Form 10-Q

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10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

¨	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: 000-30241

DDi CORP.

(Exact name of registrant as specified in its charter)

Delaware

06-1576013

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1220 N. Simon Circle

Anaheim, California 92806

(Address of principal executive offices) (Zip code)

(714) 688-7200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of October 27, 2010, DDi Corp. had 19,951,651 shares of common stock, par value $0.001 per share, outstanding.

DDi CRP.

FORM 10-Q for the Quarterly Period Ended September 30, 2010

TABLE OF CONTENTS



			Page No.
PART I — FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited):

		Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		1

		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009		2

		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009		3

		Notes to Condensed Consolidated Financial Statements		4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		21

	Item 4.	Controls and Procedures		22

PART II — OTHER INFORMATION

	Item 1.	Legal Proceedings		23

	Item 1A.	Risk Factors		23

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		23

	Item 3.	Defaults Upon Senior Securities		23

	Item 4.	Removed and Reserved		23

	Item 5.	Other Information		23

	Item 6.	Exhibits		23

	Signatures			25

PART I — FINANCIAL INFORMATION

Item 1.

Financial Statements

DDi Corp.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)


	September 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	15,475		$	19,392
Accounts receivable, net		47,469			35,280
Inventories, net		20,966			19,342
Prepaid expenses and other current assets		2,481			1,265

Total current assets		86,391			75,279
Property, plant and equipment, net		39,538			40,175
Intangible assets, net	$	804			1,374
Goodwill		3,451			2,986
Other assets		1,124			659

Total assets	$	131,308		$	120,473

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility	$	—		$	4,227
Current maturities of long-term debt		1,721			1,727
Accounts payable		19,487			13,939
Accrued expenses and other current liabilities		14,354			17,242
Income taxes payable		78			1,974

Total current liabilities		35,640			39,109
Long-term debt		10,008			11,246
Other long-term liabilities		601			810

Total liabilities		46,249			51,165

Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock — $0.001 par value, 190,000 shares authorized, 22,899 shares issued and 19,952 shares outstanding at September 30, 2010 and 22,803 shares issued and 19,856 shares outstanding at December 31, 2009		23			23
Additional paid-in-capital		246,194			247,245
Treasury stock, at cost — 2,947 shares held in treasury at September 30, 2010 and December 31, 2009		(16,323	)		(16,323	)
Accumulated other comprehensive income		917			410
Accumulated deficit		(145,752	)		(162,047	)

Total stockholders’ equity		85,059			69,308

Total liabilities and stockholders’ equity	$	131,308		$	120,473

The accompanying notes are an integral part of these condensed consolidated financial statements.

DDi Corp.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net sales	$	68,988		$	39,302		$	202,035		$	115,754
Cost of goods sold		53,450			32,693			157,196			95,206

Gross profit		15,538			6,609			44,839			20,548
Operating expenses:
Sales and marketing		4,330			2,871			13,131			8,605
General and administrative		4,298			3,198			12,801			9,457
Amortization of intangible assets		190			190			570			570

Operating income		6,720			350			18,337			1,916
Interest expense		303			196			1,063			591
Interest income		(7	)		(43	)		(31	)		(151	)
Other expense (income), net		(144	)		131			220			207

Income before income tax expense		6,568			66			17,085			1,269
Income tax expense (benefit)		69			(183	)		790			73

Net income	$	6,499		$	249		$	16,295		$	1,196

Net income per share:
Basic	$	0.33		$	0.01		$	0.82		$	0.06
Diluted	$	0.31		$	0.01		$	0.80		$	0.06
Dividend declared per share	$	0.06					$	0.12
Weighted-average shares used in per share computations:
Basic		19,916			19,715			19,868			19,715
Diluted		20,671			19,915			20,396			19,820

The accompanying notes are an integral part of these condensed consolidated financial statements.

DDi Corp.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,295		$	1,196
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		6,501			6,153
Amortization of intangible assets		570			570
Amortization of debt issuance costs and discount		—			78
Amortization of deferred lease liability		(338	)		—
Stock-based compensation		1,041			1,582
Deferred income taxes		20			—
Other		183			92
Changes in operating assets and liabilities:
Accounts receivable		(11,923	)		3,258
Inventories		(1,928	)		(65	)
Prepaid expenses and other assets		(994	)		(271	)
Accounts payable		5,437			(1,304	)
Accrued expenses and other current liabilities		(3,551	)		(1,334	)
Income taxes payable		(1,352	)		(1,359	)

Net cash provided by operating activities		9,961			8,596

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(5,765	)		(2,665	)

Net cash used in investing activities		(5,765	)		(2,665	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(1,358	)		(183	)
Payments of debt issuance costs		(665	)		—
Repayment of revolving credit facility		(4,290	)		—
Proceeds from exercise of stock options		526			—
Cash dividend payments to common shareholders		(2,394	)		—

Net cash used in financing activities		(8,181	)		(183	)

Effect of exchange rate changes on cash and cash equivalents		68			(230	)

Net (decrease) increase in cash and cash equivalents		(3,917	)		5,518
Cash and cash equivalents, beginning of period		19,392			20,081

Cash and cash equivalents, end of period		15,475			25,599


Supplemental disclosure of cash flow information:
	Nine Months Ended September 30,
	2010			2009
Non-cash operating activity:
Adjustment of inventory balance to goodwill relating to acquisition of Coretec	$	402		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

DDi Corp.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of DDi Corp. and its wholly-owned subsidiaries. DDi Corp. and its subsidiaries are referred to as the “Company” or “DDi”. The accompanying unaudited condensed financial statements include the accounts of Coretec Inc., a PCB manufacturer that was acquired by the Company on December 31, 2009. All intercompany transactions have been eliminated in consolidation.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes thereto contain all adjustments necessary for a fair presentation of the financial position of the Company as of September 30, 2010 and the results of its operations and cash flows for the three and nine months ended September 30, 2010 and 2009, and such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of results of operations to be expected for the full year.

The Company has prepared these financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such regulations, although the Company believes the disclosures provided are adequate to prevent the information presented from being misleading. The condensed consolidated balance sheet data as of December 31, 2009 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). This report on Form 10-Q for the quarter ended September 30, 2010 should be read in conjunction with the audited financial statements presented in DDi’s Annual Report on Form 10-K for the year ended December 31, 2009.

Description of Business

DDi is a leading provider of time-critical, technologically-advanced printed circuit board (“PCB”) engineering and manufacturing services. The Company specializes in engineering and fabricating complex multi-layer PCBs on a quick-turn basis, with lead times as short as 24 hours. DDi has over 1,000 customers in various market segments including communications and computing, military and aerospace, industrial electronics, instrumentation, medical and high-durability commercial markets. The Company’s engineering capabilities and manufacturing facilities located in the United States and Canada, together with its suppliers in Asia, enable it to respond to time-critical orders and technology challenges for its customers. DDi operates primarily in one geographical area, North America.

On December 31, 2009, the Company completed the acquisition of Coretec Inc. (“Coretec”), a PCB manufacturer previously headquartered in Toronto, Ontario, which was a publicly-traded company listed on the Toronto Stock Exchange. See Note 2 – Acquisition of Coretec Inc.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”.
ASU 2010-06 amends the fair value disclosure guidance to include new disclosures and changes to clarify existing disclosure requirements. These amended standards require disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of 2011. The adoption of these new standards did not materially impact the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-17, “Revenue Recognition – Milestone Method” (Topic 605). ASU 2010-017 provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This ASU is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. We do not expect the adoption of this standard to have a material impact on our financial position or results of operations as we have no material research and development arrangements which will be accounted for under the milestone method.

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 2. ACQUISITION OF CORETEC INC.

On December 31, 2009, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of Coretec by way of a plan of arrangement under the Business Corporations Act (Ontario) (the “Arrangement”). As a result of the Arrangement, Coretec and its subsidiaries became wholly-owned subsidiaries of the Company. Under the Arrangement, (i) Coretec’s shareholders received Canadian Dollar (“CAD”) of $0.38 (United States Dollar (“USD”) of $0.36) per Coretec common share; and (ii) holders of outstanding Coretec stock options having an exercise price less than CAD $0.38 (USD $0.36) per share received an amount per Coretec stock option equal to the difference between the CAD $0.38 (USD $0.36) and the exercise price in respect of such Coretec stock options. The aggregate cash purchase price paid by the Company under the Arrangement was CAD $7.0 million (USD $6.7 million). In addition, as a result of the Arrangement, DDi effectively assumed approximately CAD $16.7 million (USD $15.9 million) of Coretec debt.

The purchase price allocation used in the preparation of the consolidated financial statements at December 31, 2009 was preliminary due to the continuing analyses relating to the determination of the estimated fair values of the assets acquired and liabilities assumed in the Coretec acquisition. During the first quarter of 2010, with the addition of new operating data, we were able to update certain analyses and determine that certain inventory balances as of December 31, 2009 required adjustment to decrease the net balance by $0.4 million which resulted in an increase to goodwill of the same amount. Management does not expect any additional adjustments upon finalization of these matters to have a material effect on the allocation.

The acquisition of Coretec was recorded using the acquisition method of accounting in accordance with the revised authoritative guidance for business combinations.

NOTE 3. INVENTORIES

Inventories are stated at the lower of cost (determined on a first-in, first-out or average cost basis) or market and consisted of the following (in thousands):


	September 30, 2010		December 31, 2009
Raw materials	$	9,317	$	8,173
Work-in-process		6,801		6,264
Finished goods		4,848		4,905

Total	$	20,966	$	19,342

NOTE 4. REVOLVING CREDIT AGREEMENT

Coretec Credit Facility

In connection with the acquisition of Coretec on December 31, 2009, the Company assumed the liability for the outstanding balance on Coretec’s revolving credit line with Wells Fargo Canada. The three year, CAD $10 million asset-based lending facility was entered into by Coretec on March 24, 2009 and was to be used for day-to-day working capital and other expenditures. At December 31, 2009, the total outstanding principal and interest owed under the credit line was approximately USD $4.2 million. The Company terminated this credit line effective February 26, 2010 and paid the balance owed of approximately USD $3.1 million on that date in full as well as an additional fee of approximately USD $0.1 million for early termination and legal fees. This fee has been reflected as interest expense in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2010.

DDi Corp. Credit Agreement

On September 23, 2010, DDi Corp. (the “Company”) entered into a Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Lender, and JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Lender (the “Credit Agreement”).

The Credit Agreement provides for a revolving credit facility in an aggregate principal amount of $25 million, with a Canadian sub-limit of $10 million, none of which was drawn on the date of the Credit Agreement. The revolving credit facility

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

has an accordion provision that allows the Company to increase the size to $40 million under certain circumstances. The maturity date for the revolving credit facility is 3 years from the date of the Credit Agreement (September 23, 2013). As of September 30, 2010, there were no amounts outstanding under this agreement. Availability under the revolving credit facility is based on various liquidity and borrowing base tests including the Company’s eligible accounts receivable and inventories.

The Credit Agreement requires the Company to comply with customary covenants, some of which apply at all times and some of which are in effect only when the Company only has borrowings outstanding under the Credit Agreement. The covenants that are in effect at all times include a $20 million aggregate annual limit on capital expenditures. The covenants that are in effect only when the Company has borrowings outstanding under the Credit Agreement include (i) a requirement that the Company maintain a fixed charge ratio of greater then 1.1:1; and (ii) a limitation that the Company make no more than $8 million in dividend payments and stock repurchases in a 12 month period. At September 30, 2010, the Company had no borrowings outstanding under the Credit Agreement.

The interest rates payable under the Credit Agreement will depend on the type of loan and are based on published rates plus an applicable margin. The initial applicable rates for loans made under the Credit Agreement are (i) 3.25% for any CB Floating Rate loan; (ii) 3.79% for any Eurodollar loan; (iii) 3.50% for any Canadian Prime Rate loan; and (iv) 4.23% for any CDOR Rate loan. A commitment fee of 0.5% accrues on unused amounts of the commitments under the revolving credit facility.

All obligations under the Credit Agreement are guaranteed by the Company and each of the Company’s domestic wholly-owned subsidiaries (such subsidiary guarantors, the “U.S. Subsidiary Guarantors”). All obligations under the Credit Agreement and the guarantees of those obligations, are secured by (i) all of the capital stock of each of the U.S. Borrowers and the U.S. Subsidiary Guarantors, except that with respect to DDi Toronto Corp. such security interest is limited to 65% of its capital stock, and (ii) substantially all of the tangible and intangible assets of the Company other than real property and equipment pursuant to a Pledge and Security Agreement dated September 23, 2010 (the “U.S. Security Agreement”). The obligations of the Canadian Borrower pursuant to a Pledge and Security Agreement dated September 23, 2010 (the “Canadian Security Agreement”). The Company incurred $0.7 million in debt issuance costs in conjunction with this credit facility which will be amortized over the 3 year life of the loan.

NOTE 5. LONG-TERM DEBT

Term Loan

On October 23, 2006, the Company completed the acquisition of Sovereign Circuits, Inc. a privately-held PCB manufacturer in North Jackson, Ohio. In April 2007, the Company consolidated two outstanding term loans assumed in this acquisition with an aggregate outstanding balance totaling $1.9 million into one term loan collateralized by the real property. The note matures in April 2015, bears interest at LIBOR plus 1.5%, and has monthly payments of approximately $20,000 plus accrued interest. In connection with this transaction, the lender released its liens on all assets of the acquired company other than the real property. At September 30, 2010 and December 31, 2009, the effective interest rate of the term loan was 1.76% and 1.74%, respectively, and the principal balance was $1.1 million and $1.3 million, respectively.

Coretec Long-Term Debt

On December 31, 2009, the Company assumed all of the long-term debt of Coretec in connection with the acquisition, consisting of six asset-backed term loans as follows:

Business Development Bank of Canada

There are four existing loans with Business Development Bank of Canada (the “BDC”) – a term loan, an infrastructure loan, an equipment loan and a building loan. The BDC loans are secured by the land and building of the Company’s Sheppard Avenue facility located in Toronto, Ontario, and 25% of the loan balance is guaranteed by the Company, a requirement of the BDC. During the second quarter, the BDC defined the target available funds coverage ratio to be at 1.5. As of September 30, 2010, the Company was in compliance with all required covenants.

The outstanding term loan had a principal balance of approximately USD $0.7 million as of September 30, 2010. The loan requires monthly principal payments of approximately USD $44,000 over the loan term and bears interest, payable monthly, at BDC’s floating base rate less 1.5% (3.5% at September 30, 2010). The term loan matures in December 2011.

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

The infrastructure loan was provided to finance the completion of the Company’s Sheppard Avenue facility, located in Toronto, Ontario, for expanding infrastructure. The infrastructure loan had a principal balance of approximately USD $4.6 million as of September 30, 2010, accrues interest at BDC’s floating base rate (5% at September 30, 2010), has a 20 year term and requires monthly principal payments of approximately USD $21,000.

The equipment loan had a principal balance of approximately USD $2.2 million as of September 30, 2010. The equipment loan accrues interest at the 1-month USD floating base rate plus 0.6% (4.40% at September 30, 2010), has a 7 year term and requires monthly payments of approximately USD $36,000.

The building loan had a principal balance of approximately USD $0.3 million as of September 30, 2010. The building loan accrues interest at BDC’s floating base rate plus 0.25%, (5.25% at September 30, 2010), matures in March 2012 and requires monthly payments of approximately USD $17,000.

Zions Bank Mortgage

The mortgage loan with Zions Bank had a principal balance of approximately USD $1.5 million as of September 30, 2010, secured by the land and building of the Company’s Cuyahoga Falls, Ohio facility. The mortgage accrues interest at the Federal Home Loan Bank rate plus 2% (6.92% at September 30, 2010), has a term through November 2032, and requires monthly principal and interest payments of approximately USD $12,000.

GE Real Estate Mortgage

The mortgage loan with GE Real Estate had a principal balance of approximately USD $1.3 million as of September 30, 2010, secured by the land and building of the Company’s Littleton, Colorado facility. The mortgage accrues interest at a fixed rate of 7.55% per annum, has a term through June 2032, and requires monthly interest and principal payments of approximately USD $11,000.

NOTE 6. PRODUCT WARRANTY

The Company accrues warranty expense, which is included in cost of goods sold, at the time revenue is recognized for estimated future warranty obligations related to defective PCBs at the time of shipment, based upon the relationship between historical sales volumes and anticipated costs. Factors that affect the warranty liability include the number of units sold, historical and anticipated rates of warranty claims and the estimated cost of repair. The Company assesses the adequacy of the warranty accrual each quarter. To date, actual warranty claims and costs have been in line with the Company’s estimates. The warranty accrual is included in accrued expenses. The changes in the Company’s warranty accrual were as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Beginning balance	$	1,250		$	777		$	1,100		$	805
Warranties issued during the period		1,773			1,338			5,007			3,466
Warranty expenditures		(1,814	)		(1,323	)		(4,898	)		(3,479	)

Ending balance	$	1,209		$	792		$	1,209		$	792

NOTE 7. INCOME TAXES

The Company applies the provisions of FASB ASC Topic 740, “Income Taxes” which established standards of financial accounting and reporting for income taxes that result from an entity’s activities during the current and preceding years. The Company had $0.5 million of total gross unrecognized tax benefits at September 30, 2010 and December 31, 2009, respectively. If recognized in future periods there would be a favorable effect of $0.3 million to the effective tax rate. Management anticipates a decrease of approximately $0.1 million in the tax contingency reserve during the remainder of 2010 due to settlement of contingencies with taxing authorities. The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and Canada. The Company has substantially concluded all U.S. federal income tax matters for years through 2005. Canadian income tax matters have been examined through 2008. State jurisdictions that remain subject to examination range from 2002 to 2009.

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

The Company’s effective income tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of the mix of earnings between tax jurisdictions, research and development credits, state income taxes and its continuous evaluation of the realization of its deferred tax assets and uncertain tax positions. The reduced income tax rate in 2010 was primarily the result of reserved net operating loss carry-forwards and tax credits available to offset higher operating results in 2010.

Effective January 1, 2009, as required by FASB ASC 805, “Business Combinations” any reduction of the U.S. valuation allowance that was related to net deferred tax assets that were in existence as a result of applying fresh-start accounting and any adjustments to uncertain tax positions for years prior to the Company’s emergence from bankruptcy in 2003 will now be recognized as a U.S. tax benefit as opposed to a reduction of goodwill and additional-paid-in capital as was done in the past.

NOTE 8. STOCK-BASED COMPENSATION

In order to determine the fair value of stock options, we use the Black-Scholes option pricing model and apply the single-option valuation approach to the stock option valuation. In order to determine the fair value of restricted stock awards and restricted stock units we use the closing market price of DDi common stock on the date of grant. We recognize stock-based compensation expense on a straight-line basis over the requisite service period for time-based vesting awards of stock options, restricted stock awards and restricted stock units. Certain of the stock options may vest on an accelerated basis.

Stock options

Stock-based compensation recognized and disclosed is based on the Black-Scholes option pricing model for estimating the fair value of options granted under the Company’s equity incentive plans. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model requires the input of highly subjective assumptions, including the expected stock price volatility, risk-free interest rates, dividend rate, and expected term.

There were 10,000 and 575,800 stock options granted to Company directors and key employees during the three and nine months ended September 30, 2010, respectively. Options granted to directors vest fully on the first anniversary of the grant date. Options granted to employees vest annually over three years in equal installments, commencing on the first anniversary of the grant date. As of September 30, 2010, there was $0.9 million of total unrecognized compensation cost related to non-vested stock options, net of estimated forfeitures. This cost will be recognized on a straight-line basis over the remaining weighted-average period of approximately 1.8 years.

The following table summarizes the Company’s stock option activity under all the plans for the nine months ended September 30, 2010:


	Options Outstanding (in thousands)			Weighted Average Exercise Price per Option		Weighted Average Remaining Contractual Life in Years		Aggregate Intrinsic Value (in thousands)
Balance as of December 31, 2009		2,228		$	8.18		6.4	$	227
Granted		576		$	5.50
Exercised		(96	)	$	5.48			$	300
Forfeited		(92	)	$	7.86

Balance as of September 30, 2010		2,616		$	7.71		6.6	$	7,206

Options exercisable as of September 30, 2010		1,944		$	8.48		5.8	$	4,696

The aggregate intrinsic value represents the difference between the exercise price of the underlying awards and the quoted price of DDi’s common stock for those awards that have an exercise price below the quoted price at September 30, 2010.

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Restricted Stock

There were 3,874 and 28,874 restricted stocks units granted during the three and nine months ended September 30, 2010. As of September 30, 2010, there was $0.6 million of total unrecognized compensation cost related to non-vested restricted stock awards, net of estimated forfeitures. This cost will be recognized on a straight-line basis over the remaining weighted-average period of approximately 1.2 years.

A summary of the status of the Company’s non-vested restricted shares as of September 30, 2010 and changes during the nine months ended September 30, 2010 is presented below:


	Non-vested Shares Outstanding (in thousands)			Weighted Average Grant-Date Fair Value
Non-vested at January 1, 2010		263		$	4.08
Granted		29	(a)	$	4.48
Vested		—			—
Forfeited		—			—

Non-vested at September 30, 2010		292		$	4.05

(a)

Under the terms of the DDi 2005 Stock Incentive Plan (the “Plan”), the number of shares subject to outstanding Restricted Stock Units (“RSUs”) are adjusted upon the payment of cash dividends. As a result of the dividend declarations on May 11 and August 5, 2010, the number of shares subject to outstanding RSUs increased by 3,874 shares.

Stock-based Compensation Expense

The following table sets forth expense related to stock-based compensation (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Non-cash compensation expense:
Cost of goods sold	$	115	$	135	$	355	$	409
Sales and marketing expenses		56		91		200		271
General and administrative expenses		181		219		486		902

Total non-cash compensation expense	$	352	$	445	$	1,041	$	1,582

NOTE 9. STOCK REPURCHASE PROGRAM

The Company’s Board of Directors (the “Board”) previously authorized a common stock repurchase program of up to 3,000,000 shares of the Company’s common stock in the open market at prevailing market prices or in privately-negotiated transactions. In February 2009, the Board amended the stock repurchase program to increase the amount of shares of common stock authorized to be repurchased by up to an additional $10 million worth of shares. The stock repurchase program is subject to applicable legal and regulatory requirements and the stock repurchase program, and to restrictions set forth on the DDi Corp. Credit Agreement (See Note 4). The Company will continue to review the value in repurchasing shares after considering its cash levels and operating needs as well as other uses for its cash that could create greater shareholder value.

No shares were repurchased during the three and nine month period ended September 30, 2010. As of September 30, 2010, the Company had repurchased a total of 2,946,986 shares since the inception of the program. Shares repurchased are recorded as treasury stock (accounted for under the cost method) and are available for reissuance as determined by the Board.

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

NOTE 10. SEGMENT REPORTING

Based on evaluation of the Company’s financial information, management believes that the Company operates in one reportable segment related to the design, development, manufacture and test of complex PCBs. Since early 2005, the Company has operated primarily in one geographical area, North America. Revenues are attributed to the country in which the customer buying the product is located.

The following table summarizes net sales by geographic area (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net sales:
North America⁽¹⁾	$	61,340	$	35,452	$	179,075	$	106,703
Asia		6,696		3,360		19,586		7,178
Other		952		490		3,374		1,873

Total	$	68,988	$	39,302	$	202,035	$	115,754

(1)	The majority of sales in North America are to customers located in the United States.

NOTE 11. NET INCOME PER SHARE

Basic net income per share is computed by dividing the net income for the period by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted-average number of common and common equivalent shares outstanding during the period, if dilutive. The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method, which includes consideration of share-based compensation.

The following table sets forth the calculation of basic and diluted net income per share (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Weighted-average shares of common stock outstanding — basic		19,916		19,715		19,868		19,715
Weighted common stock equivalents		755		200		528		105

Weighted-average shares of common stock outstanding — diluted		20,671		19,915		20,396		19,820
Net income	$	6,499	$	249	$	16,295	$	1,196
Net income per share — basic	$	0.33	$	0.01	$	0.82	$	0.06
Net income per share — diluted	$	0.31	$	0.01	$	0.80	$	0.06

For the three and nine months ended September 30, 2010, common shares issuable upon exercise of outstanding stock options and vesting of restricted stock of 2,148,339 and 2,376,187 respectively, were excluded from the diluted net income per common share calculation as their impact would have been anti-dilutive.

For the three and nine months ended September 30, 2009, common shares issuable upon exercise of outstanding stock options and vesting of restricted stock of 2,516,662 and 2,612,586, respectively, were excluded from the diluted net income per common share calculation as their impact would have been anti-dilutive.

NOTE 12. DIVIDENDS

The Company has paid quarterly cash dividends since the second quarter of 2010. The following table sets forth the dividend activities during 2010 (in thousands except per share data):

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)


	Declaration Date	Record Date	Payment Date	Dividend per Share		Number of Shares Outstanding		Total Payment
	May 11, 2010	Jun 21, 2010	Jul 6, 2010	$	0.06		19,943	$	1,197
	Aug 5, 2010	Sep 15, 2010	Sep 30, 2010	$	0.06		19,952	$	1,197
(a)	Oct 19, 2010	Nov 15, 2010	Nov 30, 2010	$	0.10		20,070	$	2,007

(a)	The fourth quarter dividend declaration occurred after September 30, 2010. The numbers of shares outstanding and total payment as of the Record Date are estimated.

DDi Corp. is a Delaware corporation. Delaware code allows a corporation to declare and pay dividends out of the corporations “surplus”, which is defined as total assets minus total liabilities minus par value of issued stock. DDi had a surplus as defined by Delaware code of $85 million and $79 million as of September 30, 2010 and June 30, 2010 respectively. When the Company records a dividend the charge is recorded to additional paid-in capital as opposed to retained earnings since the Company has accumulated deficits.

NOTE 13. COMPREHENSIVE INCOME

Comprehensive income includes unrealized holding gains and losses and other items that have previously been excluded from net income and reflected instead in stockholders’ equity. The following table summarizes the Company’s comprehensive income (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net income	$	6,499	$	249	$	16,295	$	1,196
Other comprehensive income:
Foreign currency translation adjustments		310		303		507		569

Comprehensive income	$	6,809	$	552	$	16,802	$	1,765

NOTE 14. FAIR VALUE MEASUREMENTS

On January 1, 2008, the Company adopted the provision of FASB ASC 820, “Fair Value Measurements and Disclosures”. Effective January 1, 2008, the Company began applying fair value measurements to assets and liabilities reported in its financial statements at fair value on a recurring basis as required by this topic. FASB ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:


Level 1:		Quoted market prices in active markets for identical assets or liabilities.

Level 2:		Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3:		Unobservable inputs that are not corroborated by market data.

A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The estimated fair values of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, revolving credit agreement, accounts payable, accrued liabilities and income taxes payable, approximate their carrying values due to their short maturities. These items are classified as either Level 1 or Level 2 inputs.

Cash equivalents consist of the Company’s excess cash invested in highly liquid money market accounts. These amounts are reflected within cash and cash equivalents on the condensed consolidated balance sheet at a net value of 1:1 for each dollar invested. The cost and fair value of the Company’s cash equivalents was $15.5 million as of September 30, 2010 and was based on quoted market prices in active markets for identical assets, a Level 1 input.

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

To calculate the estimated fair value of the Company’s variable and fixed rate notes payable and mortgage debt as of September 30, 2010, the Company used the discounted cash flow model to assess the present value of the future cash payments related to the debt. The Company estimated that in the current market the Company’s cost of borrowing on similar debt would, on average, be approximately 5.58% based on its current debt rating and an analysis of current market rates derived from the Federal Reserve. Using this estimated interest rate and a discount rate of 8.0% (Level 2 and 3 inputs); the Company estimated the fair value of its debt to be approximately $33,000 higher than its carrying value of $11.7 million.

NOTE 15. COMMITMENTS AND CONTINGENCIES

Litigation

From time to time the Company is involved in litigation and government proceedings incidental to its business. These proceedings are in various procedural stages. The Company believes as of the date of this report that provisions or accruals made for any potential losses, to the extent estimable, are adequate and that any liabilities or costs arising out of these proceedings are not likely to have a materially adverse effect on its condensed consolidated financial statements. The outcome of any of these proceedings, however, is inherently uncertain, and if unfavorable outcomes were to occur, there is a possibility that they would, individually or in the aggregate, have a materially adverse effect on the Company’s condensed consolidated financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion of the financial condition and results of operations for our fiscal quarter ended September 30, 2010. As used herein, the “Company,” “we,” “us,” or “our” means DDi Corp. and its wholly-owned subsidiaries. This discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in DDi Corp.’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”).

Some of the statements in this section contain forward-looking statements regarding our assumptions, projections, expectations, targets, intentions or beliefs about future events, which involve risks and uncertainties. All statements other than statements of historical facts included in this section relating to expectation of future financial performance, continued growth, changes in economic conditions or capital markets and changes in customer usage patterns and preferences, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this section involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include the matters listed under “Risk Factors” in Item 1A in our Form 10-K including, but not limited to, changes in general economic conditions in the markets in which we may compete and fluctuations in demand in the electronics industry; increased competition; increased costs; our ability to retain key members of management; our ability to address changes to environmental laws and regulations; risks associated with acquisitions; adverse state, federal or foreign legislation or regulation or adverse determinations by regulators; and other factors identified from time to time in our filings with the U. S. Securities and Exchange Commission (“SEC”).

Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all such factors.

Our Company

We provide time-critical, technologically-advanced printed circuit board (“PCB”) engineering and manufacturing services. We specialize in engineering and fabricating complex multi-layer PCBs on a quick-turn basis, with lead times as short as 24 hours, and on manufacturing products with high levels of complexity and reliability with low-to-moderate production volumes. We have over 1000 customers in various market segments including communications, computing, military/aerospace, industrial electronics, instrumentation, medical and high-durability commercial markets. With such a broad customer base and approximately 60 new PCB designs tooled per day, we have accumulated significant process and engineering expertise. Our core strength is developing innovative, high-performance solutions for customers during the engineering, test and launch phases of their new electronic product development. Our entire organization is focused on rapidly and reliably filling complex customer orders and building long-term customer relationships.

On December 31, 2009, we completed the acquisition of Coretec Inc. (“Coretec”), a Canadian-based PCB manufacturer whose shares previously were publicly traded on the Toronto Stock Exchange. We believe that this acquisition will allow us to increase our overall North American production capacity, extend our presence in the military/aerospace and medical markets and strengthen our flex and rigid-flex product capabilities.

Industry Overview

Printed circuit boards are a fundamental component of virtually all electronic equipment. A PCB is comprised of layers of laminate and copper and contains patterns of electrical circuitry to connect electronic components. The level of PCB complexity is determined by several characteristics, including density, size, layer count, materials and functionality. High-end commercial and military/aerospace equipment manufacturers require complex PCBs fabricated with higher layer counts, greater density and advanced materials, and demand highly complex and sophisticated manufacturing capabilities. By contrast, other PCBs, such as those used in non-wireless consumer electronic products, are generally less complex and have less sophisticated manufacturing requirements.

We see several significant trends within the PCB manufacturing industry, including:

•

Short product life cycles for electronics. Rapid advances in technology are significantly shortening product life-cycles and placing increased pressure on OEMs to develop new products in shorter periods of time. In response to these pressures, OEMs look to PCB manufacturers to offer design and engineering support and quick-turn manufacturing services to reduce time to market. Many OEMs, in an effort to increase electronic supply chain efficiency, work with a small number of technically qualified suppliers that have sophisticated manufacturing expertise and are able to offer a broad range of PCB products.

•

Increasing complexity of electronic equipment. OEMs are continually designing more complex and higher performance electronic equipment, which requires sophisticated PCBs that accommodate higher signal speeds and frequencies and increased component densities and operating temperatures. Further, the semiconductor industry continues to design and manufacture integrated circuits with higher speeds or smaller sizes and require PCBs to meet the densities of the semiconductor industry. In turn, OEMs rely on PCB manufacturers that can provide advanced engineering and manufacturing services early in the new product development cycle. OEMs are also requiring more lead-free materials and other “green” products which add to the complexity of the materials utilized in the manufacturing of PCBs.

•

Military and aerospace products. The military/aerospace market is characterized by time-consuming and complex certification processes, long product life cycles, and a unique combination of demand for leading-edge technology with extremely high reliability and durability. An increased focus on incorporating technology in products for reconnaissance and intelligence combined with continued spending on military communications, aerospace, and weapons systems applications are anticipated to drive steady end-market growth. Success in the military/aerospace market is generally achieved only after manufacturers demonstrate the long-term ability to pass extensive OEM and government certification processes, numerous product inspections, audits for quality and performance, and extensive administrative requirements associated with participation in government programs. Export controls represent a barrier to entry for international competition as they restrict the overseas export of defense-related materials, services, and sensitive technologies that are associated with government programs. In addition, the complexity of the end products serves as a barrier to entry to potential new suppliers.

•

Shifting of high volume production to Asia. Asian-based PCB manufacturers have been able to capitalize on lower labor costs to increase their market share of production of PCBs used in higher-volume consumer electronics applications, such as personal computers and cell phones. However, Asian-based manufacturers have generally been unable to meet the lead time requirements for the production of complex PCBs on a quick-turn basis.

Results of Operations – Summary

During the last two quarters of 2009 and the first three quarters of 2010, we experienced a sequential increase in sales following four sequential quarterly declines beginning in the third quarter of 2008. The sequential growth over the last five quarters was driven primarily by the improving demand in the commercial markets, led by industrial electronics, instrumentation and medical segments as well as the government, military and aerospace segment. The net sales during the third quarter of 2010 were $69.0 million as compared to $68.4 million in the second quarter of 2010. We continued to experience strong orders of $71.5 million during the third quarter representing a 1.04 book to bill ratio. Operating income for the third quarter of 2010 was $6.7 million as compared to $6.8 million in the second quarter. The fundamentals of the business remained strong in the second and third quarters of 2010.

Results of Operations for the Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009

The following tables set forth selected data from our Condensed Consolidated Statements of Income (in thousands):


	Three Months Ended September 30,						$ Change		% Change
	2010			2009			$ Change		% Change
Net sales	$	68,988		$	39,302		$	29,686		75.5	%
Cost of goods sold		53,450			32,693			20,757		63.5	%

Gross profit		15,538			6,609			8,929		135.1	%
Gross profit as a percentage of net sales		22.5	%		16.8	%

Net Sales

Net sales are derived from the engineering and manufacture of complex, technologically-advanced multi-layer PCBs.

Net sales increased $29.7 million, or 75.5%, for the third quarter of 2010 compared to the third quarter of 2009. The improvement in net sales was due to an increase in the general demand plus the additional sales as a result of the acquisition of Coretec.

Gross Profit

Gross profit for the third quarter of 2010 was $15.5 million, or 22.5% of net sales, compared to $6.6 million, or 16.8% of net sales, for the same period in 2009. The improvement in gross profit in the third quarter is primarily attributable to leveraging labor and fixed overhead costs to achieve higher production levels.

Non-cash Compensation Expense


	Three Months Ended September 30,
	2010		2009
Non-cash compensation expense:
Cost of goods sold	$	115	$	135
Sales and marketing expenses		56		91
General and administrative expenses		181		219

Total non-cash compensation expense	$	352	$	445

Non-cash compensation expense related to stock awards was recorded in accordance with the fair value recognition provisions of FASB ASC 718 pertaining to stock based compensation.

Sales and Marketing Expenses


	Three Months Ended September 30,						$ Change		% Change
	2010			2009			$ Change		% Change
Sales and marketing expenses	$	4,330		$	2,871		$	1,459		50.8	%
Percentage of net sales		6.3	%		7.3	%

Sales and marketing expenses increased on an absolute dollar basis by $1.5 million to $4.3 million or 6.3% of net sales for the third quarter of 2010, from $2.9 million or 7.3% of sales for the third quarter of 2009. The dollar increase was primarily due to the inclusion of the sales and marketing expenses of Coretec during the quarter. The decrease in sales and marketing expenses as a percentage of net sales was primarily due to the positive operating leverage as a result of the Coretec acquisition and overall higher sales levels.

General and Administrative Expenses


	Three Months Ended September 30,						$ Change		% Change
	2010			2009			$ Change		% Change
General and administrative expenses	$	4,298		$	3,198		$	1,100		34.4	%
Percentage of net sales		6.2	%		8.1	%

General and administrative expenses increased on an absolute dollar basis by $1.1 million, or 34.4%, to $4.3 million, or 6.2% of net sales, for the three months ending September 30, 2010, from $3.2 million, or 8.1% of net sales, for the same period in 2009. The absolute dollar increase was primarily due to the inclusion of the general and administrative expenses of Coretec during the quarter. The decrease in general and administrative expenses as a percentage of net sales was primarily due to the positive operating leverage that results from higher sales levels, despite incurring $0.1 million of expense due to integration costs associated with combining two Toronto manufacturing sites into one.

The acquisition of Coretec presented DDi management with the opportunity to integrate the operations of DDi’s legacy facility in Toronto (McNicoll Avenue) with Coretec’s Toronto facility (Sheppard Avenue) which is expected to substantially reduce fixed overhead costs, eliminate excess capacity, and also take full advantage of the modern Sheppard Avenue manufacturing facility. Beginning in fourth quarter 2010, all production will be performed in the Sheppard Avenue facility. Site remediation at the McNicoll facility is expected to be completed by the end of fourth quarter 2010. We incurred $0.1 million of remediation expense during the current quarter and our updated estimated cost to complete the integration plan in the fourth quarter of 2010 is approximately $0.9 to $1.1 million. These integration costs are composed of estimated site remediation, asset disposals, severance, and other typical integration expenses.

Amortization of Intangible Assets

Amortization of intangible assets relates to customer relationships identified in connection with the purchase of Sovereign Circuits in the fourth quarter of 2006. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years resulting in $0.2 million of amortization expense per quarter for the remaining acquisition-related customer relationships through October 2011.

Interest Expense

Interest expense consists of amortization of debt issuance costs, interest expense associated with long-term deferred leases, fees related to the termination of the Coretec revolving credit line, and interest on our long term debt. Interest expense increased to $0.3 million for the third quarter of 2010 compared to $0.2 million for the same period in 2009.

Other Expense (Income), Net

Net other (income) expense consists of foreign exchange transaction gains or losses related to our Canadian operations and other miscellaneous non-operating items. For the third quarter of 2010, net other income was $0.1 million compared to net other expense of $0.1 million in the third quarter of 2009.

Income Tax Expense

The Company recorded an income tax expense for the third quarter of 2010 of $0.1 million or 1% of pre-tax income, compared to an income tax benefit of $0.2 million, or (277%) of pre-tax income, for the same period in 2009. The increase in income tax expense was primarily due to an increase in taxable income from 2009 to 2010. The effective tax rate increased from 2009 to 2010 as a result of increased profitability due to sequential quarter over quarter sales growth for the last five quarters and resulting profitability. Our effective income tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of the mix of earnings between tax jurisdictions, research and development credits, state income taxes and our continuous evaluation of the realization of our deferred tax assets and uncertain tax positions, and the impact of the recognition of the tax benefit of net operating loss carry forwards to the extent of current earnings.

According to the Business Combinations Topic of the Accounting Standards Codification (“ASC”) established by the Financial Accounting Standards Board (“FASB”), any reduction of the U.S. valuation allowance that was related to net deferred tax assets that were in existence as a result of applying fresh-start accounting and any adjustments to uncertain tax positions for years prior to our emergence from bankruptcy in 2003 will now be recognized as a U.S. tax benefit as opposed to a reduction of goodwill and additional-paid-in capital.

Results of Operations for the Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009

The following tables set forth selected data from our Condensed Consolidated Statements of Income (in thousands):


	Nine Months Ended September 30,						$ Change		% Change
	2010			2009			$ Change		% Change
Net sales	$	202,035		$	115,754		$	86,281		74.5	%
Cost of goods sold		157,196			95,206			61,990		65.1	%

Gross profit		44,839			20,548			24,291		118.2	%
Gross profit as a percentage of net sales		22.2	%		17.8	%

Net Sales

Net sales increased $86.3 million, or 74.5%, for the nine months ended September 30, 2010 compared to the same period in 2009. The improvement in net sales was due to an increase in general demand plus the additional sales as a result of the Coretec acquisition.

Gross Profit

Gross profit for the nine months ended September 30, 2010 was $44.8 million, or 22.2% of net sales, compared to $20.5 million, or 17.8% of net sales for the same period in 2009. Increased gross profit for the nine months ended September 30, 2010 benefited primarily from leveraging labor and fixed overhead costs over higher production levels.

Non-cash Compensation Expense


	Nine Months Ended September 30,
	2010		2009
Non-cash compensation expense:
Cost of goods sold	$	355	$	409
Sales and marketing expenses		200		271
General and administrative expenses		486		902

Total non-cash compensation expense	$	1,041	$	1,582

Non-cash compensation expense related to stock awards was recorded in accordance with the fair value recognition provisions of FASB ASC 718 pertaining to stock compensation.

Sales and Marketing Expenses


	Nine Months Ended September 30,						$ Change		% Change
	2010			2009			$ Change		% Change
Sales and marketing expenses	$	13,131		$	8,605		$	4,526		52.6	%
Percentage of net sales		6.5	%		7.4	%

Sales and marketing expenses increased by $4.5 million, or 52.6%, to $13.1 million or 6.5% of sales for the nine months ended September 30, 2010 compared to the same period in 2009. The dollar increase was primarily due to the inclusion of the sales and marketing expenses of Coretec during the nine month period. Sales and marketing expenses decreased as a percentage of net sales primarily due to the positive operating leverage as a result of the Coretec acquisition and overall higher sales levels.

General and Administrative Expenses


	Nine Months Ended September 30,						$ Change		% Change
	2010			2009			$ Change		% Change
General and administrative expenses	$	12,801		$	9,457		$	3,344		35.4	%
Percentage of net sales		6.3	%		8.2	%

General and administrative expenses increased on an absolute dollar basis by $3.3 million, or 35.4%, to $12.8 million, or 6.3% of net sales, for the nine months ending September 30 2010, from $9.5 million, or 8.2% of net sales, for the same period in 2009. The absolute dollar increase was primarily due to the inclusion of the general and administrative expenses of Coretec during the nine month period. The decrease in general and administrative expenses as a percentage of net sales was primarily due to the positive operating leverage that results from higher sales levels, despite incurring $0.4 million of incremental professional fees in connection with the Coretec acquisition, and approximately $0.4 million of expense due to integration costs associated with the integration of two manufacturing sites into one. Management anticipates incurring an

additional $0.9 to $1.1 million on the integration of DDi’s legacy facility in Toronto (McNicoll Avenue) with Coretec’s Toronto facility (Sheppard Avenue) during the fourth quarter of 2010. These integration costs are composed of estimated site remediation, asset disposals, severance and other typical integration expenses.

Amortization of Intangible Assets

Amortization of intangible assets relates to customer relationships identified in connection with the purchase of Sovereign Circuits in the fourth quarter of 2006. These intangible assets are being amortized using the straight-line method over an estimated useful life of five years resulting in $0.6 million of amortization expense for the nine month period ending September 30, 2010.

Interest Expense

Interest expense consists of amortization of debt issuance costs, interest expense associated with long-term deferred leases, fees related to the termination of the Coretec revolving credit line, and interest on our long-term debt. Interest expense increased to $1.1 million for the nine months ended September 30, 2010 compared to $0.6 million for the same period in 2009, primarily due to the addition of six asset-backed term loans as a result of the Coretec acquisition.

Other Expense (Income), Net

Net other expense consists of foreign exchange transaction gains or losses related to our Canadian operations and other miscellaneous non-operating items. For the nine months ending September 30, 2010 and 2009, net other expense was flat at $0.2 million.

Income Tax Expense

The Company recorded an income tax expense for the nine months ended September 30, 2010 of $0.8 million or 4.6% of pre-tax income, compared to an income tax expense of $0.1 million, or 5.75% of pre-tax income, for the same period in 2009. The increase in income tax expense was primarily due to an increase in Canadian income tax expense in the first quarter of 2010. The effective tax rate declined from 2009 to 2010 primarily due to the effect of Canadian net operating loss carry-forwards on current earnings. Our effective income tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of the mix of earnings between tax jurisdictions, research and development credits, state income taxes and our continuous evaluation of the realization of our deferred tax assets and uncertain tax positions, and the impact of the recognition of the tax benefit of net operating loss carry forwards to the extent of current earnings.

According to the Business Combinations Topic of the Accounting Standards Codification (“ASC”) established by the Financial Accounting Standards Board (“FASB”), any reduction of the U.S. valuation allowance that was related to net deferred tax assets that were in existence as of applying fresh-start accounting and any adjustments to uncertain tax positions for years prior to our emergence from bankruptcy in 2003 will now be recognized as a U.S. tax benefit as opposed to a reduction of goodwill and additional-paid-in capital.

Liquidity and Capital Resources

The Company expects its available cash generated from operations, together with existing sources of cash, if required, from our credit agreements and long term debt (See Notes 4 and 5 to the Condensed Consolidated Financial Statements) will be sufficient to fund our long-term and short-term capital expenditures, working capital and other cash requirements. The Company entered into a new revolving credit agreement on September 23, 2010. The primary purpose the of revolving credit agreement will be to provide an additional source of funds to continue to fuel the Company’s growth both through acquisition and organically through product research and capital improvements. In addition, from time-to-time, we may attempt to raise capital through either debt or equity arrangements. We cannot provide assurance that we will enter into a new debt or equity arrangements or that required capital would be available on acceptable terms, if at all, or that any financing activity would not be dilutive to our current stockholders.

Select Measures of Liquidity and Capital Resources


	September 30, 2010		December 31, 2009
	(Dollars in thousands)
Working capital	$	50,751	$	36,170
Current ratio (current assets to current liabilities)		2.4 : 1.0		1.9 : 1.0
Cash and cash equivalents	$	15,475	$	19,392
Long-term debt, including current portion	$	11,729	$	17,200

As of September 30, 2010, we had total cash and cash equivalents of $15.5 million. Management defines cash and cash equivalents as highly liquid deposits with original maturities of 90 days or less when purchased. We maintain cash and cash equivalents at certain financial institutions in excess of amounts insured by federal agencies. However, management does not believe this concentration subjects the Company to any unusual financial risk beyond the normal risk associated with commercial banking relationships. We frequently monitor the third-party depository institutions that hold our cash and cash equivalents. Our emphasis is primarily on safety of principal and secondarily on maximizing yield on those funds.

The increase in our working capital and related improvement to our current ratio from December 31, 2009 was primarily due to an increase in our current assets primarily due to higher accounts receivable and less tax payable, partially offset by a decrease in cash and cash equivalents. The increase in accounts receivable was primarily due to increased sales levels during the first nine months of 2010 as well as an increase in our days sales outstanding resulting from the integration of the Coretec credit and collection function.

The decrease in our cash and cash equivalents of $3.9 million from December 31, 2009 was primarily due to the payment of the Coretec revolving credit line and other long term debt of $5.7 million and the payment of dividends to common shareholders of $2.4 million, investments in capital equipment of $5.8 million, which were partially offset by $10.0 million of cash provided from operating activities.

Consolidated Cash Flows

The following table summarizes our statements of cash flows for the nine months ended September 30, 2010 and 2009 (in thousands):


	Nine Months Ended September 30,
	2010			2009
Net cash provided by (used in):
Operating activities	$	9,961		$	8,596
Investing activities		(5,765	)		(2,665	)
Financing activities		(8,181	)		(183	)
Effect of exchange rates on cash		68			(230	)

Net increase (decrease) in cash and cash equivalents	$	(3,917	)	$	5,518

Net cash provided by operating activities represents net income adjusted for non-cash charges and working capital changes. The $1.4 million increase in net cash provided by operating activities for the nine months ended September 30, 2010 compared to the same period in 2009 was primarily due to DDi improved profitability which is being offset by increases in accounts receivable and inventories, reflecting our expanded revenue and production levels in the first nine months of 2010.

Net cash used in investing activities for the three months ended September 30, 2010 was $3.1 million higher due to (i) increased purchases of machinery and equipment across all facilities, and (ii) integration, technology and capacity expansion for the Toronto facility.

The $8.0 million increase in net cash used in financing activities for the nine months ended September 30, 2010 compared to the same period in 2009 was primarily due to two major financing activities: $5.8 million to pay off of the borrowings from the revolver credit facility that was assumed upon the acquisition of Coretec at the end of 2009 and required principal payments made on Coretec term debt that was also assumed. The remaining $2.4 million are dividend payments made to common shareholders of record for the second and third quarters of this year.

Dividends

The Company has paid quarterly cash dividends since the second quarter of 2010. The following table sets forth the dividend activities during 2010 (in thousands except per share data):


	Declaration Date	Record Date	Payment Date	Dividend per Share		Number of Shares Outstanding		Total Payment
	May 11, 2010	Jun 21, 2010	Jul 6, 2010	$	0.06		19,943	$	1,197
	Aug 5, 2010	Sep 15, 2010	Sep 30, 2010	$	0.06		19,952	$	1,197
(a)	Oct 19, 2010	Nov 15, 2010	Nov 30, 2010	$	0.10		20,070	$	2,007

(a)	The fourth quarter dividend declaration occurred after September 30, 2010. The numbers of shares outstanding and total payment as of the Record Date are estimated.

DDi Corp. is a Delaware corporation. Delaware code allows a corporation to declare and pay dividends out of the corporation’s “surplus”, which is defined as total assets minus total liabilities minus par value of issued stock. DDi had a surplus as defined by Delaware code of $85 million and $79 million as of September 30, 2010 and June 30, 2010 respectively. When the Company records a dividend the charge is recorded to additional paid-in capital as opposed to retained earnings since the Company has accumulated deficits.

The payment of future cash dividends will be at the discretion of the Board of Directors and will depend upon earning levels and capital requirements.

Management believes that its cash and cash equivalents on hand at September 30, 2010 together with its cash flows from operations, if any, will be sufficient to meet its working capital and capital expenditure requirements as well as any dividends to be paid for the remainder of the fiscal year 2010.

Revolving Credit Agreement

On September 23, 2010, DDi Corp. (the “Company”) entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Lender, and JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Lender (the “Credit Agreement”).

The Credit Agreement provides for a revolving credit in an aggregate principal amount of $25 million, with a Canadian sub-limit of $10 million, none of which was drawn on the date of the Credit Agreement. The revolving credit agreement has an accordion provision that allows the Company to increase the size to $40 million under certain circumstances. The maturity date for the revolving credit agreement is 3 years from the date of the Credit Agreement (September 23, 2013). As of September 30, 2010 there were no amounts outstanding under this agreement. Availability under the revolving credit agreement is based on various liquidity and borrowing base tests including the Company’s eligible accounts receivable and inventories.

The interest rates payable under the Credit Agreement will depend on the type of loan and are based on published rates plus an applicable margin. The initial applicable rates for loans made under the Credit Agreement are: (i) 3.25% for any CB Floating Rate loan; (ii) 3.79% for any Eurodollar loan; (iii) 3.50% for any Canadian Prime Rate loan; and (iv) 4.23% for any CDOR Rate loan. A commitment fee of 0.5% accrues on unused amounts of the commitments under the revolving credit agreement.

equipment pursuant to a Pledge and Security Agreement dated September 23, 2010 (the “U.S. Security Agreement”). The obligations of the Canadian Borrower pursuant to a Pledge and Security Agreement dated September 23, 2010 (the “Canadian Security Agreement”).

Critical Accounting Policies and Use of Estimates

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Information with respect to our critical accounting policies which we believe could have the most significant effect on our reported results and require subjective or complex judgments by management is contained on pages 25 to 27 in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Form 10-K. We believe that at September 30, 2010 there had been no material changes to this information.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements”. ASU 2010-06 amends the fair value disclosure guidance to include new disclosures and changes to clarify existing disclosure requirements. These amended standards require disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of 2011. The adoption of these new standards did not materially impact the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU No. 2010-17, “Revenue Recognition – Milestone Method” (Topic 605). ASU 2010-017 provides guidance in applying the milestone method of revenue recognition to research or development arrangements. Under this guidance management may recognize revenue contingent upon the achievement of a milestone in its entirety, in the period in which the milestone is achieved, only if the milestone meets all the criteria within the guidance to be considered substantive. This ASU is effective on a prospective basis for research and development milestones achieved in fiscal years, beginning on or after June 15, 2010. We do not expect adoption of this standard to have a material impact on our financial position or results of operations as we have no material research and development arrangements which will be accounted for under the milestone method.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Variable Rate Debt

In connection with our acquisitions of Sovereign and Coretec, we assumed variable-rate debt including notes payable and mortgages previously used to finance the purchase of certain real estate holdings, infrastructure or plant and equipment. The interest rates on our variable rate debt are tied to various floating base rates as defined or to LIBOR. These debt obligations, therefore, expose us to variability in interest payments due to changes in these rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. However, we do not believe such exposure is material to our consolidated financial position or liquidity.

Our variable-rate notes payable and variable rate mortgages subject us to market risk exposure. However, we do not believe such exposure is material to our consolidated financial position or liquidity. At September 30, 2010, we had $11.7 million outstanding under such agreements at interest rates ranging from 1.76% to 6.92% per annum.

Our new revolving credit agreement subjects us to market risk exposure. As of September 30, 2010 we have not yet drawn on this agreement.

Fixed Rate Debt

The fair market value of our one long-term fixed interest rate mortgage assumed in connection with our acquisition of Coretec is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall because we could refinance for a lower rate. Conversely, the fair value of fixed interest rate debt will decrease as interest rates rise. The interest rate changes affect the fair market value but do not impact earnings or cash flows. Based on the

outstanding amount of the debt, future movement of the interest rate would not have a material effect on the fair value of the fixed rate debt.

Foreign Currency Exchange Risk

A portion of the sales and expenses of our Canadian operations are transacted in Canadian dollars, which is deemed to be the functional currency for our Canadian entity. Thus, assets and liabilities are translated to U.S. dollars at period-end exchange rates in effect. Sales and expenses are translated to U.S. dollars using an average monthly exchange rate. Translation adjustments are included in accumulated other comprehensive income in stockholders’ equity, except for translation adjustments related to an intercompany note denominated in Canadian dollars between our U.S. entity and our Canadian entity. Settlement of the note is planned in the foreseeable future; therefore, currency adjustments are included in determining net income for the period in accordance with FASB ASC 830, “Foreign Currency Matters”, and could have a material impact on results of operations and cash flows in the event of significant currency fluctuations. Gains and losses on foreign currency transactions are included in operations. We have foreign currency translation risk equal to our net investment in those operations. We do not use forward exchange contracts to hedge exposures to foreign currency denominated transactions and do not utilize any other derivative financial instruments for trading or speculative purposes.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that all information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission (the “SEC”), and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, and allow timely decisions regarding required disclosure.

Changes in Internal Controls

No change in our internal control over financial reporting occurred during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

Reference is made to our Annual Report on Form 10-K for the period ended December 31, 2009 (the “Form 10-K”) for a summary of our previously reported legal proceedings. Since the date of the Form 10-K, there have been no material developments in previously reported legal proceedings.

Item 1A.

Risk Factors

There have been no material changes from the risk factors as previously disclosed in the Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Removed and Reserved

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

The exhibits listed below are hereby filed with the SEC as part of this Quarterly Report on Form 10-Q. Certain of the following exhibits have been previously filed with the SEC pursuant to the requirements of the Securities Act or the Exchange Act. Such exhibits are identified in the chart to the right of the Exhibit and are incorporated herein by reference.

Incorporated by Reference

Exhibit

Description

Filed

Herewith

Form

Period
Ending

Exhibit

Filing
Date

3.1

Amended and Restated Certificate of Incorporation of DDi Corp.

8-K

3.1

12/13/2003

3.2

Amended and Restated Bylaws of DDi Corp.

10-Q

6/30/2005

3.4

8/09/2005

10.1

Credit Agreement dated September 23, 2010, by and between DDi Corp., DDi Global Corp., DDi Sales Corp., DDi North Jackson Corp., DDi Milpitas Corp., DDi Denver Corp., and DDi Cleveland Corp., DDi Toronto Corp., the other Loan Parties thereto, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and U.S. Lender, and JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Lender.

8-K

10.01

9/29/2010

10.2

Pledge and Security Agreement dated September 23, 2010 by and between DDi Corp., DDi Intermediate Holdings Corp., DDi Capital Corp., DDi Global Corp., DDi Sales Corp., DDi North Jackson Corp., DDi Milpitas Corp.,

8-K

10.02

9/29/2010

Incorporated by Reference

Exhibit

Description

Filed

Herewith

Form

Period
Ending

Exhibit

Filing
Date

Coretec Holdings Inc., DDi Cleveland Holdings Corp., DDi Denver Corp., Coretec Building Inc., DDi Cleveland Corp., Trumauga Properties, Ltd. and JPMorgan Chase Bank, N.A.

10.3

Pledge and Security Agreement dated as of September 23, 2010 by and between DDi Toronto Corp. and JPMorgan Chase Bank, N.A.

8-K

10.03

9/29/2010

31.1

Certification of Chief Executive Officer of DDi Corp., Pursuant to Rule 13a-14 of the Securities Exchange Act

31.2

Certification of Chief Financial Officer of DDi Corp., Pursuant to Rule 13a-14 of the Securities Exchange Act

32.1

Certification of Chief Executive Officer of DDi Corp., Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer of DDi Corp., Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, DDi Corp. has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.


		DDi Corp.

Date: October 29, 2010		/S/ MIKEL H. WILLIAMS
		Mikel H. Williams
		*President and Chief Executive Officer*

Date: October 29, 2010		/S/ J.MICHAEL DODSON
		J. Michael Dodson
		*Chief Financial Officer*
		*(Principal Financial Officer)*

Date: October 29, 2010		/S/ COLEMAN C. BARNER
		Coleman C. Barner
		*Chief Accounting Officer*
		*(Principal Accounting Officer)*

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