DDi (DDICQ) 10-Q 2010 Q2 Quarterly report

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 June 30, 2010

OR

¨ 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):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

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 July 27, 2010, DDi Corp. had 19,942,709 shares of common stock, par value $0.001 per share, outstanding.

DDi CORP.

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

TABLE OF CONTENTS

			Page No.
PART I — FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited):
		Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009	1
		Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009	2
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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	12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20
	Item 4.	Controls and Procedures	21
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors	22
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
	Item 3.	Defaults Upon Senior Securities	22
	Item 4.	Removed and Reserved	22
	Item 5.	Other Information	22
	Item 6.	Exhibits	22
	Signatures		23

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

DDi Corp.

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

(Unaudited)

	June 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	15,547		$	19,392
Accounts receivable, net		45,154			35,280
Inventories, net		20,619			19,342
Prepaid expenses and other current assets		1,469			1,265
Total current assets		82,789			75,279
Property, plant and equipment, net		39,296			40,175
Intangible assets, net		994			1,374
Goodwill		3,388			2,986
Other assets		838			659
Total assets	$	127,305		$	120,473
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Revolving credit facility	$	—		$	4,227
Current maturities of long-term debt		1,702			1,727
Accounts payable		20,108			13,939
Accrued expenses and other current liabilities		13,653			17,242
Cash dividend payable		1,197			—
Income taxes payable		597			1,974
Total current liabilities		37,257			39,109
Long-term debt		10,350			11,246
Other long-term liabilities		658			810
Total liabilities		48,265			51,165
Commitments and contingencies (Note 15)
Stockholders’ equity:
Common stock — $0.001 par value, 190,000 shares authorized, 22,890 shares issued and 19,943 shares outstanding at June 30, 2010 and 22,803 shares issued and 19,856 shares outstanding at December 31, 2009		23			23
Additional paid-in-capital		246,984			247,245
Treasury stock, at cost — 2,947 shares held in treasury at June 30, 2010 and December 31, 2009		(16,323	)		(16,323	)
Accumulated other comprehensive income		607			410
Accumulated deficit		(152,251	)		(162,047	)
Total stockholders’ equity		79,040			69,308
Total liabilities and stockholders’ equity	$	127,305		$	120,473

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

1

DDi Corp.

Condensed Consolidated Statements of Income

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net sales	$	68,382		$	37,177		$	133,047		$	76,452
Cost of goods sold		53,067			30,498			103,746			62,513
Gross profit		15,315			6,679			29,301			13,939
Operating expenses:
Sales and marketing		4,294			2,829			8,801			5,734
General and administrative		4,080			2,835			8,503			6,259
Amortization of intangible assets		190			190			380			380
Operating income		6,751			825			11,617			1,566
Interest expense		405			197			760			395
Interest income		(7	)		(52	)		(24	)		(108	)
Other expense, net		44			121			364			76
Income before income tax expense		6,309			559			10,517			1,203
Income tax expense		312			125			721			256
Net income	$	5,997		$	434		$	9,796		$	947
Net income per share:
Basic	$	0.30		$	0.02		$	0.49		$	0.05
Diluted	$	0.29		$	0.02		$	0.48		$	0.05
Dividend declared per share	$	0.06					$	0.06
Weighted-average shares used in per share computations:
Basic		19,863			19,715			19,844			19,715
Diluted		20,544			19,803			20,257			19,772

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

2

DDi Corp.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	9,796		$	947
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		4,363			4,093
Amortization of intangible assets		380			380
Amortization of debt issuance costs and discount		—			52
Amortization of deferred lease liability		(225	)		—
Stock-based compensation		689			1,137
Deferred income taxes		19			—
Other		152			48
Changes in operating assets and liabilities:
Accounts receivable		(9,860	)		6,084
Inventories		(1,685	)		97
Prepaid expenses and other assets		(275	)		(199	)
Accounts payable		6,163			(3,569	)
Accrued expenses and other current liabilities		(4,209	)		(1,561	)
Income taxes payable		(868	)		(1,160	)
Net cash provided by operating activities		4,440			6,349
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(3,623	)		(2,271	)
Net cash used in investing activities		(3,623	)		(2,271	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(875	)		(122	)
Payments of debt issuance costs		(108	)		—
Repayment of revolving credit facility		(4,290	)		—
Proceeds from exercise of stock options		471			—
Net cash used in financing activities		(4,802	)		(122	)
Effect of exchange rate changes on cash and cash equivalents		140			(96	)
Net (decrease) increase in cash and cash equivalents		(3,845	)		3,860
Cash and cash equivalents, beginning of period		19,392			20,081
Cash and cash equivalents, end of period	$	15,547		$	23,941
Supplemental disclosure of cash flow information:
	Six Months Ended June 30,
	2010			2009
Non-cash financing activity:
Dividend declared and accrued	$	1,197			—
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.

3

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 June 30, 2010 and the results of its operations and cash flows for the three and six months ended June 30, 2010 and 2009, and such adjustments are of a normal recurring nature. The results of operations for the three and six months ended June 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 June 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 approximately 1,100 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 headquartered in Toronto, Ontario, which was previously a publicly-traded company listed on the Toronto Stock Exchange. SeeNote 2 – Acquisition of Coretec Inc.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued amended standards related to Accounting Standards Codification (“ASC”) Topic 820 - Fair Value Measurements and Disclosures,that require additional fair value disclosures. 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 Accounting Standards Update (“ASU”) No. 2010-17-Revenue Recognition – Milestone Method(“ASC 2010-017”). ASC 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.

4

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):

	June 30, 2010		December 31, 2009
Raw materials	$	8,738	$	8,173
Work-in-process		7,091		6,264
Finished goods		4,790		4,905
Total	$	20,619	$	19,342

NOTE 4. REVOLVING CREDIT FACILITY

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 six months ended June 30, 2010.

5

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 June 30, 2010 and December 31, 2009, the effective interest rate of the term loan was 1.85% and 1.74%, respectively, and the principal balance was $1.2 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 (“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 include the requirement for the guarantee of 25% of the loan balance by the Company. During the second quarter, BDC defined the target available funds coverage ratio to be at 1.5. As of June 30, 2010, the Company was in compliance with all required covenants.

The outstanding term loan had a principal balance of approximately USD $0.8 million as of June 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% at June 30, 2010). The term loan matures in December 2011.

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 June 30, 2010, accrues interest at BDC’s floating base rate (4.5% at June 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 $2.3 million as of June 30, 2010. The equipment loan accrues interest at the 1-month USD floating base rate plus 0.6%, (4.45% at June 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 June 30, 2010. The building loan accrues interest at BDC’s floating base rate plus 0.25%, (4.75% at June 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 June 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 June 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 June 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.

6

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Beginning balance	$	1,173		$	790		$	1,100		$	805
Warranties issued during the period		1,822			1,001			3,234			2,128
Warranty expenditures		(1,745	)		(1,014	)		(3,084	)		(2,156	)
Ending balance	$	1,250		$	777		$	1,250		$	777

NOTE 7. INCOME TAXES

The Company applies the provisions of FASB ASC Topic 740 -Income Taxeswhich 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 $0.4 million of total gross unrecognized tax benefits at June 30, 2010 and December 31, 2009, respectively. If recognized in future periods there would be a favorable affect 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 statute expirations. 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.

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 carryforwards 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 and employee stock purchase plan shares, 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.

7

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 103,800 and 565,800 stock options granted to Company directors and key employees during the three and six months ended June 30, 2010, respectively. Options granted to directors in the second quarter 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 June 30, 2010, there was $1.1 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 2 years.

The following table summarizes the Company’s stock option activity under all the plans for the six months ended June 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	566		$	5.50
Exercised	(87	)	$	5.42		$	273
Forfeited	(85	)	$	7.80
Balance as of June 30, 2010	2,622		$	7.71	6.9	$	3,334
Options exercisable as of June 30, 2010	1,950		$	8.48	6.0	$	1,807

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 June 30, 2010.

Restricted Stock

There were zero and 25,000 shares of restricted stocks granted during the three and six months ended June 30, 2010. As of June 30, 2010, there was $0.8 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 1.4 years.

A summary of the status of the Company’s non-vested restricted shares as of June 30, 2010 and changes during the six months ended June 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	25	$	4.48
Vested	—		—
Forfeited	—		—
Non-vested at June 30, 2010	288	$	4.06

8

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

Stock-based Compensation Expense

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Stock-based compensation expense:
Cost of goods sold	$	115	$	135	$	240	$	274
Sales and marketing expenses		60		92		144		180
General and administrative expenses		166		290		305		683
Total stock-based compensation expense	$	341	$	517	$	689	$	1,137

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. 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 six month period ended June 30, 2010. As of June 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.

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 June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Net sales:
North America(1)	$	61,233	$	34,851	$	117,735	$	71,251
Asia		6,224		1,744		12,890		3,818
Other		925		582		2,422		1,383
Total	$	68,382	$	37,177	$	133,047	$	76,452

(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.

9

DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Weighted-average shares of common stock outstanding — basic		19,863		19,715		19,844		19,715
Weighted-average common stock equivalents		681		88		413		57
Weighted-average shares of common stock outstanding — diluted		20,544		19,803		20,257		19,772
Net income	$	5,997	$	434	$	9,796	$	947
Net income per share — basic	$	0.30	$	0.02	$	0.49	$	0.05
Net income per share — diluted	$	0.29	$	0.02	$	0.48	$	0.05

For the three and six months ended June 30, 2010, common shares issuable upon exercise of outstanding stock options and vesting of restricted stock of 2,228,891 and 2,495,839, respectively, were excluded from the diluted net income per common share calculation as their impact would have been anti-dilutive.

For the three and six months ended June 30, 2009, common shares issuable upon exercise of outstanding stock options and vesting of restricted stock of 2,630,856 and 2,662,185, respectively, were excluded from the diluted net income per common share calculation as their impact would have been anti-dilutive.

NOTE 12. DIVIDEND

On May 11, 2010, the Board of Directors declared a cash dividend of $0.06 per share, payable on July 6, 2010 (the “Payment Date”) to stockholders of record as of June 21, 2010 (the “Record Date”). 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. As of June 30, 2010, DDi had a surplus as defined by Delaware code of $79.0 million. As of the record date on June 21, 2010, there were 19,942,709 shares outstanding. The cash dividend of $1.2 million was paid on July 6, 2010. As of June 30, 2010, the Company has recorded the $1.2 million dividend as a payable with an associated charge to additional paid-in capital as opposed to retained earnings, since the Company has an accumulated deficit at the declaration date.

NOTE 13. COMPREHENSIVE INCOME

Comprehensive income includes unrealized translation gains and losses 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 June 30,					Six Months Ended June 30,
	2010			2009		2010		2009
Net income	$	5,997		$	434	$	9,796	$	947
Other comprehensive income items:
Foreign currency translation adjustments		(447	)		366		197		266
Comprehensive income	$	5,550		$	800	$	9,993	$	1,213

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.

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DDi Corp.

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

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 facility, 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 June 30, 2010 and was based on quoted market prices in active markets for identical assets, a Level 1 input.

To calculate the estimated fair value of the Company’s variable and fixed rate notes payable and mortgage debt as of June 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 6.05% 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 $414 higher than its carrying value of $12.1 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.

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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 June 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.

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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.

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Results of Operations – Summary

During the last two quarters of 2009 and the first two 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 four quarters was driven primarily by the improving demand in the commercial markets, led by communications, industrial, instrumentation, medical, and consumer electronic segments. The net sales during the second quarter of 2010 were $68.4 as compared to $64.7 million in the first quarter of 2010 which represents a 5.7% sequential growth rate. We continued to experience strong orders of $69.8 million during the second quarter representing a 1.02 book to bill ratio. Operating income for the second quarter of 2010 was $6.8 million as compared to $4.9 million in the first quarter of 2010 which represents a sequential growth rate of 38.7%. The sequential quarter-over-quarter growth is primarily driven by improved operational efficiencies derived from the net sales increase and operating expense controls.

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

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

	Three Months Ended June 30,						$ Change		% Change
	2010			2009
Net sales	$	68,382		$	37,177		$	31,205	83.9	%
Cost of goods sold		53,067			30,498			22,569	74.0	%
Gross profit		15,315			6,679			8,636	129.3	%
Gross profit as a percentage of net sales		22.4	%		18.0	%

Net Sales

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

Net sales increased $31.2 million or 83.9% to $68.4 million for the second quarter of 2010, from $37.2 million in the same period of 2009. The improvement in net sales was due to an increase in general demand plus the additional sales as a result of the acquisition of Coretec.

Gross Profit

Gross profit for the second quarter of 2010 was $15.3 million, or 22.4% of net sales, compared to $6.7 million, or 18.0% of net sales, for the same period in 2009. Gross profit in the second quarter benefited from leveraging labor and fixed overhead costs over higher production levels.

Stock-based Compensation

	Three Months Ended June 30,
	2010		2009
Stock-based compensation expense:
Cost of goods sold	$	115	$	135
Sales and marketing expenses		60		92
General and administrative expenses		166		290
Total stock-based compensation expense	$	341	$	517

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.

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Sales and Marketing Expenses

	Three Months Ended June 30,						$ Change		% Change
	2010			2009
Sales and marketing expenses	$	4,294		$	2,829		$	1,465	51.8	%
Percentage of net sales		6.3	%		7.6	%

Sales and marketing expenses increased on an absolute dollar basis by $1.5 million, or 51.8% to $4.3 million, or 6.3% of net sales for the second quarter of 2010, from $2.8 million, or 7.6% of net sales for the second 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 June 30,						$ Change		% Change
	2010			2009
General and administrative expenses	$	4,080		$	2,835		$	1,245	43.9	%
Percentage of net sales		6.0	%		7.6	%

General and administrative expenses increased on an absolute dollar basis by $1.2 million, or 43.9%, to $4.1 million, or 6.0% of net sales, for the second quarter of 2010, from $2.8 million, or 7.6% of net sales, for the second quarter of 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 approximately $0.3 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. DDi expects the integration of these two facilities to be completed by the end of the fourth quarter 2010. We incurred approximately $0.3 million during the current quarter and our updated estimated cost to complete the integration plan over the next two quarters is approximately $1.0 to $1.2 million. These integration costs are composed of estimated site remediation, asset disposals, severance and other typical integration expenses. We expect to incur approximately one-third of the remaining costs in the third quarter and the remainder in the fourth quarter.

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 note payable and newly acquired Coretec long-term debt consisting of six asset-backed term loans. Interest expense increased to $0.4 million for the second quarter of 2010 compared to $0.2 million for the same period in 2009.

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 second quarter of 2010, net other expense was $0.04 million compared to net other expense of $0.1 million in the second quarter of 2009.

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Income Tax Expense

The Company recorded an income tax expense for the second quarter of 2010 of $0.3 million or 4.9% of pre-tax income, compared to an income tax expense of $0.1 million, or 22.4% 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 declined from 2009 to 2010 primarily due to the effect of Canadian net operating loss carryforwards 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 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 as was done in the past.

Results of Operations for the Six Months Ended June 30, 2010 Compared to the Six months Ended June 30, 2009

The following tables set forth select data from our Condensed Consolidated Statement of Operations (in thousands):

	Six Months Ended June 30,						$ Change		% Change
	2010			2009
Net sales	$	133,047		$	76,452		$	56.595	74.0	%
Cost of goods sold		103,746			62,513			41,233	66.0	%
Gross profit		29,301			13,939			15,362	110.2	%
Gross profit as a percentage of net sales		22.0	%		18.2	%

Net Sales

Net sales increased $56.6 million, or 74% to $133 million for the six months ended June 30, 2010, from $76.5 million in the same period of 2009. The improvement in net sales was due to an increase in general demand plus the additional sales as a result of the acquisition of Coretec.

Gross Profit

Gross profit for the six months ending June 30, 2010 was $29.3 million, or 22.0% of net sales, compared to $13.9 million, or 18.2% of net sales, for the same period in 2009. Gross profit for the six months ending June 30, 2010 benefited from leveraging labor and fixed overhead costs over higher production levels.

Stock- Based Compensation Expense

	Six Months Ended June 30,
	2010		2009
Stock-based compensation expense:
Cost of goods sold	$	240	$	274
Sales and marketing expenses		144		180
General and administrative expenses		305		683
Total stock-based compensation expense	$	689	$	1,137

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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

	Six Months Ended June 30,						$ Change		% Change
	2010			2009
Sales and marketing expenses	$	8,801		$	5,734		$	3,067	53.5	%
Percentage of net sales		6.6	%		7.5	%

Sales and marketing expenses increased on an absolute dollar basis by $3.1 million, or 53.5% to $8.8 million or 6.6% of net sales for the six months ended June 30, 2010, from $5.7 million, or 7.5% of net sales for the same period in 2009. The dollar increase was primarily due to the inclusion of the sales and marketing expenses of Coretec during the six month period. 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

	Six Months Ended June 30,						$ Change		% Change
	2010			2009
General and administrative expenses	$	8,503		$	6,259		$	2,244	35.9	%
Percentage of net sales		6.4	%		8.2	%

General and administrative expenses increased on an absolute dollar basis by $2.2 million, or 35.9%, to $8.5 million, or 6.4% of net sales, for the six months ending June 30 2010, from $6.3 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 six 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 $0.3 million of expense due to integration costs associated with the integration of two manufacturing sites into one. Management anticipates incurring an additional $1.0 to $1.2 million on the integration of DDi’s legacy facility in Toronto (McNicoll Avenue) with Coretec’s Toronto facility (Sheppard Avenue). These integration costs are composed of estimated site remediation, asset disposals, severance and other typical integration expenses. We expect to incur approximately one-third of the remaining costs in the third quarter and the remainder in the fourth quarter.

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 $0.4 million of amortization expense for the six month period ending June 30, 2010 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 $0.8 million for the six months ended June 30, 2010 compared to $0.4 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 six months ending June 30, 2010, net other expense was $0.4 million compared to net other expense of $0.1 million for the same period in 2009.

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Income Tax Expense

The Company recorded an income tax expense for the six months ended June 30, 2010 of $0.7 million or 6.8% of pre-tax income, compared to an income tax expense of $0.3 million, or 21.3% 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 carryforwards 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 as was done in the past.

Liquidity and Capital Resources

	June 30, 2010		December 31, 2009
	(Dollars in thousands)
Working capital	$	45,532	$	36,170
Current ratio (current assets to current liabilities)		2.2 : 1.0		1.9 : 1.0
Cash and cash equivalents	$	15,547	$	19,392
Long-term debt	$	12,052	$	17,200

As of June 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 to a lesser extent higher inventory 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 six 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 $3.8 million from December 31, 2009 was primarily due to the payment of the Coretec revolving credit line and other debt of $5.1 million and, investments in capital equipment of $3.6 million, which were partially offset by $4.4 million of cash provided from operating activities.

Management anticipates in the third quarter supplementing the overall liquidity of the Company by entering into a $25 million asset backed revolving credit facility. The terms and conditions of an agreement are still being negotiated. The primary purpose of the lending arrangement 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.

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Our principal sources of liquidity to fund ongoing operations have been existing cash on hand and cash generated from operations. We believe that our current cash balance, in combination with net cash expected to be generated from operations, will fund ongoing operations for at least the next twelve months.

In the event that we require additional funding during the next twelve months, we will attempt to raise capital through either debt or equity arrangements. We cannot provide assurance that we will enter into a new credit facility such as the one described above or any at all 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.

Dividend Policy

On May 11, 2010, the Board of Directors adopted a dividend policy pursuant to which we intend to pay quarterly cash dividends on our common stock and declared the first quarterly cash dividend of $0.06 per share payable to holders of our common stock. The dividend was paid on July 6, 2010 to holders of our common stock of record at the close of business on June 21, 2010. The cash dividend policy and the payment of future cash dividends will be at the discretion of the Board of Directors and will depend upon our earnings levels and capital requirements.

DDi is a Delaware corporation. Dividends will continue to be paid out of the company “surplus” which is defined in Delaware code as total assets minus total liabilities minus par value of issued stock. As of June 30, 2010, DDi had a surplus as defined by Delaware code of $79.0 million.

Management believes that its cash and cash equivalents on hand at June 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 in the ordinary course of business for the remainder of fiscal year 2010.

Consolidated Cash Flows

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

	Six Months Ended June 30,
	2010			2009
Net cash provided by (used in):
Operating activities	$	4,440		$	6,349
Investing activities		(3,623	)		(2,271	)
Financing activities		(4,802	)		(122	)
Effect of exchange rates on cash		140			(96	)
Net increase (decrease) in cash and cash equivalents	$	(3,845	)	$	3,860

Net cash provided by operating activities represents net income adjusted for non-cash charges and working capital changes. The $1.9 million decrease in net cash provided by operating activities for the six months ended June 30, 2010 compared to the same period in 2009 was primarily due to increases in accounts receivable and inventories, reflecting our expanded revenue and production levels in the first six months of 2010. The decrease in net cash from operating activities is partially offset by increases in accounts payable and accrued expenses due to higher production levels and timing of payments made, and income tax payable due to more tax being owed.

Net cash used in investing activities for the three months ended June 30, 2010 was $1.4 million higher due to purchasing of machinery and equipment across all facilities, for technology and capacity expansion as well as replacement purposes.

The $4.7 million increase in net cash used in financing activities for the six months ended June 30, 2010 compared to the same period in 2009 was primarily due to the complete pay off of the borrowings from the revolver credit facility that was assumed upon the acquisition of Coretec at the end of 2009, as well as required principal payments made on Coretec term debt that was also assumed.

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

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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 June 30, 2010 there had been no material changes to this information.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued amended standards related to Accounting Standards Codification (“ASC”) Topic 820 - Fair Value Measurements and Disclosures,that require additional fair value disclosures. 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 Accounting Standards Update (“ASU”) No. 2010-17-Revenue Recognition – Milestone Method (“ASC 2010-017”). ASC 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 June 30, 2010, we had $10.7 million outstanding under such agreements at interest rates ranging from 1.85% to 6.92% per annum.

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.

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;

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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 June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

From time to time we are involved in litigation and government proceedings incidental to our business. These proceedings are in various procedural stages. We believe 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 our 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 our consolidated financial statements.

Item 1A. Risk Factors

There have been no significant changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2009.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

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
31.1	Certification of Chief Executive Officer of DDi Corp., Pursuant to Rule 13a-14 of the Securities Exchange Act	X
31.2	Certification of Chief Financial Officer of DDi Corp., Pursuant to Rule 13a-14 of the Securities Exchange Act	X
32.1	Certification of Chief Executive Officer of DDi Corp., Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Chief Financial Officer of DDi Corp., Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

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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: July 30, 2010	/s/    MIKEL H. WILLIAMS
	Mikel H. Williams
	President and Chief Executive Officer
Date: July 30, 2010	/s/    J.MICHAEL DODSON
	J. Michael Dodson
	Chief Financial Officer
	(Principal Financial Officer)
Date: July 30, 2010	/s/    COLEMAN C. BARNER
	Coleman C. Barner
	Chief Accounting Officer
	(Principal Accounting Officer)

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