.6
    %)
    
    
    (33,128
    )
    
    
    (0.1
    %)
    
    
    (581,077
    )
    
    
    (0.8
    %)
    
    
    (194,063
    )
    
    
    (0.2
    %)Other, net
    
    
    205,500
    
    
    
    0.7
    %
    
    
    129,917
    
    
    
    0.4
    %
    
    
    219,007
    
    
    
    0.3
    %
    
    
    28,936
    
    
    
    0.0
    %Income before income taxes
    
    
    4,912,206
    
    
    
    16.7
    %
    
    
    7,704,392
    
    
    
    25.6
    %
    
    
    9,185,397
    
    
    
    12.0
    %
    
    
    13,577,308
    
    
    
    15.8
    %Provision for income taxes
    
    
    (2,466,516
    )
    
    
    (8.4
    %)
    
    
    (1,336,366
    )
    
    
    (4.4
    %)
    
    
    (4,612,171
    )
    
    
    (6.0
    %)
    
    
    (4,020,876
    )
    
    
    (4.7
    %)Net income
    
    $
    2,445,690
    
    
    
    8.3
    %
    
    $
    6,368,026
    
    
    
    21.2
    %
    
    $
    4,573,226
    
    
    
    6.0
    %
    
    $
    9,925,432
    
    
    
    11.1
    %
 Three months ended September 30, 2006 as compared to three months ended September 30, 2005
    18




---



##### Table of Contents



19




---



##### Table of Contents



Nine months ended September 30, 2006 as compared to nine months ended September 30, 2005
        20




---



##### Table of Contents



Liquidity and capital resources
      21




---



##### Table of Contents



Caution concerning forward-looking statements
  
 Item 3. Quantitative and qualitative disclosures about market risk
  
 Item 4. Controls and procedures
 Evaluation of Disclosure Controls and Procedures
  22




---



##### Table of Contents



Material
Weaknesses in Internal Control Over Financial Reporting
   
    
    We lacked a sufficient complement of personnel with an appropriate level of accounting
knowledge, experience and training in the application of generally accepted accounting
principles commensurate with our financial reporting requirements, as certain key finance
positions were not staffed with individuals who were in their positions for an adequate
period of time. In addition, we lacked adequately documented policies and procedures
related to our financial accounting and reporting and information technology general and
application controls. Additionally, this control deficiency could result in a material
misstatement of the financial statement accounts and disclosures that would result in a
material misstatement to our interim or annual consolidated financial statements that could
not be prevented or detected. Accordingly, management determined that this control
deficiency constitutes a material weakness. This material weakness contributed to each of
the material weaknesses described below.
    
    We did not maintain effective controls over the accuracy, completeness, and presentation
of the accounting for a warrant put option. Specifically, effective controls were not
designed and in place to ensure this financial instrument was properly valued and
classified in accordance with generally accepted accounting principles. This control
deficiency resulted in a restatement of our 2002, 2003 and 2004 consolidated financial
statements. Additionally, this control deficiency could result in a misstatement of the
change in fair value for the warrant put option, the warrant put option liability, and
stockholders equity that would result in a material misstatement to our interim or annual
consolidated financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency constitutes a material
weakness.
    
    We did not maintain effective controls over the preparation, review and presentation of
our consolidated statement of cash flows. Specifically, we lacked effective controls to
ensure that amounts related to the repayment of our debt instruments were accurately
classified within the statement of cash flows. This control deficiency resulted in the
restatement of our 2004 consolidated financial statements to correct the cash flow
classification of amounts related to the unamortized debt discount from financing
activities to operating activities. Additionally, this control deficiency could result in a
misstatement of the presentation of amounts in our consolidated statements of cash flows
that would result in a material misstatement to our interim or annual consolidated
financial statements that would not be prevented or detected. Accordingly,
management determined that this control deficiency constitutes a material weakness.
    
    We did not maintain effective controls over the accuracy and completeness of revenue
recognition. Specifically, effective controls were not designed and in place to ensure that
the allowance for sales returns was properly estimated and recorded in the appropriate
period in accordance with generally accepted accounting principles. Additionally, effective
controls were not designed and in place to ensure that revenue is recorded when the risk of
ownership is transferred to our customers in accordance with generally accepted accounting
principles. This control deficiency resulted in a restatement of our 2001 through 2004
consolidated financial statements. Additionally, this control deficiency could result in a
misstatement of revenue, cost of sales, accounts receivable, inventory and our reserve for
sales returns that would result in a material misstatement to our interim or annual
consolidated financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency constitutes a material
weakness.
 23




---



##### Table of Contents




    
    We did not maintain effective controls over the accuracy and completeness of the
recording of stock-based compensation expense. Specifically, records for stock option
transactions were not properly maintained and summarized. In addition, stock compensation
expense was not accounted for in accordance with generally accepted accounting principles.
This control deficiency resulted in an audit adjustment to our 2005 consolidated financial
statements. Additionally, this control deficiency could result in a misstatement of stock
compensation expense and additional paid in capital that would result in a material
misstatement to our interim or annual consolidated financial statements that would not be
prevented or detected. Accordingly, management determined that this control
deficiency constitutes a material weakness.
 Changes in Internal Control Over Financial Reporting
  Remediation Plans
  
    
    In November 2005, we hired a new Chief Financial Officer and in January 2006, we hired a
new Controller. Both are certified public accountants (CPAs) with previous experience in
financial reporting for publicly traded companies, have worked for national public
accounting firms and have experience with the requirements of Section 404 of the
Sarbanes-Oxley Act. In December 2005, we also retained independent consultants trained in
accounting and financial reporting who are CPAs. One of our consultants was a former
partner with a national public accounting firm and has experience with the requirements of
Section 404 of the Sarbanes-Oxley Act.
    
    We have developed policies and procedures, although not yet written, to monitor and
track sales returns by product, date of sale, and by customer. Customer return logs,
identifying key product information, are now maintained and analyzed by management on a
monthly basis.
    
    We have developed policies and procedures, although not yet written, over shipments to
monitor when the risk of ownership of our products is transferred to our customers. Monthly
sales at the end of each period along with customer receiving documents are analyzed by
management to determine whether the risk of ownership has been transferred to the customer
and revenue has been appropriately recognized.
    
    We have provided key accounting personnel with access to an on-line technical accounting
database, which provides links to various authoritative and proposed technical accounting
literature and provides guidance on financial reporting.
    
    In November 2006, we hired a Director of Internal Audit who
will be responsible for establishing an internal audit function and
managing our Sarbanes Oxley Section 404 compliance project.
    
    We have commenced a Section 404 compliance project under
which management and its
outside consultants will be creating a detailed work plan to assess the adequacy of our internal
control over financial reporting in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which we are subject to for our December 31, 2007 Annual Report.
    
    We continue to assess our staffing requirements.
 24




---



##### Table of Contents



Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
    
 Item 1A. Risk Factors
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Recent Sales of Unregistered Securities
   25




---



##### Table of Contents



Use of Proceeds from Sales of Registered Securities
    Aggregate offering proceeds to the Company
    
    $
    39,600,000Underwriting discounts and commissions
    
    
    2,772,000Other fees and expenses
    
    
    1,722,316Total expenses
    
    
    4,494,316Net proceeds to the Company
    
    $
    35,105,684
       26




---



##### Table of Contents



Item 6. Exhibits
  27




---



##### Table of Contents



SIGNATURES
  HOME DIAGNOSTICS, INC.Date:
November 14, 2006
    
    By: /s/ J. RICHARD DAMRON, JR.J. Richard Damron, Jr.
President and Chief Executive Officer(principal executive officer) and DirectorDate:
November 14, 2006
    
    By: /s/ RONALD L. RUBIN.Ronald L. RubinVice President and Chief Financial Officer(principal financial and accounting officer)
 28




---



##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    
    
    Description3.1
    
    
    
    Amended and Restated Certificate of Incorporation of
the Registrant (incorporated by reference to Exhibit
3.1 to the Registrants Registration Statement on
Form S-1 filed on May 1, 2006 (File No. 333-133713)).3.2
    
    
    
    Amended and Restated Bylaws of the Registrant
(incorporated by reference to Exhibit 3.2 to the
Registrants Registration Statement on Form S-1 filed
on May 1, 2006 (File No. 333-133713)).4.1
    
    
    
    Specimen Stock Certificate for the common stock, par
value $0.01 per share, of the Registrant
(incorporated by reference to Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed on
September 28, 2006).10.1
    
    
    
    1992 Stock Option Plan of the Registrant
(incorporated by reference to Exhibit 10.1 to the
Registrants Registration Statement on Form S-1 filed
on May 1, 2006 (File No. 333-133713)).10.2
    
    
    
    Form of stock option agreements under the 1992 Stock
Option Plan (incorporated by reference to Exhibit
10.2 to the Registrants Registration Statement on
Form S-1 filed on May 1, 2006 (File No. 333-133713)).10.3
    
    
    
    2002 Stock Option Plan of the Registrant
(incorporated by reference to Exhibit 10.3 to the
Registrants Registration Statement on Form S-1 filed
on May 1, 2006 (File No. 333-133713)).10.4
    
    
    
    Form of stock option agreements under the 2002 Stock
Option Plan (incorporated by reference to Exhibit
10.4 to the Registrants Registration Statement on
Form S-1 filed on May 1, 2006 (File No. 333-133713)).10.5
    
    
    
    2006 Equity Incentive Plan of the Registrant
(incorporated by reference to Exhibit 10.13 to
Amendment No. 2 filed on July 12, 2006 to the
Registrants Registration Statement on Form S-1 (File
No. 333-133713)).10.6*
    
    
    
    Form of stock option agreements under the 2006 Equity
Incentive Plan.10.7
    
    
    
    Third Amended and Restated Revolving Credit and
Security Agreement with Wachovia Bank N.A, dated
March 7, 2006 (incorporated by reference to Exhibit
10.5 to the Registrants Registration Statement on
Form S-1 filed on May 1, 2006 (File No. 333-133713)).10.8
    
    
    
    Office/Distribution Building Lease, dated May 2,
1997, between the Registrant and Corporate Center
Developers (incorporated by reference to Exhibit 10.6
to the Registrants Registration Statement on Form
S-1 filed on May 1, 2006 (File No. 333-133713)).10.9
    
    
    
    Employment Agreement, dated January 1, 2006, between
the Registrant and J. Richard Damron, Jr
(incorporated by reference to Exhibit 10.7 to the
Registrants Registration Statement on Form S-1 filed
on May 1, 2006 (File No. 333-133713)).10.10
    
    
    
    Purchase and Supply Agreement, dated February 8,
2006, between the Registrant and Conductive
Technologies (incorporated by reference to Exhibit
10.8 Amendment No. 1 filed on June 19, 2006 to the
Registrants Registration Statement on Form S-1 (File
No. 333-133713)).10.11
    
    
    
    Forms of Indemnification Agreement with the
Registrant directors and certain of its officers
(incorporated by reference to Exhibit 10.9 to the
Registrants Registration Statement on Form S-1 filed
on May 1, 2006 (File No. 333-133713)).
 29




---



##### Table of Contents



ExhibitNumber
    
    
    
    Description10.12
    
    
    
    Top Hat Investment Plan of the Registrant, together
with Amendment Number One thereto (incorporated by
reference to Exhibit 10.10 to Amendment No. 1 filed
on June 19, 2006 to the Registrants Registration
Statement on Form S-1 (File No. 333-133713)).10.13
    
    
    
    Promissory Note of the Registrant, dated August 1,
2005, in favor of The Estate of Robert Salem in the
original principal amount of $1,625,000 (incorporated
by reference to Exhibit 10.11 to Amendment No. 1
filed on June 19, 2006 to the Registrants
Registration Statement on Form S-1 (File No.
333-133713)).10.14
    
    
    
    Promissory Note of the Registrant, dated September 1,
2005, in favor of George H. Holley in the original
principal amount of $1,625,000 (incorporated by
reference to Exhibit 10.12 to Amendment No. 1 filed
on June 19, 2006 to the Registrants Registration
Statement on Form S- (File No. 333-133713)).10.15
    
    
    
    ECI Project Development Agreement, dated January 1,
2002, between the Registrant and George Holley
(incorporated by reference to Exhibit 10.14 to
Amendment No. 3 filed on August 21, 2006 to the
Registrants Registration Statement on Form S-1 (File
No. 333-133713)).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.
 
 *
    
    Filed herewith 30