| DDI CORP Item 1A Risk Factors |
| The trading price of our common stock may continue to be volatile |
| The market price of our common stock could be subject to wide fluctuations in response to numerous factors, many of which are beyond our control |
| These factors include, among other things, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases and our competitors’ earnings releases, announcements of technological innovations that impact our services, customers, competitors or markets, changes in financial estimates by securities analysts, business conditions in our markets and the general state of the securities markets and the market for similar stocks, changes in capital markets that affect the perceived availability of capital to companies in our industries, governmental legislation or regulation, currency and exchange rate fluctuations, as well as general economic and market conditions, such as recessions |
| In addition, our common stock is listed on the Nasdaq National Market |
| Limited trading volume of our common stock could affect the trading price by magnifying the effect of larger purchase or sale orders and could increase the trading price volatility in general |
| No prediction can be made as to future trading volumes of our common stock on the Nasdaq National Market |
| 8 _________________________________________________________________ [63]Table of Contents The holders of our Series B Preferred Stock may demand that we redeem the preferred stock |
| If we are unable to comply with that demand, the redemption price and dividends on the preferred stock may increase |
| As of December 31, 2005, we had 407cmam876 shares of Series B Preferred Stock outstanding |
| At the option of the holders of the Series B Preferred Stock, we are required to redeem the preferred shares on September 30, 2006 or earlier upon a change of control, certain events of default, or other specified occurrences |
| We have the option to make redemption payments in either cash or our common stock (up to a maximum of 1cmam428cmam571 shares, unless the holders of the Series B Preferred Stock otherwise agree), except in the event of a default or certain other occurrences when the redemption payments must be made in cash |
| If the holders of the Series B Preferred Stock exercise their right to require us to redeem the Series B Preferred Stock and we are not permitted to pay the redemption price in shares of common stock or have insufficient common stock available to pay the redemption price in full because of the 1cmam428cmam571 share limit, we may not have enough funds to pay the redemption price in cash for all tendered shares of Series B Preferred Stock |
| If we are unable to redeem all of the Series B Preferred Stock submitted for redemption, (a) we must redeem a pro rata amount from each holder of the Series B Preferred Stock, (b) the redemption price for any shares not redeemed as required would increase to 108prca of the stated value of the Preferred Stock plus accrued dividends; (c) in addition to any dividends required to be paid on the Series B Preferred Stock, the unpaid portion of the redemption price would accrue interest at the rate of 8dtta0prca per annum, payable monthly in cash; and (d) the holders of the Series B Preferred Stock holding in the aggregate at least a majority in interest of the then outstanding Series B Preferred Stock, would have the right to demand a stockholders’ meeting and, at such meeting the holders of the Series B Preferred Stock would have the right to elect an additional director to the Board of Directors |
| If we default on covenants under the Certificate of Designation for our Series B Preferred Stock, the Series B Holders would have the right to accelerate and to obtain immediate repayment of the entire stated value of the Series B Preferred Stock |
| The Certificate of Designation for the Series B Preferred Stock contains a number of covenants with which the Company must comply, including a covenant that requires the Company to maintain an effective registration statement with respect to the resale of the shares of common stock issuable upon conversion of the Series B Preferred Stock, subject to certain allowable suspension periods |
| If the registration statement is not effective for a period of time in excess of the allowable suspension periods, or we fail to comply with any other covenant under the Certificate of Designation, such failure would amount to a default under the Certificate of Designation which, among other things, would entitle the Series B Holders to accelerate and to obtain immediate repayment of the entire stated value of the Series B Preferred Stock (dlra19dtta3 million) plus accrued dividends |
| Holders of our Series B Preferred Stock have the right to convert their preferred stock into shares of the Company’s common stock and to receive dividends payable in the Company’s common stock causing substantial dilution to common shareholders |
| The holders of our Series B Preferred Stock have the right to convert the principal amount of their shares into shares of our common stock |
| In addition, we have the option of paying the redemption price for and dividends on the Series B Preferred Stock in shares of the Company’s common stock |
| Shares issued as dividends or redemption payments are issued at a 5prca discount to the market price at the time of the payment |
| The holders of our Series B Preferred Stock have anti-dilution protections |
| The conversion price for the Series B Preferred Stock is subject to weighted average antidilution provisions whereby, if we issue shares in the future for consideration below the existing conversion price (currently dlra20dtta16), then (with certain exceptions, including the issuance of common stock as payment of dividends or redemption payments on the Series B Preferred Stock) the conversion price for the Series B Preferred stock will automatically be decreased, allowing the holders of the Series B Preferred Stock to receive additional shares of the Company’s common stock upon conversion |
| The issuance of additional shares of Common Stock pursuant to the terms of the Series B Preferred Stock could possibly cause substantial dilution to our common stockholders |
| Further, 9 _________________________________________________________________ [64]Table of Contents subsequent sales of the shares in the public market could depress the market price of our stock by creating an excess in supply of shares for sale |
| Issuance of these shares and sale of these shares in the public market could also impair our ability to raise capital by selling equity securities |
| We may need additional capital in the future and it may not be available on acceptable terms, or at all |
| Looking ahead at long-term needs, we may need to raise additional funds for a number of purposes, including: • to fund our operations beyond 2006; • to fund redemption of Series B Preferred Stock on September 30, 2006; • to fund working capital requirements for future growth that we may experience; • to enhance or expand the range of services we offer; • to increase our sales and marketing activities; or • to respond to competitive pressures or perceived opportunities, such as investment, acquisition and international expansion activities |
| If such funds are not available when required or on acceptable terms, our business and financial results could suffer |
| We may issue additional shares of common stock that may dilute the value of our common stock and adversely affect the market price of our common stock |
| In addition to the approximately 18cmam297cmam527 shares of our common stock that currently are outstanding, we may issue additional shares of common stock in the following scenarios: • approximately 1cmam165cmam000 shares of our common stock may be required to be issued pursuant to our issued and outstanding stock options; • approximately 2cmam302cmam000 shares of our common stock may be issued in connection with the exercise of warrants that were issued to the standby purchasers in connection with the 2005 rights offerings to our stockholders; • 1cmam344cmam000 shares of our common stock may be issued pursuant to our 2005 Stock Incentive Plan; • up to 1cmam217cmam000 shares of our common stock may be issued in connection with the redemption of our Series B Preferred Stock; • a significant number of additional shares of our common stock may be issued for financing, the payment of dividends or other purposes |
| A large issuance of shares of our common stock in any or all of the above scenarios will decrease the ownership percentage of current outstanding stockholders and will likely result in a decrease in the market price of our common stock |
| Any large issuance may also result in a change in control of DDi |
| We may in the future seek to raise funds through equity offerings, or there may be other events which could have a dilutive effect on our common stock |
| The terms of our lending arrangements and outstanding Series B Preferred Stock may restrict our financial and operational flexibility |
| The terms of our indebtedness restrict, among other things, our ability to incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with other persons or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of our assets |
| Further, our Dynamic Details subsidiary is also 10 _________________________________________________________________ [65]Table of Contents required to maintain specified financial ratios and satisfy certain financial condition tests |
| Our subsidiary’s ability to meet those financial ratios and tests can be affected by events beyond our subsidiary’s control, and there can be no assurance that they will meet those tests |
| Substantially all our assets and our subsidiaries’ assets are pledged as security under our senior credit facility |
| If the demand for our customers’ products decline, demand for our products will be similarly affected and our revenues, gross margins and operating performance will be adversely affected |
| Our customers that purchase printed circuit board engineering and manufacturing services from us are subject to their own business cycles |
| Some of these cycles show predictability from year to year |
| However, other cycles, are unpredictable in commencement, depth and duration |
| A downturn, or any other event leading to additional excess capacity will negatively impact our revenues, gross margins and operating performance |
| We cannot accurately predict the continued demand for our customers’ products and the demands of our customers for our products and services |
| As a result of this uncertainty, our past operating results, earnings and cash flows may not be indicative of our future operating results, earnings and cash flows |
| Unless we are able to respond to technological change at least as quickly as our competitors, our services could be rendered obsolete, which would reduce our revenue and operating margins |
| The market for our services is characterized by rapidly changing technology and continuing process development |
| The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, to develop and market services that meet evolving customer needs and to successfully anticipate or respond to technological changes on a cost-effective and timely basis |
| In addition, the printed circuit board engineering and manufacturing services industry could in the future encounter competition from new or revised technologies that render existing technology less competitive or obsolete or that reduce the demand for our services |
| It is possible that we will not effectively respond to the technological requirements of the changing market |
| To the extent we determine that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies and equipment may require us to make significant capital investments |
| It is possible that we will not be able to obtain capital for these purposes in the future or that any investments in new technologies will result in commercially viable technological processes |
| Recent changes to environmental laws and regulations applicable to manufacturers of electrical and electronic equipment are causing us to redesign our products, and may result in increases to our costs and greater exposure to liability |
| Effective mid-2006 the Company’s customers that provide products to the European Union must be in compliance with the Restriction of Hazardous Substances Directive, or RoHS Directive, the European legislation that restricts the use of a number of substances, including lead |
| We believe that our products are compliant with the RoHS Directive and that materials will be available to meet these emerging regulations |
| However, it is possible that unanticipated supply shortages or delays may occur as a result of these new regulations |
| In addition, these requirements may render some of our raw materials and inventory obsolete, as well as potentially increase the pricing for raw materials |
| Also, because most existing assembly processes utilize a tin-lead alloy as a soldering material in the manufacturing process, the RoHS Directive may require new soldering equipment and processes |
| The products that we manufacture that comply with the new regulatory standards or are assembled through RoHS-compliant assembly processes may not perform as well as our current products |
| If we are unable to successfully and timely redesign existing products and introduce new products that meet the standards set by environmental regulation and our customers, sales of our products could decline and warranty costs could increase, which could materially adversely affect our business, financial condition and results of operations |
| 11 _________________________________________________________________ [66]Table of Contents We may experience significant fluctuation in our revenue because we sell primarily on a purchase order basis, rather than pursuant to long-term contracts |
| Our operating results fluctuate because we sell on a purchase-order basis rather than pursuant to long-term contracts, and we expect these fluctuations to continue in the future |
| We are therefore sensitive to variability in demand by our customers |
| Because we time our expenditures in anticipation of future sales, our operating results may be less than we estimate if the timing and volume of customer orders do not match our expectations |
| Furthermore, we may not be able to capture all potential revenue in a given period if our customers’ demand for quick-turn services exceeds our capacity during that period |
| Because of these factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance |
| Because a significant portion of our operating expenses are fixed, even a small revenue shortfall can have a disproportionate effect on our operating results |
| It is possible that, in future periods, our results may be below the expectations of public market analysts and investors |
| This could cause the market price of our common stock to decline |
| We rely on a core group of significant customers for a substantial portion of our net sales, and a reduction in demand from, or an inability to pay by, this core group could adversely affect our total revenue |
| Although we have a large number of customers, net sales to our thirty largest customers accounted for approximately 52prca of our net sales in 2005 |
| Net sales to our ten largest customers accounted for approximately 36prca of our net sales during the same period |
| We may depend upon a core group of customers for a material percentage of our net sales in the future |
| Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements |
| It is possible that significant customers will not order services from us in the future or they may reduce or delay the amount of services ordered |
| Any reduction or delay in orders could negatively impact our revenues |
| In addition, we generate significant accounts receivable in connection with providing services to our customers |
| If one or more of our significant customers were to become insolvent or otherwise were unable to pay us for the services provided, our results of operations would be adversely affected |
| If we experience excess capacity due to variability in customer demand, our gross margins may decline |
| We maintain our production facilities at less than full capacity to retain our ability to respond to additional quick-turn orders |
| However, if these orders are not received, we could experience losses due to excess capacity |
| Whenever we experience excess capacity, our sales revenue may be insufficient to fully cover our fixed overhead expenses and our gross margins will decline |
| Conversely, we may not be able to capture all potential revenue in a given period if our customers’ demands for quick-turn services exceed our capacity during that period |
| We are subject to intense competition, and our business may be adversely affected by these competitive pressures |
| The printed circuit board industry is highly fragmented and characterized by intense competition |
| We principally compete with independent and captive manufacturers of complex quick-turn and longer-lead printed circuit boards |
| Our principal competitors include other established public companies, smaller private companies and integrated subsidiaries of more broadly based volume producers that also manufacture multi-layer printed circuit boards and other electronic assemblies |
| We also expect that competition will increase as a result of industry consolidation |
| Some of our principal competitors are less highly-leveraged than us and may have greater financial and operating flexibility |
| For us to be competitive in the quick-turn sector, we must maintain a large customer base, a large staff of sales and marketing personnel, considerable engineering resources and proper tooling and equipment to permit fast turnaround of small lots on a daily basis |
| 12 _________________________________________________________________ [67]Table of Contents If Asian-based production capabilities increase in sophistication, we may lose market share, and our gross margins may be adversely affected by increased pricing pressure |
| Price competition from printed circuit board manufacturers based in Asia and other locations with lower production costs may play an increasing role in the printed circuit board markets in which we compete |
| While printed circuit board manufacturers in these locations have historically competed primarily in markets for less technologically advanced products, they are expanding their manufacturing capabilities to produce higher layer count and higher technology printed circuit boards |
| In the future, competitors in Asia may be able to effectively compete in our higher technology markets, which may force us to lower our prices, reducing our gross margins or decreasing our net sales |
| Defects in our products could result in financial or other damages to our customers, which could result in reduced demand for our services and liability claims against us |
| Defects in the products we manufacture, whether caused by a design, manufacturing or materials failure or error, may result in delayed shipments, customer dissatisfaction, or a reduction in or cancellation of purchase orders |
| If these defects occur either in large quantities or too frequently, our business reputation may be impaired |
| Our sales terms and conditions generally contain provisions designed to limit our exposure to product liability and related claims; however, competing terms and provisions of our customers or existing or future laws or unfavorable judicial decisions could negate these limitation of liability provisions |
| Product liability claims made against us, even if unsuccessful, would be time consuming and costly to defend |
| Although we maintain a warranty reserve, this reserve may not be sufficient to cover our warranty or other expenses that could arise as a result of defects in our products |
| If we are unable to protect our intellectual property or infringe or are alleged to infringe others’ intellectual property, our operating results may be adversely affected |
| We primarily rely on trade secret laws and restrictions on disclosure to protect our intellectual property rights |
| We cannot be certain that the steps we have taken to protect our intellectual property rights will prevent unauthorized use of our technology |
| Our inability to protect our intellectual property rights could diminish or eliminate the competitive advantages that we derive from our proprietary technology |
| We may become involved in litigation in the future to protect our intellectual property or in defense of allegations that we infringe others’ intellectual property rights |
| These claims and any resulting litigation could subject us to significant liability for damages and invalidate our property rights |
| In addition, these lawsuits, regardless of their merits, could be time consuming and expensive to resolve and could divert management’s time and attention |
| Any potential intellectual property litigation alleging our infringement of a third-party’s intellectual property also could force us or our customers to: • stop producing products that use the intellectual property in question; • obtain an intellectual property license to sell the relevant technology at an additional cost, which license may not be available on reasonable terms, or at all; and • redesign those products or services that use the technology in question |
| The costs to us resulting from having to take any of these actions could be substantial and our operating results could be adversely affected |
| Complying with applicable environmental laws requires significant resources and if we fail to comply, we could be subject to substantial liability |
| Our operations are regulated under a number of federal, state, local and foreign environmental and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage and disposal of such materials |
| These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive 13 _________________________________________________________________ [68]Table of Contents Environmental Response, Compensation and Liability Act, as well as analogous state and foreign laws |
| Compliance with these environmental laws is a major consideration for us because we use in our manufacturing process materials classified as hazardous such as ammoniacal etching solutions, copper and nickel |
| Our efforts to comply with applicable environmental laws require an ongoing and significant commitment of our resources |
| Over the years, environmental laws have become, and may in the future become, more stringent, imposing greater compliance costs on us |
| In addition, because we are a generator of hazardous wastes and our sites may become contaminated, we may be subject to potential financial liability for costs associated with an investigation and any remediation of such sites |
| Even if we fully comply with applicable environmental laws and are not directly at fault for the contamination, we may still be liable |
| The wastes we generate include spent ammoniacal etching solutions, solder stripping solutions and hydrochloric acid solutions containing palladium, waste water which contains heavy metals, acids, cleaners and conditioners; and filter cake from equipment used for on-site waste treatment |
| Violations of environmental laws could subject us to revocation of the environmental permits we require to operate our business |
| Any such revocations could require us to cease or limit production at one or more of our facilities, thereby negatively impacting revenues and potentially causing the market price of our common stock to decline |
| Additionally, if we are liable for any violation of environmental laws, we could be required to undertake expensive remedial actions and be subject to additional penalties |
| Several of our former officers and directors are named defendants in a securities class action complaint which could divert management attention and result in substantial indemnification costs |
| Certain of our former officers and directors have been named as defendants in a number of class action and related lawsuits |
| ” Under Delaware law, our charter documents, and certain indemnification agreements we entered into with our executive officers and directors, we must indemnify our current and former officers and directors to the fullest extent permitted by law |
| The indemnification covers any expenses and/or liabilities reasonably incurred in connection with the investigation, defense, settlement or appeal of legal proceedings |
| The obligation to provide indemnification does not apply if the officer or director is found to be liable for fraudulent or criminal conduct |
| For the period in which the claims were asserted, we had in place director’s and officer’s liability insurance policies |
| We are unable to estimate what our indemnification liability in these matters may be |
| If our director’s and officer’s liability insurance policies do not adequately cover our expenses related to those class action lawsuits, we may be required to pay judgments or settlements and incur expenses in aggregate amounts that could have a material adverse effect on our financial condition, cash flows or results of operations |
| In addition, these lawsuits could divert management attention from our day to day operations, which could have a material adverse effect on our business |
| We depend on our key personnel and may have difficulty attracting and retaining skilled employees |
| Our future success will depend to a significant degree upon the continued contributions of our key management, marketing, technical, financial, accounting and operational personnel, including Mikel H Williams, our President and Chief Executive Officer |
| The loss of the services of one or more key employees could have a material adverse effect on our results of operations |
| We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled managerial and technical resources |
| Competition for such personnel is intense |
| There can be no assurance that we will be successful in attracting and retaining such personnel |
| In addition, recent and potential future facility shutdowns and workforce reductions may have a negative impact on employee recruiting and retention |
| Our manufacturing processes depend on the collective industry experience of our employees |
| If these employees were to leave and take this knowledge with them, our manufacturing processes may suffer, and we may not be able to compete effectively |
| Other than our trade secret protection, we rely on the collective experience of our employees to ensure that we continuously evaluate and adopt new technologies in our industry |
| If a significant number of employees involved in our manufacturing processes were to leave our employment and we are not able to 14 _________________________________________________________________ [69]Table of Contents replace these people with new employees with comparable experience, our manufacturing processes may suffer as we may be unable to keep up with innovations in the industry |
| As a result, we may not be able to continue to compete effectively |