UNITED
STATES SECURITIES AND EXCHANGE
COMMISSIONWashington, D.C. 20549
  FORM 10-K
  (Mark One)[X]
              
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009OR[_]
              
              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 0-20943
  Intelligroup,
      Inc.(Exact name of registrant as specified
      in its charter)
 New Jersey
              
              11-2880025(State or other jurisdiction of
      incorporation or organization)
              
              (I.R.S. Employer Identification
      No.)5 Independence Way,
      Suite 220, Princeton, NJ 08540
              
              (646)
    810-7400(Address of principal executive offices
      including zip code)
              
              (Registrant’s telephone number,
      including area code)
  Securities registered
pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section
12(g) of the Act: Common Stock, $0.01 par value
  Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes o
No þ
  Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. Yes o No þ
  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 þ No o
  Indicate by check
mark whether the registrant has submitted electronically and posted on its
corporate website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
  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 definition of "large
accelerated filer,” “accelerated filer " and "smaller reporting company" in Rule
12b-2 of the Exchange Act. (Check one):
  Large
      accelerated filero
              Accelerated filero
              Non-accelerated filero
              Smaller
      Reporting Companyþ(Do not check if a 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 o No þ
  1
     The aggregate market
value of the voting and non-voting common equity held by non-affiliates of the
registrant as of June 30, 2009 (the last business day of the most recent second
quarter) was $23,595,943 (based on the closing price of $1.53 as quoted on
Nasdaq on that date). For purposes of this calculation, shares owned by
officers, directors and 10% shareholders known to the registrant have been
deemed to be owned by affiliates. This determination of affiliate status is not
a determination for other purposes.
  Indicate the number
of shares outstanding of each of the registrant's classes of common stock, as of
March 18, 2010:
  Class
              
              Number of
    SharesCommon Stock, $0.01 par value
              41,235,018
  2
     TABLE OF
      CONTENTSItem
              
              
              PagePART I
              
              1
              
              Business
              51A
              
              Risk Factors
              111B
              
              Unresolved Staff Comments
              152
              
              Properties
              163
              
              Legal Proceedings
              174
              
              Removed and Reserved
              17PART II
              
              5
              
              Market for the Registrant’s Common
      Equity and RelatedShareholder
      Matters
              186
              
              Selected Financial Data
              197
              
              Management’s Discussion and Analysis of Financial Condition
      andResults of
      Operations
              217A
              
              Quantitative and Qualitative Disclosure
      About Market Risk
              328
              
              Financial Statements and Supplementary
      Data
              329
              
              Changes in and Disagreements with
      Accountants onAccounting
      and Financial Disclosure
              329A
              
              Controls and Procedures
              339B
              
              Other Information
              34PART III
              
              10
              
              Directors and Executive Officers and
      Corporate Governance
              3511
              
              Executive Compensation
              3512
              
              Security Ownership of Certain Beneficial Owners and
      Managementand Related
      Shareholder Matters
              3513
              
              Certain Relationships and Related
      Transactions
              3514
              
              Principal Accounting Fees and
      Services
              35PART IV
              
              15
              
              Exhibits, Financial Statement
      Schedules
              36EXHIBIT INDEX
              37SIGNATURES
              40FINANCIAL
      STATEMENTS
              41
  3
     This annual report on Form 10-K contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements include, among other things, business strategy and
expectations concerning industry conditions, market position, future operations,
margins, profitability, liquidity and capital resources. Forward-looking
statements generally can be identified by the use of terminology such as “may”,
“will”, “expect”, “intend”, “estimate”, “anticipate”, or “believe” or similar
expressions or the negatives thereof. These expectations are based on
management’s assumptions and current beliefs based on currently available
information. Although we believe that the expectations reflected in such
statements are reasonable, we can give no assurance that such expectations will
be correct. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this annual
report on Form 10-K. Our operations are subject to a number of uncertainties,
risks and other influences, many of which are outside our control, and any one
of which, or a combination of which, could cause actual results of operations to
differ materially from the forward-looking statements. Important factors that
could cause actual results to differ materially from expectations are disclosed
in Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis”
and elsewhere in this annual report on Form 10-K.
  4
     Part 1.
  Item 1 Business.
  General Business Overview.
  Intelligroup, Inc. is a vertically led global
information technology (“IT”) services organization and a leading provider of
consulting, business process optimization, and outsourcing solutions. We provide
end to end services including advisory, implementation, testing and application
management and support services (“AMS”) of Enterprise Resource Planning (ERP)
solutions from SAP AG and Oracle Corporation including PeopleSoft. We also
provide e-business solutions using Java and the Microsoft .NET and MOSS
platforms and infrastructure management services as well as ERP testing
services. Our customer base includes global Fortune 500 customers, middle market
businesses and public sector organizations. Our global delivery model, along
with its International Organization for Standardization (“ISO”) and Capability
Maturity Model (“CMM”) processes, enables our customers to achieve rapid Return
on Investment (ROI) and reduced Total Cost of Ownership (TCO). With extensive
expertise in industry-specific enterprise solutions we believe we have earned a
reputation for consistently exceeding customer expectations.
  We improve customers’ business performance by
aligning business with IT. Through our strategic alliances with SAP, Oracle,
Microsoft Corporation, and Hewlett Packard, we offer our customers comprehensive
process solutions combined with timely and cost effective implementation of new
business systems. Focusing on vertical solutions and full lifecycle
implementation in ERP, e-business solutions and application management services,
we enable customers to achieve significant business advantage, with excellent
quality, reduced time-to-market, optimized costs and long-term customer
relationships.
  We believe that the implementation of these
solutions makes our customers more competitive. Our ISO 9001:2000-certified and
SEI/SW-CMMi Level 5 Ver 1.2 assessed offshore development center delivers high
quality, cost-effective, around the clock rapid development services, for
enterprise, e-commerce and mobile commerce applications. Our offshore global
support center manages customers' critical applications, systems and
infrastructure, keeping the critical applications stable, current and optimized
through efficient and cost-effective user, technical and operations
support.
  In order to service our customers in an
optimal manner, our go-to-market strategy is guided by a regional solution
competency and industry vertical focus. The regional spread covers territories
within North America, Middle East, India, Europe and Japan. These regional
practices are responsible for managing and building overall customer
relationships. We have established practices for SAP, Oracle, PeopleSoft and
e-business solutions using Java and the Microsoft .Net platforms. These
practices develop key service offerings, support business development efforts,
and provide critical support to implementation and support projects. We have
created industry vertical practices in Media, Consumer Products, Life Sciences,
High tech, Discrete Manufacturing, State and Local Government, K-12 and Higher
Education.
  Unless otherwise indicated or the context
otherwise requires, the terms “Company,” “Intelligroup,” “we,” “us,” and “our”
refer to Intelligroup, Inc. and its subsidiaries.
  Company History
  We were incorporated in New Jersey in October
1987 under the name Intellicorp, Inc. to provide systems integration and custom
software development services. Our name was changed to Intelligroup, Inc. in
July 1992. In March 1994, we acquired Oxford Systems Inc. ("Oxford"). On
December 31, 1996, Oxford was merged into Intelligroup and ceased to exist as an
independent entity. In October 1996, we consummated our initial public offering
of our common stock (“Common Stock”). Our executive offices are located at
Princeton, New Jersey 08540.
  In 1994, we began to diversify our customer
base by expanding the scope of our systems integration and custom development
services to include ERP solutions. For many customers, ERP solutions are viewed
as an alternative to the custom design and development of their own
applications. Although ERP products are pre-packaged solutions, there is a
significant amount of technical work involved in implementing such solutions and
tailoring their use for a particular customer's needs.
  Throughout the mid-to-late 1990s, we grew
significantly by capitalizing on the business opportunity to provide
implementation and customization services work to the expanding ERP market. We
first began to provide these technical services to customers implementing SAP
software before expanding our service offerings to include ERP products
developed by Oracle in 1995 and PeopleSoft in 1997.
  In late 1999, we made the strategic decision
to spin-off our Internet services business to our shareholders. Accordingly, on
January 1, 2000, we transferred our Internet applications services and
management consulting businesses to SeraNova, a wholly-owned subsidiary of our
Company on such date.
  On July 5, 2000, we distributed all of the
outstanding shares of the common stock of SeraNova then held by us to holders of
record of our Common Stock as of the close of business on May 12, 2000 (or to
their subsequent transferees) in accordance with the terms of a Distribution
Agreement dated as of January 1, 2000 between us and SeraNova.
  In 2004, we completed a $15 million private
placement transaction whereby SOFTBANK Asia Infrastructure Fund, L.P. (“SAIF”),
an affiliate of SOFTBANK Corporation, acquired approximately 33.5% of our then
outstanding Common Stock, and Venture Tech Assets Pvt. Ltd. (“Venture Tech”)
acquired approximately 16.8% of our then outstanding Common Stock (“Private
Placement Transaction”). In connection with the Private Placement Transaction,
SAIF and Venture Tech designated five of nine directors to our Board of
Directors.
  On March 31, 2006, we completed a $10 million
private placement transaction whereby SAIF acquired an additional 3,333,333
shares of our common stock and Venture Tech acquired an additional 3,333,334
shares of our common stock, at a share price of $1.50 (the “2006 Private
Placement”). The 2006 Private Placement was approved by a special committee of
the disinterested members of our Board of Directors and generated $9.8 million
of proceeds to us, net of transaction expenses. Following the 2006 Private
Placement, SAIF and Venture Tech own about 36% and 26% of our common stock,
respectively.
  On October 1, 2007, our subsidiaries
Intelligroup Europe Ltd and Intelligroup Asia Pvt Ltd. (“IGA”) acquired certain
assets including without limitation customer contracts, fixed assets and
employees from Novasoft Information Technology Ltd., (“Novasoft Europe”) and ISG
Novasoft Technologies Limited (“Novasoft India”) for an aggregate purchase price
of $3,100,000 ("Novasoft Acquisition"). The revenues from the acquired contracts
along with the corresponding costs are accounted in the Company’s books starting
October 1, 2007.
  5
     The following is a description of our
business, including, among other things, our services, markets and competitors.
Financial information regarding geographic areas and results of operations
appears in the footnote entitled Segment Data and Geographic Information in the
Notes to the Consolidated Financial Statements included in Item 8. Financial
Statements and Supplementary Data.
  Intelligroup Services
  Our services address the implementation,
upgrade, and application management and testing needs of our customers. Our
proven methodologies and innovative tools allow customers to reduce costs by
accelerating implementations and upgrades, and by lowering ongoing support and
maintenance costs for ERP and extended ERP applications.
  Historically, our services have ranged from
providing customers with staff augmentation services to projects where we assume
full project management responsibilities. We provide these services to our
customers primarily on a time and materials or a fixed bid basis and pursuant to
agreements that are terminable upon mutually agreed notice periods. During 2000,
we began to focus on providing AMS services for our customers' ERP applications.
The contractual arrangements in these situations are typically fixed term, fixed
price and multi-year, as is common in the outsourcing market. Our focus on AMS
services is also intended to encourage ongoing and recurring service
relationships, rather than one-time implementation engagements.
  We created the industry’s first offshore lab
dedicated to SAP development in 1995. Since then, our India-based offshore
services—coupled with the operations in the United States, Europe and Japan,
have helped our customers develop, implement, maintain, support and integrate
ERP and e-commerce solutions. Our onsite/offshore model has been refined into a
series of repeatable, quality-embedded processes that continually enable it to:
 Significantly reduce customers’
  development time and costs;
        Deliver superior-quality
  enhancements on schedule;
        Ensure reliable service
  levels;
        Accommodate requirement changes
  and manage risks;
        Provide 24x7 seamless access to
  scalable, dedicated and skilled professionals; and
        Meet the peaks and valleys of
  resource requirements. Our customers partner with us in order to
implement, extend and support existing applications; or establish dedicated
offshore Centers of Excellence (CoE) that provide seamless services to the
customer and cope with the resource requirement fluctuations. Such CoE's are
setup to provide customers a dedicated pool of resources that are available to
provide a wide range of services to the customer.
  Intelligroup has partnerships with
SAP, Oracle (including PeopleSoft), Microsoft, and Hewlett Packard. We believe
that such partnerships will continue to result in enhanced industry recognition
and market opportunities.
  In 1995, we achieved the status of a "SAP
National Implementation Partner." In 1997, we enhanced our partnership status
with SAP, by first achieving "National Logo Partner" status and then
"Accelerated SAP Partner" status. In July 1997, we were awarded "PeopleSoft
Implementation Partnership" status. In June 1998, we expanded our Oracle
applications implementation services practice and added upgrade services to meet
market demand of mid to large size companies that were implementing or upgrading
Oracle applications. In 2000, we achieved "SAP Services Partner" status and "SAP
Hosting Partner" for the pharmaceuticals industry vertical status. In 2001,
Intelligroup’s pharmaceutical template for the small and medium-size businesses
market (covering current Good Manufacturing Processes (“cGMP”) and validation
standards) was certified by SAP America. In 2002, we were awarded the SAP
Services Partner Award of Excellence. In 2004 our Japan Subsidiary was awarded
the SAP Award of Excellence – Upgrade Business Award. In 2005, we became SAP
Powered by Net weaver Partner and in 2006, we became a member of the SAP
Enterprise Services Community. Recently, we have become SAP All-in-One partner
for discrete manufacturing in Denmark and Livestock industry for India. We have
also been recognized as either a finalist or winner of SAP Pinnacle Award in
2007, 2008 and 2009. In 2007, we also became Reseller and Implementation
partners of HP-Mercury and Compuware Testing products. We have also received
special mention by Oracle Corporation for their Titan Awards in 2007 and 2009 in
Hi-Tech and Life Sciences industry.
  As a result of our experience in implementing
ERP software, we have developed a proprietary methodology and associated toolset
for implementing enterprise business software applications. The toolset also
contains a project management and tracking tool, which we utilize to monitor
implementation projects undertaken for customers. We believe that our
methodology and toolset may enable our customers to realize significant savings
in time and resources. Furthermore, we believe that use of the methodology and
toolset also shortens the turn-around time for program development, as it
streamlines the information flow between Intelligroup’s offices and customer
sites.
  Additionally, we have introduced certain
SAP-based proprietary tools and services that are designed to reduce the time
and cost of upgrading and maintaining SAP systems. Through these services, we
help to cost-effectively size and analyze SAP upgrade projects, as well as to
efficiently evaluate and test SAP support packages. We combine the assessment
capabilities of our proprietary Uptimizer(SM) Tool Kit with the skills and expertise of its
SAP-certified global implementation team to deliver high-quality, cost-effective
upgrades to customized SAP environments. HotPac Analyzer(SM) enables our customers to analyze and test the
impact of a support package on their own SAP production environment before the
support package is actually applied. In addition, HotPac Analyzer enables our
customers to validate the overall impact that a support package can have and
isolate and identify the business transactions that require thorough testing.
ArchivePac(SM) enables our customers to analyze
and plan strategies for data objects archiving in SAP environments. SCEA (Supply
chain efficiency analyzer) enables our customers to measure and monitor some Key
process performance parameters in SAP transaction environments.
  In 2001, we developed Pharma Express. Pharma
Express is a ready-to-run, fully integrated pharmaceutical solution that enables
pharmaceutical companies of all sizes to improve the efficiency of their
manufacturing process to effectively control the cost-of-production and
distribution while keeping the production environment cGMP-compliant. Pharma
Express incorporates SAP Best Practices for the highly regulated pharmaceutical
industry and seamlessly integrates order management, process manufacturing,
quality management, inventory and distribution and financials.
  Our offshore centers, located in
India, allow us to provide cost-effective, timely and high quality professional
services to customers throughout the world.
  6
     The offshore centers are structured
along the following lines:
  Delivery Centers – which are development and support centers, dedicated
to certain strategic customers, that provide multi-platform, multi-service, integrated and complete solutions
to such strategic customers.
  Competencies groups – which are responsible for building process oriented
consulting excellence in SAP, Oracle suit of products, Microsoft, e-Business and
Testing around ERP environments to customers. The competencies are focused on
building capabilities around various skills including Implementations, Rollouts,
Upgrades, AMS and development.
  Infrastructure Management – which provides monitoring services for our
customers’ internal systems, networks, and wide area networks. Technologies
within this offering include Cisco, Sun, Nortel, IBM, Linux, Citrix, and
Microsoft.
  Research and Development group – which is a center for the development of
proprietary tools designed to enhance the information technology solutions
offered to our customers.
  We leverage our offshore centers, in
coordination with consultants located at customer sites, to deliver rapid,
around the clock services which provide customers with savings in application
deployment costs and expedited project completion. We are able to deliver high
value services at competitive prices due to: (i) the high level of expertise and
experience of our consultants; (ii) the rigorous application of our proprietary
project methodologies, tools and project management disciplines; and (iii) the
cost structures associated with our offshore centers.
  Our customers are primarily global Fortune 500
and other large and mid-sized companies in the United States and other diverse
geographical locations. They include Cox Newspapers, Inc., Mazda, Nissan Motor
Co. Ltd, ,TOA Corporation, Siemens International Turbomachinery Ltd, Hitachi
America and Allergan.
  We have also participated in project
teams led by IT consulting firms such as Hitachi Consulting.
  Application Management Services
  Our AMS services provide the resources,
processes and tools needed for quality-driven user, technical and operations
support. We use a well-defined set of assessment, transition and long-term
processes to deliver customized, affordable and highly responsive
support.
  Our AMS services include service offerings for
application management, application development, application integration and
application optimization. Companies around the world entrust us to manage their
complex ERP and eCommerce environment and infrastructure and to keep them stable
and optimized, and aligned with their business processes. We deliver:
 Significant reduction in support
  costs;
        Predictable costs for easier
  budgeting;
        24x7, on-demand access to skilled
  functional and technical professionals through its offshore centers located in
  India;
        Comprehensive service levels and
  flexible, individualized support programs;
        Dedicated teams that are on-site,
  offshore or a combination of on-site and offshore, depending on customer
  requirements; and
        Improved reliability, availability
  and performance of the infrastructure, database, operations, applications and
  interfaces. We believe the key to our ability to deliver
AMS services is our offshore centers located in India, which help to provide
responsive global support to customers through delivery teams that work
around-the-clock. We are able to deliver high value services at attractive
prices due to: (i) the high level of expertise and experience of support
professionals; and (ii) the cost structures associated with the offshore
centers.
  We provide Application Management Services
directly to end-user organizations. Our customers are primarily Fortune 500 and
other large and mid-sized companies in the United States and other global
locations. They include Hitachi America, Power One, 2Wire, Joy Global and
Pearson Publishing.
  We have received continuous
recognition by the outsourcing community and ecosystem over the past few years
 2008 Black Book of Outsourcing Top
  50 Outsourcing vendors
        2009 Black Book of Outsourcing Top
  50 Outsourcing vendors
        2008 RMMY Award Winner for
  People’s Choice Award, by The Outsourcing Institute
        2009 RMMY Award Winner for Best
  Relationship Management Award, by The Outsourcing Institute Testing Services
  We focus on providing ERP Test Automation
services. We provide test strategy and provide functional, regression and
performance testing. We are building scripts that automate SAP and Oracle
applications testing. We work closely with our partners at SAP, Oracle and
Hewlett Packard to deliver these services.
  Trademarks and Service Marks
  "Intelligroup," the Intelligroup
logo and "Creating the Intelligent Enterprise" are all trademarks of the
Company.
  7
     "Power Up Services", "Uptimizer", "HotPac
Analyzer", "Pharma Express", "Contractor Express", "4Sight", "4Sight Plus", "EZ
Path", "Implementation Assistant", "myADVISOR" and "ASP Plus " are service marks.
  "Empower Solutions" is a service
mark of Empower Solutions, a subsidiary of Intelligroup.
  All other trade names, trademarks or
service marks referenced herein are the property of their respective owners and
are not our property.
  Sales and Marketing
  We typically generate new sales leads from (i)
referrals from existing customers  and former  Intelligroup employees, (ii) introductions to potential customers by our
alliance partners, who often need to recommend qualified systems integrators to
implement or enhance their software products, (iii) marketing campaigns and (iv)
internal sales efforts. In addition, we have been introduced to customers by
large consulting firms who need point services such as offshore capability or
our expertise and ability to deliver complex projects.
  We have a focused approach towards sales and
marketing efforts. Our sales efforts are primarily regional and driven by onsite
Business Development Managers (“BDMs”) who are supported by Customer Service
Executives (“CSE”) who serve as leaders in multiple engagements and have both
sales and delivery responsibilities. BDMs are responsible for building the sales
funnel and closing sales with new and existing customers. We continually
evaluate the size of direct sales force in comparison to market conditions and
shall adjust the levels of our direct sales force as market conditions
warrant.
  CSEs are responsible for all aspects of the
customer relationship, with a focus on service delivery and customer
satisfaction. CSEs focus on a set of customers and manage all aspects of service
delivery for such customers. In addition to their responsibilities for
generating new revenue opportunities and expanding revenue within existing
customers, typically we bill our customers for CSE’s services. The CSEs also
serve in a quality assurance function and oversee all services delivered to the
customer.
  We have established a Business Development
Center (“BDC”) in our facilities in India. The primary objective of the BDC is
to: (i) generate qualified leads for our local BDMs to pursue with existing and
prospective customers; and (ii) support the proposal efforts of our local BDMs
by providing strategic research and proposal writing capabilities. We intend to
continue to expand the BDC in proportion to our local BDMs sales presence.
  The primary objective of our Marketing and
Alliances function is branding and lead generation. We intend to continue to
market to potential customers with demonstrated needs for our expertise in ERP,
Testing, and e-business solutions. We have exhibited at trade events associated
with our primary ERP offerings. These include events such as SAPPHIRE, the
annual SAP conference for SAP service providers and end-users, the Americas SAP
User Group, the Oracle Americas User Group and the PeopleSoft Users Group and
industry analyst shows such as Gartner IT Expo and CIO Events. We intend to
continue participation in such industry-recognized programs and trade
shows.
  In regard to our Alliances group, we have
strengthened our alliance with SAP by becoming an SAP Business All In One
Partner, Enterprise Services Partner, and winning the Pinnacle award. We are a
Platinum Partner of Oracle (highest level), and are doing joint campaigns with
them. Our Microsoft Partnership has grown, and we have been part of their
Offshore Advisory Partner Council. We have also built strong relationships with
HP for their testing suite of products. We have become a Gold Certified Partner
of HP in the US in 2009 and a Silver partner of HP in the UK in 2009. We have
also entered into a partnership with IDS-Scheer for their ARIS suite of BPM
products as well as with VMware for virtualization, Cisco for Infrastructure
offerings, and Amazon Web Services for cloud computing.
  Most importantly, however, we believe that
satisfying customer expectations within budgets and time schedules is critical
to gaining repeat business and obtaining new business from referrals. We believe
that we have consistently met customer expectations with respect to budgets and
time schedules.
  Our services require a substantial financial
commitment by customers and, therefore, typically involve a long sales cycle.
Once a lead is generated, we endeavor to quickly understand the potential
customer's business needs and objectives in order to develop the appropriate
solution and bid accordingly. Our CSEs and project managers are involved
throughout the sales cycle to ensure mutual understanding of customer goals,
including time to completion and technological requirements. Sales cycles for
complex business solutions projects typically range from one to six months from
the time we initially meet with a prospective customer until the customer
decides whether to authorize commencement of an engagement.
  Industry Background
  Organizations face a rapidly changing business
environment, including intense global competition, accelerating technological
change, and the need to embrace emerging technology strategies. Such businesses
continually seek to improve the quality of products and services, lower costs,
reduce cycle times, optimize their supply chain and increase the value to their
customers. As a result, many businesses implement and utilize advanced
information solutions, which enable them to optimize their business processes in
such areas as product development, manufacturing, sales, distribution and
finance.
  Today, as a result of the global recession,
companies are increasingly focused on reducing and optimizing costs. Companies,
like Intelligroup, that have developed global delivery centers and have a proven
ability to leverage their global delivery model stand to benefit from the
increased focus on cost optimization as the spending rebounds. We are well
positioned to win our share. Our strategy is to penetrate existing customers and
increase our share of their IT budgets. Our focus areas include Business
Intelligence, SAP and Oracle Upgrades, CRM, Testing, and
Application/Infrastructure Outsourcing. Additionally, we are positioned to win
new customers in the Small and Medium Enterprise (SME) space, as they increase
their adoption of ERP.
  Historically, many businesses have adopted
information systems strategies using pre-packaged software applications.
Customer/server systems widely replaced mainframe and legacy systems with the
promise of more functional, flexible and cost effective applications, which are
critical to the competitive needs of businesses.
  As part of their customer/server strategies,
organizations often acquire, or consider acquisition of, the pre-packaged
enterprise-wide business software applications offered by leading ERP vendors,
such as SAP and Oracle. These applications are then implemented and maintained
to meet their particular business needs. Alternatively, the organizations may
develop, or commission the development of, customized software applications to
meet the needs of these organizations. In both cases, customers have a set of
core operations applications, which they use to support their central business
processes. These customers must balance demands from their user departments for
new, innovative business applications against the absolute requirement to
maintain, manage and optimize the core operations applications. These competing
demands reflect areas of potential business opportunity for us.
  8
     The majority of customers who
implement ERP solutions are Fortune 500 companies. We believe that opportunities
for new ERP implementations will continue predominantly in subsidiaries and operating units of
large-market customers as well as mid-market customers. Many mid-size companies
have the need for core financial and other operations systems that can be
addressed by ERP products. We believe that opportunity exists to sell both
professional consulting services and AMS to mid-market customers. The mid-market
segment is very cost conscious and requires a highly efficient services delivery
model, which we believe we can provide through a combination of innovative tools
and templates, which expedite delivery and use our offshore global delivery
centers, thereby reducing costs.
  The task of developing and implementing
enterprise-wide, mission-critical, information solutions is complex. It presents
significant challenges for most customer organizations and can be a time
consuming and costly undertaking, which typically requires significant
allocation of organizational resources. Information technology managers must
integrate and manage information systems environments consisting of multiple
computing platforms, operating systems, databases and networking protocols, as
well as multiple packaged and custom developed applications.
  To support their IT needs, many businesses
increasingly engage experienced outside specialists for assistance across the
full life cycle of their solutions. Because of the heightened business pressures
they face, these customers are demanding innovative solutions, in shorter
timeframes, with lower life cycle cost of ownership, at higher levels of quality
and service, all with lower risk to themselves and their businesses.
  Companies must also continually keep pace with
a broad, and often confusing, array of new technological developments, which can
render internal IT skills obsolete. Professionals with the requisite technology
skills often are in short supply and many organizations are reluctant to expand
their internal information systems department for particular projects. At the
same time, external economic factors encourage organizations to focus on their
core competencies and trim work forces in the IT management area. Accordingly,
organizations often lack sufficient, and/or appropriate, technical resources
necessary to design, develop, implement and manage the information technology
solutions needed to support their business needs. Thus, we believe that there is
significant potential business opportunity for implementing ERP
version-to-version upgrades as well as application management and support
services.
  Another area of opportunity for us is
strategic offshore outsourcing. With our history as a pioneer in providing
offshore management and support of mission critical applications, we can offer
customers a flexible, low cost option for managing ERP
applications.
  We believe we also have an opportunity in
Service Oriented Architecture (“SOA”) solutions. SOA based solutions enable
integration and building of composite applications that enable flexible business
processes. Cloud computing is another emerging area, and we are focusing on
this.
  Customers
  We provide our services directly to many
Fortune 500 companies, as well as small to medium sized enterprises, and, to a
lesser extent, as a member of consulting teams assembled by other information
technology consultants, such as the consulting practices offered to Hitachi
consulting.
  Although we have contracts with many of our
customers to provide its services, in general such contracts are terminable upon
relatively short notice, typically not more than 30 days. When providing AMS
services for customers, we typically enter into multi-year fixed term, fixed
price contracts. There can be no assurance that our customers will continue to
enter into contracts with us or that existing contracts will not be
terminated.
  Many of our engagements involve projects that
are critical to the operations of our customers' businesses and provide benefits
that may be difficult to quantify. Our failure or inability to meet a customer's
expectations in the performance of our services could result in a material
adverse change to the customer's operations giving rise to claims against us for
damages or causing damage to our reputation, adversely affecting our business,
financial condition and results of operations. In addition, certain of our
agreements with our customers require us to indemnify the customer for damages
arising from services provided to, or on behalf of, such customer. Under certain
of our customer contracts, we warrant that we will repair errors or defects in
deliverables without additional charge to the customer. We have not experienced,
to date, any material claims against such warranties. We have purchased and
maintain errors and omissions insurance to insure us for damages and expenses
incurred in connection with alleged negligent acts, errors or omissions, but can
provide no assurance that such errors and omissions insurance will be sufficient
to claims if any, that may arise in the future.
  Competition
  The markets for our services are highly
competitive. We believe that our principal competitors include the internal
information systems groups of our prospective customers, as well as the
following classes of companies (some of which are also customers or referral
sources of Intelligroup):
 Consulting and software integration
  firms: including, IBM Global
  Services, Hewlett Packard, Computer Sciences Corporation, Cap Gemini,
  Accenture, Deloitte Consulting, SAP Professional Services, Oracle Consulting,
  Hitachi Consulting, Atos Origin and Fujitsu
  Consulting;
        Software applications
  vendors: including, SAP,
  and Oracle ; and
        Application
  management services firms:
  including, Covansys, Wipro Technologies, Infosys Technologies Limited,
  Mahindra Satyam Ltd, HCL Technologies Ltd., Cognizant Technology Solutions,
  Patni Computer Systems and Tata Consultancy Services. Many of our competitors have longer operating
histories, possess greater industry and name recognition and/or have
significantly greater financial, technical and marketing resources than we have.
In addition, there are relatively low barriers to entry into our markets and we
have faced, and expect to continue to face, additional competition from new
entrants into our markets.
  We believe that the principal competitive
factors in our markets include quality of service and deliverables, speed of
development and implementation, price, project management capability and
technical and business expertise. We believe that our ability to compete also
depends in part on a number of competitive factors outside our control,
including the ability of our competitors to hire, retain and motivate project
managers and other senior technical staff, the development by others of services
that are competitive with our services and the extent of our competitors'
responsiveness to customer needs.
  We believe that we compete based on our
expertise across the full life cycle of our customers' ERP solutions. This
expertise includes Business process consulting, strategic IT consulting skills,
plus design and implementation skills in ERP products (primarily SAP, PeopleSoft
and Oracle), application testing, application integration and application
management and support related to those solutions. There can be no assurance
that we will be able to continue to compete successfully with existing and new
competitors.
  9
     Employees
  As of December 31, 2009, we employed 2,101
full-time employees, of whom 1,793 were engaged as consultants or as software
developers, 100 were engaged in sales and marketing, and 173 were engaged in
delivery management, finance and administration and 35 were employed as
trainees. Of the total number of employees, 377 were based in the United States,
31 were based in Japan, 64 were based in Europe and 1,629 were based in India.
In addition, we engaged 154 independent contractors to perform information
technology services as of December 31, 2009.
  None of our employees are covered by a
collective bargaining agreement. Substantially all of our employees have
executed employment agreements containing non-competition, non-disclosure and
non-solicitation clauses. In addition, we require that all new employees execute
such agreements as a condition of employment by Intelligroup. We believe that we
have been successful in attracting and retaining skilled and experienced
personnel. There is increasing competition for experienced sales and marketing
personnel and technical professionals. Our future success will depend in part on
our ability to continue to attract, retain, train and motivate highly qualified
personnel. We consider relations with our employees to be good.
  Intellectual Property Rights
  Our success is dependent, in part, upon our
proprietary implementation methodology, development tools and other intellectual
property rights. We rely upon a combination of trade secret, non-disclosure and
other contractual arrangements, and copyright and trademark laws, to protect our
proprietary rights. We generally enter into confidentiality agreements with our
employees, consultants and customers, and limit access to and distribution of
our proprietary information. We also require that substantially all of our
employees and consultants assign to us their rights in intellectual property
developed while employed or engaged by us. In addition we require that all new
employees execute agreements that assign to us their rights in any intellectual
property developed during the term of employment as a condition of employment by
us. There can be no assurance that the steps taken by us in this regard will be
adequate to deter misappropriation of our proprietary information or that we
will be able to detect unauthorized use of and take appropriate steps to enforce
our intellectual property rights.
  Available Information
  Our website is www.intelligroup.com . We make available on this website free of
charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such material with or furnish such information to, the
Securities and Exchange Commission.
  10
     Item 1A. Risk Factors
  This Form 10-K contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including, without limitation, statements regarding our
intention to shift more of our focus towards the management and support of
customers' enterprise, e-commerce and m-commerce applications. Our business,
operations and financial conditions are subject to various risks. Our material
risks that are currently known to management are described below. This section
may not describe all risks associated with us, our industry or business. The
factors discussed below could cause actual results and developments to be
materially different from those expressed in or implied by such
statements.
  If we are unable to generate new sales and maintain our profitability,
our business and financial condition and results of operations may be adversely
impacted.
  Our ability to maintain profitability in
future periods will depend in large part on our ability to generate new sales,
particularly annuity-based engagements, to maintain our rate of employee
utilization, and to manage selling, general and administrative expenses in
proportion to our top line. We cannot assure you that we will be able continue
to generate profits or that a failure to do so would not have a material adverse
effect on our financial condition and results of operations.
  Our business, financial condition and results of operations may be
materially impacted by economic conditions, particularly economic conditions in
the United States, and related fluctuations in customer demand for marketing,
business, technology and other consulting services.
  Our business and financial condition depends
on the health of the general economy, as well as the demand for information
technology services, particularly in the United States as we derive a
significant portion of our revenue from customers in the United States. Our
revenue and profits are driven by demand for our services. Due to the economic
recession, demand for our services, particularly from customers based in the
United States, declined significantly beginning in the fourth quarter of 2008.
While demand began to stabilize beginning in the middle of 2009, any failure of
the emerging recovery of the economy, particularly the United States economy, or
a further deterioration in economic activity in the United States could
adversely affect demand for our services, which may materially and adversely
impact our revenue and profitability. During economic cycles in which many
companies are experiencing financial difficulties or uncertainty, customers and
potential customers may cancel or delay spending on marketing, technology and
other business initiatives. Any failure of the emerging recovery of the United
States economy or a further deterioration in economic activity in the United
States could adversely affect demand for our services, which may materially and
adversely impact our revenue and profitability.
  Some of our customers may experience unique economic conditions that are
specific to their particular industry which could adversely affect the results
of our operations .
  We provide services to customers in a wide
variety of industries. Many of the industries are subject to factors and
economic conditions that are unique to the particular industry and may not be
reflected in the overall health of the economy in general. Our revenue growth
and realization of accounts receivable could be adversely affected if our
customers in these particular industries encounter economic difficulties. Such
difficulties could include: (1) inability of participants in the industry to
access the capital or credit markets; (2) business slowdowns due to excess
inventory; and (3) shortfalls in demand for the product or service produced by a
particular industry.
  The departure of one or more key
employees may have a material adverse effect on our ability to operate our
business.
  Our future performance depends to a
significant degree upon the continued service of the key members of our
management team, as well as marketing and sales personnel, and our ability to
attract and retain new management and other marketing and sales personnel. In
addition, our future performance depends on the ability to effectively
transition key management, sales and operational roles, including adequate
knowledge transfer, in the event of any turnover in our key personnel. The loss
of any one or more of our key personnel or the failure to attract and retain key
personnel or the ability to effectively manage changes in key personnel could
have a material adverse effect on our business, results of operations and
financial condition.
  If we are unable to attract and
retain a sufficient number of highly skilled employees our
profitability  may adversely be affected .
  Our business is labor intensive and,
therefore, our success depends in large part on our ability to recruit, retain,
train and motivate highly skilled employees, particularly project managers,
technical personnel in India and other senior level technical personnel. Our
ability to attract and retain a sufficient number of highly skilled employees is
impacted by a number of factors including, but not limited to, concerns
regarding our financial condition and competition for employees in India, which
may cause us to increase compensation for existing and prospective employees,
and the continued ability to use stock options to compensate such highly skilled
employees in light of changes in accounting rules related to stock options. We
cannot assure you that we will be able to attract and retain a sufficient number
of highly skilled employees or that a failure to do so would not have a material
adverse effect on our financial condition and results of operations.
  A substantial portion of our
operations are located in India and we are subject to regulatory, economic and
political uncertainties in India.
  We intend to continue to develop and expand
our offshore facilities in India where, as of December 31, 2009, a majority of
our technical professionals were located. While wage costs are lower in India
than in the United States and other developed countries for comparably skilled
professionals, wages in India are increasing at a faster rate than in the United
States, which could result in our incurring increased costs for technical
professionals and reduced operating margins. In addition, there is intense
competition in India for skilled technical professionals and we expect that
competition to increase.
  Unlike operating in the United States,
operating in India involves more regional geopolitical risks than operating in
the US including a history of civil unrest, terrorism and substantial economic
regulation by the Indian Government. Such geopolitical risks may cause
disruptions to our operations or may cause our customers to decline to contract
with us for offshore services.
  Software Technology parks of India (STPI) is a
society setup by the Government of India with the objective of encouraging,
promoting and boosting software exports from India providing companies a tax
holiday on the earnings of software exports from India. The STPI exports
benefits are scheduled to end from April 2011.
  The information technology services
industry is highly competitive and we may not be able to compete
effectively.
  The markets for our services are highly
competitive. Many of our competitors have greater financial, technical and
marketing resources than we do. The increased competition in the industry, among
other negative effects, may cause a decrease in our billing and employee
utilization rates. We cannot assure you that we will be able to compete
effectively or that our inability to compete effectively would not have a
material adverse effect on our financial condition and results of operations.
  11
     If we lose any large customer, our
financial condition could be materially, negatively
impacted.
  We derive a significant portion of our revenue
from a limited number of customers and projects. Our ability to grow our
business depends in large part on maintaining such customer relationships and
the continuing purchasing power of such customers. The loss of any large
customer could have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that we will not
lose a large customer or that losing a large customer would not have a material
adverse effect on our financial condition and results of operations.
  We frequently need to negotiate
customer contract renewals on comparable terms to maintain our
profitability.
  Contracts continually expire and must be
renegotiated or rebid. Due to the competitive nature of our industry, variable
economic status of our customers and the current global economic downturn, we
may experience difficulty in negotiating terms comparable to current or recently
expired contracts. There can be no assurance that difficulty in renegotiating or
renewing contracts would not have a material adverse effect on our financial
condition and results of operations.
  Future legislation and anti-offshoring sentiment in the United States and
other jurisdictions could significantly affect the ability of our customers to
utilize our services.
  The issue of companies outsourcing services to
organizations operating in other countries is a topic of political discussion in
many countries. For example, many organizations and public figures in the United
States have publicly expressed concern about a perceived association between
offshore service providers and the loss of jobs in the United States. In
addition, there has been publicity about negative experiences associated with
offshore outsourcing, such as inadequate security procedures and
misappropriation of sensitive customer data, particularly involving service
providers in India. As a result, current or prospective customers may elect to
perform such services themselves or may be discouraged from transferring these
services from onshore to offshore providers to avoid negative perceptions that
may be associated with using an offshore provider. Such anti-offshoring
sentiments and negative publicity may materially impact our ability to compete
effectively for customers in the United States
  In the United States, measures aimed at
limiting or restricting offshore outsourcing by companies are periodically
considered in Congress and in numerous state legislatures to address concerns
over the perceived association between offshore outsourcing and the loss of jobs
in the United States.. Such measures have been enacted in a few states and there
is currently legislation pending in several states. The measures that have been
enacted to date generally have restricted the ability of government entities to
outsource work to offshore business process service providers and have not
materially adversely affected our business, primarily because we do not
currently work for such governmental entities. . In addition, legislation aimed
at limiting or restricting offshore outsourcing has been enacted in certain
European jurisdictions but to date such legislation has not had a significant
impact on our business, results of operations and financial condition. However,
there can be no assurance that pending or future legislation aimed at limited or
restricting offshore outsourcing will not be enacted in the United States,
Europe or other jurisdictions and, if enacted, that such legislation would not
significantly adversely affect our business, results of operations and financial
condition will not be enacted.
  Legislation enacted in certain European
jurisdictions and any future legislation in Europe, Japan or any other country
in which we have customers restricting the performance of business process
services from an offshore location could also have a material adverse effect on
our business, results of operations and financial condition.
  We can not predict shifts in policy
or political changes in India which can impact our business operations.
  There is continued uncertainty relating to the
current geopolitical climate, particularly relative to internal India politics
and their relation to India’s continuing efforts to liberalize its economy and
be receptive to economic conditions and policies favorable to our business
model. Changes in India’s economic policies or additional legislation regarding
information technology services businesses may adversely affect our business
model.
  Liability claims for damages caused by disclosure of confidential
information or system failures could have a material adverse effect on our
business.
  Many of our engagements involve projects that
are critical to the operations of our customers’ businesses and provide benefits
that are difficult to quantify. Any failure in a customer’s ERP system could
result in a claim for substantial damages against us, regardless of our
responsibility for the failure. Although we attempt to limit by contract our
liability for damages arising from negligent acts, errors, mistakes or omissions
in rendering our IT development and maintenance services, we cannot assure you
that any contractual limitations on liability will be enforceable in all
instances or will otherwise protect us from liability for damages.
  In addition, we often have access to or are
required to collect and store confidential customer and customer data. If any
person, including any of our employees, penetrates our network security or
misappropriates sensitive data, we could be subject to significant liability
from our customers for breaching contractual confidentiality provisions or
privacy laws. Unauthorized disclosure of sensitive or confidential customer and
customer data, whether through breach of our computer systems, systems failure
or otherwise, could damage our reputation and cause us to lose
customers.
  Although we have general liability insurance
coverage, including coverage for errors or omissions, there can be no assurance
that coverage will continue to be available on reasonable terms or will be
sufficient in amount to cover one or more large claims, or that the insurer will
not disclaim coverage as to any future claim. The successful assertion of one or
more large claims against us that exceed available insurance coverage or changes
in our insurance policies, including premium increases or the imposition of
large deductible or co-insurance requirements, could have a material adverse
effect on our business, results of operations and financial condition.
  System failure or disruptions in telecommunications could disrupt our
business and result in lost customers and curtailed operations which would
reduce our revenue and profitability.
  To deliver our services to our customers, we
must maintain a high speed network of satellite, fiber optic and land lines and
active voice and data communications 24 hours a day between our main offices in
India and globally and the offices of our customers worldwide. Although we
maintain back-up facilities, any systems failure could disrupt the services we
provide to our customers and could result in lost customers and curtailed
operations which would reduce our revenue and profitability.
  Our growth may be hindered by
immigration restrictions.
  The vast majority of our IT professionals in
the United States are Indian nationals. The ability of Indian nationals to work
in the United States depends on their ability and our ability to obtain the
necessary visas and work permits.
  12
     The H-1B visa classification enables U.S.
employers to hire qualified foreign workers in positions that require an
education at least equal to a Baccalaureate Degree in the United States in
specialty occupations such as IT systems engineering and systems analysis. There
is a limit on the number of new H-1B petitions that United States Citizenship and Immigration
Services, or CIS, one of the successor agencies to the Immigration and
Naturalization Service, may approve in any federal fiscal year, and in years in
which this limit is reached, we may be unable to obtain H-1B visas necessary to
bring foreign employees to the United States. Each year the H-1B cap is reached
at an earlier point prior to the beginning of the fiscal year for which the
H-1B’s will be available.
  Compliance with existing U.S. immigration and
labor laws, or changes in those laws making it more difficult to hire foreign
nationals or limiting our ability to successfully obtain permanent residence for
our foreign employees in the United States, could require us to incur additional
unexpected labor costs and expenses or could restrain our ability to retain the
skilled professionals we need for our operations in the United States. Any of
these restrictions or limitations on our hiring practices could have a material
adverse effect on our business, results of operations and financial
condition.
  Immigration and work permit laws and
regulations are subject to legislative and administrative changes as well as
changes in the application of standards and enforcement. Immigration and work
permit laws and regulation can be significantly affected by political forces and
levels of economic activity. Our business, results of operations and financial
condition may be materially adversely affected if changes in immigration and
work permit laws and regulations or the administration or enforcement of such
laws or regulations impair our ability to staff projects with IT professionals
who are not citizens of the country where the work is to be
performed.
  If our measures to protect our
intellectual property rights are inadequate, our financial condition could be
negatively impacted.
  We rely upon a combination of trade secrets,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect our proprietary rights. Our future success is dependent, in
part, upon our proprietary methodologies and toolsets, development tools and
other intellectual property rights. We enter into confidentiality agreements
with our employees, generally require that our consultants and customers enter
into such agreements, and limit access to and distribution of our proprietary
information. We also require that substantially all of our employees and
consultants assign to us their rights in intellectual property developed while
employed or engaged by us. There can be no assurance that the steps taken by us
in this regard will be adequate to deter misappropriation of our proprietary
information or that we will be able to detect unauthorized use of and take
appropriate steps to enforce our intellectual property rights.
  Third parties may claim that our
services or deliverables infringe upon their intellectual property rights, which
could result in material costs.
  Third parties may assert infringement claims
against us in the future, especially in light of recent developments in patent
law expanding the scope of patents on software and business methods. These
assertions, regardless of their validity, could result in costly and
time-consuming litigation, including damage awards and indemnification payments
to customers, or could require costly redesign of products or present the need
to enter into royalty arrangements which could decrease margins and could
adversely affect our results of operations. Any such litigation or redesign of
products could also negatively impact customer confidence in our services or
deliverables and could result in damage to our reputation and reduced licensing
revenue.
  Our ability to effectively manage our
business is dependent, in part, on our ability to maintain effective internal
controls.
  We have previously experienced material
weaknesses in internal control over financial reporting. If we are unable to
continue to maintain an effective control environment and to prevent material
weaknesses, or to remediate any weaknesses that may arise, such failure will
adversely impact our ability: (i) to effectively manage our business; (ii) to
timely record, process, summarize and report financial statements that fairly
present, in all material aspects, our financial condition, statements of
operations and cash flows; and (iii) to comply with applicable law, including
Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404").
  If we are unable to maintain effective
internal control over financial reporting, such inability may adversely affect
our financial condition and results of operations as well as our ability to
comply with Section 404.
  If we are unable to maintain access
to external funding, we may be unable to continue our ongoing business or fund
future growth.
  In addition to cash generated by on-going
operations, we rely on cash on hand, access to external sources of funding and
our ability to timely collect cash from our customers to manage our business.
Our existing credit facility represents our sole source of external funding for
our US operations. Our ability to continue ongoing business operations and fund
future growth depends on our ability to maintain access to our credit facility
and to maintain compliance with the financial and other covenants in such credit
facility or to secure alternate sources of financing . However, such
credit facility or alternate financing may not be available or if available may
not be on terms favorable to us.
  The fact that our common stock is not listed on a national exchange may
negatively impact our ability to attract investors and to use our common stock
to fund future growth.
  Our common stock trades on the OTC Bulletin
Board. In order to maintain liquidity in our common stock, we depend upon the
continuing availability of a market on which our securities may be traded. The
fact that our common stock is not listed on a national exchange may impact our
ability to attract investors and to use our common stock to fund future
growth.
  Currency fluctuations may negatively
impact our financial results, and this may in turn discourage
investment.
  Uncertainty relating to worldwide currency
exchange rates, particularly in regard to the Indian rupee, the Euro, British
Pound, Danish Kroner and Japanese Yen, and the fluctuations in such exchange
rates may impact our quarterly and/or annual financial results. We cannot assure
you that such a fluctuation in currency would not have a material adverse effect
on our financial condition and results of operations.
  If accounting interpretations relating to revenue recognition change, our
reported revenues could decline or we could be forced to make changes in our
business practices.
  There are several accounting standards and
interpretations covering revenue recognition for the software industry. These
pronouncements include Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 605-35 (prior authoritative literature SOP 81-1
“ Accounting for
Performance of Construction-Type and Certain Production-Type Contracts”), ASC
605-25 (prior authoritative literature Emerging Issues Task Force of the FASB Issue No. 00-21, “Accounting for
Revenue Arrangements with Multiple Deliverables”) and the Securities and
Exchange Commission Staff Accounting Bulletin No. 101 and 104, “Revenue
Recognition in Financial Statements.” These standards address revenue
recognition matters primarily from a conceptual level and do not include
specific implementation guidance. We believe that our revenue has been
recognized in compliance with these pronouncements.
  13
     In October 2009, the FASB issued Accounting
Standards Updates (ASU) 2009-13, “Multiple-Deliverable Revenue Arrangements”,
(amendments to FASB ASC Topic 605, Revenue Recognition) (“ASU 2009-13”). ASU
2009-13 requires entities to allocate revenue in an arrangement using estimated
selling prices of the delivered goods and services based on a selling price
hierarchy. The amendments eliminate the residual method of revenue allocation
and require revenue to be
allocated using the relative selling price method. ASU 2009-13 is effective on a
prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the potential impact, if any, of the
adoption of ASU 2009-13 on its consolidated results of operations and financial
condition and whether it will adopt the standard early. ASU 2009-13 will become
effective with our fiscal year beginning January 1, 2011.
  The accounting profession and regulatory
agencies continue to discuss various provisions of these pronouncements with the
objective of providing additional guidance on their application. These
discussions and the issuance of new interpretations, if any, could lead to
unanticipated reductions in recognized revenue. They could also drive
significant adjustments to our business practices which could result in
increased administrative costs, lengthened sales cycles and other changes which
could adversely affect our reported revenues and results of operations.
  There may be circumstances in which
the interests of our major shareholders could be in conflict with your interests
as a shareholder.
  Our major shareholders collectively own
approximately 62% of our common stock on a consolidated basis as of the date of
this report and control our board of directors. So long as our majority
shareholders continue to own a majority to controlling interest of our common
stock and control our board of directors, circumstances may occur in which the
major shareholders (or other major investors) may have an interest in pursuing
acquisitions, divestitures or other transactions, including among other things,
taking advantage of certain corporate opportunities that, in their judgment,
could enhance their investment in us or another company in which they invest.
These transactions might invoke risks to our other holders of common stock or
adversely affect us or other investors.
  We may be subject to increased tax liabilities, including if the spin-off
of our former subsidiary, SeraNova, is determined to be taxable. We could be
liable in the range of $55 million to $65 million and related penalties (if
assessed) and interest could increase the amount by $50 million to $60 million
as at December 31, 2009.
  In July 2000, we completed the tax-free
spin-off of SeraNova, our former subsidiary. In March 2001, SeraNova and
Silverline Technologies Limited (“Silverline”) consummated the acquisition of
SeraNova by Silverline. Had the acquisition of SeraNova by Silverline been
contemplated at the time of the spinoff, the spin-off would have been a taxable
transaction. Based upon the information available to us, we believe that such
acquisition was not contemplated at the time of the spin-off of SeraNova by
Intelligroup, and accordingly should not impact the tax-free nature of the
spin-off. However, if it were determined that the spin-off was taxable,
Intelligroup may be obliged to pay such tax liability, which would be material.
Please refer to Note 9- Commitments and Contingencies to the financial
statements for the fiscal year ended December 31, 2009.
  As a result of these factors and others, our
actual results may differ materially from the results disclosed in the
forward-looking statements contained in this report.
  14
     Item 1B. Unresolved Staff
Comments.
  Not applicable.
  15
     Item 2. Properties.
  As of December 31, 2009, we lease or sublease
all of our office space. Within the United States, as of December 31, 2009, we
lease office space in Princeton, NJ for certain technical and support personnel,
sales and marketing, administrative, finance and management personnel, and in
Atlanta, GA, Naperville, IL, and Milpitas, CA, for certain other sales and
operations personnel. We also lease office space in Denmark, India, Japan, the
UAE and the United Kingdom.
  Effective December 10, 2009, Intelligroup Asia
Pvt. Ltd. (“IGA”) entered into an agreement to lease certain additional premises
of area 14,700 sq.ft, for certain of our India operations from ILabs Hyderabad
Technology Center Pvt. Ltd. (“ILabs”) a related party. The lease of demised
premises commencing from January 1, 2010. For additional information, please see
Note 8 to the consolidated financial statements.
  We believe that such facilities are
adequate for our present needs. The following table summarizes our leased office
space as of December 31, 2009:
  Area
              
              
              
              LeaseLocation
              
              in Sq. Ft.
              
              Use
              
              ExpirationPrinceton, NJ (A)
              
              9,724
              
              Corporate Headquarters
              
              1/1/2015Consulting
      Services - focus on SAP, Peoplesoftcommercial,
      Oracle and E-Business markets inthe US. Selling, general and
      administrativefunctions in the USAtlanta, GA
              
              2,533
              
              Consulting Services - focus on SAP and
      Peoplesoft
              
              3/31/2012public
      sector market in the US; Limited selling,general and
      administrative functions in the USNaperville, IL
              
              2,502
              
              Limited selling and marketing functions
      in the US
              
              2/28/2013Milpitas, CA
              
              2,197
              
              Limited selling and marketing functions
      in the US
              
              11/30/2010Odense, Denmark
              
              5,971
              
              Consulting Services - focus on SAP
      market in
              
              3/31/2012Denmark;
      Selling, general and administrativefunctions in DenmarkHyderabad, India
              
              13,427
              
              Delivery center and support
      services
              
              4/30/2010Hyderabad, India
              
              1,074
              
              Delivery center and support
      services
              
              6/30/2010Hyderabad, India
              
              8,798
              
              Delivery center and support
      services
              
              10/31/2011Hyderabad, India
              
              4,748
              
              Delivery center and support
      services
              
              11/30/2011Hyderabad, India
              
              56,600
              
              IT development and support services
      and
              
              7/31/2010administrative and general
      functionsHyderabad, India
              
              14,700
              
              IT development and support services
      and
              
              12/31/2013administrative and general
      functionsBangalore, India
              
              23,645
              
              IT development and support
      services
              
              4/30/2012Tokyo, Japan
              
              2,826
              
              Consulting Services - focus on SAP
      market in
              
              8/31/2010Japan; Selling, general and
      administrative functionsin JapanMilton Keynes, UK
              
              2,800
              
              Consulting Services - focus on
      Peoplesoft and
              
              2/21/2011SAP market in the UK; Selling, general
      andadministrative functions in the
    UKRas Al Khaimah
              
              160
              
              Consulting Services - focus on SAP &
      Oracle markets
              
              11/30/2010in the Middle East; Selling function in
      the Middle East
  16
     Item 3. Legal Proceedings
  There is no pending litigation to which we are
a party or to which any of our property is subject which would have a material
impact on our consolidated financial condition, results of operations or cash
flows in the event we are unsuccessful in such litigation. However we cannot
predict with certainty the outcome of any litigation or the potential for future
litigation and any matters may adversely affect our financial condition and
business.
  Item 4. Removed and
Reserved
  17
     PART II
  Item 5. Market for the Registrant’s Common
Equity, Related Shareholder Matters and issuer purchases of equity
securities.
  Our Common Stock is currently being
traded on the OTC Bulletin Board operated by the NASD (the “OTCBB”) under the
symbol “ITIG.OB”.
  The following table sets forth, for each of
the periods indicated, the high and low sale prices per share of Common Stock as
quoted on the OTCBB. The prices shown represent quotations among securities
dealers, do not include retail markups, markdowns or commissions and may not
represent actual transactions.
  Quarter Ended
              
              High
              
              Low31-Mar-08
              
              $
              2.50
              
              $
              1.8330-Jun-08
              
              $
              2.05
              
              $
              1.2730-Sep-08
              
              $
              2.60
              
              $
              1.4131-Dec-08
              
              $
              1.95
              
              $
              1.3031-Mar-09
              
              $
              1.52
              
              $
              1.1030-Jun-09
              
              $
              1.55
              
              $
              1.0130-Sep-09
              
              $
              2.75
              
              $
              1.4031-Dec-09
              
              $
              3.50
              
              $
              2.05
  As of March 18, 2010, the approximate number
of holders of record of the Common Stock was 66 and the approximate number of
beneficial holders of the Common Stock was 1,613.
  We have never declared or paid any dividends
on our capital stock. We intend to retain any earnings to fund future growth and
the operation of our business, and, therefore, do not anticipate paying any cash
dividends in the foreseeable future, and we are prohibited from paying dividends
under the terms of our revolving credit loan agreement.
  The following table summarizes
securities authorized for issuance under our equity compensation plans as of
December 31, 2009.
  Number of
      securitiesNumber of securities to
      be
              
              Weighted-average
              
              remaining
      availableissued upon
      exercise
              
              exercise price
      of
              
              for future issuance
      underof outstanding
      options
              
              outstanding
      options
              
              equity compensation
      plansEquity compensation plans approved
      by
              
              2,731,869
              
              $
              1.91
              
              1,878,179security holdersEquity compensation plans not approved bysecurity holders
              
              -
              
              
              -
              
              65,000Total
              
              2,731,869
              
              $
              1.91
              
              1,943,179
  On October 24 2008, our Board of Directors
approved a share repurchase program of up to $5,000,000 of the Company's common
stock over an 18 month period ending April 24, 2010. The share repurchase
program will be funded using the Company's working capital and authorizes the
Company to repurchase shares from time to time through open market or privately
negotiated transactions. The program will expire on the earlier of (i) the
repurchase of the maximum number of shares under the program, (ii) the 18 month
anniversary of the approval of the program or (iii) a determination by the Board
of Directors to discontinue the program. The Company is not obligated to
continue to repurchase shares under the authorization and the timing; actual
number and value of shares purchased will depend on many factors, including the
Company’s cash flow and the liquidity and price performance of its shares. The
share repurchase program will expire on April 24, 2010 according to its terms
and the company does not anticipate extending such share repurchase program or
introducing a new repurchase program.
  No shares were repurchases in the quarter
ended December 31, 2009. As of December 31, 2009, a total of 1,197,881 shares
have been repurchased at an average price of $1.65 out of which 1,118,581 shares
were repurchased at an average price of $1.65 for the year ended December 31,
2009 and a total of 79,300 shares were repurchased at an average purchase price
of $1.64 for the year ended December 31, 2008. All the repurchased shares are
constructively retired.
  18
     Item 6. Selected Financial
Data.
  You should read the selected financial data
presented below, in conjunction with our consolidated financial statements, the
notes to those consolidated financial statements and the management’s discussion
and analysis of financial condition and results of operations section appearing
elsewhere in this report on Form 10-K.
  The consolidated statement of operations data
for the years ended December 31, 2009 and 2008 and the consolidated balance
sheet data as of December 31, 2009 and 2008 have been derived from our audited
consolidated financial statements, which are included in Item 15, and should be
read in conjunction with those consolidated financial statements (including
notes thereto). The selected financial data as of December 31, 2007, 2006 and
2005, and for the years ended December 31, 2007, 2006 and 2005, have been
derived from audited consolidated financial statements not included herein, but
which were previously filed with the Securities and Exchange Commission, or
“SEC”. Our historical results are not necessarily indicative of the operating
results to be realized in the future.
  On October 1, 2007 Intelligroup Europe Limited
a wholly owned subsidiary of Intelligroup Inc., acquired customer contracts,
fixed assets and employees from Novasoft Information Technology Corporation for
a cash consideration of $3.1 million. The revenues from the acquired contracts
along with the corresponding costs are accounted in the Company’s books
beginning October 1, 2007.
  As of December 31,2009
              
              2008
              
              2007
              
              2006
              
              2005(in thousands)Balance Sheet Data:Cash and cash equivalents
              
              $
              20,783
              
              $
              10,161
              
              $
              8,419
              
              $
              12,277
              
              $
              5,305Working capital
              
              
              36,092
              
              
              25,085
              
              
              17,993
              
              
              20,058
              
              
              11,302Total assets
              
              
              67,403
              
              
              60,230
              
              
              65,462
              
              
              54,543
              
              
              42,998Line of credit borrowings and current portion ofobligations under capital leases
              
              
              -
              
              
              125
              
              
              6,566
              
              
              5,442
              
              
              3,684Long-term debt and obligations under capitalleases, net of current
      portion
              
              
              214
              
              
              533
              
              
              375
              
              
              552
              
              
              350Shareholders' equity
              
              
              46,304
              
              
              35,042
              
              
              33,384
              
              
              26,394
              
              
              17,890
  19
     For the Years Ended December
      31,2009
              
              2008
              
              2007
              
              2006
              
              2005(in thousands, except per share
      data)Statement of Operations
      Data:Revenue
              
              $
              126,518
              
              
              $
              157,101
              
              
              $
              145,066
              
              
              $
              125,309
              
              
              $
              125,326Cost of revenue
              
              
              84,117
              
              
              
              107,635
              
              
              
              105,351
              
              
              
              91,104
              
              
              
              92,304Gross profit
              
              
              42,401
              
              
              
              49,466
              
              
              
              39,715
              
              
              
              34,205
              
              
              
              33,022Selling, general and administrative expenses
              
              
              27,984
              
              
              
              35,938
              
              
              
              34,055
              
              
              
              35,031
              
              
              
              37,705Depreciation and amortization
              
              
              2,492
              
              
              
              2,399
              
              
              
              2,472
              
              
              
              2,474
              
              
              
              2,260Total operating
    expenses
              
              
              30,476
              
              
              
              38,337
              
              
              
              36,527
              
              
              
              37,505
              
              
              
              39,965Operating income
    (loss)
              
              
              11,925
              
              
              
              11,129
              
              
              
              3,188
              
              
              
              (3,300
              )
              
              
              (6,943
              )Interest income
              
              
              141
              
              
              
              297
              
              
              
              133
              
              
              
              27
              
              
              
              147Interest expense
              
              
              (80
              )
              
              
              (535
              )
              
              
              (792
              )
              
              
              (597
              )
              
              
              (318
              )Other income (expense), net
              
              
              874
              
              
              
              (2,690
              )
              
              
              1,155
              
              
              
              1,300
              
              
              
              283Income (loss) before income taxes
              
              
              12,860
              
              
              
              8,201
              
              
              
              3,684
              
              
              
              (2,570
              )
              
              
              (6,831
              )Provision for (benefit of) income taxes
              
              
              2,060
              
              
              
              1,512
              
              
              
              720
              
              
              
              1,137
              
              
              
              (240
              )Net Income / (Loss)
              
              $
              10,800
              
              
              $
              6,689
              
              
              $
              2,964
              
              
              $
              (3,707
              )
              
              $
              (6,591
              )Basic Net Income / (loss) per
      share
              
              $
              0.26
              
              
              $
              0.16
              
              
              $
              0.07
              
              
              $
              (0.09
              )
              
              $
              (0.19
              )Diluted Net Income / (loss)
      per share
              
              $
              0.26
              
              
              $
              0.16
              
              
              $
              0.07
              
              
              $
              (0.09
              )
              
              $
              (0.19
              )Weighted average number of
      common sharesoutstanding - basic
              
              
              41,360
              
              
              
              42,155
              
              
              
              42,026
              
              
              
              40,179
              
              
              
              35,103outstanding - diluted
              
              
              41,733
              
              
              
              42,387
              
              
              
              42,115
              
              
              
              40,179
              
              
              
              35,103
  20
     Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations
  Overview
  We plan, consult, build, support and manage
enterprise resource planning (“ERP”) solutions based on SAP, Oracle, PeopleSoft
and Microsoft applications and technology platforms and also provide services
around business intelligence, ERP Infrastructure Management, E-Business ERP
Integration, ERP Testing and business process outsourcing or “BPO” and knowledge
process outsourcing or “KPO”.
  We help our customers align and optimize their
technology platforms, primarily their ERP systems, with their businesses. While
historically ERP providers had focused on providing solutions for large market
companies with revenues of over $5 billion, such systems have increasingly
become mission critical for companies with revenues of between $500 million and
$5 billion (“Mid-Tier Market”), as these systems are used to help them drive
greater revenue and productivity as well as to better manage and control
costs.
  We have worked to position ourselves as the
“go-to” partner for companies looking for an ERP and extended ERP solutions
partners and that positioning provides us with an important competitive edge.
This positioning is reflected in the fact that over 90% of our business is
generated from ERP-driven projects.
  In this Section, we will discuss the
following: (1) key factors in evaluating our financial performance; (2)
application of critical accounting policies, which explains the accounting
policies necessary to understand how we record our financial information; (3)
results of operations - consolidated, in which our consolidated results are
compared year to year to recognize trends; (4) results of operations by business
segment, which allows us to compare the results of our different business units;
(5) liquidity and capital resources; (6) contractual obligations and other
commercial commitments; and (7) recent accounting pronouncements, which
identifies new accounting literature that may have an impact on our future
results and (8) a discussion of our business outlook
  Key Factors in Evaluating the Company’s
Financial Performance
  Management believes the following factors
should be considered when evaluating our reported financial information
contained in Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
  Revenue
  The majority of our revenue is derived from
professional services rendered to customers. Revenue is typically recognized as
services are performed. Our services range from providing customers with a
single consultant to multi-personnel full-scale projects. Although we have
contracts with many of its customers to provide our services, in general, such
contracts are terminable upon relatively short notice, typically not more than
30 days. There can be no assurance that our customers will continue to enter
into contracts with us or that existing contracts will not be terminated. We
provide our services either directly to end-user organizations, or as a member
of a consulting team assembled by another IT consulting firm. Where contractual
provisions permit, customers also are billed for reimbursement of expenses
incurred by us on the customers’ behalf.
  Fixed Price
Projects
  We have provided services on certain projects
in which we, at the request of our customers, offer a fixed price for our
services. For the years ended December 31, 2009 and 2008, revenue derived from
projects under fixed-time and fixed price service contracts represented
approximately 38% and 30%, respectively, of our total revenue. No single fixed
price project was material to our business for the year ended December 31, 2009
and 2008. We believe that, as we pursue our strategy of providing AMS to
customers, We will continue to offer fixed price projects. We believe that there
are certain risks related to fixed price arrangements and thus price such
arrangements to reflect the associated risk. There can be no assurance that we
will be able to complete such projects within the fixed price timeframes. The
failure to perform within such fixed price contracts, if entered into, could
have a material adverse effect on our business, financial condition and results
of operations.
  Customer
Concentration
  We have derived and believes that we will
continue to derive a significant portion of our revenue from a limited number of
customers and projects. For the years ended December 31, 2009 and 2008, our ten
largest customers accounted for in the aggregate approximately 36% and 35% of
our total revenue, respectively. During 2009 and 2008, no single customer
accounted for 10% or more of revenues. As of December 31, 2009 no customer
accounted for more than 10% of total accounts receivable and as of December 31,
2008, one customer accounted for 11% of total accounts receivable. For the years
ended December 31, 2009 and 2008, 14% and 18% of our revenue, respectively, was
generated by providing supplemental resources directly to the end-customer or as
part of a consulting team assembled by another information technology consulting
firm. There can be no assurance that such customers will continue to engage us
in the future at current levels of retention, if at all.
  21
     Software
Partners
  For the years ended December 31, 2009 and
2008, we derived the following percentages of total revenue from projects in
which we implemented, extended, maintained, managed or supported software
developed by SAP, Oracle Universe and other e-Business application
providers:
  Percentage of
RevenueYear Ended December
  31,2009
              
              2008SAP
              
              70
              %
              
              71
              %Oracle *
              
              15
              %
              
              13
              %e-Business
              
              6
              %
              
              8
              %Others
              
              9
              %
              
              8
              %Total
              
              100
              %
              
              100
              %
  *Oracle universe
represents Oracle, People Soft and Siebel software technologies.
  Markets
  We currently serve the United States market
with its headquarters in Princeton, New Jersey, and branch offices in Atlanta,
Georgia, Naperville, Illinois and Milpitas, California. We also maintain local
offices to serve the markets in India, the United Kingdom, Denmark, Japan and
the United Arab Emirates.
  Expenses
  Our most significant cost is project personnel
expenses, which consist of consultant salaries, payroll taxes, benefits and
subcontractor fees. Thus our financial performance is based primarily upon
billing margin (billable hourly rate less the cost to us of a consultant on an
hourly basis) and personnel utilization rates (billable hours divided by paid
hours).
  Application of Critical Accounting
Policies
  The preparation of our consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
  Certain of our accounting policies require
higher degrees of judgment than others in their application. These include
revenue recognition and allowance for doubtful accounts, impairments and
estimation of useful lives of long-term assets, income tax recognition of
current and deferred tax items, assumptions used in valuing stock-based
compensation arrangements and fair value measurements, and accruals for
contingencies. In addition, the footnotes to the Consolidated Financial
Statements include further discussion of our significant accounting
policies.
  Revenue Recognition and Allowance for Doubtful
Accounts .
  We generate revenue from professional services
rendered to customers. Revenue is recognized under our contracts generally when
persuasive evidence of an arrangement exists, the sales price is fixed or
determinable and collectability is reasonably assured. The majority of our
revenue is generated under time-and-material contracts whereby costs and revenue
are recognized as services are performed, with the corresponding cost of
providing those services reflected as cost of revenue. The majority of customers
are billed on an hourly or daily basis whereby actual time is charged directly
to the customer. Such method is expected to result in reasonably consistent
profit margins over the contract term.
  We also derive a portion of our revenue from
fixed-price, fixed-time contracts. Revenue generated from most fixed-price
contracts, including most application management and support contracts, is
recognized ratably over the contract term. Certain fixed price contracts are for
implementation services, including design and modification, for which
specifications are provided by the customer. The scope of the work is usually
defined in terms of overall deliverables and the revenue for such work is
ultimately earned by achieving the deliverables. We consider the performance of
service towards the planned deliverable as partial execution of the deliverable
and hence the revenue generated from such fixed-price contracts is recognized
using the percentage of completion (POC) method. The POC method recognizes the
legal and economic results of contract performance on a timely basis. This
method of accounting relies on estimates of total expected contract revenues and
costs. Where the contracts involve only implementation services, we recognize
revenue based on a proportional performance method. The pattern of performance
on these contracts closely resembles the time spent by our employees and
therefore efforts-expended, measured based on the cost of the employee’s time,
is used as a measure for the proportion of services rendered in relation to the
total services expected to be rendered.
  The use of the POC method or the proportional
performance method requires significant judgment relative to estimating the
number of hours or days required to complete the contracted scope of work,
including assumptions and estimates relative to the length of time to complete
the project and the nature and complexity of the work to be performed. Our
project delivery and business unit finance personnel continually review labor
hours incurred and estimated total labor hours, which may result in revisions to
the amount of recognized revenue for the contract. Changes in estimates are
accounted for in the period of change. If we do not accurately estimate the
resources required or the scope of work to be performed for a contract or if we
do not manage the project properly within the planned time period, then a loss
may have to be recognized on the contract. Losses are recorded in the period
when they become known, and estimated through the completion of the
contract.
  22
     We occasionally derive revenue from projects
involving multiple revenue-generating activities. Accordingly, the revenue from
such projects is accounted for in accordance with the ASC 605-25 (previously
Emerging Issues Task Force of the Financial Accounting Standards Board (“FASB”)
Issue No. 00-21), “Accounting for Revenue Arrangements with Multiple
Deliverables.” If a contract involves the provision of multiple service
elements, total estimated contract revenue is allocated to each element based on
their fair value. The amount of revenue allocated to each element is limited to
the amount that is not contingent upon the delivery of another element in the
future. Revenue for each element is then recognized as described above depending
upon whether the contract is a time-and-materials contract or a fixed-price,
fixed-time contract.
  Any estimation process, including that used in
preparing contract accounting models, involves inherent risk. We reduce the
inherent risk relating to revenue and cost estimates in proportional performance
models through approval and monitoring processes. Risks relating to service
delivery, usage, productivity and other factors are considered in the estimation
process.
  We accrue for revenue and receivables for
services rendered between the last billing date and the balance sheet date.
Unbilled services as of December 31, 2009 and December 31, 2008 represent
services provided through year ended December 31, 2009 and the year ended
December 31, 2008, respectively, which are billed subsequent to the balance
sheet date. All such amounts are anticipated to be collected in the following
year.
  Reimbursements of out-of-pocket expenses
received from customers have been included as part of revenues in accordance
with ASC 605 (previously EITF 01-14), “Income Statement Characterization of
Reimbursements Received for “Out-of-Pocket” Expenses Incurred.”
  We establish billing terms at the time project
deliverables are agreed, and we continually monitor timely payments from
customers and assess collection issues. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. We base our estimates on historical collection and
write-off experience, current trends, credit policy, detailed analysis of
specific customer situations and percentage of accounts receivable by aging
category.
  Recoverability of Long-lived
Assets
  We review the recoverability of our long-lived
assets including intangible assets and fixed assets on a periodic basis whenever
events and changes in circumstances have occurred which may indicate a possible
impairment. The assessment for potential impairment is based primarily on our
ability to recover the carrying value of its long-lived assets from expected
future cash flows from our operations on an undiscounted basis. If such assets
are determined to be impaired, the impairment recognized is the amount by which
the carrying value of the assets exceeds the fair value of the assets. Property
and equipment to be disposed of by sale is carried at the lower of the then
current carrying value or fair value less estimated costs to sell.
  Accounting for Income
Taxes
  We record income taxes using the asset and
liability method. Deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective income tax carrying amount and operating loss and tax credit carry
forwards. Our consolidated financial statements contain certain deferred tax
assets which have arisen as a result of operating losses incurred since 1999, as
well as other temporary differences between book and tax accounting. FASB
Statement of Financial Accounting Standards ASC 740 (prior authoritative
literature (“SFAS”) No. 109, “Accounting for Income Taxes,”) requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
  Significant management judgment is required in
determining the provision for income taxes, deferred tax assets and liabilities
and any valuation allowance recorded against net deferred tax assets. We
evaluate the weight of all available evidence to determine whether it is more
likely than not that some portion or all of the deferred income tax assets will
not be realized in the future. Management considered the history of operating
losses (if any) at each jurisdiction and the inherent uncertainty in the extent
and timing of future profitability in determining the appropriate valuation
allowance. Based upon this assessment, we recorded approximately $21.0 million
of valuation allowance against gross deferred tax assets of $22.5 million as of
December 31, 2009. The decision to record the valuation allowance required
significant judgment including estimating the various factors impacting future
taxable income. Had we not recorded this allowance, we would have reported
materially different results. If the realization of all deferred tax assets in
the future is considered more likely than not, a decrease in the valuation
allowance would be made resulting in an increase to the net carrying value of
deferred tax assets and increase net income in the period of such determination
by approximately $21.0 million. The amount of the deferred tax asset considered
realizable is based on significant estimates, and it is at least reasonably
possible that changes in these estimates in the near term could materially
affect our financial condition and results of operations. Our effective tax rate
may vary from period to period based on changes in estimated taxable income or
loss, changes to the valuation allowance, changes to federal, state or foreign
tax laws, future expansion into areas with varying country, state, and local
income tax rates and deductibility of certain costs and expenses by
jurisdiction.
  In July 2006, the Financial Accounting
Standards Board (“FASB”) issued ASC 740 (prior authoritative literature FASB
Interpretation No. 48 , “Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (“FIN 48”)), which provides criteria
for the recognition, measurement, presentation and disclosure of uncertain tax
positions. A tax benefit from an uncertain position may be recognized only if it
is “more likely than not” that the position is sustainable based on its
technical merits. The provisions of ASC 740 are effective for fiscal years
beginning after December 15, 2006. ASC 740 contains a two-step approach to
recognizing and measuring uncertain tax positions. The first step is to evaluate
the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be
sustained on audit, including resolution of related appeals or litigation
process, if any. The second step is to measure the tax benefit as the largest
amount that is more than 50% likely of being realized upon ultimate
settlement.
  The total amount of gross
unrecognized tax benefit as of December 31, 2009 and December 31, 2008 was $0.1
million.
  Under U.S. tax law, the utilization of the
deferred tax asset related to Net Operating Losses (“NOL”) carried forward is
subject to an annual limitation if there is a more than 50 percentage point
change in shareholder ownership. We incurred such a change in ownership as
defined under Internal Revenue Code (“IRC”) Section 382 for U.S. federal income
tax purposes in September 2004. As a result, we are subject to limitations on
future usage of our previously incurred tax attributes and wrote down our NOL
carry-forward in 2004. This limitation and related write-down of the NOL did not
have an income statement impact in 2004 as we had previously established a full
valuation allowance against the net deferred tax balances, which was
subsequently removed in conjunction with the write-down.
  23
     Derivative Instruments
  In the normal course of business, our Indian
subsidiary actively looks to mitigate the exposure of foreign currency market
risk, by entering into various derivative instruments, authorized under our
policies, with counterparties that are highly rated financial institutions. The
primary exchange rate exposure of the Indian subsidiary is to the US
Dollars.
  We use derivative instruments consisting of
foreign currency exchange option and forward contracts not designated as hedging
instruments under ASC 815-10 to hedge exposure of foreign currency market risk.
Changes in the fair value of these instruments are recognized in the
consolidated statement of operations and are included in foreign exchange gain/
(loss). Refer Note 10 – Financial Instruments for the detailed
disclosure.
  Share-Based Compensation
Plans
  We have share-based compensation plans that
reserve common shares for issuance to key employees and directors. We adopted
the provisions of ASC 718 (previously SFAS No. 123R) on January 1, 2006, using
the modified prospective transition method. Under this method, we recognize
share-based compensation expense for (i) all share-based payments granted prior
to, but not yet vested as of, January 1, 2006, based on the grant date fair
value originally estimated in accordance with the provisions of ASC 718, and
(ii) all future share-based payment awards based on the grant date fair value
estimated in accordance with the provisions of ASC 718. Because we elected to
use the modified prospective transition method, results for prior periods have
not been restated.
  There were no share-based payment awards
granted during the year ended December 31, 2009. We recognize compensation
expense for all share-based payment awards based on the grant date fair value
estimated in accordance with the provisions of ASC 718.
  The compensation cost that has been charged
against income for share-based compensation plans was $0.6 million for the year
ended December 31, 2009. Due to our valuation allowance we did not recognize
income tax benefit in the consolidated statement of operations and comprehensive
income for the year ended December 31, 2009. We received approximately $0.25
million and $0.04 million from option exercises under share-based compensation
plans for the years ended December 31, 2009 and 2008, respectively.
  As of December 31, 2009, there was $0.4
million of total unrecognized compensation cost related to stock options. Those
costs are expected to be recognized during the next three years.
  The fair value of each option award is
estimated on the date of grant using the Black-Scholes option valuation model.
We recognize the fair value of each option as compensation expense ratably using
the straight-line attribution method over the service period (generally the
vesting period). The Black-Scholes model incorporates the following
assumptions:
 Expected volatility – we estimate
  the volatility of common stock at the date of grant using a combination of
  unadjusted historical volatility, and historical volatility adjusted for
  periods of unusual stock price activity.
        Expected term – we estimate the
  expected term of options granted based on a combination of vesting schedules,
  life of the option, historical experience and in cases where the Company does
  not have significant historical experience, the simplified method of
  determining expected term outlined in ASC 718 ,Staff Accounting
  Bulletin(“SAB”) 107 and SAB 110.
        Risk-free interest rate – we
  estimate the risk-free interest rate using the U.S. Treasury yield curve in
  effect at the time of grant for periods equal to the expected life of the
  options.
        Dividends – we use an expected
  dividend yield of zero since we have never declared or paid any dividends on
  our capital stock. We intend to retain any earnings to fund future growth and
  the operation of its business, and, therefore does not anticipate paying any
  cash dividends in the foreseeable future. Additionally, we estimate forfeitures at the
time of grant and revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. We use a combination of historical
data, demographic characteristics and other factors to estimate pre-vesting
option forfeitures and record share-based compensation expense only for those
awards that are expected to vest. However, because a majority of the outstanding
options are quarterly vesting, forfeiture assumptions are not material. ASC 718
requires the cash flows resulting from the tax benefits for tax deductions in
excess of the compensation expense recorded for those options to be classified
as financing cash flows. We issued 141,512 and 33,600 shares upon exercise of
options for the year ended December 31, 2009 and 2008,
respectively.
  If factors change and we employ different
assumptions in the application ASC 718 (prior authoritative literature SFAS No.
123R) to options grants made in future periods, the compensation expense that we
record under ASC 718 for those future awards may differ significantly from what
we recorded in the current period. There is a high degree of subjectivity
involved in selecting the option pricing model assumptions used to estimate
share-based compensation expense under ASC 718.
  Option pricing models were developed for use
in estimating the value of traded options that have no vesting or hedging
restrictions, are fully transferable and do not cause dilution. Because
share-based payments have characteristics significantly different from those of
freely traded options, and because changes in the subjective input assumptions
can materially affect estimates of fair values, existing valuation models may
not provide reliable measures of the fair values of share-based compensation.
Consequently, there is a risk that our estimates of the fair values of
share-based compensation awards on the grant dates may bear little resemblance
to the actual values realized upon the exercise, expiration or forfeiture of
those share-based payments in the future. Stock options may expire worthless or
otherwise result in zero intrinsic value as compared to the fair values
originally estimated on the grant date and reported in our financial statements.
Alternatively, value may be realized from these instruments significantly in
excess of the fair values originally estimated on the grant date and reported in
our financial statements.
  24
     There are significant differences among
valuation models. This may result in a lack of comparability with other
companies that use different models, methods and assumptions. There is also a
possibility that we will adopt different valuation models in the future. This
may result in a lack of consistency in future periods. Although varying option
models are expected to yield similar results, adopting a different valuation
method may materially affect the fair value estimate of share-based
payments.
  Contingent Liabilities
  We have certain contingent liabilities that
arise in the ordinary course of business. Contingent liabilities would be
accrued when it is probable that future expenditures will be made and such
expenditures can be reasonably estimated. We are subject to various pending or
threatened legal matters which have arisen in the ordinary course of business.
The ultimate outcome of these items is uncertain and the potential loss, if any,
may be significantly higher or lower than amounts previously
accrued.
  Principles of Consolidation and Use of
Estimates
  The accompanying consolidated financial
statements include the accounts of Intelligroup, Inc. and subsidiaries that are
more than 50% owned and controlled have been prepared in US dollars. All
inter-company balances and transactions have been eliminated in
consolidation.
  The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
  25
     Results of Operations -
Consolidated
  The following table sets forth for the periods indicated certain
financial data expressed as a percentage of total revenue, for continuing
operations:
  Percentage of
RevenueYear Ended December
  31,2009
              
              2008Revenue
              
              100.0
              
              %
              
              100.0
              
              %Cost of Revenues
              
              66.5
              
              
              
              68.5Grsoss Profit
              
              33.5
              
              
              
              31.5Selling general and administrative
      expenses
              
              22.1
              
              
              
              22.9Depreciation and amortization
              
              2.0
              
              
              
              1.5Total operating expenses
              
              24.1
              
              
              
              24.4Operating Gain
              
              9.4
              
              
              
              7.1Interest income
              
              0.1
              
              
              
              0.2Interest expense
              
              (0.1
              )
              
              
              (0.2
              )Foreign currency transaction gain
      (loss), net
              
              -
              
              
              
              (2.0
              )Other income (expense), net
              
              0.7
              
              
              
              0.3Income before income tax provision
              
              10.1
              
              
              
              5.4Income Tax
              
              1.6
              
              
              
              1.0Net
      income
              
              8.5
              
              %
              
              4.4
              
              %
  Year Ended December 31, 2009 Compared to Year
Ended December 31, 2008
  The following discussion compares the consolidated results of operations
for the year ended December 31, 2009 to the year ended December 31,
2008.
  Revenue : Total
revenue decreased by 19.5% or $30.6 million from $157.1 million for the year
ended December 31, 2008 to $126.5 million as compared to the year ended December
31, 2009. The decrease was due to the impact of the challenging global economic
environment. Despite adding 116 new customers for the year ended December 31,
2009, the volume of our business declined as our customers and prospective
customers deferred the decision-making on a range of IT services initiatives,
particularly shorter-term projects. Due to decline in customer demand
competitive pressures have resulted in downward pressure on pricing. Our on-site
rates reduced by 4% from an average rate of $107 for the year ended December 31,
2008 to an average rate of $102 for the year ended December 31, 2009. Our
off-shore rates were reduced by 8% from an average rate of $24 for the year
ended December 31, 2008 to an average rate of $22 for the year ended December
31, 2009. Recently, however, we have seen signs that the market for IT services
have begun to stabilize both in terms of price and volume and therefore we are
not expecting further significant declines in revenues on a sequential
basis.
  Cost of revenue and gross profit : The cost of revenue has decreased by 21.8%
or $23.5 million from $107.6 million for the year ended December 31, 2008 to
$84.1 million as compared to the year ended December 31, 2009. The decrease was
attributable to the decrease in payroll costs by 10.4% due to decrease in the
headcount, decrease in sub-contractors cost by 4.2% due to reduction in the
headcount of sub-contractors, decrease in project related expenses by 5.6% due
to decline in volume of services sold and decrease by 1.7% due to fluctuations
in the functional currencies of the subsidiaries. Gross profit has decreased by
14.3% from $49.5 million for the year ended December 31, 2008 to $42.4 million
as compared to the year ended December 31, 2009. The decrease in gross profit
was a result of the decrease in the revenues partially offset by the cost
savings achieved for the year ended December 31, 2009. Gross margin has
increased from 31.5% for the year ended December 31, 2008 to 33.5% for the year
ended December 31, 2009. The increase in gross margin was due to improvement in
utilization rate by 7% from utilization level of 71% for the year ended December
31, 2008 to 78% as compared to the year ended December 31, 2009. Our
on-site/off-shore revenue mix improved in 2009 and off-shore services accounted
for 33% of revenue for the year ended December 31, 2009 compared to 30% of
revenue for the year ended December 31, 2008, which also added to the improved
margins. The cost of revenue has decreased by 21.8% as opposed to a decrease in
revenue by 19.5%, thereby contributing to an increase in gross
margin.
  Selling, general and administrative expenses : Selling, general and administrative expenses
consist of salaries and related benefits for sales and general administrative
personnel, facilities costs, related travel and entertainment and professional
fees. Selling, general and administrative expenses decreased by 22.1% from $35.9
million for the year ended December 31, 2008 to $28.0 million as compared to the
year ended December 31, 2009. The decrease in selling, general and
administrative expenses is due to (i) reduction in operating lease rentals and
maintenance by 3.1% due to relocation of the office facility, (ii) fluctuations
in the functional currencies of the subsidiaries by 2.1%, (iii) sales commission
and payroll expenses have decreased by 10.7% due to reduction in sales head
count and revenue during the period and (iv) other advertising, insurance and
general expenses have decreased by 6.1% in line with the decrease of our
business.
  Depreciation and amortization expenses: We recorded depreciation and amortization
expenses of $2.4 million for the year ended December 31, 2008 to $2.5 million as
compared to the year ended December 31, 2009. The marginal increase was due to
additional purchase of fixed assets for the year ended December 31,
2009.
  Interest Expense: For the year ended December 31, 2009 and 2008, we recorded $0.08 million
and $0.5 million as interest expense respectively. The decrease in interest
expense was due to repayment of the borrowings from the line of credit in
2008.
  Foreign Currency gain (loss) : For the year ended December 31, 2009, we
recorded foreign currency transaction losses of approximately $0.02 million as
compared to transaction losses of approximately $3.1 million for the year ended
December 31, 2008. The loss recorded the year ended December 31, 2008 was due to
marked to market valuation of the outstanding derivative instruments consequent
to significant fluctuations in Indian Rupee (“INR”) and US Dollar (“USD”). We
had outstanding foreign exchange contracts totaling $8.0 million as of December
31, 2009 and $29.1 million as of December 31, 2008.
  26
     Interest and Other Income: Interest and other income was approximately $1.0 million and $0.7
million for the year ended December 31, 2009 and 2008 respectively.
  Income tax provision: We recorded an income tax provision of $2.1 million on a pretax income
of $12.9 million for the year ended December 31, 2009 as compared to an income
tax provision of $1.5 million on a pretax income of $8.2 million for the year
ended December 31, 2008. The effective tax rate has decreased to a tax provision
of 16% for the year ended December 31, 2009 from a tax provision of 18.4% for
the year ended December 31, 2008 primarily due to changes in the geographic
distribution of the income and changes in non taxable income. The difference
between the income tax rates for the 2009 and 2008 periods and the statutory
rate is primarily due to the existence of carried forward net operating losses
in the U.S. locations and earnings taxed in countries that have rates lower than
the United States.
  Our net deferred tax assets as of December 31,
2009 related to our Indian operations. Based on various positive evidence,
including historical profitability, management believes it is more likely than
not that the Indian operations’ deferred tax assets of $1.5 million will be
realized in the future and therefore, no valuation allowance has been
established against these net deferred tax assets for the year ended December
31, 2009. For the year ended December 31, 2009, $0.9 million is considered as
deferred tax assets.
  In 2009, the Bangalore unit of our Indian
subsidiary that qualified for an exemption from corporate tax under section 10A
of the Indian Income Tax Act was able to utilize the benefit of this exemption.
Consequently, a taxable profit of INR 20 million (or approximately $0.4 million)
was exempt from taxes which had an overall tax rate impact of reducing the tax
liability by 1%. The 10A benefit at the Bangalore unit is expected to end by
fiscal year 2011.
  Our India subsidiary received tax assessments
for the fiscal years ended March 31, 1998 through 2003 and fiscal year ended
March 31, 2005, challenging the tax exemptions of certain revenue earned and
disallowing certain expenses. We have deposited additional tax of INR 49.1
million (or approximately $1.1 million) under protest, net of allowance of $0.1
million, as at December 31, 2009 consequent to the above tax
assessments.
  During the year ended December 31, 2009, we
have deposited an amount of INR 2.8 million (or approximately $0.1 million)
under protest against the order passed by the tax authorities challenging
certain tax exemptions, we were previously permitted to take for the fiscal year
ended March 31, 2001. Further, for the fiscal year ended March 31, 2005, an
amount of INR 20.4 million (or approximately $0.4 million) had also been
deposited by us under protest, during the 2009, against an assessment order
passed by the tax authorities, challenging the transfer pricing methodology
followed by us and non submission of evidence in support of foreign inward
remittance. We have also received an order from the tax authorities demanding an
additional payment of INR 8 million (or approximately $0.2 million) for open
assessments pertaining to fiscal years ending March 31, 2001 and 2005. We have
not recorded a reserve on the additional tax paid under protest as it believes
its tax position will most likely be sustained based on independent
merits.
  Results of Operations by Business
Segment
  We operate in one industry segment, information technology solutions and
services.
  We have four reportable geographic operating segments, which are
organized and managed on a geographical basis, as follows:
  United States (“US”) – Our largest segment,
with operations in the US and Puerto Rico. Includes the operations of our US
subsidiary, Empower, Inc., and all corporate functions and activities. The US
and corporate headquarters is located in Princeton, New Jersey;
  India – includes our operations in India,
including services provided on behalf of other group subsidiaries, primarily to
the US. The India offices are located in Hyderabad and Bangalore, India. A
majority of the total revenue generated in India is derived from providing off
shore development and support services to customers through our affiliated
entities in other parts of the world, but predominantly with the United States.
This Segment also covers our operations in the UAE;
  Europe – includes our operations in Denmark
and the United Kingdom. The European offices are located in Milton Keynes,
United Kingdom; and Odense in Denmark; and
  Japan – includes our operations in
Japan. The office is located in Tokyo, Japan.
  The inter-segment transactions are
recorded based on a cost plus mark up arrangement with the holding company.
  The revenues are attributed to each segment on
the basis of the location of the entity which contracts with the customer and on
the basis of the inter-company agreements between the affiliated entities. The
CEO has been identified as the Chief Operating Decision Maker (“CODM”) because
he has final authority over resource allocation decisions and performance
assessment. The CODM regularly receives certain discrete financial information
about the geographical operating segments, including primarily revenue and
operating income, to evaluate segment performance.
  Accordingly our consolidated operating results
for the twelve months period ended December 31, 2009 and 2008 are presented in
the following geographic segments.
  Year Ended December 31, 2009 Compared to Year
Ended December 31, 2008
  The following discussion compares the segment results of operations for
the year ended December 31, 2009 to the year ended December 31,
2008.
  27
     Revenue and Operating
Income . The following
table displays revenues and operating income by reportable segment (in
thousands).
  Year Ended December
  312009
              
              2008
              
              Change in% of
              
              Operating
              
              
              
              
              
              % of
              
              Operating
              
              
              
              
              
              OperatingRevenues
              
              Total
              
              Income
              
              Revenues
              
              Total
              
              Income
              
              Revenues
              
              IncomeUnited States
              
              $
              96,047
              
              
              76
              %
              
              $
              6,599
              
              
              $
              120,082
              
              
              76
              %
              
              $
              2,405
              
              
              $
              (24,035
              )
              
              $
              4,194India
              
              
              34,699
              
              
              27
              %
              
              
              3,431
              
              
              
              47,309
              
              
              30
              %
              
              
              7,629
              
              
              
              (12,610
              )
              
              
              (4,198
              )Europe
              
              
              19,956
              
              
              16
              %
              
              
              2,369
              
              
              
              18,164
              
              
              12
              %
              
              
              1,115
              
              
              
              1,792
              
              
              
              1,254Japan
              
              
              4,218
              
              
              3
              %
              
              
              (474
              )
              
              
              5,374
              
              
              3
              %
              
              
              (20
              )
              
              
              (1,156
              )
              
              
              (454
              )Inter-segment eliminations
              
              
              (28,402
              )
              
              -22
              %
              
              
              -
              
              
              
              (33,828
              )
              
              -22
              %
              
              
              -
              
              
              
              5,426
              
              
              
              -Total
              
              $
              126,518
              
              
              100
              %
              
              $
              11,925
              
              
              $
              157,101
              
              
              100
              %
              
              $
              11,129
              
              
              $
              (30,583
              )
              
              $
              796
  US revenue has decreased by 20% from $120.1
million for the year ended December 31, 2008 to $96.0 million for the year ended
December 31, 2009. The decrease in revenue was attributable to challenging
global economic environment, due to which many of our customers and prospective
customers deferred the decision-making on a range of IT services initiatives,
particularly shorter-term projects. Operating income for US segment increased by
174.4% from $2.4 million for the year ended December 31, 2008 to $6.6 million
for the year ended December 31, 2009 due to reduction in payroll and
subcontracting cost by 23%, project related and travel costs by 41% and
marketing and administrative expenses by 19% as compared to the year ended
December 31, 2008. These cost savings were partially offset by 20% reduction in
revenues.  Recently our revenues from services to our US
based customers have begun to stabilize and therefore we are not expecting
further significant revenue declines from current levels.
  India revenue has decreased by 26.7% from
$47.3 for the year ended December 31, 2008 to $34.7 million for the year ended
December 31, 2009. The decrease in revenues was attributable to global economic
slowdown which resulted in decreased demand for our off shore services,
particularly from customers in the US market and reduced demand during the
period from customers in the local geographic markets which our India subsidiary
services. Off-shore revenues decreased by 18% while revenues from local
geographic markets decreased by 48% as compared to the year ended December 31,
2008. In addition to the decrease in the volume of services sold, increased
competition has resulted in downward pressure on bill rates for our off shore
services. Our off-shore rates were reduced by 8% from an average rate of $24 for
the year ended December 31, 2008 to an average rate of $22 for the year ended
December 31, 2009. Operating income for India segment decreased by 55.0% from
$7.6 million for the year ended December 31, 2008 to $3.4 million for the year
ended December 31, 2009. The decrease in operating income resulted from the
decrease in revenue by 26.7% which was partially offset by decreases in payroll
and subcontracting costs by 19%, project related and travel costs by 29% and
marketing and administrative expenses by 24%.
  Europe revenue has increased by 9.9% from
$18.2 million for the year ended December 31, 2008 to $20.0 million for the year
ended December 31, 2009. The increase in revenue is due to the start of one
major customer project during the period partially offset by decrease in
revenues due to strengthening of the U.S. Dollar against British Pound in
particular by 10.3%. Operating income for Europe segment increased by $1.3
million from $1.1 million for the year ended December 31, 2008 to $2.4 million
for the year ended December 31, 2009. The increase in operating income is
attributable due to decreases in payroll and subcontracting costs by 4%, project
related and travel costs by 15% and marketing and administrative expenses by 15%
as compared to the year ended December 31, 2008 combined with a revenue increase
of 9.9%.
  Japan revenue has decreased by 21.5% from $5.4
million for the year ended December 31, 2008 to $4.2 million for the year ended
December 31, 2009. Japan reported operating loss of $0.02 million for the year
ended December 31, 2008 where as it reported an operating loss of $0.5 million
for the year ended December 31, 2009. The operating loss for the year ended
December 31, 2009 was due to the inability of the Japan subsidiary to adjust to
changing market conditions and reduce its expenditure in light of the decrease
in revenues in the local Japanese market.
  Liquidity and Capital
Resources
  Cash Position and Cash
Flows
  We had cash and cash equivalents of $20.8
million as at December 31, 2009 as compared to $10.2 million as at December 31,
2008. We had a working capital of $36.1 million at December 31, 2009 and $25.1
million as at December 31, 2008. The increase in cash and working capital was
attributed to cost effective management of operations reflected in the increase
of operating margin percentage to 9.4% as of December 31, 2009 from 7.1% as of
December 31, 2008, this was further enhanced due to decrease in foreign exchange
losses to $0.02 million as of December 31, 2009 from $ 3.1million as of December
31, 2008.
  Cash generated from operating activities was
$14.8 million for the year ended December 31, 2009, resulting from the net
income of $10.8 million for the period and increase by $3.8 million due to
realization of accounts receivable and unbilled services balances, as we have
worked to increase efficiency in its billing and collections processes. Cash
generated from operating activities was $13.2 million for the year ended
December 31, 2008 resulting mainly from the net income of $6.7 million for the
period adjusted for non-cash items of $7.3 million and partly off-set by
increase in working capital of $0.8 million.
  We invested $1.3 million in net purchase of
computer equipment, internal-use computer software and office furniture,
fixtures and leasehold improvements for the year ended December 31, 2009
compared to $1.5 million for the year ended December 31, 2008. Net cash used for
short term and long term investments was $1.3 million and $3.1million for the
year ended December 31, 2009 and 2008 respectively.
  28
      Cash used in financing activities was $1.8
million for the year ended December 31, 2009 as compared to $6.7 million for the
year ended December 31, 2008. We repurchased stock amounting to $1.8 million for
the year ended December 31, 2009 and repaid the borrowings of $6.0 million from
the line of credit during the year ended December 31, 2008.
  Credit Facility
  On May 22, 2008, we and our wholly-owned
subsidiary Empower, Inc. closed out the existing $15 million line of credit with
Steel City Capital Funding. Concurrently, we entered into a revolving credit
loan and security agreement (“Credit Agreement”) with HSBC Bank, (the “Bank”).
The Credit Agreement is comprised of a three year revolving line of credit
pursuant to which we can borrow up to $10 million at the Bank’s Base Rate (as
defined in the Credit Agreement) of 3.25% as of December 31 2009, minus 0.85%
percent. The credit facility is collateralized by substantially all of the
assets of the United States based operations and all subsidiary stock (not to
exceed 65% of the Equity Interests of any Foreign Subsidiary). The maximum
borrowing availability under the Credit Agreement is based upon a percentage of
eligible billed and unbilled accounts receivable. The Credit Agreement provides
for certain financial covenants that shall only be tested as of the end of any
fiscal quarter.
  We were in compliance with the
applicable financial covenants of the credit agreement as of December 31,
2009.
  A standby letter of credit of $0.1million has
been issued by and drawn upon HSBC banking corporation in favor of a landlord as
security deposit. This letter of credit is secured by a lien on the assets of
the company. We estimate undrawn availability under the Credit Facility to be
$9.9 million as of December 31, 2009.
  We are prohibited from paying dividends under
the terms of the Credit Agreement. Please see Note 5 – Line of Credit to the
consolidated financial statements for further information on our credit
agreement.
  Cash to Fund Operating Activities
  We rely on the cash generated by operating
activities, cash on hand and the financing available under our credit facility
to fund ongoing operations. Our credit facility with the Bank represents our
sole source of external financing for business operations. Our operating plan
depends on cash generated by operating activities and continued borrowing
availability under this credit facility or securing alternate sources of
financing.
  We must comply with certain covenants or
secure from the Bank waivers of its default on such covenants to maintain line
of credit with the Bank. Considering the variable operating performance in the
past few years, there can be no assurances that we will be able to maintain
compliance with our bank covenants or obtain waivers of any
defaults.
  Our 2010 operating plan contains assumptions
regarding revenue and expenses. The achievement of the operating plan depends
heavily on the timing of work performed on existing projects and the ability to
gain and perform work on new projects. Project cancellations, delays in the
timing of work performed on existing projects or the inability to gain and
perform work on new projects, or inability to timely collect cash from the
customers could have an adverse impact on company’s ability to execute operating
plan and maintain adequate cash flow. In the event actual results do not meet
the operating plan, management believes it could execute contingency plans to
mitigate such effects. Such plans include reductions in capital expenditures and
operating costs, and/or seeking additional financing. In addition, we may seek
additional financing from time to time to fund our cash requirements for
operating expenses and capital expenses; however, the availability of financing
may be limited because, among other things, we are not currently listed on a
national stock exchange. At December 31, 2009, we had cash and cash equivalents
and short-term investments of $23.1 million and working capital of approximately
$36.0 million. Accordingly, we do not anticipate any near-term liquidity issues.
  Off-Balance Sheet
Arrangements
  As of December 31, 2009 and December
31, 2008, we had no off-balance sheet arrangements or obligations.
  Contractual Obligations and Other
Commercial Commitments
  The following tables summarize our
contractual obligations and other commercial commitments as of December 31,
2009:
  Payments Due by Period (in
      000’s)Less
      than
              
              1-3
              
              3-5
              
              More
      thanDescription of Contractual
      Obligation
              Total
              
              1
      year
              
              years
              
              years
              
              5
      yearsCapital Lease Obligations
              $
              452
              
              
              201
              
              
              244
              
              
              7
              
              
              -Purchase Obligations
              
              168
              
              
              168
              
              
              -
              
              
              -
              
              
              -Operating Lease Obligations
              
              5,994
              
              
              1,897
              
              
              3,351
              
              
              746
              
              
              -Total Contractual Obligations
              $
              6,614
              
              
              2,266
              
              
              3,595
              
              
              753
              
              
              -
  We could use $10.0 million revolving credit
facility with the Bank to fund the working capital needs of the business;
therefore, the outstanding borrowings under the credit facility fluctuate
accordingly. The credit facility is collateralized by substantially all of the
assets of our United States based operations. The maximum borrowing availability
under the line of credit is based upon a percentage of eligible billed and
unbilled accounts receivable, as defined in the Credit Agreement.
  A standby letter of credit of $0.1million has
been issued by and drawn upon HSBC banking corporation in favor of a landlord as
security deposit. This letter of credit is secured by a lien on the assets of
the company. We estimate undrawn availability under the Credit Facility to be
$9.9 million as of December 31, 2009.
  We have also entered into various
contractual arrangements to obtain certain office space, office equipment and
vehicles under capital and operating leases.
  29
     Recent Accounting Pronouncements
  Effective July 1, 2009, we adopted the
Financial Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) 105-10, Generally Accepted Accounting Principles – Overall (ASC 105-10).
ASC 105-10 establishes the FASB Accounting Standards Codification (the
Codification) as the source of authoritative accounting principles recognized by
the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with U.S. GAAP. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative U.S. GAAP for SEC registrants. All guidance contained in the
Codification carries an equal level of authority. The Codification superseded
all existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification is non-authoritative. The FASB will not issue new standards in the
form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates (ASUs). The FASB
will not consider ASUs as authoritative in their own right. ASUs will serve only
to update the Codification, provide background information about the guidance
and provide the bases for conclusions on the change(s) in the Codification.
References made to FASB guidance throughout this document have been updated for
the Codification.
  The Company elected a partial deferral of ASC
820-10 (previously SFAS No 157) related to the measurement of fair value used
when evaluating goodwill, other intangible assets, and other long-lived assets
for impairment. We adopted the provisions of this statement for non-financial
assets and liabilities effective January 1, 2009. This adoption did not have
impact on our Consolidated Financial statements.
  In December 2007, the FASB issued ASC 805
Business Combinations (previously SFAS 141R). ASC 805 establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. ASC 805 also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. This statement was adopted
beginning January 1, 2009. There was no significant impact on the Company’s
financial position or results of operations as a result of the adoption of ASC
805.
  In March 2008, the FASB issued ASC 815
(previously SFAS No. 161), Disclosures about Derivative Instruments and Hedging
Activities, which requires additional disclosures about the objectives of using
derivative instruments, the method by which the derivative instruments and
related hedged items are accounted for and its related interpretations, and the
effect of derivative instruments and related hedged items on financial position,
financial performance, and cash flows. ASC 815 also requires disclosure of the
fair values of derivative instruments and their gains and losses in a tabular
format. ASC 815 is effective for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early adoption
encouraged. The Company adopted this standard effective January 1, 2009. The
implementation of this standard did not have a material impact on our
consolidated financial statements. (Please see Note 10 – Financial Instruments,
below for the expanded disclosure regarding derivative instruments in accordance
with the pronouncement).
  In December 2008, the FASB issued ASC 715,
Compensation – Retirement Benefits, (previously FASB issued FSP No. 132(R)-1,
Employers’ Disclosures about Pensions and Other Postretirement Benefits) which
requires that an employer disclose the following information about the fair
value of plan assets: (1) how investment allocation decisions are made,
including the factors that are pertinent to understanding of investment policies
and strategies; (2) the major categories of plan assets; (3) the inputs and
valuation techniques used to measure the fair value of plan assets; (4) the
effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period; and (5) significant concentrations of
risk within plan assets. This pronouncement is effective for fiscal years ending
after December 15, 2009, with early application permitted. At initial adoption,
application of this standard would not be required for earlier periods that are
presented for comparative purposes. The Company adopted this standard effective
October 1, 2009. The implementation of this standard did not have a material
impact on our consolidated financial statements. (Please see Note 14 – Employee
benefit plans, for the expanded disclosure regarding its plan
assets).
  In April 2009, the FASB issued ASC 320-10
(previously FSP SFAS 115-2 and FAS 124-2), Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments in the financial statements. The most significant change the FSP
brings is a revision to the amount of other-than-temporary loss of a debt
security recorded in earnings. The Company adopted this standard effective April
1, 2009. The implementation of this standard did not have a material impact on
our consolidated financial statements.
  In April 2009, the FASB issued ASC 820-10
(previously FSP SFAS 157-4), Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly. This FSP provides additional guidance for
estimating fair value, Fair Value Measurements, when the volume and level of
activity for the asset or liability have significantly decreased. This FSP also
includes guidance on identifying circumstances that indicate a transaction is
not orderly. This FSP emphasizes that even if there has been a significant
decrease in the volume and level of activity for the asset or liability and
regardless of the valuation technique(s) used, the objective of a fair value
measurement remains the same. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. The Company adopted this
standard effective April 1, 2009. The implementation of this standard did not
have a material impact on our consolidated financial statements.
  In May 2009, the FASB issued ASC 855
(previously SFAS No. 165), Subsequent Events. ASC 855 established general
standards of accounting for the disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. The adoption of ASC 855 required us to disclose the date through
which we have evaluated subsequent events and whether that date is the date the
financials were issued. We adopted ASC 855 in the second quarter of 2009. In
February 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-09,
Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”),
which amends ASC 855. ASC 855, as amended by ASU 2010-09, establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. ASU No. 2010-09
removes the requirement for an SEC filer (as defined in ASU 2010-09) to disclose
the date, in both issued and revised financial statements, through which it has
evaluated subsequent events. This change alleviates potential conflicts with
current SEC guidance. ASU No. 2010-09 is effective upon issuance for all
entities other than conduit bond obligors. We adopted the requirements of ASU
No. 2010-09 on the effective date and did not have any material subsequent
events that impact our consolidated financial statements (Please see Note 16 –
Subsequent events below).
  In August 2009, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-05,
“Measuring Liabilities at Fair Value” (“ASU 2009-05”). The amendment in this ASU
apply to all entities that measure liabilities at fair value and provides
clarification that in circumstances in which a quoted price in an active market
for the identical liability is not available, an entity is required to measure
fair value using one or more techniques laid out in this ASU. The guidance
provided in this ASU is effective for the first reporting period (including
reporting periods) beginning after issuance. The Company does not expect the
adoption of this ASU to have a material impact on its consolidated financial
statements.
  30
     In October 2009, the FASB issued ASU
2009-13, “Multiple-Deliverable Revenue Arrangements”, (amendments to FASB ASC
Topic 605, Revenue Recognition)
(“ASU 2009-13”). ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy. The amendments eliminate the residual method
of revenue allocation and require revenue to be allocated using the relative
selling price method. ASU 2009-13 is effective on a prospective basis for
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted. The Company
is currently evaluating the potential impact, if any, of the adoption of ASU
2009-13 on its consolidated results of operations and financial condition and
whether it will adopt the standard early. ASU 2009-13 will become effective for
the Company with its fiscal year beginning January 1, 2011.
  In January 2010, the FASB issued ASU 2010-06,
“Fair Value Measurements and Disclosures”, (amendments to FASB ASC Topic 820,
Fair Value Measurements and Disclosures) (“ASU 2010-06”). ASU 2010-06 requires
entities to disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements along with the reasons for such
transfers. Entities should also present separate information about purchases,
sales, issuances and settlement activity in Level 3 fair value measurements. The
Update requires entities to provide fair value measurement disclosures for each
class of assets and liabilities and disclosures about inputs and valuation
techniques. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after December 15,
2009 except for the disclosures pertaining to Level 3 fair value measurements.
Those disclosures are effective for interim and fiscal years beginning after
December 15, 2010. This Update will become effective for the Company with its
interim period beginning January 1, 2010. The Company is currently evaluating
the potential impact, if any, of the adoption of ASU 2010-06 on its consolidated
results of operations and financial condition.
  Business Outlook
  Our business and financial condition depend on
the health of the general economy, as well as the demand for information
technology services, particularly in the United States as we derive a
significant portion of our revenue from customers located in the United States.
Our revenue and profits are driven by demand for our services. We continue to be
impacted by the challenging global economic environment, which led many
companies to defer decision-making on a range of IT services projects,
particularly affecting smaller, shorter-term projects where we have primarily
focused our efforts in order to develop inroads with new customers. We have seen
the impact of such decline in demand for our services as reflected by the 19.5%
decrease in revenue to $126.5 million in 2009 from $157 million in 2008.
  Despite the continuation of a very challenging
business environment, we are seeing some encouraging signs in the overall IT
services sector, including a greater degree of receptiveness from many of our
customers and prospects to discuss new or expanded initiatives and many
customers in the small and mid market are looking to engage IT service firms as
strategic partners for future projects. We won 24 new customers during the three
month period ended December 31, 2009 and a total 116 for the year 2009. The
total value of the new contracts entered into during the three month period
ended December 31, 2009, including new engagements from existing customers was
approximately $26.1 million. While these were generally smaller initial
engagements, we believe that the market for IT services is stabilizing across
many industry sectors in which we work with the exception of our customers and
prospects in the consumer products and manufacturing sectors which continue to
exhibit challenged demand on a sequential basis.
  During this challenging economic period our
management team has focused its efforts on improvements in our operational
performance and aligning our cost structure to current market conditions. To
date, we have been able to effectively manage our cost structure to stabilize
and even achieve marginal growth in our operating income at $11.9 million for
the year ended December 31, 2009 compared with $11.1 million for the year ended
December 31, 2008. However, if the emerging economic recovery does not continue
or economic conditions worsen again, particularly in the United States and the
stabilization we have seen recently in market demand for our IT services does
not continue, we may not be able to continue to reduce costs to a level
sufficient to minimize the impact of any possible further revenue declines on
our operating income and any of these events could materially and adversely
impact our business, financial condition and results of operations.
  31
     Item 7a. Quantitative & Qualitative
Disclosure About Market Risk - Not applicable
  Item 8. Financial Statements and Supplementary
Data
  The financial statements and supplementary
data required to be filed pursuant to this Item 8 are included under Item 15 of
this Annual Report on Form 10-K.
  Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
  Not Applicable.
  32
     Item 9A. Controls and Procedures.
  Evaluation of Disclosure Controls and
Procedures and Changes in Internal Control over Financial Reporting.
  We are responsible for maintaining disclosure
controls and procedures designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities Exchange
Commission’s rules and regulations, and that such information is accumulated and
communicated to its management, including our chief executive officer and chief
financial officer, as appropriate, to allow for timely decisions regarding
required disclosure. Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. In designing and evaluating our disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures and
implementing controls and procedures based upon the application of management’s
judgment.
  Based on management’s evaluation, our chief
executive officer and chief financial officer concluded that, as of December 31,
2009, our disclosure controls and procedures are effective to provide reasonable
assurance that information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure.
  Management’s Responsibility for Financial
Statements
  Our management is responsible for the
integrity and objectivity of all information presented in this annual report.
The consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America and
include amounts based on management’s best estimates and judgments. Management
believes the consolidated financial statements fairly reflect the form and
substance of transactions and that the financial statements fairly represent our
financial position and results of operations.
  Our Audit Committee of the Board of Directors,
which is composed solely of non-employee directors, meets regularly with our
independent registered public accounting firm and representatives of management
to review accounting, financial reporting, internal control and audit matters,
as well as the nature and extent of the audit effort. Our Audit Committee also
has the opportunity to regularly meet with our independent registered public
accounting firm in executive session without the presence of management. The
Audit Committee is responsible for the engagement of the independent registered
public accounting firm. The independent registered public accounting firm has
free access to the Audit Committee.
  33
     Management’s Report on Internal Control Over
Financial Reporting
  Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as is a process designed by, or under the
supervision of, our principal executive and principal financial officers and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
  Pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of our assets;
  Provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of our management and directors; and
  Provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the company’s assets that could have a material effect on our financial
statements.
  Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
  Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, our management conducted an evaluation of the effectiveness
of the company’s internal control over financial reporting as of December 31,
2009. In making this assessment, we used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
  Based on our management’s evaluation, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2009.
  This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit us to provide only
management's report in this annual report.
  We believe that there were no changes in our
internal control over financial reporting during the quarter ended December 31,
2009 that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
  Item 9B Other Information - Not
applicable
  34
     PART III
  Item 10. Directors and Executive Officers and
Corporate Governance.
  The discussion under the heading “Directors
and Executive Officers of the Registrant” in our definitive proxy statement for
the 2010 Annual Meeting of Shareholders is incorporated herein by reference to
such proxy statement. We adopted a Code of Business Conduct and Ethics (“Code”)
in 2004. Such Code applies to our officers, directors, and employees. A copy of
the Code is available on our website at www.intelligroup.com. If the proxy
statement is not filed with the SEC within 120 days after the end of our most
recent fiscal year, we will provide such information by means of an amendment to
this Annual Report on Form 10-K.
  Item 11. Executive Compensation.
  The discussion under the heading “Executive
Compensation” in our definitive proxy statement for the 2010 Annual Meeting of
Shareholders is incorporated herein by reference to such proxy statement. If the
proxy statement is not filed with the SEC within 120 days after the end of our
most recent fiscal year, we will provide such information by means of an
amendment to this Annual Report on Form 10-K.
  Item 12. Security Ownership of Certain
Beneficial Owners and Management.
  The discussion under the heading “Security
Ownership of Certain Beneficial Owners and Management” in our definitive proxy
statement for the 2010 Annual Meeting of Shareholders is incorporated herein by
reference to such proxy statement. If the proxy statement is not filed with the
SEC within 120 days after the end of our most recent fiscal year, we will
provide such information by means of an amendment to this Annual Report on Form
10-K.
  Item 13. Certain Relationships and Related
Transactions and Director Independence.
  The discussion under the heading “Certain
Relationships and Related Transactions” in our definitive proxy statement for
the 2010 Annual Meeting of Shareholders is incorporated herein by reference to
such proxy statement. If the proxy statement is not filed with the SEC within
120 days after the end of our most recent fiscal year, we will provide such
information by means of an amendment to this Annual Report on Form 10-K.
  Item 14. Principal Accounting Fees and
Services.
  The discussion under the heading “Principal
Accounting Fees and Services” in our definitive proxy statement for the 2010
Annual Meeting of Shareholders is incorporated herein by reference to such proxy
statement. If the proxy statement is not filed with the SEC within 120 days
after the end of our most recent fiscal year, we will provide such information
by means of an amendment to this Annual Report on Form 10-K.
  35
     Part IV
  Item 15. Exhibits and Financial Statement Schedules.
  (a)
              
              (1)
              
              Financial Statements.Reference is made to the Index to
      Financial Statements on Page 41.(2)
              
              Financial Statement
  Schedules.Financial statement schedules as of December 31, 2009 and 2008,
      have been omitted since they are either not required, not material or the
      information is otherwise included in our consolidated financial statements
      or the notes to our consolidated financial statements.(3)
              
              Exhibits.Reference is made to the Exhibit Index on Page
  37.
  36
     INTELLIGROUP, INC.
  EXHIBIT INDEX
  Exhibit No.
              
              
              Description of
      Exhibit2
              
              
              Agreement and Plan
      of Merger of the Company and its wholly owned subsidiary Oxford Systems
      Inc. dated December 2, 1996 (Incorporated by reference to the Company's
      Annual Report on Form 10-KSB for the year ended December 31,
    1996.)3.1
              
              
              Amended and
      Restated Certificate of Incorporation dated June 08, 2007.3.2
              
              
              Amended and
      Restated Bylaws. (Incorporated by reference to the Company's Registration
      Statement on Form SB-2 (Registration Statement No. 333-5981) declared
      effective on September 26, 1996.)4.1
              
              
              Shareholder
      Protection Rights Agreement dated as of November 6, 1998, between the
      Company and American Stock Transfer & Trust Company which includes (I)
      the Form of Rights Certificate and (ii) the Certificate of Amendment to
      the Amended and Restated Certificate of Incorporation of Intelligroup,
      Inc. (Incorporated by reference to Exhibit No. 4.1 of the Company's Report
      on Form 8-K dated November 9, 1998, filed with the Securities and Exchange
      Commission on November 9, 1998.)4.2
              
              
              Amendment dated
      September 29, 2004 to the Shareholder Protection Rights Agreement dated
      November 6, 2004. (Incorporated by reference to Exhibit No. 4.1 of the
      Company’s Report on Form 8-K dated September 29, 2004, filed with the
      Securities and Exchange Commission on October 5, 2004.)10.1
              *
              
              1996 Stock Plan,
      as amended, of the Company.10.2
              *
              
              1996 Non-Employee
      Director Stock Option Plan. (Incorporated by reference to the Company's
      Registration Statement on Form SB-2 (Registration Statement No. 333-5981)
      declared effective on September 26, 1996.)10.3
              *
              
              Form of
      Indemnification Agreement entered into by the Company and each of its
      Directors and officers. (Incorporated by reference to the Company's
      Registration Statement on Form SB-2 (Registration Statement No. 333-5981)
      declared effective on September 26, 1996.)10.4
              *
              
              Employee's
      Invention Assignment and Confidentiality Agreement. (Incorporated by
      reference to the Company's Registration Statement on Form SB-2
      (Registration Statement No. 333-5981) declared effective on September 26,
      1996.)10.5
              
              
              Services Provider
      Agreement by and between Oracle Corporation and the Company dated July 26,
      1994. (Incorporated by reference to the Company's Registration Statement
      on Form SB-2 (Registration Statement No. 333-5981) declared effective on
      September 26, 1996.) See Exhibit 10.8.10.6
              
              
              Agreement by and
      between the Company and Intelligroup Asia Private Limited ("Intelligroup
      Asia") relating to operational control of Intelligroup Asia, with related
      agreements. (Incorporated by reference to the Company's Registration
      Statement on Form SB-2 (Registration Statement No. 333-5981) declared
      effective on September 26, 1996.)10.7
              
              
              Amendment No. 1 to
      Services Provider Agreement by and between Oracle Corporation and the
      Company dated December 30, 1996. (Incorporated by reference to the
      Company's Annual Report on Form 10-KSB for the year ended December 31,
      1996.) See Exhibit 10.6.10.8
              
              
              R/3 National Logo
      Partner Agreement by and between SAP America, Inc. and the Company dated
      as of April 29, 1997. (Incorporated by reference to the Company's
      Registration Statement on Form SB-2 (Registration Statement No. 333-29119)
      declared effective on June 26, 1997.) See Exhibits 10.10, 10.14 and
      10.24.10.9
              
              
              ASAP Partner
      Addendum to R/3 National Logo Partner Agreement between SAP America, Inc.
      and the Company effective July 1, 1997 (amends existing R/3 National Logo
      Partner Agreement). (Incorporated by reference to the Company's Quarterly
      Report on Form 10-QSB for the quarter ended September 30, 1997.) See
      Exhibits 10.9, 10.14 and 10.24.10.10
              
              
              Implementation
      Partner Agreement between PeopleSoft, Inc. and the Company effective July
      15, 1997. (Incorporated by reference to the Company's Quarterly Report on
      Form 10-QSB for the quarter ended September 30, 1997.) See Exhibit
      10.13.10.11
              
              
              Lease Agreement
      between Alfieri-Parkway Associates, as Landlord, and Intelligroup, Inc.,
      as Tenant, dated March 17, 1998. (Incorporated by reference to the
      Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
      1998.)10.12
              
              
              Fifth Amendment to
      the Implementation Partner Agreement dated July 15, 1998, between the
      Company and PeopleSoft, Inc. See Exhibit
10.11.
 
 37
     Exhibit No.
              
              
              Description of
      Exhibit10.13
              
              
              Amendment to the National Implementation
      Partner Agreement dated as of January 1, 1999, between SAP America and the
      Company. See Exhibits 10.9, 10.10 and 10.24.10.14
              
              
              mySap.com Partner-Services Addendum
      effective June 7, 2000 to R/3 National Logo Partner Agreement between SAP
      America, Inc. and the Company. (Incorporated by reference to the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2000.) See
      Exhibits 10.9, 10.10 and 10.14.10.15
              
              
              Service Alliance Master Agreement and
      Addendums dated May 5, 2000 between PeopleSoft, Inc. and the Company.
      (Incorporated by reference to the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2000.)10.16
              *
              
              2004 Equity Incentive Award
    Plan.10.17
              *
              
              First Amendment to the 2004 Equity
      Incentive Award Plan. (Incorporated by reference to the Company’s Current
      Report on Form 8-K dated September 29, 2004, filed with the Securities and
      Exchange Commission on October 5, 2004.)10.18
              
              
              Common Stock Purchase Agreement dated
      September 29, 2004 by and between the Company, SB Asia Infrastructure Fund
      LP and Venture Tech Assets Ltd. (Incorporated by reference to the
      Company’s Current Report on Form 8-K dated September 29, 2004, filed with the
      Securities and Exchange Commission on October 5,
2004.)10.19
              
              
              Amendment No. 1 to the Common Stock
      Purchase Agreement dated September 29, 2004. (Incorporated by reference to
      the Company’s Current Report on Form 8-K dated March 25, 2005, filed with
      the Securities and Exchange Commission on March 25, 2005.)10.20
              *
              
              Employment Agreement effective June 30,
      2005 between the Company and Vikram Gulati. (Incorporated by reference to
      the Company’s Current Report on Form 8-K dated June 30, 2005, filed with
      the Securities and Exchange Commission on July 7, 2005.)10.21
              *
              
              Second Amendment to the 2004 Equity
      Incentive Award Plan.10.22
              
              
              Common Stock Purchase Agreement dated
      March 30, 2006 by and between Intelligroup Inc., SB Asia Infrastructure
      Fund LP and Venture Tech Assets, Ltd. (Incorporated by reference to the
      Company’s current report on Form 8-K dated March 30, 2006 filed with the
      Securities and Exchange Commission on April 5, 2006.)10.23
              *
              
              First Amendment to the Employment
      Agreement dated June 30, 2005 between Intelligroup Inc. and Vikram Gulati.
      (Incorporated by reference to the Company’s current report on Form 8-K
      dated April 6, 2006, filed with the Securities and Exchange Commission on
      April 13, 2006.)10.24
              *
              
              Second Amendment to Employment Agreement
      dated June 30, 2005, between Intelligroup, Inc. and Vikram Gulati.
      (Incorporated by reference to the Company’s current report on Form 8-K
      dated June 8, 2006 filed with the Securities and Exchange Commission on
      June 12, 2006.)10.25
              *
              
              Third Amendment to the 2004 Equity
      Incentive Award Plan.10.26
              *
              
              Employment Agreement dated September 7,
      2006 by and between Intelligroup, Inc. and Alok Bajpai. (Incorporated by
      reference to the Company’s Current Report on Form 8-K dated September 7,
      2006, filed with the Securities and Exchange Commission on September 7,
      2006.)10.27
              *
              
              Amendment No.3 dated June 8, 2007 to
      Employment agreement dated June 30, 2005 between Intelligroup, Inc. and
      Vikram Gulati. (Incorporated by reference to the Company’s Current Report
      on Form 8-K dated June 8, 2007, filed with the Securities and Exchange
      Commission on June 13, 2007.)10.28
              
              
              Master Assignment Agreement between
      Novasoft Information Technology (Europe) Limited and Intelligroup Europe
      Limited dated June 8, 2007 (Incorporated by reference to the Company’s
      Current Report on Form 8-K dated June 8, 2007, filed with the Securities
      and Exchange Commission on June 14, 2007.)10.29
              
              
              Master Assignment Agreement between ISG
      Novasoft Technologies Limited and Intelligroup Asia Private Limited dated
      June 8, 2007 (Incorporated by reference to the Company’s Current Report on
      Form 8-K dated June 8, 2007, filed with the Securities and Exchange
      Commission on June 14, 2007.)10.30
              
              
              Non Compete Agreement between Novasoft
      Information Technology Corporation and Intelligroup Europe Ltd. Dated June
      8, 2007. (Incorporated by
      reference to the Company’s Current Report on Form 8-K dated June 8, 2007,
      filed with the Securities and Exchange Commission on June 14,
      2007.)
  38
     Exhibit No.
              
              
              Description of
      Exhibit10.31
              *
              
              Employment
      Agreement between Intelligroup Asia Pvt. Ltd. and Kalyan Sundaram
      Mahalingam. (Incorporated by reference to the Company’s annual report on
      Form 10-K for the year ended December 31, 2007 filed with the Securities
      and Exchange Commission on March 31, 2008).10.32
              
              
              Amendment No.1
      dated August 22, 2007 to Master Assignment Agreement between Novasoft
      Information Technology (Europe) Limited and Intelligroup Europe Limited
      dated June 8, 2007. (Incorporated by reference to the Company’s Current
      Report on Form 8-K dated August 22, 2007, filed with the Securities and
      Exchange Commission on August 28, 2007.)10.33
              
              
              Amendment No.1
      dated August 22, 2007 to Master Assignment Agreement between ISG Novasoft
      Technologies Limited and Intelligroup Asia Private Limited dated June 8,
      2007 (Incorporated by reference to the Company’s Current Report on Form
      8-K dated August 22, 2007, filed with the Securities and Exchange
      Commission on August 28, 2007.)10.34
              
              
              Amendment No.1
      dated August 22, 2007 to Non Compete Agreement between Novasoft
      Information Technology Corporation and Intelligroup Europe Ltd. Dated June
      8, 2007.10.35
              *
              
              Amendment No.1
      dated February 4, 2008 to Employment Agreement dated September 7, 2006
      between Intelligroup, Inc. and Alok Bajpai. (Incorporated by reference to
      the Company’s Current Report on Form 8-K dated February 4, 2008, filed
      with the Securities and Exchange Commission on February 4,
  2008.)10.36
              
              
              Revolving Credit
      and Security Agreement dated May 22, 2008 by and between Intelligroup
      Inc., Empower Inc. and HSBC Bank USA, National Association (incorporated
      by reference to Company’s current report on Form 8-K dated May 22, 2008,
      filed with the Securities and Exchange Commission on May 28,
    2008.)10.37
              
              
              Revolving
      Promissory Note dated May 22, 2008 (incorporated by reference to Company’s
      current report on Form 8-K dated May 22, 2008 filed with the Securities
      and Exchange Commission on May 28, 2008.)10.38
              *
              
              Amendment No.2
      dated September 11 2008 to Employment Agreement dated September 7, 2006
      between Intelligroup, Inc. and Alok Bajpai. (Incorporated by reference to
      the Company’s Current Report on Form 8-K dated September 11, 2008, filed
      with the Securities and Exchange Commission on September 11,
    2008.)10.39
              *
              
              Amendment No. 4
      dated March 4, 2009 to Employment Agreement dated June 30, 2005 between
      Intelligroup, Inc. and Vikram Gulati. (Incorporated by reference to the
      Company’s Current Report on Form 8-K dated March 4, 2009, filed with the
      Securities and Exchange Commission on March 9, 2009.)10.40
              
              
              Amendment number 5 dated July 20, 2009,
      employment dated June 30, 2005 agreement between Intelligroup Inc and
      Vikram Gulati (Incorporated by reference to the Company’s current report
      form 8-k dated July 20, 2009 and filed with Securities and Exchange
      Commission on July 21, 2009)10.41
              
              
              Lease agreement dated Dec-10, 2009 between
      Intelligroup Asia Pvt Ltd and I Labs Technology Center Pvt Ltd
      (Incorporated by reference to the Company’s Current Report on form 8-k
      dated December 10, 2009 and filed with Securities and Exchange Commission
      on December 15, 2009)10.42
              *
              
              Lease agreement dated September 1, 2008
      between Intelligroup Inc and Mack Cali realty corporation16
              
              
              Letter dated July 15, 2009 to Securities and
      Exchange Commission from Ernst & Young LLP21
              †
              
              Subsidiaries of
      the Registrant23.1
              †
              
              Consent of Ernst
      & Young LLP23.2
              †
              
              Consent of Ernst & Young31.1
              †
              
              Certifications of
      Chief Executive Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2
              †
              
              Certifications of
      Chief Financial Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
              †
              
              Certifications of
      Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
              †
              
              Certifications of
      Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002
   *
              
              A management contract or compensatory
      plan or arrangement required to be filed as an exhibit pursuant to Item
      15(c) of Form 10-K.†
              
              Filed herewith. All other exhibits
      previously filed.
   39
     SIGNATURES
  Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned; thereunto duly
authorized this 29th day of March 2009.
  INTELLIGROUP, INC.By: /s/
              VIKRAM GULATIVikram GulatiChief Executive
    Officer
  Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
  Signature
              
              
              
              Title
              
              
              
              Date/s/
              VIKRAM GULATI
              
              Chief Executive Officer
              
              March 29, 2010Vikram Gulati
              
              and Director/s/
              ALOK BAJPAI
              
              Chief Financial Officer
              
              March 29, 2010Alok
    Bajpai
              
              and Principal
      Accounting Officer/s/
              RAVI ADUSUMALLI
              
              Director
              
              March 29, 2010Ravi
      Adusumalli/s/
              SRINIVASA RAJU
              
              Director
              
              March 29,
      2010Srinivasa
      Raju/s/
              SANDEEP REDDY
              
              Director
              
              March 29,
      2010Sandeep
      Reddy
  40
     INTELLIGROUP,
INC. INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
  PageConsolidated Financial
    Statements:Reports of Independent Registered Public Accounting Firms
              
              42Consolidated Balance Sheets as of
      December 31, 2009 and 2008
              
              44Consolidated Statements of Operations and Comprehensive
      Incomefor the years ended December
      31, 2009 and 2008
              
              45Consolidated Statements of Changes in
      Shareholders’ Equity forthe
      years ended December 31, 2009 and 2008
              
              46Consolidated Statements of Cash Flows for the years endedDecember 31, 2009 and
      2008
              
              47Notes to Consolidated Financial
      Statements
              
              48
  41
     Report of Independent
Registered Public Accounting Firm
  The Board of Directors and
Shareholders of Intelligroup, Inc.:
  We have audited the accompanying
consolidated balance sheet of Intelligroup, Inc. (“Intelligroup”) as of December
31, 2008, and the related consolidated statement of operations and comprehensive
income, changes in shareholders’ equity and cash flows for the year then ended.
These financial statements are the responsibility of Intelligroup’s management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
  We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
  In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Intelligroup, Inc. at December 31, 2008, and
the consolidated results of its operations and its cash flows for the year then
ended, in conformity with U.S. generally accepted accounting
principles.
  /s/ Ernst & Young LLP
  Metropark, New JerseyMarch 10, 2009
  42
     Report of Independent
Registered Public Accounting Firm
  The Board of Directors and
Shareholders of Intelligroup, Inc:
  We have audited the accompanying
consolidated balance sheet of Intelligroup, Inc. (“Intelligroup”) as of December
31, 2009 and the related consolidated statement of operations and comprehensive
income, changes in shareholders’ equity and cash flows for the year then ended.
These financial statements are the responsibility of the Intelligroup’s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
  We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
  In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Intelligroup, Inc. at December 31, 2009, and
the consolidated results of its operations and its cash flows for the year then
ended, in conformity with U.S. generally accepted accounting principles.
  /s/ Ernst & Young
  March 29, 2010New Delhi, India
  43
        INTELLIGROUP,
INC.CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2009 AND
2008 (In thousands except par
value)
  December 31
              
              December 312009
              
              2008ASSETSCURRENT ASSETSCash and cash equivalents
              $
              20,783
              
              
              $
              10,161Short-term
      investments
              
              2,441
              
              
              
              1,031Accounts receivable, less allowance for doubtful accounts of $2,176
      and $1,996at December 31, 2009 and 2008, respectively
              
              23,677
              
              
              
              23,805Unbilled services,
      less allowance for doubtful accounts of $136 and $20 atDecember 31, 2009 and
      2008, respectively
              
              6,433
              
              
              
              10,456Deferred tax
      asset
              
              644
              
              
              
              545Prepaid expenses and
      prepaid taxes
              
              1,092
              
              
              
              1,115Other current
      assets
              
              741
              
              
              
              617Total current assets
              
              55,811
              
              
              
              47,730Property and equipment, net
              
              3,085
              
              
              
              5,041Goodwill
              
              1,616
              
              
              
              1,452Intangibles
              
              272
              
              
              
              489Restricted cash and investments
              
              1,202
              
              
              
              882Prepaid taxes - Non-adjustable, less allowance for doubtful
      accounts of $104 and$95 at December 31, 2009 and 2008, respectively
              
              1,130
              
              
              
              393Deferred taxes
              
              856
              
              
              
              337Other assets
              
              3,431
              
              
              
              3,906Total Assets
              $
              67,403
              
              
              $
              60,230LIABILITIES AND SHAREHOLDERS'
      EQUITYCURRENT LIABILITIESAccounts
    payable
              $
              1,418
              
              
              $
              1,820Liability on
      derivative instruments
              
              389
              
              
              
              2,621Accrued payroll and
      related taxes
              
              10,899
              
              
              
              11,609Accrued
    expenses
              
              3,493
              
              
              
              3,687Other current
      liabilities
              
              1,425
              
              
              
              1,368Unearned
    revenue
              
              1,353
              
              
              
              735Income tax
      payable
              
              261
              
              
              
              -Capital lease and
      deferred payments
              
              481
              
              
              
              805Total current
    liabilities
              
              19,719
              
              
              
              22,645Obligations under capital lease, net of current portion
              
              214
              
              
              
              533Unearned revenue, net of current portion
              
              322
              
              
              
              454Other long-term liabilities
              
              844
              
              
              
              1,556Total Liabilities
              
              21,099
              
              
              
              25,188SHAREHOLDERS' EQUITYPreferred stock, $.01
      par value, 5,000 shares authorized, none issued oroutstanding
              
              —
              
              
              
              —Common stock, $.01 par
      value, 65,000 shares authorizedat December 31, 2009
      and 2008; 41,137 and 42,114 shares issued andoutstanding at
      December 31, 2009 and 2008, respectively
              
              411
              
              
              
              421Additional paid-in
      capital
              
              71,090
              
              
              
              72,089Accumulated
      deficit
              
              (23,300
              )
              
              
              (34,100
              )Accumulated other
      comprehensive loss
              
              (1,897
              )
              
              
              (3,368
              )Total
      shareholders’ equity
              
              46,304
              
              
              
              35,042Total liabilities
      and shareholders’ equity
              $
              67,403
              
              
              $
              60,230
  The accompanying notes
to the consolidated financial statements are an integral part of these
statements.
  44
     INTELLIGROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME(Thousands except per share data)
  YEAR ENDED DECEMBER
  31,2009
              
              2008Revenue
              $
              126,518
              
              
              $
              157,101Cost of revenue (excluding depreciation and amortisation shown
      separately below)
              
              84,117
              
              
              
              107,635Gross profit
              
              42,401
              
              
              
              49,466Selling, general and administrative
      expenses
              
              27,984
              
              
              
              35,938Depreciation and amortization
              
              2,492
              
              
              
              2,399Total operating expenses
              
              30,476
              
              
              
              38,337Operating income
              
              11,925
              
              
              
              11,129Interest income
              
              141
              
              
              
              297Interest expense
              
              (80
              )
              
              
              (535
              )Foreign currency transaction gain
      (loss), net
              
              (18
              )
              
              
              (3,126
              )Other income (expense), net
              
              892
              
              
              
              436Income before income taxes
              
              12,860
              
              
              
              8,201Provision for income taxes
              
              2,060
              
              
              
              1,512Net income
              $
              10,800
              
              
              $
              6,689Basic net income per share
              $
              0.26
              
              
              $
              0.16Diluted net income per share
              $
              0.26
              
              
              $
              0.16Weighted average no. of common shares
      outstanding- Basic
              
              41,360
              
              
              
              42,155- Diluted
              
              41,733
              
              
              
              42,387Comprehensive incomeNet income
              $
              10,800
              
              
              $
              6,689Other comprehensive income (loss)Currency translation adjustments
              
              1,471
              
              
              
              (6,001
              )Comprehensive income
              $
              12,271
              
              
              $
              688
  The accompanying notes
to the consolidated financial statements are an integral part of these
statements.
  45
     INTELLIGROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYFOR THE
YEAR ENDED DECEMBER 31, 2009, AND 2008(in thousands)
  AccumulatedAdditional
              
              
              
              
              Other
              
              TotalCommon Stock
              
              Paid-in
              
              Accumulated
              
              Comprehensive
              
              Shareholders'Shares
              
              Amount
              
              Capital
              
              Deficit
              
              Income (Loss)
              
              EquityBalance, December 31, 2007
              $
              42,160
              
              
              421
              
              
              71,119
              
              
              (40,789
              )
              
              2,633
              
              
              33,384Stock compensation expense
              
              -
              
              
              -
              
              
              1,055
              
              
              -
              
              
              -
              
              
              1,055Currency translation
adjustment
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (6,001
              )
              
              (6,001
              )Exercise of stock options
              
              34
              
              
              1
              
              
              43
              
              
              -
              
              
              -
              
              
              44Shares terminated through Repurchase
      program
              
              (79
              )
              
              (1
              )
              
              (128
              )
              
              
              
              
              
              
              
              (129
              )Net Income
              
              -
              
              
              -
              
              
              -
              
              
              6,689
              
              
              -
              
              
              6,689Balance, December 31, 2008
              $
              42,115
              
              
              421
              
              
              72,089
              
              
              (34,100
              )
              
              (3,368
              )
              
              35,042Stock compensation expense
              
              -
              
              
              -
              
              
              588
              
              
              -
              
              
              -
              
              
              588Currency translation
adjustment
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,471
              
              
              1,471Exercise of stock options
              
              142
              
              
              1
              
              
              250
              
              
              -
              
              
              -
              
              
              251Shares terminated through Repurchase
      program
              
              (1,119
              )
              
              (11
              )
              
              (1,837
              )
              
              -
              
              
              -
              
              
              (1,848
              )Net Income
              
              -
              
              
              -
              
              
              -
              
              
              10,800
              
              
              -
              
              
              10,800Balance, December 31,
    2009
              $
              41,138
              
              
              411
              
              
              71,090
              
              
              (23,300
              )
              
              (1,897
              )
              
              46,304
  The accompanying notes
to the consolidated financial statements are an integral part of these
statements.
  46
     INTELLIGROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWSFOR YEAR ENDED DECEMBER 31, 2009
AND 2008(USD in thousands)
  YEAR ENDED DECEMBER
  31,2009
              
              2008Cash flows from operating
      activities:Net income
              $
              10,800
              
              $
              6,689Adjustments to reconcile net income to
      netCash provided by
      operating activities:Depreciation and amortization
              
              3,075
              
              
              2,759Provision for doubtful
      accounts and advances
              
              999
              
              
              1,146Stock compensation expense
              
              588
              
              
              1,055Profit on sale of
      investment
              
              (147)
              
              
              -Unrealized gain on investments
              
              (637)
              
              
              -Loss on sale of fixed
      assets
              
              127
              
              
              -Unrealized exchange (gain)/loss
              
              283
              
              
              2,424Deferred
    taxes
              
              (556)
              
              
              (77
              )Changes in operating assets and
      liabilities:Accounts
      receivable
              
              (42)
              
              
              (1,434)Unbilled services
              
              3,877
              
              
              742Prepaid
taxes
              
              (667)
              
              
              -Prepaid expenses and other current assets
              
              (188)
              
              
              (1,235
              )Other assets
              
              271
              
              
              (107
              )Restricted cash and investments
              
              733
              
              
              3,350Derivative
      liability
              
              (2,642)
              
              
              (541
              )Accounts payable
              
              (573)
              
              
              (2,224
              )Accrued payroll and
      related taxes
              
              (829)
              
              
              502Accrued expenses and other current liabilities
              
              (659)
              
              
              297Unearned revenue,
      current portion
              
              598
              
              
              (1,659
              )Unearned revenue, net of current portion
              
              (146)
              
              
              -Income taxes
      payable
              
              492
              
              
              1,027Other long-term liabilities
              
              12
              
              
              515Net cash provided by operating activities
              $
              14,769
              
              $
              13,229Cash flows from investing
      activities:Purchase of property
      and equipment
              $
              (1,300)
              
              $
              (1,523
              )Proceeds from sale of equipment
              
              -
              
              
              84Purchases of
      investments
              
              (23,882)
              
              
              (3,131
              )Proceeds from sale of investments
              
              22,571
              
              
              -Net cash used in investing activities
              $
              (2,611)
              
              $
              (4,570
              )Cash flows from financing
      activities:Principal payments
      under capital leases
              $
              (242)
              
              $
              (569
              )Stock repurchase
              
              (1,848)
              
              
              (129
              )Proceeds from exercise
      of stock options
              
              251
              
              
              44Net change in line of credit borrowings
              
              -
              
              
              (6,034
              )Net cash used in financing activities
              $
              (1,839)
              
              $
              (6,688
              )Effect of foreign currency exchange rate
      changes on cash
              $
              303
              
              $
              (229
              )Net increase in cash and cash
      equivalents
              
              10,622
              
              
              1,742Cash and cash equivalents - beginning of year
              $
              10,161
              
              $
              8,419Cash and cash equivalents - end of the
      period
              $
              20,783
              
              $
              10,161Supplemental disclosures of cash flow information:Cash paid for income taxes
              $
              1,668
              
              $
              836Cash paid for
      interest
              $
              64
              
              $
              277Supplemental disclosures of noncash
      investing and financing activitiesProperty and equipment
      acquired by capital lease
              $
              152
              
              $
              288
  The accompanying notes
to the consolidated financial statements are an integral part of these
statements.
  47
     INTELLIGROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1 - ORGANIZATION AND BASIS OF
PRESENTATION
  Intelligroup, Inc., together with
its subsidiaries (“Intelligroup” or the “Company”) is a global provider of
strategic IT outsourcing services. Intelligroup develops implements and supports
information technology solutions for global corporations and public sector
organizations.
  The Company was incorporated in New
Jersey in October 1987 under the name Intellicorp, Inc. to provide systems
integration and custom software development services. The Company’s name was
changed to Intelligroup, Inc. in July 1992. In March 1994, the Company acquired
Oxford Systems Inc. (“Oxford”). On December 31, 1996, Oxford was merged into the
Company and ceased to exist as an independent entity. In October 1996, the
Company consummated its initial public offering of its common stock.
  The accompanying consolidated
financial statements have been prepared in conformity with U.S. generally
accepted accounting principles.
  Certain prior period amounts have
been reclassified in the consolidated financial statements to conform to the
2009 presentation. Prepaid taxes which represent taxes paid under protest to the
tax authorities in India (please refer to Income Taxes under Note 13 below),
previously included as current assets, have now been classified under
non-current assets since the timing of recoverability of such prepayments is not
determinable.
  NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
  Principles of
Consolidation
  The accompanying consolidated
financial statements include the accounts of Intelligroup, Inc. and subsidiaries
that are more than 50% owned and controlled and have been prepared in US
dollars. All inter-company balances and transactions have been eliminated in
consolidation.
  Use of
Estimates
  The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
  Cash and Cash
Equivalents
  The Company considers all highly
liquid debt instruments and other short-term investments with a maturity of
three months or less to be cash equivalents.
  The Company maintains cash and cash
equivalent balances at several financial institutions that are insured by the
Federal Deposit Insurance Corporation up to $250,000. The Company maintains cash
balances in excess of insured amounts.
  The Company did not have any cash
equivalents as at December 31, 2009 and 2008.
  Property and
Equipment
  Property and equipment is stated at
cost, less accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives of the related assets
(primarily three to five years). Leasehold improvements and equipment under
capital leases are amortized over the shorter of the lease term or the estimated
useful life. Costs of maintenance and repairs are charged to expense as
incurred.
  Goodwill and
Intangibles
  The Company does not amortize
goodwill but instead tests goodwill at the reporting unit level for impairment
at least annually or as circumstances warrant. If impairment is indicated, a
write down to fair value (normally measured discounting estimated cash flows) is
recorded. Other intangibles represent customer relationships which are amortized
on a straight line basis over their estimated useful lives.
  Recoverability of Long-Lived
Assets
  The Company reviews the
recoverability of its long-lived assets including intangible assets and fixed
assets on a periodic basis whenever events and changes in circumstances have
occurred which may indicate a possible impairment. The assessment for potential
impairment is based primarily on the Company’s ability to recover the carrying
value of its long-lived assets from expected future cash flows from its
operations on an undiscounted basis. If such assets are determined to be
impaired, the impairment recognized is the amount by which the carrying value of
the assets exceeds the fair value of the assets. Property and equipment to be
disposed of by sale is carried at the lower of the then current carrying value
or fair value less estimated costs to sell.
  Revenue
Recognition
  The Company generates revenue from
professional services rendered to customers. Revenue is recognized under the
Company’s contracts generally when persuasive evidence of an arrangement exists,
the sales price is fixed or determinable and collectability is reasonably
assured. The majority of the Company’s revenue is generated under
time-and-material contracts whereby costs and revenue are recognized as services
are performed, with the corresponding cost of providing those services reflected
as cost of revenue. The majority of customers are billed on an hourly or daily
basis whereby actual time is charged directly to the customer. Such method is
expected to result in reasonably consistent profit margins over the contract
term.
  The Company also derives a portion
of our revenue from fixed-price, fixed-time contracts. Revenue generated from
most fixed-price contracts, including most application management and support
contracts, is recognized ratably over the contract term. Certain fixed price
contracts are for implementation services, including design and modification,
for which specifications are provided by the customer. The scope of the work is
usually defined in terms of overall deliverables and the revenue for such work
is ultimately earned by achieving the deliverables. We consider the performance
of service towards the planned deliverable as partial execution of the
deliverable and hence the revenue generated from such fixed-price contracts is
recognized using the percentage of completion (POC) method. The POC method
recognizes the legal and economic results of contract performance on a timely
basis. This method of accounting relies on estimates of total expected contract
revenues and costs. Where the contracts involve only implementation services,
the Company recognizes revenue based on a proportional performance method. The
pattern of performance on these contracts closely resembles the time spent by
our employees and therefore efforts-expended, measured based on the cost of the
employee’s time, is used as a measure for the proportion of services rendered in
relation to the total services expected to be rendered.
  48
     The use of the POC method or the
proportional performance method requires significant judgment relative to
estimating the number of hours or days required to complete the contracted scope
of work, including assumptions and estimates relative to the length of time to
complete the project and the nature and complexity of the work to be performed.
Our project delivery and business unit finance personnel continually review
labor hours incurred and estimated total labor hours, which may result in
revisions to the amount of recognized revenue for the contract. Changes in
estimates are accounted for in the period of change. If we do not accurately
estimate the resources required or the scope of work to be performed for a
contract or if we do not manage the project properly within the planned time
period, then a loss may have to be recognized on the contract. Losses are
recorded in the period when they become known, and estimated through the
completion of the contract.
  We occasionally derive revenue from
projects involving multiple revenue-generating activities. Accordingly, the
revenue from such projects is accounted for in accordance with Accounting
Standards Codification (“ASC) 605-25 (Previously Emerging Issues Task Force of
the Financial Accounting Standards Board (“FASB”) Issue No. 00-21), “Accounting
for Revenue Arrangements with Multiple Deliverables.” If a contract involves the
provision of multiple service elements, total estimated contract revenue is
allocated to each element based on their fair value of each element. The amount
of revenue allocated to each element is limited to the amount that is not
contingent upon the delivery of another element in the future. Revenue for each
element is then recognized as described above depending upon whether the
contract is a time-and-materials contract or a fixed-price, fixed-time
contract.
  Any estimation process, including
that used in preparing contract accounting models, involves inherent risk. We
reduce the inherent risk relating to revenue and cost estimates in proportional
performance models through approval and monitoring processes. Risks relating to
service delivery, usage, productivity and other factors are considered in the
estimation process.
  The Company accrues for revenue and
receivables for services rendered between the last billing date and the balance
sheet date. Unbilled services as of December 31, 2009 and December 31, 2008
represent services provided through the year ended December 31, 2009 and the
year ended December 31, 2008, respectively, which is billed subsequent to the
balance sheet date. All such amounts are anticipated to be collected in the
following year.
  Reimbursements of out-of-pocket
expenses received from customers have been included as part of revenues in
accordance with ASC No. 605-45 (previously EITF 01-14), “Income Statement
Characterization of Reimbursements Received for “Out-of-Pocket” Expenses
Incurred.”
  We establish billing terms at the
time project deliverables are agreed, and we continually monitor timely payments
from customers and assess collection issues. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. We base our estimates on historical collection and
write-off experience, current trends, credit policy, detailed analysis of
specific customer situations and percentage of accounts receivable by aging
category.
  Allowance for Doubtful
Accounts
  The Company provides an allowance
for doubtful accounts, which is based upon a review of outstanding receivables
as well as historical collection information. Credit is granted to substantially
all customers on an unsecured basis. In determining the amount of the allowance,
management is required to make certain estimates and assumptions. Activity in
the allowance for doubtful accounts is as follows:
  Year
      Ended
              
              
              Balance
      at
              
              
              Charged to
      costs
              
              
              
              
              Balance at end
      ofDecember 31,
              
              
              beginning of year
              
              
              and expenses
              
              
              Write-offs and other
              
              year2008
              
              $
              (2,151
              )
              
              (901
              )
              
              1,036
              
              (2,016
              )2009
              
              $
              (2,016
              )
              
              (660
              )
              
              364
              
              (2,312
              )
  The balance includes a reserve for
unbilled services of $136 and $20 as of December 31, 2009 and 2008
respectively.
  Derivative
Instruments
  In the normal course of business,
the Indian subsidiary of the Company actively looks to mitigate the exposure of
foreign currency market risk, by entering into various derivative instruments,
authorized under Company policies, with counterparties that are highly rated
financial institutions. The primary exchange rate exposure of the Indian
subsidiary is to the US Dollar.
  The Company uses derivative
instruments consisting of foreign currency exchange option and forward contracts
not designated as hedging instruments under ASC 815-10 to hedge exposure of
foreign currency market risk. Changes in the fair value of these instruments are
recognized in the consolidated statement of operations and are included in
foreign exchange gain/ (loss). (Please refer Note 10 – Financial
instruments)
  Share-Based Compensation
Plans
  The Company’s share-based
compensation plans are described in Note 7 – Share holders’ equity. The Company
adopted the provisions of ASC 718 (previously SFAS No. 123R) on January 1, 2006,
using the modified prospective transition method.
  There were no share-based payment
awards granted during the year ended December 31, 2009. The Company recognizes
compensation expense for all share-based payment awards based on the grant date
fair value estimated in accordance with the provisions of ASC 718.
  The fair value of each option award
is estimated on the date of grant using the Black-Scholes option valuation
model. The Company recognizes the fair value of each option as compensation
expense ratably using the straight-line attribution method over the service
period (generally the vesting period).
  49
     Additionally, the Company estimates
forfeitures at the time of grant and revises those estimates in subsequent
periods if actual forfeitures differ from those estimates. It uses a combination
of historical data, demographic characteristics and other factors to estimate
pre-vesting option forfeitures. The Company records share-based compensation
expense only for those awards that are expected to vest, and is calculated on
straight line pro-rata basis without taking into account the effect of
forfeiture rate. ASC 718 requires the cash flows resulting from the tax benefits
for tax deductions in excess of the compensation expense recorded for those
options to be classified as financing cash flows. The Company issued 141,512 and
33,600 shares upon exercise of options for the years ended December 31, 2009 and
2008, respectively.
  Currency
Translation
  The Company’s non-US subsidiaries
consider their respective local currency as the functional currency and record
the financial position and results of operations in such local currency. The
Company translates income and expense amounts at average exchange rates for the
year, translates assets and liabilities at year-end exchange rates and equity at
historical rates. The Company records these translation adjustments as a
component of accumulated other comprehensive income (loss) within shareholders’
equity. Gains and losses from foreign currency transactions are included in
other income (expense) in the results of operations. Transaction loss as a
result of currency remeasurement for the year ended December 31, 2009 and year
ended December 31 2008, amounted to approximately $0.02 million and $3.1 million
respectively.
  Concentrations
  For the years ended December 31,
2009 and 2008, approximately 70% and 71% of revenue, respectively, was derived
from projects in which the Company’s personnel implemented, extended,
maintained, managed or supported software developed by SAP.
  For the years ended December 31,
2009 and 2008, approximately 15% and 13% of revenue, respectively, was derived
from projects in which the Company’s personnel implemented, extended,
maintained, managed or supported software from Oracle universe which primarily
consists of Oracle, Peoplesoft and Siebel software.
  For the years ended December 31,
2009 and 2008, approximately 6% and 8% of revenue, respectively, was derived
from projects in which the Company’s personnel implemented, extended,
maintained, managed or supported e-Business related software.
  A portion of the Company’s revenue
was generated by providing supplemental resources for consulting teams assembled
by other information technology consulting firms or directly to the
end-customer. For the years ended December 31, 2009 and 2008, 14% and 18% of the
Company's revenue, respectively, was generated by providing supplemental
resources directly to the end-customer or as part of a consulting team assembled
by another information technology consulting firm. There can be no assurance
that such information technology consulting firms will continue to engage the
Company in the future at current levels of retention, if at all.
  The Company has derived and believes
that it will continue to derive a significant portion of its revenue from a
limited number of customers and projects. For the years ended December 31, 2009
and 2008, the Company's ten largest customers accounted for in the aggregate
approximately 36% and 35% of the Company’s revenue, respectively. During the
year 2009 and 2008 no single customer accounted for more than 10% of total
revenues. As of December 31, 2009 no customer accounted for more than 10% of
total accounts receivable and as of December 31, 2008, one customer accounted
for 11% of total accounts receivable.
  Investments
  The Company classifies its debt and
equity securities in one of the three categories: trading, held-to-maturity or
available-for-sale, at the time of purchase and re-evaluates such
classifications as of each balance sheet date. Trading and available-for-sale
securities are recorded at fair value. Held-to-maturity securities are recorded
at amortized cost, adjusted for the amortization or accretion of premiums or
discounts. Unrealized holding gains and losses on trading securities are
included in income. Temporary unrealized holding gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from income
and are reported as a part of other comprehensive income/(loss) in stockholders’
equity until realized. Realized gains and losses from the sale of trading and
available-for-sale securities are determined on a first-in-first out basis and
are included in income. A decline in the fair value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value with a charge to the
income statement. Fair value for mutual fund units is based on published per
unit value, which is the basis for current transactions. Non-readily marketable
equity securities for which there is no readily determinable fair value are
recorded at cost, subject to an impairment charge to the income statement for
any other than temporary decline in value.
  The Company has investments in
interest bearing securities designated as trading securities as of December 31,
2009. The Company securities have been accounted for in accordance with the
provisions of ASC 320 Investments – Debt and Equity Securities (previously SFAS
No. 115).
  Income
Taxes
  The Company accounts for income
taxes using the asset and liability method of accounting for income taxes. Under
this method, income tax expense is recognized for the amount of taxes payable or
refundable for the current year. In addition, deferred tax assets and
liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their tax bases and all operating loss carry forwards, if
any. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates or tax status is recognized in
the consolidated statement of income in the period that includes the enactment
date or the filing/ approval date of the tax status change. Deferred tax assets
are reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
  The Company applies a two-step
approach for recognizing and measuring uncertain tax positions. The first step
is to evaluate the tax position for recognition by determining, based on the
technical merits, that the position will be more likely than not sustained upon
examination. The second step is to measure the tax benefit as the largest amount
of the tax benefit that is greater than 50% likely of being realized upon
settlement. The Company includes interest and penalties related to unrecognized
tax benefits within its provision for income tax expense.
  50
     Operating
Leases
  The Company estimates the expected
term of a lease by assuming the exercise of renewal options, where an economic
penalty exists, that would preclude the abandonment of the lease at the end of
the initial non-cancellable term and the exercise of such renewal is at the sole
discretion of the Company. This expected term is used in the determination of
whether a lease is a capital or operating lease and in the calculation of
straight line rent expense.
  Rent abatements and escalations are
considered in the calculation of minimum lease payments in the Company's capital
lease tests and in determining straight line rent expense for operating
leases.
  Retirement
Benefits
  Contributions to defined
contribution plans are charged to income in the period in which they accrue.
Current services costs for defined benefit plans are accrued in the period to
which they relate. The liability in respect of defined benefit plans is
calculated annually by a qualified actuary using the projected unit credit
method. The related actuarial gains / (losses) are accounted for in the Income
Statement. The Company recognizes the net funded position of its plans as an
asset or liability in the consolidated balance sheets.
  In measuring the defined benefit
obligations, the Company uses discount rates based on yields of high quality
fixed income instruments (i.e. yields on high quality corporate bonds)
prevailing as at the balance sheet date for the corresponding tenure of the
obligations. Please refer Note 14 – Employee benefit plans.
  Earnings Per
Share
  Basic Earnings per share (“EPS”) is
computed by dividing the net income by the weighted average number of common
shares outstanding for the period. Diluted earnings per share include additional
dilution from potential common stock, such as stock issuable pursuant to the
exercise of stock options. Potential common stock is not included in the
computation of diluted earnings per share when the exercise price of the options
exceeds the current market value or when the Company reports a loss because to
do so would be anti-dilutive for the periods presented.
  Options to purchase 857,250 and
1,872,000 shares of Common Stock at December 31, 2009 and 2008 respectively were
not included in the computation of diluted EPS because inclusion would have been
anti-dilutive. A reconciliation of the weighted average number of shares used to
compute basic earnings per share to the number used to compute diluted earnings
per share follows:
  in thousands2009
              
              2008Weighted Average number of basic
      shares
              41,360
              
              42,155Add: Dilutions from Stock Options
              373
              
              232Weighted Average number of diluted
      shares
              41,733
              
              42,387
  Commitments and
Contingencies
  Liabilities for loss contingencies
arising from claims, assessments, litigation, fines and penalties and other
sources are recorded when it is probable that a liability has been incurred and
the amount of the assessment and/or remediation can be reasonably estimated.
Legal costs incurred in connection with the same are expensed as
incurred.
  Advertisement
activities
  The advertising costs are expensed
as incurred, and were approximately $0.1 million and $0.1 million for the year
ended December 31, 2008 and 2009, respectively. These costs include the cost of
advertisements, shows, memberships and subscriptions.
  RECENT ACCOUNTING
PRONOUNCEMENTS
  Effective July 1, 2009, we
adopted the Financial Accounting Standards Board (FASB) Accounting Standards
Codification (ASC) 105-10, Generally Accepted
Accounting Principles – Overall (ASC 105-10). ASC
105-10 establishes the FASB Accounting
Standards Codification (the Codification)
as the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with U.S. GAAP. Rules and interpretive releases of the
SEC under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants. All guidance contained in the Codification
carries an equal level of authority. The Codification superseded all existing
non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC
accounting literature not included in the Codification is non-authoritative. The
FASB will not issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts. Instead, it will issue
Accounting Standards Updates (ASUs). The FASB will not consider ASUs as
authoritative in their own right. ASUs will serve only to update the
Codification, provide background information about the guidance and provide the
bases for conclusions on the change(s) in the Codification. References made to
FASB guidance throughout this document have been updated for the
Codification.
  The Company elected a partial
deferral of ASC 820-10 (previously SFAS No 157) related to the measurement of
fair value used when evaluating goodwill, other intangible assets, and other
long-lived assets for impairment. We adopted the provisions of this statement
for non-financial assets and liabilities effective January 1, 2009. This
adoption did not have impact on our Consolidated Financial
statements.
  In December 2007, the FASB issued
ASC 805 Business Combinations (previously SFAS 141R). ASC 805 establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non controlling interest in the acquiree and the goodwill acquired. ASC 805
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. This statement was adopted
beginning January 1, 2009. There was no significant impact on the Company’s
financial position or results of operations as a result of the adoption of ASC
805.
  51
     In March 2008, the FASB issued ASC
815 (previously SFAS No. 161), Disclosures about Derivative Instruments and
Hedging Activities, which requires additional disclosures about the objectives
of using derivative instruments, the method by which the derivative instruments
and related hedged items are accounted for and its related interpretations, and
the effect of derivative instruments and related hedged items on financial
position, financial performance, and cash flows. ASC 815 also requires
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. ASC 815 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early adoption encouraged. The Company adopted this standard effective January
1, 2009. The implementation of this standard did not have a material impact on
our consolidated financial statements. (Please see Note 10 – Financial
instruments, for the expanded disclosure regarding derivative instruments in
accordance with the pronouncement).
  In December 2008, the FASB issued
ASC 715, Compensation — Retirement Benefits, (previously FASB issued FSP No.
132(R)-1, Employers’ Disclosures about Pensions and Other Postretirement
Benefits) which requires that an employer disclose the following information
about the fair value of plan assets: (1) how investment allocation decisions are
made, including the factors that are pertinent to understanding of investment
policies and strategies; (2) the major categories of plan assets; (3) the inputs
and valuation techniques used to measure the fair value of plan assets; (4) the
effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period; and (5) significant concentrations of
risk within plan assets. This pronouncement is effective for fiscal years ending
after December 15, 2009, with early application permitted. At initial adoption,
application of this standard would not be required for earlier periods that are
presented for comparative purposes. The Company adopted this standard effective
October 1, 2009. The implementation of this standard did not have a material
impact on our consolidated financial statements. (Please see Note 14 – Employee
benefit plans, for the expanded disclosure regarding its plan assets).
  In April 2009, the FASB issued ASC
320-10 (previously FSP SFAS 115-2 and FAS 124-2), Recognition and Presentation
of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments in the financial statements. The most significant change the FSP
brings is a revision to the amount of other-than-temporary loss of a debt
security recorded in earnings. The Company adopted this standard effective April
1, 2009. The implementation of this standard did not have a material impact on
our consolidated financial statements.
  In April 2009, the FASB issued ASC
820-10 (previously FSP SFAS 157-4), Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. This FSP provides additional
guidance for estimating fair value, Fair Value Measurements, when the volume and
level of activity for the asset or liability have significantly decreased. This
FSP also includes guidance on identifying circumstances that indicate a
transaction is not orderly. This FSP emphasizes that even if there has been a
significant decrease in the volume and level of activity for the asset or
liability and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions. The
Company adopted this standard effective April 1, 2009. The implementation of
this standard did not have a material impact on our consolidated financial
statements.
  In May 2009, the FASB issued ASC 855
(previously SFAS No. 165), Subsequent Events. ASC 855 established general
standards of accounting for the disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. The adoption of ASC 855 required the Company to disclose the date
through which we have evaluated subsequent events and whether that date is the
date the financials were issued. The Company adopted ASC 855 in the second
quarter of 2009. In February 2010, the FASB issued Accounting Standards Update
(“ASU”) No. 2010-09, Amendments to Certain Recognition and Disclosure
Requirements (“ASU 2010-09”), which amends ASC 855. ASC 855, as amended by ASU
2010-09, establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. ASU No. 2010-09 removes the requirement for an SEC filer (as defined
in ASU 2010-09) to disclose the date, in both issued and revised financial
statements, through which it has evaluated subsequent events. This change
alleviates potential conflicts with current SEC guidance. ASU No. 2010-09 is
effective upon issuance for all entities other than conduit bond obligors. The
Company adopted the requirements of ASU No. 2010-09 on the effective date and
did not have any material subsequent events that impact its consolidated
financial statements (Please see Note 16 – Subsequent events below).
  In August 2009, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). The
amendments in this ASU apply to all entities that measure liabilities at fair
value and provide clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, an entity is
required to measure fair value using one or more techniques laid out in this
ASU. The guidance provided in this ASU is effective for the first reporting
period (including reporting periods) beginning after issuance. The Company does
not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
  In October 2009, the FASB issued ASU
2009-13, “Multiple-Deliverable Revenue Arrangements”, (amendments to FASB ASC
Topic 605, Revenue Recognition) (“ASU 2009-13”). In September 2009, the FASB
ratified Accounting Standards Update (ASU) 2009-13 (ASU 2009-13) (previously
Emerging Issues Task Force (EITF) Issue No. 08-1, Revenue Arrangements with
Multiple Deliverables (EITF 08-1)). ASU 2009-13 superseded EITF 00-21 and
addresses criteria for separating the consideration in multiple-element
arrangements. ASU 2009-13 will require companies to allocate the overall
consideration to each deliverable by using a best estimate of the selling price
of individual deliverables in the arrangement in the absence of vendor-specific
objective evidence or other third-party evidence of the selling price. ASU
2009-13 will be effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and
early adoption will be permitted. The Company is currently evaluating the
potential impact, if any, of the adoption of ASU 2009-13 on its consolidated
results of operations and financial condition and whether it will adopt the
standard early. ASU 2009-13 will become effective for the Company with its
fiscal year beginning January 1, 2011.
  In January 2010, the FASB issued ASU
2010-06, “Fair Value Measurements and Disclosures”, (amendments to FASB ASC
Topic 820, Fair Value Measurements and Disclosures) (“ASU 2010-06”). ASU 2010-06
requires entities to disclose separately the amounts of significant transfers in
and out of Level 1 and Level 2 fair value measurements along with the reasons
for such transfers. Entities should also present separate information about
purchases, sales, issuances and settlement activity in Level 3 fair value
measurements. The Update requires entities to provide fair value measurement
disclosures for each class of assets and liabilities and disclosures about
inputs and valuation techniques. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009 except for the disclosures pertaining to Level
3 fair value measurements. Those disclosures are effective for interim and
fiscal years beginning after December 15, 2010. This Update will become
effective for the Company with its interim period beginning January 1, 2010. The
Company is currently evaluating the potential impact, if any, of the adoption of
ASU 2010-06 on its consolidated results of operations and financial
condition.
  52
     NOTE 3 - PROPERTY AND EQUIPMENT AND
INTANGIBLES
  Property and equipment consist of
the following as of December 31, 2009 and 2008 (in thousands, except useful
lives data):
  Estimated UsefulLives (Years)
              
              2009
              
              2008Vehicles
              
              5
              
              $
              699
              
              
              $
              703Furniture
              
              5
              
              
              2,849
              
              
              
              2,979Equipment
              
              3-5
              
              
              9,657
              
              
              
              11,071Computer software
              
              3
              
              
              7,940
              
              
              
              9,045Leasehold improvements
              
              lesser of useful life orlease term
              
              
              1,966
              
              
              
              2,14423,111
              
              
              
              25,942Less: Accumulated depreciation
              
              
              
              
              (20,026
              )
              
              
              (20,901
              )Total, net
              
              
              
              $
              3,085
              
              
              $
              5,041
  Included in property and equipment
is $1.3 million and $1.8 million of assets held under capital lease at December
31, 2009 and 2008, respectively. Accumulated amortization of the assets held
under capital lease is $1.0 million for both December 31, 2009 and 2008,
respectively. During the year, the company disposed certain fully depreciated
assets amounting to $1.1 at Denmark location and $0.7 at India location. The
depreciation expense included in Depreciation and Amortization on the
consolidated statement of operations and comprehensive income amounted to $2.2
million and $2 million for year ended December 31, 2009 and 2008, respectively.
  Other intangibles represent
primarily customer relationships which are amortized on a straight line basis
over their estimated useful lives.
 
 Components of Intangible assets as
of December 31, 2009 and 2008 (in thousands, except useful lives data)
  Estimated UsefulLives (Months)
              
              2009
              
              2008Customer Relationship
              
              36
              
              $
              848
              
              
              $
              848Less: Accumulated amortization
              
              
              
              
              (576
              )
              
              
              (359
              )Total, net
              
              
              
              $
              272
              
              
              $
              489
  Above intangible assets as of
December 31, 2009 would be completely amortized by next year ended December 31,
2010.
  On October 1, 2007, the Company’s
wholly owned subsidiaries Intelligroup Europe Ltd and Intelligroup Asia Pvt Ltd
acquired certain assets including without limitation customer contracts, fixed
assets and employees from ISG Novasoft Technologies Limited (“Novasoft India”)
and Novasoft Information Technology  (Europe) Ltd.,
(“Novasoft Europe”) for an aggregate purchase price of $3,100,000 ("Novasoft
Acquisition") . The Company applied the purchase method of
accounting for the acquisition and recorded goodwill of $1.9 million after
completing the purchase price allocation in September 2008. The change in value
of goodwill subsequent to the finalization of the purchase price allocation has
been on account of foreign currency translation adjustment.
  The goodwill, which is tax
deductible, is allocated completely to the Europe segment upon above Novasoft
acquisition. The Company does not amortize goodwill but instead tests goodwill
at the reporting unit level for impairment at least annually or as circumstances
warrant. The Company’s reporting units are determined in accordance with ASC 350
(previously SFAS 142), which defines a reporting unit as an operating segment or
one level below an operating segment. If impairment is indicated, a write down
to fair value (normally measured by discounting estimated cash flows) is
recorded. The Company concluded that no impairment to the carrying value of
goodwill existed when its annual impairment testing was done.
  NOTE 4 - RESTRICTED CASH AND
INVESTMENTS
  The various components of restricted
cash and investments consist of the following as of December 31 2009 and 2008:
  in thousandsKind of Cash/Investment
              
              Restricted against
              
              Dec 31, 2009
              
              Dec 31, 2008Non Convertible Debentures
              
              Lien towards derivative
    contracts
              
              $
              1,039
              
              -Term deposits
              
              Lien towards derivative contracts
              
              
              -
              
              538Term deposits
              
              Bank guarantees for various statutory
      and customer related
              
              
              163
              
              344Total
              
              
              
              $
              1,202
              
              882
  Please refer to Note 10 – Financial
instruments for the fair value measurement reporting of the restricted cash and
investments.
  NOTE 5 - LINE OF
CREDIT
  On May 22, 2008, the Company and its
wholly-owned subsidiary Empower, Inc. closed out the existing $15 million line
of credit with Steel City Capital Funding. Concurrently, the Company entered
into a revolving credit loan and security agreement (“Credit Agreement”) with
HSBC Bank, (the “Bank”). The Credit Agreement is comprised of a three year
revolving line of credit pursuant to which the Company can borrow up to $10
million at the Bank’s Base Rate (as defined in the Credit Agreement) of 3.25% as
of December 31 2009, minus 0.85% percent. The credit facility is collateralized
by substantially all of the assets of the United States based operations and all
subsidiary stock (not to exceed 65% of the Equity Interests of any Foreign
Subsidiary). The maximum borrowing availability under the Credit Agreement is
based upon a percentage of eligible billed and unbilled accounts receivable. The
Credit Agreement provides for certain financial covenants that shall only be
tested as of the end of any fiscal quarter.
  53
     The Company was in compliance with
the applicable financial covenants of the Credit Agreement as of December 31,
2009.
  A standby letter of credit of
$0.1million has been issued by and drawn upon HSBC banking corporation in favor
of a landlord as security deposit. This letter of credit is secured by a lien on
the assets of the company. The Company estimates undrawn availability under the
Credit Facility to be $9.9 million as of December 31, 2009.
  The Company is prohibited from
paying dividends under the terms of the Credit Agreement.
  NOTE 6 - OBLIGATIONS UNDER CAPITAL
LEASES
  The Company is the lessee of
equipment, vehicles and furniture under capital leases expiring in 2014. The
weighted average interest rate on such borrowings was 14.55% and 13.13% during
year ended December 31, 2009 and 2008, respectively. The total interest expense
on such borrowings included under interest expense in the consolidated statement
of operations was $0.06 million and $0.09 million for year ended December 31,
2009 and 2008, respectively.
  Minimum lease payments under capital
leases at December 31, 2009 are as follows (in thousands):
  Minimum lease payments:2010
              
              
              $
              2012011
              
              
              $
              1392012
              
              
              $
              742013
              
              
              $
              312014 and after
              
              
              $
              7452Less: amounts representing interest
              
              
              $
              (84
              )Less: current portion
              
              
              $
              (201
              )Long-term portion
              
              
              $
              167
  NOTE 7 - SHAREHOLDERS’
EQUITY
  Preferred Stock
  At December 31, 2009 and 2008, there
are 5,000,000 shares of Preferred Stock, par value $0.01 per share authorized
and no shares issued or outstanding.
  Common Stock
  At December 31, 2009 and 2008, there
are 65,000,000 authorized shares of Common Stock.
  Stock Options
  The Company’s stock option plans
permit the granting of options to employees, non-employee directors and
consultants. The Compensation Committee of the Board of Directors generally has
the authority to select individuals who are to receive options and to specify
the terms and conditions of each option so granted, including the number of
shares covered by the option, the type of option (incentive stock option or
non-qualified stock option), the exercise price, vesting provisions, and the
overall option term. A total of 7,105 shares of Common Stock have been reserved
for issuance under the plans. All of the options issued pursuant to these plans
expire ten years from the date of grant (number of shares data in thousands).
  Share-Based Compensation Plans
  The Company has four share-based
compensation plans that reserve common shares for issuance to key employees,
consultants and directors, as described below. The compensation cost that has
been charged against income for those plans was $0.6 million and $1.1 million
for years ended December 31, 2009 and 2008 respectively. The Company received
approximately $0.25 million and $0.04 million from option exercises under
share-based compensation plans for the year ended December 31, 2009 and December
31, 2008 respectively. Although there were options exercised during the year
ended December 31, 2009 and 2008, no tax benefits were recorded as there were no
benefits for tax deductions expected to be utilized, based on the history of net
operating losses in the US.
  The 2004 Equity Incentive Award Plan
(“2004 Plan”) was approved by the Company’s Board of Directors on April 5, 2004
and adopted by the Company’s shareholders on June 8, 2004. The maximum number of
shares of Common Stock reserved for issuance under the 2004 Plan shall be equal
to 1,600,000, plus the number of shares of Common Stock which are or become
available for issuance under the Company’s 1996 Stock Plan (the “Prior Plan”),
and which are not issued under such plan, which includes an increase of 500,000
options as adopted by the Board of Directors on May 4, 2006 and approved by the
stockholders of the Company on June 8, 2006. Those eligible to receive stock
option grants or stock purchase rights under the 2004 Plan include employees and
non employee Directors. The Compensation Committee of the Board of Directors of
the Company administers the 2004 Plan. Subject to the provisions of the 2004
Plan, the administrator of the 2004 Plan has the discretion to determine the
optionees and/or grantees, the type of equity awards to be granted (incentive
stock options and nonqualified stock options, restricted stock, stock
appreciation rights, performance shares, performance stock units, stock
payments, deferred stock, restricted stock units, other stock-based awards, and
performance-based awards), the vesting provisions, the terms of the grants and
such other related provisions as are consistent with the 2004 Plan.
  54
     The exercise price of a stock option
may not be less than the fair market value per share of the Common Stock on the
date of grant or, in the case of an optionee receiving incentive stock option
award who beneficially owns 10% or more of the outstanding capital stock of the
Company, not less than 110% of the fair market value per share on the date of
grant. Notwithstanding the foregoing, the Compensation Committee of the Board
may in its discretion issue non-qualified stock options to purchase up to
500,000 shares of Common Stock with an option exercise price of less than 100%
of the fair market value of the Common Stock on the date of grant. The options
terminate not more than ten years from the date of grant, subject to earlier
termination on the optionee’s death, disability or termination of employment
with the Company, provided however that the term of any incentive stock options
granted to a holder of more than 10% of the outstanding shares of capital stock
may be no longer than five years. Options are not assignable or otherwise
transferable except by will or the laws of descent and distribution.
  The Compensation Committee may
provide that if a Change of Control (as defined in the 2004 Plan) of the Company
occurs and any awards made pursuant to the 2004 Plan are not converted, assumed
or replaced by a successor, then all outstanding awards that are not converted,
assumed or replaced may become fully vested and exercisable. The Compensation
Committee, subject to approval of the Board, may terminate, amend, or modify the
2004 Plan at any time; provided, however, that stockholder approval must be
obtained for any amendment to the extent necessary or desirable to comply with
any applicable law, regulation or stock exchange rule, to increase the number of
shares available under the 2004 Plan, to permit the Compensation Committee to
grant options with an exercise price below fair market value on the date of
grant, or to extend the exercise period for an option beyond ten years from the
date of grant. The 2004 Plan terminates on June 8, 2014 unless terminated
earlier by the Company’s Board of Directors.
  The 1996 Stock Plan (“1996 Plan”)
was adopted by the Board of Directors and approved by the shareholders of the
Company on June 3, 1996, and became effective on July 12, 1996. Those eligible
to receive stock option grants or stock purchase rights under the 1996 Plan
include employees, non employee Directors and consultants. The Compensation
Committee of the Board of Directors of the Company administers the 1996 Plan.
Subject to the provisions of the 1996 Plan, the administrator of the 1996 Plan
has the discretion to determine the optionees and/or grantees, the type of
options to be granted (incentive stock options or nonqualified stock options),
the vesting provisions, the terms of the grants and such other related
provisions as are consistent with the 1996 Plan. The exercise price of an
incentive stock option may not be less than the fair market value per share of
the Common Stock on the date of grant or, in the case of an optionee who
beneficially owns 10% or more of the outstanding capital stock of the Company,
not less than 110% of the fair market value per share on the date of grant. The
exercise price of a nonqualified stock options granted under the 1996 Plan may
not be less than 85% of the fair market value per share of the Common Stock on
the date of grant or, in the case of an optionee who beneficially owns 10% or
more of the outstanding capital stock of the Company, not less than 110% of the
fair market value per share on the date of grant. The purchase price of shares
issued pursuant to stock purchase rights may not be less than 50% of the fair
market value of such shares as of the offer date of such rights. The options
terminate not more than ten years from the date of grant, subject to earlier
termination on the optionee’s death, disability or termination of employment
with the Company, provided however that the term of any options granted to a
holder of more than 10% of the outstanding shares of capital stock may be no
longer than five years. Options are not assignable or otherwise transferable
except by will or the laws of descent and distribution. In the event of a merger
or consolidation of the Company with or into another corporation or the sale of
all or substantially all of the Company’s assets in which the successor
corporation does not assume outstanding options or issue equivalent options, the
Board of Directors of the Company is required to provide accelerated vesting of
outstanding options. As of June 8, 2004, the Company ceased granting options
under the 1996 Plan.
  The 1996 Non-Employee Director Plan
was approved by the Board of Directors on June 3, 1996. The shareholders adopted
the Company’s 1996 Non-Employee Director Stock Option Plan (the “Director Plan”)
and it became effective on July 12, 1996. The Director Plan provides for the
grant of options to purchase a maximum of 140,000 shares of Common Stock of the
Company to non-employee Directors of the Company. The Board of Directors
administers the Director Plan.
  In October and November 2000, the
Company’s Board of Directors approved grants of options for equity compensation
plans not approved by security holders (the “Out of Plan” options). Each of the
Out of Plan options vest in four equal semiannual installments beginning on the
first six-month anniversary of the date of grant and expire on the tenth
anniversary of the date of grant. The price of the options granted pursuant to
the Out of Plan options is equal to the fair market value of the shares on the
date of grant.
  A summary of stock option activity
as of December 31, 2009 and 2008, and changes during the years then ended is
presented below:
  AggregateShares (in
              
              Weighted Average
              
              Weighted avg remaining
              
              Intrinsic Valuethousands)
              
              Exercise
      Price
              
              contractual term
      (Years)
              
              (in
  thousands)Outstanding as of December 31,
      2007
              
              3,271
              
              
              $
              2.05Granted
              
              385
              
              
              
              2.02Exercised
              
              (34
              )
              
              
              1.28Cancelled, foreited or expired
              
              (259
              )
              
              
              2.43Outstanding as of December 31,
      2008
              
              3,363
              
              
              $
              2.03
              
              6.6
              
              2,529Granted
              
              -
              
              
              
              0.00Exercised
              
              (142
              )
              
              
              1.78Cancelled, foreited or expired
              
              (490
              )
              
              
              2.76Outstanding as of December 31,
      2009
              
              2,731
              
              
              
              1.91
              
              6.1
              
              4,408Exercisable as of December 31, 2009
              
              2,422
              
              
              $
              1.93
              
              5.7
              
              3,851
  The number of shares vested during
the year ended December 31, 2009 was 445,548 at a total fair value of $0.6
million.
  55
     The fair value of each option award
is estimated on the date of grant using the Black-Scholes option valuation
model. The Company recognizes the fair value of each option as compensation
expense ratably using the straight-line attribution method over the service
period (generally the vesting period). The Black-Scholes model incorporates the
following assumptions:
 Expected volatility – the Company
  estimates the volatility of common stock at the date of grant using a
  combination of unadjusted historical volatility, and historical volatility
  adjusted for periods of unusual stock price activity.
        Expected term – the Company
  estimates the expected term of options granted based on a combination of
  vesting schedules, life of the option, historical experience and in cases
  where the Company does not have significant historical experience, the
  simplified method of determining expected term outlined in ASC 718, Staff
  Accounting Bulletin(“SAB”) 107 and SAB 110.
        Risk-free interest rate – the
  Company estimates the risk-free interest rate using the U.S. Treasury yield
  curve in effect at the time of grant for periods equal to the expected life of
  the options.
        Dividends – the Company uses an
  expected dividend yield of zero since we have never declared or paid any
  dividends on our capital stock. We intend to retain any earnings to fund
  future growth and the operation of its business, and, therefore does not
  anticipate paying any cash dividends in the foreseeable future. Additionally, the Company estimates
forfeitures at the time of grant and revises those estimates in subsequent
periods if actual forfeitures differ from those estimates. It uses a combination
of historical data, demographic characteristics and other factors to estimate
pre-vesting option forfeitures and record share-based compensation expense only
for those awards that are expected to vest.
  The fair value of option grants is
estimated on the date of grant using the Black-Scholes option-pricing model
using the following weighted average assumptions:
  2009
              
              2008Expected Volatility
              
              -
              
              79 - 85%Expected Life (years)
              
              -
              
              1 - 6.1 yearsRisk free Interest Rate
              
              -
              
              1.7 - 3.5%Expected Dividends
              
              -
              
              0%
  The weighted average grant date fair
value of options granted during the years ended December 31, 2008 was $2.02
while there were no options granted in the year ended December 31, 2009. The
aggregate intrinsic value of options outstanding is calculated as the difference
between the exercise price of the underlying options and the market price of
common shares for the shares that were in the money at December 31, 2009. The
intrinsic value of options exercised during the years ended December 31, 2009
and 2008 was $128,456 and $17,000 respectively.
  As of December 31, 2009 there was
$0.4 million of total unrecognized compensation cost related to non-vested stock
options which will be amortized over a weighted average period of 1.3 years.
  The following table summarizes the
share-based compensation expense for stock options that were recorded in
accordance with ASC 718 (Previously SFAS No. 123R) for the year ended December
31, 2009 and December 31, 2008 (in thousands):
  Year Ended December
  312009
              
              2008Cost of revenue
              
              $
              171
              
              343Selling, general and administrative expenses
              
              
              417
              
              713Total share based compensation
      expense
              
              $
              588
              
              1,056
  Share Buyback
Program:
  On October 24 2008, our Board of
Directors approved a share repurchase program of up to $5,000,000 of the
Company's common stock over an 18 month period ending April 24, 2010. The share
repurchase program will be funded using the Company's working capital and
authorizes the Company to repurchase shares from time to time through open
market or privately negotiated transactions. The program will expire on the
earlier of (i) the repurchase of the maximum number of shares under the program,
(ii) the 18 month anniversary of the approval of the program or (iii) a
determination by the Board of Directors to discontinue the program. The Company
is not obligated to continue to repurchase shares under the authorization and
the timing; actual number and value of shares purchased will depend on many
factors, including the Company’s cash flow and the liquidity and price
performance of its shares.
  As of December 31, 2009, a total of
1,197,881 shares have been repurchased at an average price of $1.65 out of which
1,118,581 shares were repurchased at an average price of $1.65 for the year
ended December 31, 2009 and a total of 79,300 shares were repurchased at an
average purchase price of $1.64 for the year ended December 31, 2008. All the
repurchased shares are constructively retired.
  NOTE 8 - RELATED PARTY
TRANSACTIONS
  Effective August 1, 2005,
Intelligroup Asia Pvt. Ltd. (“IGA”) entered into an agreement to lease certain
premises for certain of the Company’s India operations from ILabs Hyderabad
Technology Center Pvt. Ltd. (“ILabs”), a party with which two members of the
Company’s Board of Directors are affiliated. The terms of the lease agreement
provide for, among other things: (1) a minimum lease period of five years with
an option for two three-year renewal periods; (2) payment of a security deposit
equivalent to nine (9) months’ rent in the amount of 16.3 million Indian rupees
(approximately $351,000); (3) payment of monthly lease fees in the amount of 1.7
million Indian rupees (approximately $38,000), subject to yearly five percent
(5%) escalation; and (4) monthly operations and maintenance fees of 0.5 million
Indian rupees (approximately $11,000). Rent expense for the year ended December
31, 2009 towards the said lease was 31.34 million rupees (approximately
$674,000). There are no advance lease rentals as of December 31, 2009.
  56
     Effective December 10, 2009,
Intelligroup Asia Pvt. Ltd. (“IGA”) entered into an agreement to lease certain
additional premises of area 14,700 sq.ft, for certain of the Company’s India
operations from ILabs Hyderabad Technology Center Pvt. Ltd. (“ILabs”). The lease
of demised premises commencing from January 1, 2010 and terms of the lease
agreement provide for, among other things: (1) a minimum lease period of 3 years
with an option for two three-year renewal periods; (2) payment of a security
deposit equivalent to four (4) months’ rent in the amount of 2 million Indian
rupees (approximately $43,000); (3) payment of monthly lease fees in the amount
of 0.5 million Indian rupees (approximately $11,000), subject to fifteen percent
(15%) escalation once in every three years; and (4) monthly operations and
maintenance fees of 0.1 million Indian rupees (approximately $2,000).
  NOTE 9 - COMMITMENTS AND
CONTINGENCIES
  Tax-Free Spin-off of SeraNova
  On July 5, 2000, the Company
distributed SeraNova common stock to its shareholders in a transaction that was
structured to be and was reported as a tax-free spin-off pursuant to Section 355
of the Internal Revenue Code (“IRC Section 355”). For distributions of stock
qualifying under IRC Section 355, neither the Company nor the Company’s
shareholders recognize any gain or income in connection with the transaction for
US federal income tax purposes. The Company and SeraNova executed a Tax Sharing
Agreement, dated January 1, 2000 (“Tax Sharing Agreement”), whereby SeraNova
would indemnify the Company for any tax liabilities in the event a future
transaction of SeraNova results in the spin-off is being deemed a taxable event.
On October 27, 2000, SeraNova and Silverline Technologies, Inc. announced that
they had entered into an agreement and plan of merger, under which Silverline
Technologies, Inc. would acquire control of SeraNova in exchange for American
depository shares of Silverline. Subsequently, SeraNova and Silverline
Technologies, Inc. filed for Chapter 7 Bankruptcy on August 8, 2003. As a
condition to the distribution, SeraNova management represented that there was no
present plan, nor intent to enter into a subsequent transaction that would
disturb the intended tax–free nature of the distribution.
  IRC Section 355(e) provides that the
Company may be required to recognize a gain equal to the excess of the fair
market value of the SeraNova shares distributed over their tax basis if the
distribution is part of a plan pursuant to which one or more persons acquire 50%
or more of SeraNova common stock within two years of the distribution date.
Should the spin-off ultimately be construed as taxable the resultant tax
liability could be in the range of $55 million to $65 million and related
penalties (if assessed) and interest could increase the amount by $50 million to
$60 million as of December 31, 2009, depending on the facts that ultimately are
established. No future benefits would inure to the Company as a result of
imposition of a tax on the SeraNova distribution, and no reserve has been
recorded for this potential tax. However, should such a tax liability be
imposed, the Company may be able to utilize some of its existing net operating
losses to mitigate this tax liability.
  Employee Agreements
  As of December 31, 2009, the Company
had employment agreements with certain of its executive officers, which provide
for minimum payments in the event of termination for reasons other than just
cause. The aggregate amount of compensation commitment in the event of
termination under such agreements is approximately $1.6 million.
  In addition, the Company’s wholly
controlled and majority owned subsidiary Intelligroup Asia Pvt. Ltd. (“IGA”) had
entered into Severance Packages totaling approximately $0.6 million with certain
former members of the IGA management team. Pursuant to the terms of the
Agreement for Severance Package, the Severance Package is activated upon the
fulfillment of certain events, including a change in management of the Company
or IGA. In April 2005, following the termination of the Company’s Chief
Executive Officer, three members of the IGA management team, each of whom had a
Severance Package, resigned. Except as set forth below, to date, the Company has
not received any claim for payment of the Severance Package. In September 2005,
two former members of the IGA management team sent IGA notices under Section 433
and 434 of the Indian Companies Act, 1956 for payment of such Severance Package.
Such claims have not been pursued since such initial notice was served, and the
Company does not believe that such severance amount is owed. In the event the
Company is unsuccessful in defending against such claim for payment, the Company
would owe approximately $0.6 million to such individuals.
  Leases
  The Company leases office space
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year. Certain leases are subject to common area maintenance or
operating expense charges and have options to renew. Future minimum aggregate
annual lease payments are as follows (in thousands):
  For the Years Ended
              
              MinimumDecember 31,
              
              Lease Payments2010
              
              $
              1,8972011
              
              
              1,5022012
              
              
              1,0432013
              
              
              8062014
              
              
              5212014 and after
              
              
              225$
              5,994
  Rent expense for the years ended
December 31, 2009 and 2008 was $1.8 million and $2.6 million, and there is no
sublease income for year 2009, where as sublease income of $0.4 million was
derived during year 2008.
  A standby letter of credit of
$0.1million has been issued by and drawn upon HSBC banking corporation in favor
of a landlord as security deposit. This letter of credit is secured by a lien on
the assets of the company.
  57
     NOTE 10 - FINANCIAL
INSTRUMENTS
  The Company measures certain financial assets
and liabilities at fair value on a recurring basis, including derivative
instruments and investments. The fair value measurements of these derivative
instruments and investments were determined using the following inputs as of
December 31, 2009:
  Fair Value Measurements at Reporting
      Date UsingQuoted Prices
    in
              
              Significant
    Other
              
              Significant
    OtherActive Markets
    for
              
              Observable
    Inputs
              
              Unobservable
      InputsIdentical
    AssetsTotal
              
              (Level 1)
              
              (Level 2)
              
              (Level 3)Assets:Short-term Investments (Note a)
              
              $
              2,441
              
              
              $
              -
              
              $
              2,441
              
              
              $
              -Bank guarantees & Term Deposits
      (Note b)
              
              $
              163
              
              
              $
              -
              
              $
              163
              
              
              $
              -Investments (Note c)
              
              $
              2,474
              
              
              $
              -
              
              $
              2,474
              
              
              $
              -Longterm Investments (Note d)
              
              $
              238
              
              
              $
              -
              
              $
              238
              
              
              $
              -Total
              
              $
              5,316
              
              
              $
              -
              
              $
              5,316
              
              
              $
              -Liabilities:Derivative Instruments (Note e)
              
              $
              (389
              )
              
              $
              -
              
              $
              (389
              )
              
              $
              -Total
              
              $
              (389
              )
              
              $
              -
              
              $
              (389
              )
              
              $
              -
  a)  Represents term deposits
and is reported under the head ‘Short Term Investments’ in the current assets on
the consolidated balance sheet as of December 31, 2009. The fair value in the
table is the face value of the instruments plus interest accrued up to December
31, 2009.
  The short-term investments and term deposits
referred above are considered as trading securities. The carrying value of these
investments as of December 31, 2009 approximates the fair value. Unrealized
gains of $0.1 million and realized gains of $0.1 million on these investments
were recorded for the year ended December 31, 2009. Gross proceeds from sale of
such investments amounted to approximately $22.6 million for the year ended
December 31, 2009.
  b)  Reported as ‘Restricted
cash and investments’ on the consolidated balance sheet as of December 31, 2009.
(Please refer Note 4 – Restricted cash and investments.) The fair value is the
face value of the instruments plus interest accrued up to December 31, 2009
  c)  Represents non
convertible debentures with a amount of $1.0 million reported under ‘Restricted
cash and Investments’ and $ 0.4 million reported as ‘Other assets’ on the
consolidated balance sheet as of December 31, 2009. (Please refer Note 4 –
Restricted cash and investments.) The fair value is derived based on market
related inputs.
  d)  Represents term deposits
long-term and is reported under the head ‘Other assets’ in the current assets on
the condensed consolidated balance sheet as of December 31, 2009. The fair value
is derived based on observable inputs.
  e)  Reported under current liabilities on the consolidated balance sheets.
The fair value is derived based on observable inputs.
  Derivative
Instruments:
  In the normal course of business, the Indian
subsidiary of the Company actively looks to mitigate the exposure of foreign
currency market risk, by entering into various derivative instruments,
authorized under Company policies, with counterparties that are highly rated
financial institutions. The primary exchange rate exposure of the Indian
subsidiary is to the US Dollars.
  The Company uses derivative instruments
consisting of foreign currency exchange option and forward contracts not
designated as hedging instruments under ASC 815-10 to hedge exposure of foreign
currency market risk. Changes in the fair value of these instruments are
recognized in the consolidated statement of operations and are included in
foreign exchange gain/ (loss). The Company had outstanding foreign exchange
contracts totaling $8.0 million as of December 31, 2009 and $29 million as of
December 31, 2008. During the year ended December 31, 2009 the Company entered
into foreign currency range forward contracts totaling $3.0 million to sell US
dollars for Indian rupees.
  At December 31, 2009 summary
information about the foreign exchange options is as follows:
  Option Contracts
              Range forward
  ContractsNotional Amount
              $5 million
              $3 millionRates
              INR 43.45
              INR 46.25 to 48.12Effective date
              5/18/2007
              12/09/2009,Maturity Dates
              1/27/2010 to 05/26/10
              1/27/2010 to 12/29/10Fair Value
              $ (0.37) million
              $ (0.02) million
  58
     The fair values of
derivative instruments in the consolidated balance sheet as of December 31, 2009
and December 31, 2008 are as follows:
  As on year endedDerivative Instruments not designated as
      hedging
              
              
              
              December 31stinstrument under ASC 815:
              
              Balance Sheet Location
              
              2009
              
              2008Fair value of foreign exchange
      contracts
              
              Liability on derivative
      instruments
              
              $
              (389
              )
              
              ($
              2,621
              )Fair value of foreign exchange contracts
              
              Other long-term liabilities
              
              
              -
              
              
              ($
              651
              )Fair Value Total
              
              
              
              $
              (389
              )
              
              ($
              3,272
              )
  The effect of
derivative instruments on the consolidated statement of operations for the year
ended December 31, 2009 and 2008 is as follows:
  For the year endedDerivative Instruments not designated as
      hedging
              
              Location of gain / (loss) recognized on
      the
              
              December 31stinstrument under ASC 815:
              
              Income Statement
              
              2009
              
              2008Foreign Exchange Contracts
              
              Foreign currency transaction gain /
      (loss),net
              
              $
              387
              
              $
              (7,354
              )Total
              
              
              
              $
              387
              
              $
              (7,354
              )
  Please also refer Note 11- Foreign currency
transaction gain/(loss), net below for the various components of foreign
currency transaction gain / (loss) as reported on the consolidated statement of
operations and comprehensive income for the year ended December 31, 2009 and
2008.
  NOTE 11 - FOREIGN CURRENCY TRANSACTION GAIN/(LOSS),
NET
  Foreign currency transaction gain / (loss)
comprises of two components – i) ASC 830 (previously FAS 52) re-measurement
gains or losses on the Accounts receivable denominated in other than the
functional currency and the mark to market gains or losses of the derivative
instruments as follows.
  For the year endedDecember 31st2009
              
              2008Foreign currency translation /
      realization gain / (loss)
              
              $
              (405
              )
              
              4,228Derivative unrealized gain / (loss)
              
              
              272
              
              
              (6,052
              )Derivative realized gain /
    (loss)
              
              
              115
              
              
              (1,302
              )Total foreign currency transaction gain
      / (loss)
              
              $
              (18
              )
              
              (3,126
              )
  NOTE 12 - LITIGATION
  There is no pending litigation to which the
Company is a party or to which any of its property is subject that would have a
material impact on its consolidated financial condition, results of operations
or cash flows in the event we were unsuccessful in such litigation. However the
Company cannot predict with certainty the outcome of any litigation or the
potential for future litigation and any such matters could adversely affect its
financial condition, results of operations, cash flows and
business.
  NOTE 13 - INCOME TAXES
  The Company records tax expense/benefit based
upon the taxable income/loss recorded in each tax jurisdiction. The Company
recorded an income tax expense of $2.1 million and $1.5 million on a pretax
income of $12.9 million and $8.2 million for year ended December 31, 2009 and
2008, respectively.
  59
     Income tax provision consists of the
following (in thousands):
  Year ended December 312009
              
              2008Current:Federal -
      Expense/(Benefit)
              
              $
              120
              
              
              $
              -State - Expense/(Benefit)
              
              
              35
              
              
              
              85Foreign -
      Expense/(Benefit)
              
              
              2,456
              
              
              
              1,6372,611
              
              
              
              1,722Deferred:Federal - Expense/(Benefit)
              
              
              -
              
              
              
              -Foreign -
      Expense/(Benefit)
              
              
              (551
              )
              
              
              (210
              )Total
              
              $
              2,060
              
              
              $
              1,512
  Income before taxes from domestic
and foreign sources is as follows (in thousands):
  2009
              
              2008United States
              
              $
              6,597
              
              $
              2,706Foreign
              
              
              6,263
              
              
              5,495Income before income taxes
              
              $
              12,860
              
              $
              8,201
  The effective tax rate has decreased to a tax
provision of 16.0% for year ended December 31, 2009 from a tax provision of
18.4% for year ended December 31, 2008. Changes in the effective rate of taxes
are due to the changes in the geographic distribution of our income and changes
in non taxable income. The difference between the income tax rates for the 2009
and 2008 periods and the statutory rate is primarily due to the existence of
carried forward net operating losses in the U.S. locations and earnings taxed in
countries that have rates lower than the United States.
  The provision for income taxes differs from
the amount computed by applying the statutory rate of 34% to income before
income taxes. The principal reasons for the differences are:
  2009
              
              2008Tax at federal statutory rate
              
              34.0
              %
              
              34.0
              %State income tax, net of federal benefit
              
              0.3
              %
              
              1.0
              %Foreign Tax Rate Differential
              
              -1.2
              %
              
              -3.6
              %Changes in Valuation Allowance
              
              -14.2
              %
              
              -4.9
              %Permanent items
              
              -6.0
              %
              
              -5.5
              %Tax holiday, India
              
              -1.1
              %
              
              0.0
              %FIN 48 Expense (Benefit)
              
              0.3
              %
              
              0.3
              %Other
              
              3.9
              %
              
              -2.9
              %16.0
              %
              
              18.4
              %
  Deferred income taxes reflect the tax effect
of temporary differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
The significant components of the Company’s deferred tax assets and liabilities
are as follows (in thousands):
  2009
              
              2008Deferred Tax Assets:Allowance for doubtful
      accounts
              
              $
              1,159
              
              
              $
              914Vacation accrual
              
              
              1,436
              
              
              
              1,383Bonus Accrual
              
              
              212
              
              
              
              211Net
      operating losses
              
              
              19,578
              
              
              
              21,379Other Deferred tax
      assets
              
              
              212
              
              
              
              39Total gross deferred tax
assets
              
              
              22,597
              
              
              
              23,926Deferred Tax Liabilities:Depreciation
              
              
              67
              
              
              
              164Total gross deferred tax liabilities
              
              
              67
              
              
              
              164Valuation Allowance
              
              
              (21,030
              )
              
              
              (22,880
              )Net deferred income tax assets
              
              $
              1,500
              
              
              $
              882
  60
     During 2009 and 2008, the Company generated
net operating losses in certain tax jurisdictions. The Company has provided a
valuation allowance against these net operating losses in some jurisdictions as
the ability to utilize these losses may be limited in the future. The Company’s
valuation allowance as of December 31, 2009 and 2008 was $21.0 million and $22.9
million respectively. Cumulative net operating loss carry forwards of $49.1
million expire in various years through 2026.
  In 2009, the Bangalore unit of the Company’s
Indian subsidiary that qualified for an exemption from corporate tax under
section 10A of the Indian Income Tax Act was able to utilize the benefit of this
exemption. Consequently, a taxable profit of INR 20 million (or approximately
$0.4 million) was exempt from taxes which had an overall tax rate impact of
reducing the tax liability by 1%. The 10A benefit at the Bangalore unit shall
continue till the fiscal year 2011.
  APB 23 (as amended by ASC 740) presumes that
all undistributed earnings of foreign subsidiaries will be remitted to the US
parent and deferred taxes provided on such earnings unless a US parent asserts
that its foreign earnings are indefinitely reinvested abroad. The Company
considers the current and accumulated earnings of all its foreign subsidiaries
to be permanently reinvested outside the US and as such no additional US taxes
for these earnings has been provided. As of December 31, 2009, the Company had
undistributed earnings of foreign subsidiaries of approximately $31 million, for
which deferred taxes have not been provided. The Company intends to reinvest
these earnings for the foreseeable future. If these amounts were distributed to
the United States, in the form of dividends or otherwise, the Company would be
subject to additional U.S. income taxes. Determination of the amount of
unrecognized deferred income tax liabilities on these earnings is not
practicable because such liability, if any, is dependent on circumstances if and
when remittance was to occur.
  Uncertain Tax Positions
  The Company’s India subsidiary received tax
assessments for the fiscal years ended March 31, 1998 through 2003 and fiscal
year ended March 31, 2005, challenging the tax exemptions of certain revenue
earned and disallowing certain expenses. The Company has deposited additional
tax of INR 49.1 million (or approximately $1.1 million) under protest, net of
allowance of $0.1 million, as at December 31, 2009 consequent to the above tax
assessments.
  During the year ended December 31, 2009, the
Company deposited an amount of INR 2.8 million (or approximately $0.1 million)
under protest against the order passed by the tax authorities challenging
certain tax exemptions, the Company were previously permitted to take for the
fiscal year ended March 31, 2001. Further, for the fiscal year ended March 31,
2005, an amount of INR 20.4 million (or approximately $0.4 million) had also
been deposited by the Company under protest, during the 2009, against an
assessment order passed by the tax authorities, challenging the transfer pricing
methodology followed by the Company and non submission of evidence in support of
foreign inward remittance. The Company also received an order from the tax
authorities demanding an additional payment of INR 8 million (or approximately
$0.2 million) for open assessments pertaining to fiscal years ending March 31,
2001 and 2005. The Company has not recorded a reserve on the additional tax paid
under protest as it believes its tax position will most likely be sustained
based on independent merits. Such taxes paid under protest have been included
under Prepaid Taxes – Non-adjustable on the consolidated balance sheet.
  U.S. and Indian transfer pricing regulations
require that any international transaction involving associated enterprises be
at an arm’s-length price. Transactions among the Company’s subsidiaries and the
Company may be required to satisfy such requirements. Accordingly, the Company
determines the pricing among its associated enterprises on the basis of detailed
functional and economic analysis involving benchmarking against transactions
among entities that are not under common control. If the applicable income tax
authorities review any of the Company’s tax returns and determine that the
transfer price applied was not appropriate, the Company may incur increased tax
liability, including accrued interest and penalties.
  Based on advice from its Indian tax advisors,
the facts underlying its position and its experience with these types of
assessments, the Company believes that the probability of loss is remote and
accordingly has not accrued any amount with respect to these matters.
  The following table summarizes the
roll forward activity with regard to the uncertain tax positions:
  2009
              
              2008Opening balance at January 1
              
              $
              95
              
              
              $
              69Decrease related to prior year tax positions
              
              
              (9
              )
              
              
              (12
              )Increase related to current year tax
      positions
              
              
              -
              
              
              
              51Effect of exchange rate changes
              
              
              4
              
              
              
              (13
              )Closing balance at December 31
              
              $
              90
              
              
              $
              95
  Impact of uncertain tax positions is not
expected to change significantly in the year 2010. The impact of uncertain tax
positions on the effective tax rate is 0.2% as of December 31, 2009.
  NOTE 14 - EMPLOYEE BENEFIT
PLANS
  The Company maintains a defined contribution
401(k) plan. All United States employees, who are employed on a full-time basis,
are eligible to participate in the plan, effective the first day of the next
quarterly enrollment period. Costs incurred by the Company related to this plan
amounted to $0.5 million for the year ended December 31, 2009 and $0.6 million
for the year ended December 31, 2008. The Company’s match in the 401(k) plan is
2%, which vests over a service period of three years. The forfeitures to offset
contributions for the years ended December 2009 and 2008 were not
material.
  In accordance with Indian law, all employees
of the Company’s Indian subsidiary are entitled to receive benefits under the
Provident Fund, which is a defined contribution plan. Both the employees and the
employer make monthly contributions to the plan at a predetermined rate
(presently 12.0%) of the employees’ basic salary. These contributions are made
to the fund administered and managed by the Government of India. In addition,
some employees of the Company are covered under the employees’ state insurance
schemes, which are also defined contribution schemes recognized by the Indian
Revenue Authorities and are administered through the Government of India. The
Company’s contributions are expensed as incurred. The Company has no further
obligations under these plans beyond its monthly contributions. The Company’s
contribution towards the Provident Fund amounted to $0.9 million and $1 million
for year ended December 31, 2008 and 2009, respectively.
  61
     The Company’s India subsidiary provides its
employees with benefits under a defined benefit pension plan, which is referred
to as the Gratuity Plan. Pursuant to applicable India law, the Gratuity Plan
provides a lump sum payment to vested employees on retirement or on termination
of employment in an amount based on the respective employee’s salary and years
of employment with the Company. The Company determines liability under the
Gratuity Plan by actuarial valuation using the projected unit credit method.
Under this method, the Company determines liability based upon the discounted
value of salary increases until the date of separation arising from retirement,
death, resignation or other termination of services. Critical assumptions used
in measuring the plan expense and projected liability under the projected unit
credit method include the discount rate, expected return on assets and the
expected increase in the compensation rates. The Company evaluates these
critical assumptions at least annually. The Company periodically evaluates and
updates other assumptions used in the projected unit credit method involving
demographic factors, such as retirement age and turnover rate, to reflect its
experience. The mortality rates used are consistent with those published by the
Life Insurance Corporation of India.
  The discount rate enables the Company to state
expected future cash flows at a present value on the measurement date. The
discount rate used is equal to the yield on high quality fixed income
investments in India at the measurement date. The expected rate of return on
plan assets is estimated based on available market information, Indian law which
regulates such investments and historical returns. Liabilities with regard to
the Gratuity Plan are determined by actuarial valuation. Current service costs
for the Gratuity Plan are accrued in the year to which they relate.
  Net gratuity cost includes the
following components as follows (in thousands):
  Year ended December
  31,2009
              
              2008Service Cost
              
              $
              118
              
              
              $
              85Interest Cost
              
              
              42
              
              
              
              32Actuarial (Gain) / Loss
              
              
              (10
              )
              
              
              93Expected Return on Assets
              
              
              (7
              )
              
              
              (3
              )Net Gratuity Cost
              
              $
              143
              
              
              $
              207
  The following summarizes the
components of benefit obligation (in thousands)
  December 31,2009
              
              2008Change in Benefit Obligation during the
      yearProjected Benefit Obligation at beginning of year
              
              $
              453
              
              
              $
              563Current Service Cost
              
              
              118
              
              
              
              85Interest Cost
              
              
              42
              
              
              
              32Actuarial (Gain) / Loss due to change in
      assumptions
              
              
              (10
              )
              
              
              93Benefits Paid
              
              
              (62
              )
              
              
              (212
              )Impact of Foreign Exchange
      Translations
              
              
              22
              
              
              
              (108
              )Projected Benefit Obligation at End of Year
              
              $
              563
              
              
              $
              453
  The following summarizes the
components of plan assets (in thousands):
  As at December 31,2009
              
              2008Change in Plan Assets During the
      yearFair Value of Plan Asset at beginning of Year
              
              $
              32
              
              
              $
              67Actual Return on Plan Asset
              
              
              7
              
              
              
              3Employer Contribution
              
              
              257
              
              
              
              185Benefit Payments
              
              
              (62
              )
              
              
              (212
              )Impact of Foreign Exchange Translations
              
              
              2
              
              
              
              (11
              )Fair Value of Plan Asset at End of
      Year
              
              $
              236
              
              
              $
              32
  The Gratuity Plan is a funded plan that is
managed and administered by Life Insurance Corporation (LIC) of India, a body
corporate fully owned by Government of India, which calculates the annual
contribution required to be made by the Company, manages the investment as well
as payouts under the plan. The plan assets held by the LIC are principally in
the form of Indian government securities and high quality corporate bonds. Based
on the plan investments allowed by the Government of India, LIC estimates the
expected future returns on the fund assets which were expected to be
approximately 8% and 8.7% in the years 2009 and 2008 respectively. The LIC
manages the fund on a cash accumulation basis and declares interest
retrospectively on March 31, each year.
  The unfunded benefit obligation as at December
31, 2009 and 2008 was $326,000 and $421,000 respectively. The short term portion
of the pension liability net of plan assets is recorded under Accrued Payroll
and related taxes on the consolidated Balance Sheet. The long term portion is
recorded in Other Long Term Liabilities. The Company recognizes full amount of
actuarial gains and losses immediately in the Income Statement.
  62
     The following summarizes the
expected future benefit payments from the plan (in thousands)
  ExpectedYear
      ending
              
              BenefitPayments2010
              
              $
              1152011
              
              
              1002012
              
              
              772013
              
              
              572014 to 2018
              
              
              122$
              471
  The accumulated benefit obligation
as at December 31, 2009 and 2008 was approximately $473,000 and $344,000
respectively.
  The following are the assumptions
used for the valuation.
  Assumptions
              2009
              
              2008Discount Rate % per annum at year
      end
              8.00%
              
              7.50%Expected return on plan assets
              8.00%
              
              8.70%Salary escalation
              7.50%
              
              8.00%
  The expected employer contributions
for the year ending December 31, 2010 are approximately $321,000.
  NOTE 15 - SEGMENT DATA AND GEOGRAPHIC
INFORMATION
  The Company operates in one
industry, information technology solutions and services.
  The Company has four reportable
operating segments from continuing operations, which are organized and managed
on a geographical basis, as follows:
  United States (“US”) – the largest segment of the Company, with
operations in the US and Puerto Rico. Includes the operations of the Company’s
US subsidiary, Empower, Inc., and all corporate functions and activities. The US
and corporate headquarters is located in Princeton, New Jersey;
  India – includes the operations of the Company in India, including
services provided on behalf of other group subsidiaries, primarily to the US.
The India offices are located in Hyderabad and Bangalore, India. A majority of
total revenue generated in India is derived from providing offshore development
and support services to customers through the Company’s affiliated entities in
other parts of the world, but predominantly with the US. This Segment also
covers our operations in the United Arab Emirates (“UAE”);
  Europe – includes the operations of the Company in Denmark and the United
Kingdom. The European offices are located in Milton Keynes, United Kingdom and
Odense in Denmark; and
  Japan – includes the operations of the Company in Japan. The office is
located in Tokyo, Japan.
  The inter-segment transactions are
recorded based on a cost plus mark up arrangement with the holding company.
  The CEO has been identified as the Chief
Operating Decision Maker (“CODM”) because he has final authority over resource
allocation decisions and performance assessment. The CODM regularly receives
certain discrete financial information about the geographical operating
segments, including primarily revenue and operating income, to evaluate segment
performance.
  Accordingly, the Company’s consolidated
operating results for the years ended December 31, 2009 and 2008 and financial
position as of December 31, 2009 and 2008 are presented in the following
geographic segments (in thousands):
  63
     UnitedStates
              
              India
              
              Europe
              
              Japan
              
              Elimination
              
              TotalYear ended December 31,
      2009Revenue
              
              95,234
              
              
              7,110
              
              
              19,956
              
              
              4,218
              
              
              -
              
              
              126,518Inter-segment Revenue
              
              813
              
              
              27,589
              
              
              -
              
              
              -
              
              
              (28,402
              )
              
              -Depreciation and amortization
              
              481
              
              
              1,636
              
              
              364
              
              
              11
              
              
              -
              
              
              2,492Operating Income / (Loss)
              
              6,599
              
              
              3,431
              
              
              2,369
              
              
              (474
              )
              
              -
              
              
              11,925Interest expenses
              
              49
              
              
              (64
              )
              
              (65
              )
              
              -
              
              
              -
              
              
              (80
              )Income Tax Expense
              
              541
              
              
              1,173
              
              
              346
              
              
              -
              
              
              -
              
              
              2,060Net Income / (Loss)
              
              6,056
              
              
              3,414
              
              
              1,872
              
              
              (542
              )
              
              -
              
              
              10,800Property & Equipment, net
              
              441
              
              
              1,851
              
              
              743
              
              
              50
              
              
              -
              
              
              3,085
              
              
              (1)Total assets
              
              46,538
              
              
              34,738
              
              
              9,777
              
              
              1,233
              
              
              (24,883
              )
              
              67,403Year ended December 31,
      2008Revenue
              
              119,926
              
              
              13,637
              
              
              18,164
              
              
              5,374
              
              
              -
              
              
              157,101Inter-segment Revenue
              
              156
              
              
              33,672
              
              
              -
              
              
              -
              
              
              (33,828
              )
              
              -Depreciation and amortization
              
              387
              
              
              1,546
              
              
              453
              
              
              13
              
              
              -
              
              
              2,399Operating Income / (Loss)
              
              2,405
              
              
              7,629
              
              
              1,115
              
              
              (20
              )
              
              -
              
              
              11,129Interest expenses
              
              (200
              )
              
              (87
              )
              
              (248
              )
              
              -
              
              
              -
              
              
              (535
              )Income Tax Expense
              
              111
              
              
              1,198
              
              
              203
              
              
              -
              
              
              -
              
              
              1,512Net Income
              
              2,595
              
              
              2,532
              
              
              1,160
              
              
              402
              
              
              -
              
              
              6,689Property & Equipment, net
              
              504
              
              
              3,279
              
              
              1,196
              
              
              62
              
              
              -
              
              
              5,041
              
              
              (2)Total assets
              
              48,072
              
              
              34,221
              
              
              6,701
              
              
              2,456
              
              
              (31,220
              )
              
              60,230
  (1)
              
              Of the
      total capital expenditures incurred for the year ended December 31 2009,
      $0.5 million was incurred in the US, $0.2 million was incurred in Europe,
      and $0.6 million was incurred in India.(2)
              
              Of the
      total capital expenditures incurred for the year ended December 31 2008,
      $0.3 million was incurred in the US, $0.2 million was incurred in Europe,
      and $1.0 million was incurred in India.
 
 NOTE 16 - SUBSEQUENT EVENTS
  As per ASU 560, the Company is required to
disclose significant changes in estimates as on the balance sheet date and to
evaluate subsequent events that occurred after the balance sheet date but before
the financial statements were issued. The company has concluded that no events
or transactions have occurred which would require adjustments or disclosures in
the Company’s financial statements.
  NOTE 17 - UNAUDITED QUARTERLY FINANCIAL
DATA
  2009 and 2008 Quarterly Financial Data
  The following tables set forth certain
unaudited results of operations for each quarter during 2009 and 2008. The
unaudited information has been prepared on the same basis as the audited
consolidated financial statements and includes all adjustments which management
considers necessary for a fair presentation of the financial data shown. The
operating results for any quarter are not necessarily indicative of the results
to be attained for any future period. Basic and diluted earnings (loss) per
share are computed independently for each of the periods presented. Accordingly,
the sum of the quarterly earnings (loss) per share may not agree to the total
for the year (in thousands, except per share data).
  64
     For the quarters
  endedMarch 31,
              
              June
      30,
              
              September 30,
              
              December 31,Statement of
      Operations
              
              2009
              
              2009
              
              2009
              
              2009Revenue
              
              $
              30,869
              
              $
              30,960
              
              $
              31,730
              
              $
              32,959Cost of revenue
              
              $
              21,248
              
              $
              20,267
              
              $
              20,745
              
              $
              21,857Total operating expenses
              
              $
              7,811
              
              $
              7,828
              
              $
              7,366
              
              $
              7,471Operating income (loss)
              
              
              1,810
              
              
              2,865
              
              
              3,619
              
              
              3,631Income (loss) before provision for
      income taxes
              
              $
              1,307
              
              $
              3,797
              
              $
              4,066
              
              $
              3,690Provision for income taxes
              
              $
              530
              
              $
              593
              
              $
              506
              
              $
              431Net income (loss)
              
              
              777
              
              
              3,204
              
              
              3,560
              
              
              3,259Net income (loss) per common share -
      basic
              
              $
              0.02
              
              $
              0.08
              
              $
              0.09
              
              $
              0.08Net income (loss) per common share - diluted
              
              $
              0.02
              
              $
              0.08
              
              $
              0.09
              
              $
              0.08Shares Outstanding:Basic
              
              
              41,719
              
              
              41,498
              
              
              41,143
              
              
              41,090Diluted
              
              
              41,740
              
              
              41,516
              
              
              41,641
              
              
              42,099For the quarters
  endedMarch 31,
              
              June
      30,
              
              September 30,
              
              December 31,Statement of
      Operations
              
              2008
              
              2008
              
              2008
              
              2008Revenue
              
              $
              38,453
              
              $
              40,137
              
              $
              41,207
              
              $
              37,304Cost of revenue
              
              $
              27,029
              
              $
              27,099
              
              $
              28,326
              
              $
              25,181Total operating expenses
              
              $
              9,718
              
              $
              10,413
              
              $
              9,020
              
              $
              9,186Operating income (loss)
              
              
              1,706
              
              
              2,625
              
              
              3,861
              
              
              2,937Income (loss) before provision for
      income taxes
              
              $
              2,188
              
              $
              1,446
              
              $
              3,152
              
              $
              1,415Provision for income taxes
              
              $
              326
              
              $
              312
              
              $
              456
              
              $
              418Net income (loss)
              
              
              1,862
              
              
              1,134
              
              
              2,696
              
              
              997Net income (loss) per common share -
      basic
              
              $
              0.04
              
              $
              0.03
              
              $
              0.06
              
              $
              0.02Net income (loss) per common share - diluted
              
              $
              0.04
              
              $
              0.03
              
              $
              0.06
              
              $
              0.02Shares Outstanding:Basic
              
              
              42,160
              
              
              42,160
              
              
              42,160
              
              
              42,142Diluted
              
              
              42,493
              
              
              42,248
              
              
              42,580
              
              
              42,203
  65