NEW YORK, Nov 03, 2009 (BUSINESS WIRE) ----RiskMetrics Group Inc. (NYSE:RMG), a leading provider of risk management and corporate governance products and services to participants in the global financial markets, today announced its financial results for the third quarter ended September 30, 2009.

Earnings Highlights: See Tables C, D and H through K for a reconciliation of GAAP and Non-GAAP financial measures.

(Note: Percentage changes are referenced to the comparable period in fiscal year 2008, unless otherwise noted.)

-- Third quarter 2009 revenues decreased 2.1% to $74.0 million and revenue for the nine months ended September 30, 2009 increased 2.7% to $226.9 million.

-- Third quarter 2009 Adjusted EBITDA increased 2.9% to $25.8 million, with an Adjusted EBITDA margin of 34.8%. Adjusted EBITDA for the nine months ended September 30, 2009 increased 14.3% to $82.3 million with an Adjusted EBITDA margin of 36.3%.

-- GAAP EPS for third quarter 2009 was $0.11, up from $0.09 in the prior year.

-- Adjusted EPS (before amortization of intangibles, one-time costs, and stock-based compensation) for the third quarter 2009 was $0.19, up from $0.16 in the prior year.

"Due to the decline in new sales and renewal rates during the first part of 2009, revenue growth has flattened compared to the prior year," said Ethan Berman, Chief Executive Officer of RiskMetrics Group. "However, we are beginning to see improved renewal rates, increased new sales and a growing sales pipeline. We have controlled costs and realized the benefits of streamlining operations as Adjusted EBITDA for the nine months increased 14.3% to $82.3 million despite flattening revenue growth."

Selected Financial Information (unaudited)

All amounts (except share and per share information) are in thousands, unless indicated otherwise.

   TABLE A                             Three Months Ended
   September 30,
   %
   2009         2008         Change
   Revenues:
   Risk                                $39,487      $40,846      (3.3  )%
   ISS                                 34,493       34,708       (0.6  )%
   Total Revenues                      73,980       $75,554      (2.1  )%
   Operating Cost and Expenses:
   Adjusted EBITDA expenses (1)        48,219       50,514       (4.5  )%
   Other operating expenses (2)        10,566       9,853        7.2   %
   Total operating costs and expenses  58,785       60,367       (2.6  )%
   Income from operations              15,195       15,187       0.1   %
   Other expense                       (4,986   )   (4,860   )   (2.6  )%
   Income before income taxes          10,209       10,327       (1.1  )%
   Provision for income taxes          2,426        4,045        (40.0 )%
   Net income - GAAP                   $7,783       $6,282       23.9  %
   EPS (diluted) - GAAP                $0.11        $0.09
   Adjusted Net income (3)             $13,030      $10,937      19.1  %
   Adjusted EPS (diluted) (3)          $0.19        $0.16
   Adjusted EBITDA (4)                 $25,761      $25,040      2.9   %
   Adjusted EBITDA margin              34.8     %   33.1     %
   Nine Months Ended
   September 30,
   %
   2009         2008         Change
   Revenues:
   Risk                                $119,102     $114,110     4.4   %
   ISS                                 107,787      106,790      0.9   %
   Total Revenues                      226,889      $220,900     2.7   %
   Operating Cost and Expenses:
   Adjusted EBITDA expenses (1)        144,639      148,914      (2.9  )%
   Other operating expenses (2)        31,808       30,646       3.8   %
   Total operating costs and expenses  176,447      179,560      (1.7  )%
   Income from operations              50,442       41,340       22.0  %
   Other expense                       (15,252  )   (21,337  )   28.5  %
   Income before income taxes          35,190       20,003       75.9  %
   Provision for income taxes          11,669       7,828        49.1  %
   Net income - GAAP                   $23,521      $12,175      93.2  %
   EPS (diluted) - GAAP                $0.35        $0.18
   Adjusted Net income (3)             $39,681      $29,789      33.2  %
   Adjusted EPS (diluted) (3)          $0.58        $0.44
   Adjusted EBITDA (4)                 $82,250      $71,986      14.3  %
   Adjusted EBITDA margin              36.3     %   32.6     %
   

* Exceeds 100%

(1) Represents cost of revenues, research and development, selling and marketing and general and administrative expenses, excluding stock-based compensation and one time charges. Refer to tables H through K for a reconciliation to the comparable GAAP measure.

(2) Represents depreciation and amortization of property and equipment, amortization of intangible assets, one-time costs, loss on disposal of property and equipment, and stock-based compensation. Refer to tables H through K for a reconciliation to the comparable GAAP measure.

(3) Represents net income and EPS before amortization of intangible assets, one-time costs, and stock-based compensation. Refer to table D for a reconciliation to the comparable GAAP measure.

(4) Represents net income before interest expense, interest income, income tax expense, depreciation, amortization, non-cash stock based compensation expense and one-time costs. Refer to table C for a reconciliation to the comparable GAAP measure.

Third Quarter 2009 Results Compared to Third Quarter 2008 Results

Third Quarter 2009 Revenues

Total revenues for the third quarter of 2009 ("Q3 2009") were $74.0 million, down 2.1% from $75.6 million in the third quarter of 2008 ("Q3 2008"). Q3 2009 consolidated revenues decreased $1.5 million, or 2.1%, compared to the second quarter of 2009 due to a $1.9 million decline in non-recurring revenue primarily due to the seasonality of ISS Corporate Advisory Services.

Changes in foreign currency exchange rates (principally the strengthening of the US dollar) in Q3 2009 compared to Q3 2008 had a negative impact on consolidated revenue of $1.8 million. Revenue for Q3 2009, excluding the impact of foreign currency, was flat relative to Q3 2008.

On a business segment level, Q3 2009 Risk revenues were $39.5 million, a 3.3% decrease over Q3 2008 due to lower new sales, higher non-renewals rates, particularly in the hedge fund sector, and negative currency impacts.

ISS revenues were $34.5 million in Q3 2009, a 0.6% decrease over Q3 2008 primarily due to a decline in proxy research and voting and CFRA revenues partially offset by the Innovest acquisition (which was acquired on March 2, 2009).

Third Quarter 2009 Adjusted EBITDA Expenses

Adjusted EBITDA expenses, which exclude depreciation and amortization of property and equipment, amortization of intangible assets, one-time costs, non-cash stock-based compensation expense, interest, dividend and investment income (expense) and income tax expense, of $48.2 million decreased $2.3 million, or 4.5%, compared to Q3 2008. Changes in foreign currency exchange rates (principally the strengthening of the US dollar) in Q3 2009 compared to Q3 2008 had a favorable impact on reported Adjusted EBITDA expenses of $3.3 million.

Q3 2009 Adjusted EBITDA expenses of $48.2 million decreased slightly compared to Q2 2009 Adjusted EBITDA expenses of $48.4 million.

Compensation expense, which accounted for 71.7% of total Adjusted EBITDA expenses, increased by 1.2% to $34.6 million for Q3 2009 compared to Q3 2008 due to increased salaries and benefits, partially from the Innovest acquisition offset by lower commissions and favorable changes in foreign currency exchange rates.

Non-compensation expenses decreased to $13.6 million, or 16.5%, for Q3 2009 from Q3 2008, due mainly to decreases in marketing, travel and entertainment expenses, reduced accounting and SOX 404 costs and favorable changes in foreign currency exchange rates.

Adjusted EBITDA expenses represented approximately 65.2% of total revenues during Q3 2009, compared with 66.9% in Q3 2008.

Third Quarter 2009 Adjusted EBITDA

Consolidated Adjusted EBITDA increased 2.9% to $25.8 million in Q3 2009 from $25.0 million in Q3 2008. EBITDA, including stock based compensation expense of $2.3 million, was $23.5 million in Q3 2009. Q3 2009 consolidated Adjusted EBITDA decreased $1.4 million compared to Q2 2009 primarily due to a $1.5 million sequential decline in revenue.

The Adjusted EBITDA margin expanded 170 basis points to 34.8% in Q3 2009, compared with 33.1% in Q3 2008 as Adjusted EBITDA expenses decreased 4.5%.

On a segment level, the Risk business generated Adjusted EBITDA of $15.7 million, which was a 9.5% increase over Q3 2008. The Q3 2009 Risk Adjusted EBITDA Margin was 39.9% as compared to 35.2% in Q3 2008 as Adjusted EBITDA expenses decreased 10.3%.

ISS generated Adjusted EBITDA of $10.0 million in Q3 2009 which was a 6.0% decrease over Q3 2008. The Q3 2009 ISS Adjusted EBITDA Margin of 29.0% decreased versus 30.7% in Q3 2008 due to a decline in revenue and 1.8% increase in Adjusted EBITDA expenses due primarily to increased compensation costs as a result of the continued investment in ISS product development and operations.

Third Quarter 2009 Other Operating Expenses and Income from Operations

Consolidated Q3 2009 income from operations of $15.2 million was flat compared to Q3 2008. Other operating expenses (stock based compensation, depreciation, amortization, one-time charges and loss on disposal of fixed assets) of $10.6 million grew by $0.7 million compared to Q3 2008 primarily due to a $0.5 million increase in amortization expense as a result of intangibles acquired in connection with the Innovest acquisition.

Third Quarter 2009 Interest, Dividend, Investment and Other Income (Expense), Net

Net interest, dividend, investment and other expense of $5.0 million for Q3 2009 increased slightly compared to Q3 2008 due to lower interest rate yields offset by decreased interest expense from reduced debt borrowings.

Third Quarter 2009 Net Income and EPS

Net income for Q3 2009 of $7.8 million increased from $6.3 million for Q3 2008. GAAP EPS (diluted) increased to $0.11 for Q3 2009 from $0.09 in Q3 2008. Q3 2009 EPS and net income was positively impacted by a reduction in the annual effective tax rate due to increased tax credits and a one-time reversal of previously accrued income tax contingencies in Q3 2009 as a result of statute of limitations expiration.

Adjusted net income, as defined in Table D, increased to $13.0 million in Q3 2009 from $10.9 million in Q3 2008. Adjusted EPS increased to $0.19 for Q3 2009 from $0.16 in Q3 2008.

Nine Months ended September 30, 2009 Results Compared to Nine months ended September 30, 2008 Results

Nine months 2009 Revenues

Total revenues for the nine months ended September 30, 2009 were $226.9 million, up 2.7% from $220.9 million over the comparable prior year period. Nine months 2009 revenue includes $3.6 million from Innovest offset by negative currency impacts (principally the strengthening of the US dollar) of $3.1 million. Revenue growth for the first nine months of 2009, excluding the impact of foreign currency, was approximately 4.1%.

On a business segment level, Risk revenues for the nine months ended September 30, 2009 were $119.1 million, a 4.4% increase over the comparable period in 2008. This was primarily driven by 4.6% growth in RiskManager revenue partially offset by increased non renewals and negative currency effects.

ISS revenues were $107.8 million for the nine months ended September 30, 2009, a 0.9% increase over the comparable 2008 period primarily due to the Innovest acquisition and increased Corporate Advisory Service revenue partially offset by a decline in proxy research and voting and CFRA revenue.

Nine months 2009 Adjusted EBITDA Expenses

Adjusted EBITDA expenses of $144.6 million decreased $4.3 million, or 2.9%, compared to nine months ended September 30, 2008. Changes in foreign exchange rates (principally the strengthening of the US dollar) in the nine months ended September 30, 2009 compared to the comparable period in 2008 had a favorable impact on Adjusted EBITDA expenses of $7.4 million.

Compensation expense, which accounted for 70.8% of total Adjusted EBITDA expenses, increased by 1.7% to $102.4 million for the nine months ended September 30, 2009 compared to the comparable period in 2008, increased salaries and benefits due partially to the Innovest acquisition offset by lower commissions and favorable changes in foreign exchange rates.

Non-compensation expenses decreased to $42.2 million, or 12.4%, for the nine months ended September 30, 2009 compared to the comparable period in 2008, due mainly to decreases in marketing, travel and entertainment expenses, reduced accounting and SOX 404 costs and favorable changes in foreign exchange rates.

Adjusted EBITDA expenses represented approximately 63.7% of total revenues during the nine months ended September 30, 2009 compared with 67.4% in the comparable period 2008.

Nine months 2009 Adjusted EBITDA

Consolidated Adjusted EBITDA increased 14.3% to $82.3 million in the nine months ended September 30, 2009 from $72.0 million in the comparable period in 2008 as revenue grew 2.7% and Adjusted EBITDA expenses decreased 2.9%.

EBITDA, including stock based compensation expense of $6.4 million, was $75.9 million for the nine months ended September 30, 2009.

The Adjusted EBITDA margin increased to 36.3% in the nine months ended September 30, 2009, compared with 32.6% in the comparable 2008 period and 34.1% in full year 2008 ( 220 basis point expansion), as revenues grew and Adjusted EBITDA expenses declined.

On a segment level, the Risk business generated Adjusted EBITDA of $49.1 million for the nine months ended September 30, 2009 which was a 21.4% increase over the nine months ended September 30, 2008. The Risk Adjusted EBITDA Margin was 41.2% for the nine months ended September 30, 2009 as compared to 35.4% in the nine months ended September 30, 2008 as revenue grew 4.4% and Adjusted EBITDA expenses declined 5.0%.

ISS generated Adjusted EBITDA of $33.1 million for the nine months ended September 30, 2009 which was a 5.1% increase over the nine months ended September 30, 20008. The ISS Adjusted EBITDA Margin for the nine months ended September 30, 2009 was 30.7% as compared to 29.6% in the nine months ended September 30, 2008.

Nine months 2009 Other Operating Expenses and Income from Operations

Consolidated nine months 2009 income from operations was $50.4 million, an increase of 22.0% compared to $41.3 million in the comparable period in 2008. Other operating expenses (stock based compensation, depreciation, amortization, one-time charges and loss on disposal of fixed assets) of $31.8 million increased $1.2 million compared to the comparable period in 2008 primarily due to a $1.0 million increase in amortization expense as a result of intangibles acquired in connection with the Innovest acquisition.

Nine months 2009 Interest, Dividend, Investment and Other Income (Expense), Net

Net interest, dividend, investment and other expense decreased to $15.3 million for the nine months ended September 30, 2009 from $21.3 million in the comparable period in 2008. The decrease in other expenses was mainly due to lower interest expense and one-time IPO and debt repayment-related costs of $5.0 million in 2008, which consisted of a $1.25 million debt prepayment penalty fee and a $1.4 million loss on a interest rate swap settlement, both included in the Other Expense line, as well as a non-cash $2.4 million debt issuance cost write-off, included in Interest Expense during 2008.

Nine months 2009 Net Income and EPS

Net Income increased to $23.5 million for the nine months ended September 30, 2009 from $12.2 million for the nine months ended September 30, 2008. Net income for the nine months ended September 30, 2009 and 2008 includes $1.5 million and $6.3 million of one time charges, respectively. GAAP EPS (diluted) for the nine months ended September 30, 2009 increased to $0.35 from $0.18 in the comparable period in 2008. EPS for the nine months ended September 30, 2009 excluding one-time costs was $0.37.

The effective tax rate for the nine months ended September 30, 2009 decreased to 33.2% from 39.1% in the comparable prior period. The effective tax rate declined primarily due to increased tax credits and a one-time reversal of previously accrued income tax contingencies in Q3 2009 as a result of statute of limitations expiration. The Company expects the future years normalized effective annual tax rate to range from 35% to 37%.

Adjusted net income, as defined in Table D, increased to $39.7 million for the nine months ended September 30, 2009 from $29.8 million in the comparable period in 2008. Adjusted EPS increased to $0.58 for the nine months ended September 30, 2009, from $0.44 in the comparable period in 2008.

Selected Operating Data

The Company believes that the following supplemental consolidated financial information is helpful to understanding the Company's overall financial results.

   TABLE B
   As of and for the
   Nine Months Ended
   September
   30
   Operating Data                                 2009      2008
   Annualized Contract Value (1)
   Risk                                           $153,713  $159,603
   % Decline                                      (3.7)%
   ISS (2)                                        $122,929  $128,486
   % Decline                                      (4.3)%
   Annualized Contract Value                      $276,642  $288,089
   % Decline                                      (4.0)%
   Recurring Revenue as a % of total revenue (3)
   Risk                                           98.4%     98.6%
   ISS                                            86.3%     88.4%
   Recurring Revenue as a % of total revenue.     92.7%     93.6%
   Renewal Rate
   Risk                                           81.3%     88.9%
   ISS                                            81.8%     88.0%
   Renewal Rate                                   81.5%     88.5%
   

Notes to Operating Data Table:

   (1)  We define annualized contract value ("ACV") as the aggregate value,
   on an annualized basis, of all recurring subscription contracts in
   effect on a reporting date.
   (2)  Innovest was acquired on March 2, 2009 with $5.2 million of ACV,
   which is not included in ISS ACV as of September 30, 2008. Innovest
   ACV does not include any contracts where fees are based on the
   clients' asset under management, which currently as of September 30,
   2009 approximated $0.8 million of annual revenue.
   (3)  We define recurring revenue as a percentage of total revenue as
   revenue from subscription contracts divided by total revenue during
   the applicable period.
   

Overall, renewal rates were 81.5% for the nine months ended September 30, 2009 as compared with 88.5% for the nine months ended September 30, 2008. Risk achieved a renewal rate of 81.3% which decreased compared to the prior year renewal rate of 88.9%. ISS had a renewal rate of 81.8% which decreased compared to the prior year renewal rate of 88.0%.

The Risk renewal rate declined mainly due to higher non-renewals rates in the alternative investment segment. The ISS renewal rate declined primarily due to a decline in the proxy business renewal rate driven by budget constraints of clients, as well as significantly lower renewal rates in Corporate Services and CFRA products.

Mr. Berman added, "Renewal rates for Risk and ISS have improved in the third quarter over the first half of the year due to improvements in our end markets. We expect the trend of increased renewal rates to continue for the remainder of 2009 and into 2010."

Annualized Contract Value as of September 30, 2009 was $276.6 million and decreased 4.0% compared to $288.1 million at September 30, 2008, with Risk ACV decreasing 3.7% (from $159.6 million to $153.7 million) and ISS ACV decreasing 4.3% (from $128.5 million to $122.9 million). Consolidated ACV has been negatively impacted by $8.4 million in negative currency effects and positively impacted by $5.2 million from the acquisition of Innovest. Excluding the impact of currency effects and the Innovest acquisition, consolidated ACV decreased 2.9% from September 30, 2008. The negative currency impact on ACV which has occurred during the first nine months of 2009 is expected to begin to become positive in Q4.

On a consolidated basis, the Company had $27.1 million of new ACV sales in the nine months ended September 30, 2009, down 51.2% over the comparable period in 2008. Q3 09 consolidated new ACV sales were $10.0 million, up from Q2 09 new sales of $8.9 million and Q1 09 new sales of $8.2 million.

One times sales were $15.3 million for the nine months ended September 30, 2009, up 1.7% over the comparable period in 2008.

Discussion of Cash Flow

As of September 30, 2009, cash and cash equivalents were $198.6 million, up $27.8 million compared to December 31, 2008. In 2009, we completed the acquisition of Innovest which used $14.8 million of cash. Operating activities for the nine months ended 2009 provided cash of $40.5 million, a decline compared to $58.8 million in 2008 due to increased income tax payments, which approximated $16.1 million in the first nine months of 2009.

Free Cash Flow (operating cash flow minus capital expenditures) for the nine months ended September 30, 2009 decreased to $35.0 million compared to $53.0 million for 2008. Free cash flow for the full 2009 year is expected to be in low to mid $60 million range. The decline in free cash flow year over year is due to increased income tax payments in 2009 as the Company utilized substantially all available net operating losses in 2008.

Capital expenditures decreased to $5.5 million for the nine months ended September 30, 2009 compared to $5.8 million in 2008.

Our cash flow tends to be lower in the beginning of each year due to year end bonuses and commissions paid during this period. As a result, we typically generate more cash flows from operations during the second half of the year than during the first half of the year.

Conference Call Information

The Company will hold a conference call to discuss results for the third quarter of 2009 today at 10 a.m. Eastern. The call will be hosted by Ethan Berman, Chief Executive Officer, and David Obstler, Chief Financial Officer, of RiskMetrics Group. Investors can participate in the conference call by using the following dial-in details:

US Toll free dial-in: 800.659.1942 International dial-in: 617.614.2710 Passcode: 48899607

In addition, investors can access the conference call (as well as a replay of the call) directly from the RiskMetrics Group Investor Relations Web Site at http://investor.riskmetrics.com.

About RiskMetrics Group

RiskMetrics Group is a leading provider of risk management and corporate governance products and services to participants in the global financial markets. By bringing transparency, expertise and access to the financial markets, RiskMetrics Group helps investors better understand and manage the risks associated with their financial holdings. Our solutions address a broad spectrum of risk across our clients' financial assets. Headquartered in New York with 20 global offices, RiskMetrics Group services some of the most prestigious institutions and corporations worldwide.

Forward-Looking Statements

This release contains forward-looking statements. These statements relate to future events or to future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," or "continue" or the negative of these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and that could materially affect actual results, levels of activity, performance, or achievements.

Other factors that could materially affect actual results, levels of activity, performance or achievements can be found in the Company's December 31, 2008 Annual Form 10-K which was filed with the Securities and Exchange Commission on February 27, 2009. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary significantly from what we projected. Any forward-looking statement in this release reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future events, or otherwise.

Notes Regarding the Use of Non-GAAP Financial Measures

RiskMetrics Group (the "Company") has provided certain non-GAAP financial information as supplemental information regarding its operating results. These measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States ("GAAP") and may be different from non-GAAP measures reported by other companies. The Company believes that its presentation of non-GAAP measures, such as Adjusted EBITDA, Adjusted EBITDA expenses, other operating expenses, Adjusted Net Income, Adjusted EPS and free cash flow, provides useful information to management and investors regarding certain financial and business trends relating to its financial condition and results of operations. In addition, the Company's management uses these measures for reviewing the financial results of the Company and for budgeting and planning purposes.

Adjusted EBITDA

The table below sets forth a reconciliation of Net Income to Adjusted EBITDA on our historical results:

   TABLE C
   Three months ended      Nine months ended
   September 30,           September 30,
   2009        2008        2009           2008
   Net income                                               $   7,783   $   6,282   $   23,521     $   12,175
   Interest, other expense, net                             4,986       4,860       15,252         21,337
   Income tax expense                                       2,426       4,045       11,669         7,828
   Depreciation and amortization of property and equipment  2,189       2,153       6,253          6,433
   Amortization of intangible assets                        5,876       5,398       17,351         16,310
   Stock-based compensation                                 2,323       2,245       6,406          7,622
   Non-recurring expenses                                   -           -           1,493      (a) 198        (b)
   Loss on disposal of property and equipment               178         57          305            83
   Adjusted EBITDA                                          $   25,761  $   25,040  $   82,250     $   71,986
   

(a) Represents employee severance, acquisition costs, and lease exit costs incurred. (b) Represents lease exist costs.

Adjusted EBITDA, as defined in our credit facility, represents net income (loss) before interest expense, interest income, income tax expense (benefit), depreciation and amortization of property and equipment, amortization of intangible assets, impairment of goodwill and intangible assets, non-cash stock-based compensation expense and extraordinary or non-recurring charges or expenses. It is a material metric used by our lenders in evaluating compliance with the maximum consolidated leverage ratio covenant in our credit facility. The maximum consolidated leverage ratio covenant, as defined in our credit facilities, represents the ratio of total indebtedness as compared to Adjusted EBITDA, and can not exceed a maximum ratio range which declines from 8.50 to 3.00 over the life of the credit facilities. Non-compliance with this covenant could result in us being required to immediately repay our outstanding indebtedness under our credit facility. Adjusted EBITDA is also a metric used by management to measure operating performance and for planning, including preparation of annual budgets, analyzing investment decisions and evaluating profitability.

We also present Adjusted EBITDA as a supplemental performance measure because we believe that this measure provides our board of directors, management and investors with additional information to measure our performance, provide more consistent comparisons from period to period by excluding potential differences caused by variations in capital structure (affecting interest expense), tax position (such as the impact on periods of changes in effective tax rates or net operating losses), the age and book depreciation of fixed assets (affecting relative depreciation expense), acquisitions (affecting amortization expense) and compensation plans (affecting stock-based compensation expense).

Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with U.S. GAAP or as an alternative to cash flow from operating activities as a measure of our profitability or liquidity.

Adjusted EBITDA Expenses

Adjusted EBITDA expenses represent cost of revenues, research and development, selling and marketing and general administrative expenses, excluding stock-based compensation. Adjusted EBITDA expenses represent expenses which are classified as reductions to Adjusted EBITDA, as defined in our credit facility. Adjusted EBITDA is also a metric used by management to measure operating performance and for planning, including preparation of annual budgets, analyzing investment decisions and evaluating profitability.

Other Operating Expenses

Other operating expenses represent stock-based compensation, depreciation and amortization of property and equipment, amortization of intangible assets and loss on disposal of property and equipment. Other operating expenses represent expenses which are classified as reductions to Adjusted EBITDA, as defined in our credit facility.

Adjusted Net Income and EPS

We define adjusted net income and adjusted EPS as net income (earnings per share) before amortization of intangibles, one-time costs, impairment charges and stock-based compensation. A reconciliation from net income and EPS to Adjusted net income and EPS is set forth below:

   TABLE D
   Three months ended September 30,
   2009              2008
   $ Amount          $ Amount
   GAAP - Net Income                                                   $7,783            $6,282
   Plus: One-time Costs                                                -                 -
   Plus: Stock-Based Compensation                                      2,323             2,245
   Plus: Amortization of Intangible Assets                             5,876             5,398
   Income tax effect                                                   (2,952)           (2,988)
   Adjusted Net income before, stock-based compensation, amortization  $13,030           $10,937
   of intangibles and one-time costs
   Adjusted EPS - diluted                                              $0.19             $0.16
   Diluted Shares                                                      68,168,896        68,409,343
   Nine months ended September 30,
   2009              2008
   $ Amount          $ Amount
   GAAP - Net Income                                                   $23,521           $12,175
   Plus: One-time Costs                                                1,493      (1)    6,348       (2)
   Plus: Non IPO Stock-Based Compensation                              6,406             6,265
   Plus: Amortization of Intangible Assets                             17,351            16,310
   Income tax effect                                                   (9,090)           (11,309)
   Adjusted Net income before, stock-based compensation, amortization  $39,681           $29,789
   of intangibles and one-time costs
   Adjusted EPS - diluted                                              $0.58             $0.44
   Diluted Shares                                                      67,838,520        67,040,711
   

(1) Includes one-time expenses which include employee severance costs of $0.5 million, $0.8 million for lease exit costs and $0.2 million for Innovest acquisition related costs during the nine months ended September 30, 2009.

(2) Includes one-time expenses incurred as a result of the IPO, which include $1.4 million of stock-based compensation related to IPO stock option grants, a $1.25 million debt prepayment penalty fee, a $2.4 million write-off of debt issuance costs and a $1.4 million loss on an interest rate swap settlement, during the nine months ended September 30, 2008.

Free Cash Flow

We define free cash flow as net cash provided by operating activities from continuing operations minus capital expenditures. We believe free cash flow is an important non-GAAP measure as it provides useful cash flow information regarding our ability to service, incur or pay down indebtedness. We use free cash flow as a measure to reflect cash available to service our debt as well as to fund our expenditures. A limitation of using free cash flow versus the GAAP measure of net cash provided by operating activities is that free cash flow does not represent the total increase or decrease in the cash balance from operations for the period since it excludes cash used for capital expenditures during the period.

Historical GAAP Financial Statements

Tables E through G presents the historical GAAP financial statements of RiskMetrics Group as of and for the three and nine months ended September 30, 2009.

   TABLE E
   RISKMETRICS GROUP, INC.
   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   FOR THE THREE AND NINE MONTHS SEPTEMBER 30, 2009 AND 2008
   (UNAUDITED)
   (In thousands, except share and per share amounts)
   Three months ended          Nine Months ended
   September 30,               September 30,
   2009          2008          2009           2008
   REVENUES                                                           $     73,980  $     75,554  $     226,889  $     220,900
   OPERATING COSTS AND EXPENSES:
   Cost of revenues                                                   22,002        23,507        68,259         69,387
   Research and development                                           11,302        11,248        32,610         32,114
   Selling and marketing                                              7,487         9,045         22,055         27,531
   General and administrative                                         9,751         8,959         29,614         27,702
   Depreciation and amortization of property and equipment            2,189         2,153         6,253          6,433
   Amortization of intangible assets                                  5,876         5,398         17,351         16,310
   Loss on disposal of property and equipment                         178           57            305            83
   Total operating costs and expenses (1)                             58,785        60,367        176,447        179,560
   INCOME FROM OPERATIONS                                             15,195        15,187        50,442         41,340
   INTEREST, DIVIDEND, INVESTMENT, AND OTHER INCOME (EXPENSE), NET:
   Interest, dividend and investment income                           168           686           461            1,927
   Interest expense                                                   (5,154)       (5,546)       (15,713)       (20,651)
   Other expenses                                                     -             -             -              (2,613)
   Total interest, dividend, investment, and other income (expense),  (4,986)       (4,860)       (15,252)       (21,337)
   net
   INCOME BEFORE PROVISION FOR INCOME TAXES                           10,209        10,327        35,190         20,003
   PROVISION FOR INCOME TAXES                                         2,426         4,045         11,669         7,828
   NET INCOME                                                         $     7,783   $     6,282   $     23,521   $     12,175
   NET INCOME PER SHARE:
   Basic                                                              $     0.13    $     0.10    $     0.38     $     0.20
   Diluted                                                            $     0.11    $     0.09    $     0.35     $     0.18
   WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
   62,097,967    60,780,651    61,745,222     59,493,052
   Basic                                                              68,168,896    68,409,343    67,838,520     67,040,711
   Diluted
   

(1) Includes stock-based compensation expense of $2,323, $2,245, $6,406 and $7,622 for three and nine months ended September 30, 2009 and 2008, respectively.

   TABLE F
   RISKMETRICS GROUP, INC.
   CONDENSED CONSOLIDATED BALANCE SHEETS
   (UNAUDITED)
   (In thousands, except share amounts)
   September 30,   December 31,
   2009            2008
   ASSETS
   CURRENT ASSETS:
   Cash and cash equivalents                                           $      198,626  $      170,799
   Accounts receivable, net                                            37,175          42,319
   Deferred tax assets                                                 2,459           2,092
   Income taxes receivable                                             3,423           4,562
   Other receivables and prepaid expenses                              8,986           5,666
   Total current assets                                                250,669         225,438
   Intangibles--net                                                    136,769         148,340
   Goodwill                                                            318,592         308,613
   Property and equipment--net                                         14,887          15,400
   Deferred financing costs                                            4,448           5,227
   Other assets                                                        2,351           1,995
   TOTAL ASSETS                                                        $      727,716  $      705,013
   LIABILITIES AND STOCKHOLDERS' EQUITY
   CURRENT LIABILITIES:
   Trade accounts payable                                              $      4,812    $      1,981
   Accrued expenses                                                    35,365          40,174
   Debt, current portion                                               2,966           2,224
   Deferred revenue, current portion                                   105,385         109,525
   Other current liabilities                                           221             211
   Total current liabilities                                           148,749         154,115
   LONG-TERM LIABILITIES
   Debt                                                                286,171         288,395
   Deferred tax liabilities                                            24,902          31,405
   Deferred revenue                                                    595             1,364
   Other long-term liabilities                                         20,623          26,567
   Total liabilities                                                   $      481,040  $      501,846
   COMMITMENTS AND CONTINGENCIES
   STOCKHOLDERS' EQUITY:
   Common stock, $.01 par value--200,000,000 authorized; 62,723,667    $      627      $      617
   and 61,673,960 issued and 62,480,513 and 61,430,806 outstanding at
   September 30, 2009 and December 31, 2008, respectively
   Treasury stock--243,154 shares                                      (579)           (579)
   Additional paid-in capital                                          445,739         431,781
   Accumulated other comprehensive loss                                (11,235)        (17,255)
   Accumulated deficit                                                 (187,876)       (211,397)
   Total stockholders' equity                                          246,676         203,167
   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                          $      727,716  $      705,013
   

   TABLE G
   RISKMETRICS GROUP, INC.
   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
   (UNAUDITED)
   (Amounts in thousands)
   2009              2008
   CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                        $       23,521    $       12,175
   Adjustments to reconcile net income to net cash provided by
   operating activities:
   Depreciation and amortization of property and equipment           6,253             6,433
   Provision for bad debts                                           471               713
   Amortization of intangible assets                                 17,351            16,310
   Amortization of debt issuance costs                               780               3,190
   Stock-based compensation                                          6,406             7,622
   Tax benefit associated with exercise of stock options             (2,957)           (5,075)
   Loss on disposal of property and equipment                        305               83
   Changes in assets and liabilities (net of assets and liabilities
   acquired):
   Decrease (increase) in accounts receivable                        6,861             (12,507)
   (Increase) decrease in income and deferred taxes                  (5,128          ) 11,330
   (Increase) decrease in other receivables and prepaid expenses     (3,081)           72
   Increase in other assets                                          (347)             (136)
   (Decrease) increase in deferred revenue                           (6,141)           14,258
   Increase (decrease) in trade accounts payable                     2,727             (2,875)
   Decrease (increase) in accrued expenses and other liabilities     (6,507)           7,217
   Net cash provided by operating activities                         40,514            58,810
   CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                               (5,537)           (5,804)
   Cash refunded from CFRA acquisition                               -                 223
   Payment for intangible asset                                      -                 (1,000)
   Payment of deferred purchase price                                (159)             (127)
   Cash paid to acquire Innovest (net of cash acquired of $1,190)    (14,806)          -
   Net cash used in investing activities                             (20,502)          (6,708)
   CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of debt                                                 (1,482)           (132,131)
   Gross proceeds from equity offering                               -                 197,400
   Equity offering expenses                                          -                 (1,581)
   Excess tax benefit associated with exercise of stock options      2,957             5,075
   Proceeds from exercise of stock options                           4,605             5,679
   Net cash provided by financing activities                         6,080             74,442
   EFFECT OF EXCHANGE RATE CHANGES ON CASH                           1,735             (2,338)
   NET INCREASE IN CASH AND CASH EQUIVALENTS                         27,827            124,206
   CASH AND CASH EQUIVALENTS--Beginning of period                    170,799           27,455
   CASH AND CASH EQUIVALENTS--End of period                          $       198,626   $       151,661
   SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid for interest                                            $       14,802    $       17,215
   Cash paid (refunded) for taxes                                    $       16,064    $       (4,907)
   NON CASH INVESTING AND FINANCING ACTIVITIES:
   Tax benefit associated with exercise of ISS stock options         $       183       $       616
   Recovery of common stock issued to purchase CFRA                  $       -         $       (577)
   

Supplemental Information and Non-GAAP Reconciliations

The tables below set forth a reconciliation of GAAP costs of revenues, research and development, selling and marketing and general and administrative expenses to Adjusted EBITDA expenses and other operating expenses:

   TABLE H
   RISKMETRICS GROUP, INC.
   UNAUDITED AS ADJUSTED STATEMENT OF INCOME
   FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
   (AMOUNTS IN THOUSANDS)
   RISKMETRICS    ADJUSTMENTS        AS ADJUSTED
   GROUP, INC.
   JULY 1 TO
   SEPTEMBER 30,
   2009
   Revenues                                                        $73,980                           $73,980
   Operating cost and expenses:
   Cost of revenues                                                22,002         (733)       (A)    21,269
   Research and development                                        11,302         (595)       (A)    10,707
   Selling and marketing                                           7,487          (302)       (A)    7,185
   General and administrative                                      9,751          (693)       (A)    9,058
   Total adjusted EBITDA expenses                                  50,542         (2,323)            48,219
   Depreciation and amortization of property and equipment         2,189                             2,189
   Amortization of intangible assets                               5,876                             5,876
   Loss on disposal of property and equipment                      178                               178
   Total other operating expenses                                  8,243          2,323              10,566
   Total operating expenses                                        58,785                            58,785
   Income from operations                                          15,195                            15,195
   Interest, dividend, investment and other income (expense), net
   Interest, dividend and investment income                        168                               168
   Interest expense                                                (5,154)                           (5,154)
   Other expenses                                                  -                                 -
   Interest, dividend, investment and other income (expense), net  (4,986)                           (4,986)
   Income before provision for income taxes                        10,209                            10,209
   Provision for income taxes                                      2,426                             ,2,426
   Net income                                                      $7,783         $                  $7,783
   

The following adjustments are included in the preparation of the statement of income:

(A) Reclassification of stock-based compensation from adjusted EBITDA expenses to other operating expenses.

   TABLE I
   RISKMETRICS GROUP, INC.
   UNAUDITED AS ADJUSTED STATEMENT OF INCOME
   FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
   (AMOUNTS IN THOUSANDS)
   RISKMETRICS    ADJUSTMENTS        AS ADJUSTED
   GROUP, INC.
   JANUARY 1 TO
   SEPTEMBER 30,
   2009
   Revenues                                                        $226,889                          $226,889
   Operating cost and expenses:
   Cost of revenues                                                68,259         (2,104)     (A)    66,155
   Research and development                                        32,610         (1,724)     (A)    30,886
   Selling and marketing                                           22,055         (1,065)     (A)    20,990
   General and administrative                                      29,614         (1,513)     (A)    26,608
   (1,493)     (B)
   Total adjusted EBITDA expenses                                  152,538        (7,899)            144,639
   Depreciation and amortization of property and equipment         6,253                             6,253
   Amortization of intangible assets                               17,351                            17,351
   Loss on disposal of property and equipment                      305                               305
   Total other operating expenses                                  23,909         7,899              31,808
   Total operating expenses                                        176,447                           176,447
   Income from operations                                          50,442                            50,442
   Interest, dividend, investment and other income (expense), net
   Interest, dividend and investment income                        461                               461
   Interest expense                                                (15,713)                          (15,713)
   Other expenses                                                  -                                 -
   Interest, dividend, investment and other income (expense), net  (15,252)                          (15,252)
   Income before provision for income taxes                        35,190                            35,190
   Provision for income taxes                                      11,669                            11,669
   Net income                                                      $23,521        $                  $23,521
   

The following adjustments are included in the preparation of the
   statement of income:
   (A)                    Reclassification of stock-based compensation from adjusted EBITDA
   expenses to other operating expenses.
   (B)                    Reclassification of non-recurring employee severance, lease exit
   costs, and transactions costs from adjusted EBITDA expenses to other
   operating expenses.
   

   TABLE J
   RISKMETRICS GROUP, INC.
   UNAUDITED AS ADJUSTED STATEMENT OF INCOME
   FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008
   (AMOUNTS IN THOUSANDS)
   RISKMETRICS    ADJUSTMENTS        AS ADJUSTED
   GROUP, INC.
   JULY 1 TO
   SEPTEMBER 30,
   2008
   Revenues                                                        $75,554                           $75,554
   Operating cost and expenses:
   Cost of revenues                                                23,507         (721)       (A)    22,786
   Research and development                                        11,248         (608)       (A)    10,640
   Selling and marketing                                           9,045          (422)       (A)    8,623
   General and administrative                                      8,959          (494)       (A)    8,465
   Total adjusted EBITDA expenses                                  52,759         (2,245)            50,514
   Depreciation and amortization of property and equipment         2,153                             2,153
   Amortization of intangible assets                               5,398                             5,398
   Loss on disposal of property and equipment                      57                                57
   Total other operating expenses                                  7,608          2,245              9,853
   Total operating expenses                                        60,367                            60,367
   Income from operations                                          15,187                            15,187
   Interest, dividend, investment and other income (expense), net
   Interest, dividend and investment income                        686                               686
   Interest expense                                                (5,546)                           (5,546)
   Other expenses                                                  -                                 -
   Interest, dividend, investment and other income (expense), net  (4,860)                           (4,860)
   Income before provision for income taxes                        10,327                            10,327
   Provision for income taxes                                      4,045                             4,045
   Net income                                                      $6,282         $                  $6,282
   

The following adjustments are included in the preparation of the statement of income:

(A) Reclassification of stock-based compensation from adjusted EBITDA expenses to other operating expenses.

   TABLE K
   RISKMETRICS GROUP, INC.
   UNAUDITED AS ADJUSTED STATEMENT OF INCOME
   FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
   (AMOUNTS IN THOUSANDS)
   RISKMETRICS    ADJUSTMENTS        AS ADJUSTED
   GROUP, INC.
   JANUARY 1 TO
   SEPTEMBER 30,
   2008
   Revenues                                                        $220,900                          $220,900
   Operating cost and expenses:
   Cost of revenues                                                69,387         (2,719)     (A)    66,668
   Research and development                                        32,114         (2,060)     (A)    30,054
   Selling and marketing                                           27,531         (1,375)     (A)    26,156
   General and administrative                                      27,702         (1,468)     (A)    26,036
   (198)       (B)
   Total adjusted EBITDA expenses                                  156,734        (7,820)            148,914
   Depreciation and amortization of property and equipment         6,433                             6,433
   Amortization of intangible assets                               16,310                            16,310
   Loss on disposal of property and equipment                      83                                83
   Total other operating expenses                                  22,826         7,820              30,646
   Total operating expenses                                        179,560                           179,560
   Income from operations                                          41,340                            41,340
   Interest, dividend, investment and other income (expense), net
   Interest, dividend and investment income                        1,927                             1,927
   Interest expense                                                (20,651)                          (20,651)
   Other expenses                                                  (2,613)                           (2,613)
   Interest, dividend, investment and other income (expense), net  (21,337)                          (21,337)
   Income before provision for income taxes                        20,003                            20,003
   Provision for income taxes                                      7,828                             7,828
   Net income                                                      $12,175        $                  $12,175
   

The following adjustments are included in the preparation of the
   statement of income:
   (A)                    Reclassification of stock-based compensation from adjusted EBITDA
   expenses to other operating expenses.
   (B)                    Reclassification of lease exit costs from adjusted EBITDA expenses
   to other operating expenses.
   

SOURCE: RiskMetrics Group Inc.

   RiskMetrics Group 
   Sarah Cohn, 212-354-4643 
   sarah.cohn@riskmetrics.com
   

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