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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended June 30,2009**

 

**Commission file number: 001-33928**

 

**RiskMetrics Group, Inc.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                               | ** ** | **20-8175809**                     |
|----------------------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization)            |       | (IRS Employer  Identification No.) |
| ** **                                                                 | ** ** | ** **                         |
| **One Chase Manhattan Plaza, 44****th**** Floor  New York, New York** | ** ** | **10005**                          |
| (Address of principal executive offices)                                   |       | (Zip Code)                         |

 

**(212) 981-7475**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicate by check mark whether the Registrant is a shell company (asdefined in rule 12b-2 of the Act). Yes o  No x

 

The number of shares outstanding of each of the registrant’s classes ofcommon stock, as of July 30, 2009 was:

 

| **Class**                   | ** ** | **Outstanding** |
|-----------------------------|------------|-----------------|
| Common stock $.01 par value |       | 61,949,724      |

 

 

 

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Table ofContents

 

**RiskMetricsGroup, Inc**

**Index to Form 10-Q**

 

**Table of Contents**

 
| ** **                                                                                                                                                                        | **Page Number** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------|
| **PART I  — FINANCIAL INFORMATION**                                                                                                                                     |
| Item 1—  Financial Statements                                                                                                                                           | ** **           |
| Condensed Consolidated Financial Statements as of June 30, 2009  and December 31, 2008 and for the three and six months ended  June 30, 2009 and 2008 (unaudited): |                 |
| Condensed Consolidated Balance Sheets                                                                                                                                             | 3                    |
| Condensed Consolidated Statements of Operations                                                                                                                                   | 4                    |
| Condensed Consolidated Statements of Changes in  Stockholders’ Equity                                                                                                        | 5                    |
| Condensed Consolidated Statements of Cash Flows                                                                                                                                   | 6                    |
| Notes to Condensed Consolidated Financial Statements                                                                                                                              | 7                    |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                                    | 17                   |
| Item 3 —  Quantitative and Qualitative Disclosures About Market Risk                                                                                                    | 34                   |
| Item 4 —  Controls and Procedures                                                                                                                                       | 34                   |
|                                                                                                                                                                              |                 |
| **PART II  — OTHER INFORMATION**                                                                                                                                        |
| Item 1  — Legal Proceedings                                                                                                                                             | 34                   |
| Item1A—Risk  Factors                                                                                                                                                         | 35                   |
| Item 2 — Unregistered Sales of Equity Securities  and Use of Proceeds                                                                                                   | 35                   |
| Item 3 — Defaults Upon Senior Securities                                                                                                                                | 35                   |
| Item 4 — Submission of Matters to a Vote of  Security Holders                                                                                                           | 35                   |
| Item 5  — Other Information                                                                                                                                             | 36                   |
| Item 6  — Exhibits                                                                                                                                                      | 36                   |

 

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**RISKMETRICSGROUP, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(Inthousands, except share amounts)**

 
| ** **                                                                                                                                                                                            | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                       |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                             |       | $                       | 184,796    |                        | $          | 170,799 |   |
| Accounts receivable—net                                                                                                                                                                          |       | 35,729                  |       | 42,319                      |       |
| Deferred tax assets                                                                                                                                                                                   |       | 2,453                   |       | 2,092                       |       |
| Income taxes receivable                                                                                                                                                                               |       | 666                     |       | 4,562                       |       |
| Other receivables and prepaid expenses                                                                                                                                                                |       | 9,018                   |       | 5,666                       |       |
| Total current assets                                                                                                                                                                                  |       | 232,662                 |       | 225,438                     |       |
| Intangibles—net                                                                                                                                                                                  |       | 142,645                 |       | 148,340                     |       |
| Goodwill                                                                                                                                                                                              |       | 318,700                 |       | 308,613                     |       |
| Property and equipment—net                                                                                                                                                                       |       | 16,138                  |       | 15,400                      |       |
| Deferred financing costs                                                                                                                                                                              |       | 4,708                   |       | 5,227                       |       |
| Other assets                                                                                                                                                                                          |       | 2,379                   |       | 1,995                       |       |
| TOTAL ASSETS                                                                                                                                                                                          |       | $                       | 717,232    |                        | $          | 705,013 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                        |       |                    |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                                                                  |       |                    |       |                        |       |
| Trade accounts payable                                                                                                                                                                                |       | $                       | 5,222      |                        | $          | 1,981 |   |
| Accrued expenses                                                                                                                                                                                      |       | 28,776                  |       | 40,174                      |       |
| Debt, current portion                                                                                                                                                                                 |       | 2,966                   |       | 2,224                       |       |
| Deferred revenue, current portion                                                                                                                                                                     |       | 109,850                 |       | 109,525                     |       |
| Other current liabilities                                                                                                                                                                             |       | 221                     |       | 211                         |       |
| Total current liabilities                                                                                                                                                                             |       | 147,035                 |       | 154,115                     |       |
| LONG-TERM LIABILITIES                                                                                                                                                                                 |       |                    |       |                        |       |
| Debt                                                                                                                                                                                                  |       | 286,912                 |       | 288,395                     |       |
| Deferred tax liabilities                                                                                                                                                                              |       | 28,232                  |       | 31,405                      |       |
| Deferred revenue                                                                                                                                                                                      |       | 1,073                   |       | 1,364                       |       |
| Other long-term liabilities                                                                                                                                                                           |       | 21,695                  |       | 26,567                      |       |
| Total liabilities                                                                                                                                                                                     |       | $                       | 484,947    |                        | $          | 501,846 |   |
|                                                                                                                                                                                                  |       |                    |       |                        |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                         |       |                    |       |                        |       |
|                                                                                                                                                                                                  |       |                    |       |                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                            |       |                    |       |                        |       |
| Common stock, $.01 par value—200,000,000  authorized; 62,062,945 and 61,673,960 issued and 61,819,791 and 61,430,806  outstanding at June 30, 2009 and December 31, 2008, respectively |       | $                       | 621        |                        | $          | 617 |   |
| Treasury stock—243,154 shares                                                                                                                                                                    |       | (579                    | )          | (579                        | )          |
| Additional paid-in capital                                                                                                                                                                            |       | 438,835                 |       | 431,781                     |       |
| Accumulated other comprehensive loss                                                                                                                                                                  |       | (10,933                 | )          | (17,255                     | )          |
| Accumulated deficit                                                                                                                                                                                   |       | (195,659                | )          | (211,397                    | )          |
| Total stockholders’ equity                                                                                                                                                                       |       | 232,285                 |       | 203,167                     |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                       |       | $                       | 717,232    |                        | $          | 705,013 |   |

 

See notes to condensedconsolidated financial statements.

 

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**RISKMETRICSGROUP, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THETHREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008**

 

**(UNAUDITED)**

 

**(Inthousands, except share and per share amounts)**

 
| ** **                                                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                             | ** ** | **2009**                                        | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| REVENUES                                                               |       | $                                               | 75,528     |                                     | $          | 74,126 |   | $ | 152,909 |   | $ | 145,346 |   |
| OPERATING COSTS AND EXPENSES:                                          |       |                                            |       |                                     |       |   |   |   |   |
| Cost of revenues                                                       |       | 22,935                                          |       | 23,176                                   |       | 46,257 |   | 45,880 |   |
| Research and development                                               |       | 11,171                                          |       | 10,405                                   |       | 21,308 |   | 20,866 |   |
| Selling and marketing                                                  |       | 7,501                                           |       | 9,280                                    |       | 14,568 |   | 18,486 |   |
| General and administrative                                             |       | 9,256                                           |       | 9,538                                    |       | 19,863 |   | 18,743 |   |
| Depreciation and amortization of property and  equipment               |       | 2,109                                           |       | 2,165                                    |       | 4,064 |   | 4,280 |   |
| Amortization of intangible assets                                      |       | 5,883                                           |       | 5,456                                    |       | 11,475 |   | 10,912 |   |
| Loss on disposal of property and equipment                             |       | 127                                             |       | 4                                        |       | 127 |   | 26 |   |
| Total operating costs and expenses (1)                                 |       | 58,982                                          |       | 60,024                                   |       | 117,662 |   | 119,193 |   |
| INCOME FROM OPERATIONS                                                 |       | 16,546                                          |       | 14,102                                   |       | 35,247 |   | 26,153 |   |
|                                                                   |       |                                            |       |                                     |       |   |   |   |   |
| INTEREST, DIVIDEND, INVESTMENT, AND OTHER INCOME  (EXPENSE), NET:      |       |                                            |       |                                     |       |   |   |   |   |
|                                                                   |       |                                            |       |                                     |       |   |   |   |   |
| Interest, dividend and investment income                               |       | 100                                             |       | 618                                      |       | 293 |   | 1,241 |   |
| Interest expense (Note 7)                                              |       | (5,173                                          | )          | (5,618                                   | )          | (10,559 | ) | (15,105 | ) |
| Other expenses (Note 7 & 8)                                   |       | —                                          |       | —                                   |       | — |   | (2,613 | ) |
| Total interest, dividend, investment, and other  income (expense), net |       | (5,073                                          | )          | (5,000                                   | )          | (10,266 | ) | (16,477 | ) |
| INCOME BEFORE PROVISION FOR INCOME TAXES                               |       | 11,473                                          |       | 9,102                                    |       | 24,981 |   | 9,676 |   |
| PROVISION FOR INCOME TAXES                                             |       | 4,262                                           |       | 3,556                                    |       | 9,243 |   | 3,783 |   |
| NET INCOME                                                             |       | $                                               | 7,211      |                                     | $          | 5,546 |   | $ | 15,738 |   | $ | 5,893 |   |
|                                                                   |       |                                            |       |                                     |       |   |   |   |   |
| NET INCOME PER SHARE:                                                  |       |                                            |       |                                     |       |   |   |   |   |
| Basic                                                                  |       | $                                               | 0.12       |                                     | $          | 0.09 |   | $ | 0.26 |   | $ | 0.10 |   |
| Diluted                                                                |       | $                                               | 0.11       |                                     | $          | 0.08 |   | $ | 0.23 |   | $ | 0.09 |   |
|                                                                   |       |                                            |       |                                     |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING:                 |       |                                            |       |                                     |       |   |   |   |   |
|                                                                   |       |                                            |       |                                     |       |   |   |   |   |
| Basic                                                                  |       | 61,665,981                                      |       | 60,522,656                               |       | 61,565,927 |   | 58,842,179 |   |
| Diluted                                                                |       | 68,050,544                                      |       | 68,046,927                               |       | 67,729,199 |   | 66,428,885 |   |

 

----

(1) Includesstock-based compensation expense of:

 
| ** **                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                        | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                             | ** ** | ** **                                      | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenues                       |       | $                                               | 761        |                                     | $          | 440 |   | $ | 1,371 |   | $ | 1,998 |   |
| Research and development               |       | 609                                             |       | 671                                      |       | 1,129 |   | 1,452 |   |
| Selling and marketing                  |       | 425                                             |       | 632                                      |       | 763 |   | 953 |   |
| General and administrative             |       | 480                                             |       | 273                                      |       | 820 |   | 974 |   |
| Total stock-based compensation expense |       | $                                               | 2,275      |                                     | $          | 2,016 |   | $ | 4,083 |   | $ | 5,377 |   |

 

See notes to condensedconsolidated financial statements.

 

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**RISKMETRICSGROUP, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

**FOR THE SIXMONTHS ENDED JUNE 30, 2009**

 

**(UNAUDITED)**

 

**(Inthousands, except share amounts)**

 
| ** **                                                                       | ** ** | **Common Shares**                 | ** ** | ** ** | ** ** | **Additional**      | ** ** | **Accumulated  Other** | ** ** | ** **              | ** ** | **Total**                | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|---------------------|------------|------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                                       | ** ** | **Number of  Shares Issued** | ** ** | **Amount** | ** ** | **Treasury  Stock** | ** ** | **Paid-In  Capital**   | ** ** | **Comprehensive  Loss** | ** ** | **Accumulated  Deficit** | ** ** | **Stockholders’  Equity** | ** ** |
|                                                                             |       |                                   |       |       |       |                |       |                   |       |                    |       |                     |       |   |   |
| BALANCE—January 1,  2009                                               |       | 61,673,960                             |       | $          | 617        |                | $          | (579                   | )          | $                       | 431,781    |                     | $          | (17,255 | ) | $ | (211,397 | ) | $ | 203,167 |   |
| Comprehensive  income:                                                           |       |                                   |       |       |       |                |       |                   |       |                    |       |                     |       |   |   |
| Net  income                                                                      |       | —                                 |       | —     |       | —              |       | —                 |       | —                  |       | 15,738                   |       | 15,738 |   |
| Foreign  currency translation adjustment                                         |       | —                                 |       | —     |       | —              |       | —                 |       | 3,439                   |       | —                   |       | 3,439 |   |
| Net  unrealized gain on cash flow hedge, net of deferred tax liability of $1,768 |       | —                                 |       | —     |       | —              |       | —                 |       | 2,883                   |       | —                   |       | 2,883 |   |
| Total  comprehensive income                                                      |       | —                                 |       | —     |       | —              |       | —                 |       | —                  |       | —                   |       | 22,060 |   |
|                                                                             |       |                                   |       |       |       |                |       |                   |       |                    |       |                     |       |   |   |
| Common  shares issued upon exercise of stock options                             |       | 356,051                                |       | 4          |       | —              |       | 1,966                  |       | —                  |       | —                   |       | 1,970 |   |
| Tax  benefit associated with exercise of stock options                           |       | —                                 |       | —     |       | —              |       | 1,005                  |       | —                  |       | —                   |       | 1,005 |   |
| Stock-based  compensation                                                        |       | —                                 |       | —     |       | —              |       | 4,083                  |       | —                  |       | —                   |       | 4,083 |   |
| Issuance  of common stock (Note 11)                                         |       | 32,934                                 |       | —     |       | —              |       | —                 |       | —                  |       | —                   |       | — |   |
|                                                                             |       |                                   |       |       |       |                |       |                   |       |                    |       |                     |       |   |   |
| BALANCE—June 30,  2009                                                 |       | 62,062,945                             |       | $          | 621        |                | $          | (579                   | )          | $                       | 438,835    |                     | $          | (10,933 | ) | $ | (195,659 | ) | $ | 232,285 |   |
|                                                                             |       |                                   |       |       |       |                |       |                   |       |                    |       |                     |       |   |   |
| Disclosure  of realized loss:                                                    |       |                                   |       |       |       |                |       |                   |       |                    |       |                     |       |   |   |
| Unrealized  loss on cash flow hedge                                              |       | $                                      | (231       | )          |       |                |       |                   |       |                    |       |                     |       |   |   |   |
| Realized  loss for cash flow hedge settlement, net of tax benefit(Note 8)        |       | 3,114                                  |       |       |       |                |       |                   |       |                    |       |                     |       |   |   |
| Net  unrealized gain on cash flow hedge                                          |       | $                                      | 2,883      |       |       |                |       |                   |       |                    |       |                     |       |   |   |   |

 

See notes to condensedconsolidated financial statements.

 

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**RISKMETRICS GROUP, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDEDJUNE 30, 2009 AND 2008**

**(UNAUDITED)****(Amountsin thousands)**

 
| ** **                                                                         | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                    |       | $          | 15,738     |       | $          | 5,893 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |       |       |       |       |
| Depreciation and amortization of property and  equipment                           |       | 4,064      |       | 4,280      |       |
| Provision for bad debts                                                            |       | 417        |       | 763        |       |
| Amortization of intangible assets                                                  |       | 11,475     |       | 10,912     |       |
| Amortization of debt issuance costs                                                |       | 520        |       | 2,930      |       |
| Stock-based compensation                                                           |       | 4,083      |       | 5,377      |       |
| Tax benefit associated with exercise of stock  options                             |       | (1,005     | )          | (1,458     | )          |
| Loss on disposal of fixed assets                                                   |       | 127        |       | 26         |       |
| Changes in assets and liabilities (net of assets  and liabilities acquired):       |       |       |       |       |       |
| Decrease (increase) in accounts receivable                                         |       | 8,248      |       | (21,650    | )          |
| Decrease in income and deferred taxes                                              |       | (577       | )          | 2,690      |       |
| Increase in other receivables and prepaid expenses                                 |       | (3,714     | )          | (1,732     | )          |
| Increase in other assets                                                           |       | (438       | )          | (103       | )          |
| Increase (decrease) in deferred revenue                                            |       | (924       | )          | 14,121     |       |
| Increase in trade accounts payable                                                 |       | 3,159      |       | 939        |       |
| Decrease in accrued expenses and other liabilities                                 |       | (13,074    | )          | (4,485     | )          |
| Net cash provided by operating activities                                          |       | 28,099     |       | 18,503     |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |       |       |       |       |
| Purchases of property and equipment                                                |       | (4,301     | )          | (3,992     | )          |
| Payment for intangible asset                                                       |       | —     |       | (1,000     | )          |
| Payment for deferred purchase price                                                |       | (174       | )          | (139       | )          |
| Cash paid to acquire Innovest (net of cash  acquired of $1,190)                    |       | (14,806    | )          | —     |       |
| Net cash used in investing activities                                              |       | (19,281    | )          | (5,131     | )          |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |       |       |       |       |
| Repayment of debt                                                                  |       | (741       | )          | (132,131   | )          |
| Gross proceeds from equity offering                                                |       | —     |       | 197,400    |       |
| Equity offering expenses                                                           |       | —     |       | (1,331     | )          |
| Excess tax benefit associated with exercise of  stock options                      |       | 1,005      |       | 1,458      |       |
| Proceeds from exercise of stock options                                            |       | 1,970      |       | 2,959      |       |
| Net cash provided by financing activities                                          |       | 2,234      |       | 68,355     |       |
| EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            |       | 2,945      |       | (945       | )          |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 13,997     |       | 80,782     |       |
| CASH AND CASH EQUIVALENTS—Beginning of period                                 |       | 170,799    |       | 27,455     |       |
| CASH AND CASH EQUIVALENTS—End of period                                       |       | $          | 184,796    |       | $          | 108,237 |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                 |       |       |       |       |       |
| Cash paid for interest                                                             |       | $          | 9,949      |       | $          | 11,978 |   |
| Cash paid for taxes                                                                |       | $          | 9,390      |       | $          | 880 |   |
| NON CASH INVESTING AND FINANCING ACTIVITIES:                                       |       |       |       |       |       |
| Tax benefit associated with exercise of ISS stock  options                         |       | $          | 75         |       | $          | 596 |   |

 

See notes to condensedconsolidated financial statements.

 

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**RISKMETRICS GROUP, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE AND SIX MONTHSENDED JUNE 30, 2009**

**(UNAUDITED)**

 

**(Unless indicated otherwise,all amounts in thousands, except share and per share amounts)**

 

**1. OVERVIEW AND BASIS OF PRESENTATION**

 

***Company Overview***—RiskMetricsGroup, Inc. (the “Company” or “RMG”) is a provider of risk management andcorporate governance products and services to participants in the globalfinancial markets. The Company’s products and services enable its clients tobetter understand and manage the risks associated with their financialholdings, provide greater transparency to their internal and externalconstituencies, satisfy regulatory and reporting requirements and make moreinformed investment decisions. The Company provides its products and servicesacross multiple asset classes, markets and geographies to a diverse client baseincluding asset managers, hedge funds, pension funds, banks, insurancecompanies, financial advisors and corporations. The Company operates in twobusiness segments, the “RiskMetrics business” and the “ISS business”.

 

***Principles of Consolidation andBasis of Presentation***—The condensed consolidated financialstatements include the accounts of RMG and its wholly owned-subsidiaries whichare prepared in accordance with accounting principles generally accepted in theUnited States of America (“US GAAP”). All intercompany accounts andtransactions have been eliminated in consolidation.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared pursuant to the rules of the Securities and Exchange Commission(the “SEC”). Certain information and footnote disclosures normally included infinancial statements prepared in accordance with US GAAP have been condensed oromitted pursuant to SEC rules. These financial statements should be read inconjunction with the Company’s Annual Report on Form 10-K for the yearended December 31, 2008.

 

Thecondensed consolidated financial statements as of June 30, 2009 and forthe three and six months ended June 30, 2009 and 2008 in the opinion ofmanagement, include all adjustments, consisting only of normal recurringaccruals, necessary to present fairly the Company’s financial position, resultsof operations and cash flows. The operating results for the three and sixmonths ended June 30, 2009 are not necessarily indicative of the resultsto be expected for the full year.  The December 31, 2008 condensedconsolidated financial statement information has been derived from the 2008audited consolidated financial statements.

 

**2. SIGNIFICANT ACCOUNTING POLICIESAND RECENT ACCOUNTING PRONOUNCEMENTS**

 

***Use of Estimates and Significant AccountingPolicies****—*The preparation of condensedconsolidated financial statements in conformity with US GAAP requiresmanagement to make estimates, judgments and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the condensed consolidated financial statementsand the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptionsmade by management include the deferral and recognition of revenue, impairmentof goodwill and intangible assets, the fair value of acquired assets andliabilities, stock-based compensation, gains or losses on derivativeinstruments, accounting for income taxes and other matters that affect thecondensed consolidated financial statements and related disclosures. There have been no changes to the Company’s significant accounting policiessince December 31, 2008 other than as discussed below.

 

***Effects of Recently Issued Accounting Standards***—On December 4,2007, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standard (“SFAS”) No. 141(R), *Business Combinations, as ammended*(“SFAS 141(R)”)and SFAS 160, *Noncontrolling Interestsin Consolidated Financial Statements*, *an amendmentof ARB No. 51* (SFAS 160). These new standardssignificantly change the financial accounting and reporting of businesscombination transactions and noncontrolling (previously minority) interests inconsolidated financial statements. SFAS 141(R) is required to beadopted concurrently with SFAS 160 and was effective for businesscombination transactions for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008. Application of SFAS 141(R) and SFAS 160 is generallyrequired to be adopted prospectively, except for certain provisions of SFAS 141(R) andSFAS 160, which are required to be adopted retrospectively upon adoption.Business combination transactions accounted for before adoption ofSFAS 141(R) should be accounted for in accordance withSFAS141 and that accounting previously completed under SFAS 141 should notbe modified as of or after the date of adoption of SFAS 141(R).The Companyadopted SFAS 141(R) and SFAS 160 effective January 1, 2009 and theimpact of such adoption will be dependent upon the business combinations theCompany pursues.  The Company accounted for the acquisition of InnovestStrategic Value Advisors, Inc. (“Innovest”) in accordance with SFAS 141(R)(see Note 4).

 

In March 2008, theFASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASB**Statement No. 133* (“SFAS 161”).SFAS 161 establishes, among other things, the disclosure requirements forderivative instruments and for hedging activities. The Company adopted SFAS 161on January 1, 2009 and has included the required disclosures regarding thefair value of derivative instruments in Note 8.

 

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In April 2008, theFASB issued FASB Staff Position (“FSP”) FAS 142-3, *Determination of the Useful Life of Intangible Assets* (“FSPFAS 142-3”). FSP FAS 142-3 amends the factors an entity should consider indeveloping renewal or extension assumptions used in determining the useful lifeof recognized intangible assets under SFAS No. 142, *Goodwill andOther Intangible Assets*. This new guidance applies prospectively tointangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions. The Company adopted FSPFAS 142-3 on January 1, 2009 and such adoption did not have a materialimpact on the condensed consolidated financial statements.

 

In April 2009,the FASB issued FSP FAS 107-1 and APB 28-1, *InterimDisclosures**about Fair Value ofFinancial Instruments*. This FSP essentially expands the disclosureabout fair value of financial instruments that were previously required onlyannually to also be required for interim period reporting. In addition, the FSPrequires certain additional disclosures regarding the methods and significantassumptions used to estimate the fair value of financial instruments. TheCompany adopted FSP FAS 107-1 and APB 28-1 on April 1, 2009 and suchadoption did not have a material impact on the condensed consolidated financialstatements.

 

In May 2009,the FASB issued SFAS No. 165, *Subsequent Events*(“SFAS 165”). SFAS 165 establishes general standards of accountingfor, and disclosure of, events that occur after the balance sheet date butbefore financial statements are issued or are available to beissued.  In particular, this statement sets forth: (1) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements, (2) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements and (3) thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date.  SFAS 165 is effectivefor the interim or annual financial periods ending after June 15,2009.  The Company adopted SFAS 165 on June 30, 2009 andsuch adoption did not have a material impact on the Company’s condensedconsolidated financial statements.  TheCompany evaluated subsequent events through the date the accompanying financialstatements were issued, which was August 4, 2009.

 

**3. INITIAL PUBLIC OFFERING**

 

In January 2008, the Company completed an initial public offeringof 16,100,000 shares of common stock, which included 4,035,816 shares sold byselling stockholders and 2,100,000 shares to cover over-allotments, which wasexercised in full in January 2008. The Company did not received anyproceeds from the sale of the shares by the selling stockholders. Net proceedsfrom the offering, including the exercise of the underwriters’ allotment, were$193.9 million, after deducting underwriting discounts and commissions andapproximately $3.5 million of offering expenses, of which$1.3 million were paid during the six months ended June 30, 2008. TheCompany utilized a portion of the proceeds to prepay the entire outstandingindebtedness under the Company’s second loan lien credit facility (SeeNote 7).

 

**4. INNOVEST ACQUISITION**

 

OnMarch 2, 2009, the Company acquired all of the outstanding common stock ofInnovest for $16.0 million in cash.  Innovest is aninternational investment research and advisory firm specializing in analyzing “non-traditional”drivers of risk and shareholder value, including companies’ performance onenvironmental, social and strategic governance issues.  The purpose of this acquisition is to enhancethe product offerings and services the Company may offer its customers inassessing risk within the environmental, social and governance sectors.  The purchase of Innovest has been accountedfor using the acquisition method, and the operating results of Innovest havebeen included within the ISS segment in the condensed consolidated financialstatements since the date of its acquisition.

 

The aggregate consideration paid for the acquisition is as follows:

 
| Total cash purchase consideration |   | $     | 15,996 |   |
|-----------------------------------|--------|-------|--------|--------|
| Less: cash acquired               |   | 1,190 |   |
| Total cash paid                   |   | $     | 14,806 |   |

 

The following table summarizes the amounts allocated to the acquiredassets and liabilities assumed based on management’s estimates:

 
| Cash                                          |   | 1,190 |   |
|-----------------------------------------------|--------|-------|--------|
| Accounts receivable                           |   | 1,256 |   |
| Property and equipment and non current assets |   | 259   |   |
| Deferred tax assets                           |   | 1,934 |   |
| Intangible assets                             |   | 5,780 |   |

 

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| Goodwill                                       |   | 10,162 |   |
|------------------------------------------------|--------|--------|--------|
| Total assets acquired                          |   | 20,581 |   |
| Accounts payable                               |   | (18    | )      |
| Accrued expenses and other current liabilities |   | (633   | )      |
| Deferred tax liability                         |   | (2,289 | )      |
| Deferred revenue                               |   | (1,645 | )      |
| Net assets acquired                            |   | $      | 15,996 |   |
| Goodwill                                       |   | 10,162 |   |
| Identifiable intangible assets                 |   | 5,780  |   |
| Net assets assumed                             |   | 54     |   |
| Total purchase consideration                   |   | $      | 15,996 |   |

 

In accordance with SFAS No. 109, *Accountingfor Income Taxes*, the Company has provided for a deferred taxliability representing the difference between the estimated book and tax basisof the net assets acquired. The excess of the purchase price over the estimatedfair values of the assets acquired and liabilities assumed was allocated togoodwill, which is not expected to be deductible for tax purposes. The Companyrecorded a deferred tax asset for acquired net operating losses which areexpected to be utilized over a period of approximately 6 years.

 

Revenue included in the condensed consolidated statements of operationsfor the three and six months ended June 30, 2009 pertaining to Innovestwas approximately $1.5 million and $2.0 million and net earnings were notsignificant.

 

The Company incurred acquisition related expenses of $0.2 million inconnection with the acquisition and such costs are included in general andadministrative costs in the accompanying condensed consolidated statement ofoperations for the six months ended June 30, 2009. In addition, thepurchase consideration was reduced by $0.2 million of employee severance costsand during the six months ended June 30, 2009 the Company incurred a totalof $0.5 million of employee severance costs as a result of reorganizing the ISSbusiness due to the Innovest acquisition.  Such expenses have beenincluded in general and administrative expenses in the accompanying statementof operations.

 

The purchase price for Innovest was determined based on a valuation ofmarket value comparables and future projections of discounted cash flows. TheCompany believes the purchase price reflects the financial prospects of theexisting business as well as the opportunities for revenue growth, cost savingsand other synergies, including the ability to cross-sell to one another’sclients, and offer more comprehensive and diverse services. The value reflectedin these elements of the purchase price does not meet the definition of anintangible asset under SFAS 141(R) and is therefore reflected as goodwillwithin the ISS segment.  The amounts anduseful lives allocated to intangible assets were as follows:

 
| Customer  relationships  |   | $   | 4,300  |         | 10 years |   |
|--------------------------|--------|-----|--------|--------------|---------------|--------|
| Covenant  not to compete |   | 150 |   | 2 years |          |
| Trade  name              |   | 350 |   | 1 year  |          |
| Customer  contracts      |   | 670 |   | 1 year  |          |
| Proprietary  process     |   | 310 |   | 5 years |          |
| Total  intangible assets |   | $   | 5,780  |         |          |   |

 

Thepurchase price allocation for Innovest is not complete as the acquisitionoccurred in March 2009 and the Company is still in the process ofreviewing the valuation of assets and liabilities acquired.

 

Thefollowing table summarizes unaudited pro forma financial information for thesix months ended June 30, 2009 and 2008 assuming the Innovest acquisitionhad occurred on January 1, 2008.

 
| ** **             | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------|------------|------------------------------------------|------------|
| ** **             | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Revenues               |       | $                                        | 154,229    |   | $ | 148,869 |   |
| Income from operations |       | 34,879                                   |       | 25,634 |   |
| Net income             |       | 15,469                                   |       | 5,657 |   |
| Net income per share:  |       |                                     |       |   |   |
| Diluted                |       | $                                        | 0.23       |   | $ | 0.09 |   |

 

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Theseunaudited pro forma results are intended for informational purposes only andare not necessarily indicative of the results of operations that would haveoccurred had the Innovest acquisition been in effect at the beginning of theperiods presented, or of future results of the combined operations.

 

**5. INTANGIBLE ASSETS AND GOODWILL**

 

Intangibleassets as of June 30, 2009 and December 31, 2008 consist of thefollowing:

 
| ** **              | ** ** | **June 30, 2009** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Useful Lives**       | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Customer relationships  |       | 7–11 years        |       | $ | 132,450 |   | $ | (30,127 | ) | $ | 102,323 |   |
| Acquired technology     |       | 5 years                |       | 27,123 |   | (12,700 | ) | 14,423 |   |
| Covenant not to compete |       | 1–3 years         |       | 1,650 |   | (1,004 | ) | 646 |   |
| Proprietary process     |       | 5-7 years              |       | 9,180 |   | (2,449 | ) | 6,731 |   |
| Trade names             |       | 1–10 years        |       | 23,950 |   | (5,875 | ) | 18,075 |   |
| Customer contracts      |       | 1 year                 |       | 670 |   | (223 | ) | 447 |   |
| Total                   |       |                        |       | $ | 195,023 |   | $ | (52,378 | ) | $ | 142,645 |   |

 
| ** **              | ** ** | **December 31, 2008** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **Useful Lives**           | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Customer relationships  |       | 7–11 years            |       | $ | 128,150 |   | $ | (23,751 | ) | $ | 104,399 |   |
| Acquired technology     |       | 5 years                    |       | 27,123 |   | (10,013 | ) | 17,110 |   |
| Covenant not to compete |       | 1–3 years             |       | 1,500 |   | (771 | ) | 729 |   |
| Proprietary process     |       | 7 years                    |       | 8,870 |   | (1,795 | ) | 7,075 |   |
| Trade names             |       | 1–10 years            |       | 23,600 |   | (4,573 | ) | 19,027 |   |
| Total                   |       |                            |       | $ | 189,243 |   | $ | (40,903 | ) | $ | 148,340 |   |

 

Annual amortization expense, which is based on the values ofintangibles and their useful lives, for the next five years, is expected to beas follows:

 
| Remainder of year ending December 31, 2009 |   | $      | 11,765 |   |
|-------------------------------------------------|--------|--------|--------|--------|
| Years ending December 31,                  |   |   |   |
| 2010                                            |   | $      | 22,576 |   |
| 2011                                            |   | $      | 22,031 |   |
| 2012                                            |   | $      | 17,141 |   |
| 2013                                            |   | $      | 16,871 |   |

 

Goodwill changed during the six months ended June 30, 2009 asfollows:

 
| Balance at January 1, 2009                                          |   | $      | 308,613 |   |
|--------------------------------------------------------------------------|--------|--------|---------|--------|
| Goodwill from Innovest acquisition                                       |   | 10,162 |    |
| Tax benefit on exercise of stock options granted  during ISS acquisition |   | (75    | )       |
| Balance as of June 30, 2009                                         |   | $      | 318,700 |   |

 

**6. ACCRUED EXPENSES**

 

Accrued expenses as of June 30, 2009 and December 31, 2008consist of the following:

 
| ** **                           | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Accrued compensation and related tax |       | $                       | 18,489     |                        | $          | 29,492 |   |
| Accrued data expense                 |       | 811                     |       | 1,907                       |       |
| Accrued travel and entertainment     |       | 415                     |       | 393                         |       |
| Accrued professional fees            |       | 1,265                   |       | 1,392                       |       |
| Current portion of deferred rent     |       | 532                     |       | 273                         |       |
| Other accrued expenses               |       | 7,264                   |       | 6,717                       |       |
|                                 |       | $                       | 28,776     |                        | $          | 40,174 |   |

 

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**7.  DEBT**

 

The Company’s debt is comprised of two term loan facilities and arevolving credit facility.  As of June 30,2009, and December 31, 2008, $289.9 million and $290.6 million of debtremains outstanding under the first lien loan respectively, and no indebtednessremains outstanding under the second lien term loan or revolving creditfacility.  The maturity date of the firstlien term loan is December 2013.

 

The first lien credit facilities consists of a $25.0 millionrevolving credit facility and $300.0 million of first lien term loanfacility and accumulates interest, at the option of the Company at: (a) theLIBOR rate plus a margin of 1.75% to 2.25% depending on the Company’sconsolidated leverage ratio, or (b) the higher of (i) the FederalFunds Effective Rate plus 0.5% and (ii) Bank of America’s “prime rate,”plus a margin of 0.75% or 1.25% depending on the consolidated leverageratio.  Amounts repaid under the first lienterm loan facility may not be re-borrowed. Amounts repaid under the revolvingcredit facility may be re-borrowed.

 

The second lien term loan facility was for $125.0 million andaccumulated interest based on, at the option of the Company at: (a) the LIBORrate plus a margin of 5.50%, or (b) the higher of (i) the FederalFunds Effective Rate plus 5.0% and (ii) Bank of America’s “prime rate,”plus a margin of 4.50%. In January 2008, the Company utilized a portion ofproceeds from the initial public offering to prepay the entire outstandingindebtedness under the second lien loan, in the amount of $125.0 million.In addition, the Company paid a 1% prepayment penalty fee, or$1.25 million, upon repayment as set forth in the credit agreement, whichhas been included in other expenses for the six months ended June 30,2008.

 

The effective interest rate on the Company’s debt was 6.9% and 7.3% forthe six months ended June 30, 2009 and 2008, respectively.

 

In addition to quarterly interest payments due on the credit facility,the Company is required to repay the principal amounts of the first lien creditfacility in quarterly installments of $741, of which the next payment is due onSeptember 30, 2009. Furthermore, the Company is required to make amandatory payment equal to each year’s excess cash flow depending on leverageratios, as defined in the first lien term loan facility, within five days ofdelivery of audited financial statements. Based on the Company’s consolidatedleverage ratio as of June 30, 2009, no future excess cash flow paymentswould be required as long as that ratio is maintained. The Company is requiredto repay the aggregate principal remaining on the first lien term loan facilityon the maturity date. The Company may voluntarily prepay the first lien creditfacilities in whole or in part without penalty.

 

Scheduled repayments of balances outstanding as of June 30, 2009are as follows:

 
| For  the twelve months ending June 30, |   |    |    |
|---------------------------------------------|--------|---------|---------|
| 2010                                        |   | $       | 2,966   |   |
| 2011                                        |   | 2,966   |    |
| 2012                                        |   | 2,966   |    |
| 2013                                        |   | 2,966   |    |
| 2014                                        |   | 278,014 |    |
|                                        |   | $       | 289,878 |   |

 

The Company has guaranteed the payment and performance of the creditfacilities. The Company has pledged substantially all of its assets ascollateral against the debt.

 

The Company incurred debt issuance costs of $10,074, which have beenrecorded on the accompanying condensed consolidated balance sheet, net ofamortization. Such amount is being amortized over the life of the remainingdebt and is reflected as a component of interest expense on the accompanyingstatement of operations. In conjunction with the prepayment of the second lienloan during the six months ended June 30, 2008, the Company wrote-off debtissuance costs of $2,377.  The followingtable summarizes amortization of debt issuance costs, including the write-offof debt issuance costs in the accompanying condensed consolidated statements ofoperations:

 
| ** **                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                        | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Amortization of debt issuance costs |       | $                                               | 260        |                                     | $          | 260 |   | $ | 520 |   | $ | 2,930 |   |
|                                     |            |                                                 |            |                                          |            |  |  |  |  |  |  |  |  |

 

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**8. FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

*Derivative Instruments*

 

The Company utilizesmarket data or assumptions that the Company believes market participants woulduse in pricing the fair value asset or liability of derivative instruments,including assumptions about risk and the risks inherent in the inputs to thevaluation technique. These inputs can be readily observable quoted prices inactive markets for identical assets or liabilities (level 1), significant otherobservable inputs (level 2) or significant unobservable inputs (level 3).The Company primarily uses the incomeapproach, which uses valuation techniques to convert future amounts to a singlepresent amount. As of June 30, 2009 the Company had interest rate swapagreements which are valued using level 2 inputs as shown in the followingtable:

 
| ** **                                                              | ** ** | ** ** | ** ** | **Fair value at June 30, 2009, using:** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | ** ** | ** ** | **Quoted prices in**                                        | ** ** | **Significant** | ** ** | **Significant** | ** ** |
| ** **                                                              | ** ** | ** ** | ** ** | **active markets for**                                      | ** ** | **other** | ** ** | **unobservable** | ** ** |
| ** **                                                              | ** ** | ** ** | ** ** | **identical assets**                                             | ** ** | **observable inputs** | ** ** | **inputs** | ** ** |
| ** **                                                              | ** ** | **Total**  | ** ** | **(Level 1)**                                                    | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| Interest rate swap liability (included in other  long term liabilities) |       | $          | 17,658     |                                                                  | $          | — |   | $ | 17,658 |   | $ | — |   |
|                                                                         |            |            |            |                                                                       |            |  |  |  |  |  |  |  |  |

 

In February 2007, the Company entered into two interest-rate swapagreements to reduce interest rate risks and to manage interest expense. Byentering into these agreements, the Company changed the fixed/variableinterest-rate mix of its debt portfolio. The agreements effectively convertfloating-rate debt into fixed-rate debt over the maturity life of the debt.This reduces the Company’s risk of incurring higher interest costs in periodsof rising interest rates and increases the Company’s risk of paying higherinterest costs in periods of decreasing interest rates. The interest rate swapagreements adjusted the Company’s weighted average effective interest rate,which resulted in a gain (loss) being recorded in interest expense in theaccompanying condensed consolidated statements of operations.

 

The Company’s interest-rate swap agreements hedge a substantial portionof the interest rate risk exposure under the Company’s debt (see Note 7).As of June 30, 2009 and December 31, 2008, the swap agreements had anotional amount of $252,488 and $279,375, respectively. As of June 30,2009 and December 31, 2008, the swap agreements had a fair value liabilityof $17,658 and $22,311, respectively, which is included in other long-termliabilities on the accompanying condensed consolidated balance sheets.

 

In conjunction with the prepayment of the second lien term loan duringthe six months ended June 30, 2008 (Note 7), the Company reduced thenotional amount of the interest rate swap by $19,300 in order to hedge theremaining debt outstanding.  The cost forthe reduction of the notional was $1,364 and has been included in otherexpenses on the accompanying condensed consolidated statement of operations forthe six months ended June 30, 2008.

 

The notional amount of the swap amortizes over the life of the debt andresults in gains and losses being recognized in interest expense in theaccompanying condensed consolidated statements of operations. The loss from theamortization and reduction of the swap agreement is summarized in the followingtable:

 
| ** **               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **2009**                                        | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Loss from swap agreement |       | $                                               | 2,481      |                                     | $          | 1,699 |   | $ | 5,023 |   | $ | 1,914 |   |
|                          |            |                                                 |            |                                          |            |  |  |  |  |  |  |  |  |

 

These hedges of interest rate risk relating to the Company’s debt havebeen designated as effective cash flow hedges at inception and on an ongoingquarterly basis. The Company estimates the effectiveness of the interest rateswap agreement utilizing the hypothetical derivative method. Under this method,the fair value of the actual interest rate swap agreement is compared to thefair value of a hypothetical swap agreement. To the extent that the agreementis not considered to be highly effective in offsetting the change in the valueof the interest payments being hedged, the fair value relating to theineffective portion of such agreement and any subsequent changes in such fairvalue will be immediately recognized in earnings. To the extent that theagreement is considered highly effective but not completely effective in offsettingthe change in the value of the interest payments being hedged, any changes infair value relating to the ineffective portion of such agreement will beimmediately recognized in earnings. Effective gains and losses have beenincluded in the unrealized loss on cash flow hedges as a component of othercomprehensive income, net of tax.

 

*Other Financial Instruments*

 

Thecarrying value of the Company’s cash, accounts receivable, accounts payable andaccrued expenses approximates their fair value due to the short-term nature ofthese items. The carrying value and approximate fair value of the Company’sdebt based on prevailing interest rates as of June 30, 2009 and December 31,2008 is as follows:

 

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| ** **            | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------|------------|-------------------------|------------|------------------------|------------|
| Carrying value        |       | $                       | 289,878    |                   | $          | 290,619 |   |
| Estimated fair  value |       | 252,000                 |       | 253,000                |       |
|                       |            |                         |            |                        |            |  |  |

 

**9. INCOME TAXES**

 

The Company’s effective tax rate for the provision for income taxes was37.0% and 39.1% for the six months ended June 30, 2009 and 2008,respectively.  The effective tax rate of 37.0% for the six monthsended June 30, 2009 reflects the Company’s estimate of the effective taxrate during the period.

 

As of June 30, 2009, the Company’s unrecognized tax benefitstotaled $2,104, all of which would favorably impact the Company’s effective taxrate, if recognized. Over the next six months, an increase of $169 will berecorded for unrecognized tax benefits and such increase will unfavorablyimpact the Company’s income tax provision. Interest and penalties accrued during the six months ended June 30,2009 and 2008 were $43 and $9, respectively.

 

The Company’s tax returns for 2005-2007 remain open to examination bythe Internal Revenue Service in their entirety. They also remain open withrespect to international and state taxing jurisdictions. Currently, the Company(or one of its subsidiaries) has been selected for audit by the Internal RevenueService for 2006 and 2007, and Canada Revenue Agency for 2005-2006. As of June 30,2009 and December 31, 2008, $500 and $457 were accrued for the payment ofinterest and penalties, respectively.

 

A reconciliation of the beginning and ending amount of unrecognizedgross tax benefits is as follows:

 
| Balance at January 1, 2009                               |   | $   | 2,017  |   |
|---------------------------------------------------------------|--------|-----|--------|--------|
| Additions based on tax positions related to the  current year |   | 105 |   |
| Additions for tax positions of prior years                    |   | 64  |   |
| Reductions for tax positions of prior years                   |   | (82 | )      |
| Balance at June 30, 2009                                 |   | $   | 2,104  |   |

 

**10. COMMITMENTS AND CONTINGENCIES**

 

The Company is committed to unrelated parties for the rental of officespace under operating leases. As of June 30, 2009, minimum future rentalpayments under operating leases are as follows:

 
| For the twelve months ending June 30, |   |   |   |
|--------------------------------------------|--------|--------|--------|
| 2010                                       |   | $      | 7,166  |   |
| 2011                                       |   | 6,831  |   |
| 2012                                       |   | 6,629  |   |
| 2013                                       |   | 2,971  |   |
| 2014                                       |   | 1,734  |   |
| Thereafter                                 |   | 6,161  |   |
| Total minimum lease payments               |   | $      | 31,492 |   |

 

Duringthe six months ended June 30, 2009 the Company signed an 11 year operatinglease agreement for its new ISS headquarters in Rockville, Maryland for a totalrent commitment of approximately $10.4 million.   The term of thelease agreement does not commence until the facilities are completed by thelessor and are ready for occupancy, which has not yet occurred.

 

Duringthe six months ended June 30, 2009 and 2008 the Company incurred leaseexit costs of $795 and $198, respectively, as a result of moving variousCompany operations.  Such expenses have been included in general andadministrative expenses in the accompanying condensed consolidated statementsof operations.

 

***Data Agreements***—The Companyhas entered into agreements with various vendors to supply the Company withdata. The aggregate minimum payments with respect to these data agreements asof June 30, 2009, are as follows:

 

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| For the twelve months ending June 30, |   |   |   |
|--------------------------------------------|--------|--------|--------|
| 2010                                       |   | $      | 7,061  |   |
| 2011                                       |   | 1,173  |   |
| 2012                                       |   | 72     |   |
| Total                                      |   | $      | 8,306  |   |

 

***Contingencies***—The Companyhas no pending litigation matters against it that it considers to be materialnor has the Company initiated any litigation against any parties.

 

**11. STOCK-BASED COMPENSATION**

 

The Company has incentive plans that provide for the issuance of equityawards, including stock options and non-vested shares of our common stock (“non-vestedstock”).

 

*StockOptions*

 

During2000, the Company’s Board of Directors adopted a Stock Option Plan (the “2000Plan”) that provided for the grant of options to employees, consultants, andnon-employee directors to purchase common stock, which vest over a one to fouryear period and have a ten-year contractual term. The maximum number of sharesof the Company’s common stock available for issuance under the 2000 Plan was12,500,000, and no more than 4,000,000 were allowed to be issued in anycalendar year. The Company retired the 2000 Plan and adopted a new option plan(the “2004 Plan”). As of June 30, 2009, 5,369,621 options issued under the2000 Plan remain outstanding.

 

The 2004 Plan provides for the grant of options to employees,consultants, and non-employee directors to purchase common stock, which vestover a three to four year period and have a ten-year contractual term. Tosatisfy options granted under the plan, the Company may make common stockavailable from authorized but unissued shares or shares held in treasury by theCompany. The maximum number of shares of the Company’s common stock availablefor issuance under the 2004 Plan is 7,500,000. The Company retired the 2004Plan and adopted a new option plan in January 2007. As of June 30,2009, 4,326,763 options issued under the 2004 Plan remain outstanding.

 

In January 2007, the Company’s Board of Directors adopted a stockoption plan covering the employees from ISS (the “ISS Plan”), which resulted inthe rollover of 1,396,000 fully-vested options. Under the adoption of this ISSPlan, no additional options are to be issued. As of June 30, 2009, 147,433options issued under the ISS Plan remain outstanding.

 

In January 2007 the Company’s Board of Directors adopted a StockOption Plan (the “2007 Plan”) that provides for the grant of options andnon-vested stock to employees, consultants, and non-employee directors topurchase common stock, which vest over a four year period and have a ten-yearcontractual term. In June 2009, the Company’s shareholders approved anamendment to the 2007 Plan to increase the maximum number of shares of commonstock available for issuance under the plan to 10,000,000 and extend thetermination date of the Plan to June 30, 2012.  As of June 30, 2009, 3,701,511 optionsand 205,939 shares of non-vested stock granted under the 2007 Plan remainoutstanding.

 

Summarized information relative to the Company’s stock option plans isas follows:

 
| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|---------------------------------------|------------|----------------------------|------------|-----------------------------------------|------------|
| Outstanding—January 1, 2009 |       | 12,819,587                 |       | $                                       | 7.20       |   |
| Granted                               |       | 1,373,500                  |       | $                                       | 13.45      |   |
| Exercised                             |       | (356,051                   | )          | $                                       | 5.53       |   |
| Forfeited                             |       | (291,708                   | )          | $                                       | 15.33      |   |
| Outstanding—June 30, 2009   |       | 13,545,328                 |       | $                                       | 7.71       |   |

 

TheCompany’s stock options outstanding as of June 30, 2009 were as follows:

 
| ** **                         | ** ** | **Outstanding Options** | ** ** | **Options Exercisable**                                        | ** ** |
|------------------------------------|------------|------------------------------|------------|---------------------------------------------------------------------|------------|
| **Range of  Exercise  Price** | ** ** | **Number of  Options**  | ** ** | **Weighted-Average  Remaining  Contractual  Life  (In Years)** | ** ** | **Weighted-Average  Exercise  Price** | ** ** | **Number of  Options** | ** ** | **Weighted-Average  Exercise  Price** | ** ** |
| $1.00-5.00                         |       | 6,914,042                    |       | 3.80                                                                |       | $ | 2.55 |   | 6,914,040 |   | $ | 2.55 |   |
| 5.01-10.00                         |       | 1,879,511                    |       | 6.51                                                                |       | 7.02 |   | 1,390,472 |   | 6.99 |   |
| 10.01-15.00                        |       | 914,000                      |       | 9.66                                                                |       | 11.84 |   | — |   | — |   |
| 15.01-20.00                        |       | 3,837,775                    |       | 8.15                                                                |       | 16.36 |   | 1,486,171 |   | 15.98 |   |
|                               |       | 13,545,328                   |       | 5.80                                                                |       | $ | 7.71 |   | 9,790,683 |   | $ | 5.22 |   |

 

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Of the unvested options as of June 30, 2009, 3,304,088 areexpected to vest in the future.  As of June 30,2009 the intrinsic value of stock options outstanding and exercisable wasapproximately $134,776 and $121,796, respectively. The intrinsic value of stockoptions exercised during the six months ended June 30, 2009 was $3,631.

 

Thefair value of stock options at date of grant was estimated using theBlack-Scholes option-pricing model utilizing the following weighted-averageassumptions:

 
| ** **                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                        | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free interest rate         |       | 2.3                                             | %          | 2.9                                      | %          | 2.0 | % | 2.6 | % |
| Expected term (in years)        |       | 5.5                                             |       | 4.5                                      |       | 5.5 |   | 4.5 |   |
| Expected stock price volatility |       | 46.5                                            | %          | 35                                       | %          | 45.8 | % | 35 | % |
| Expected dividend yield         |       | None                                            |       | None                                     |       | None |   | None |   |

 

The weighted-average per share fair value of options granted was asfollows:

 
| ** **                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted average per share fair value of options  granted |       | $                                               | 7.85       |                                          | $          | 6.67 |   | $ | 6.02 |   | $ | 5.77 |   |
|                                                           |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

*Non-vested Stock*

 

The following table summarizes non-vested stock activity for the sixmonths ended June 30, 2009:

 
| ** **                              | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| Unvested shares at January 1, 2009 |       | 235,039                    |       | $                                                           | 18.01      |   |
| Granted                                 |       | 5,613                      |       | $                                                           | 13.79      |   |
| Vested                                  |       | (32,934                    | )          | $                                                           | 14.17      |   |
| Forfeited                               |       | (1,779                     | )          | $                                                           | 16.50      |   |
| Unvested Shares at June 30, 2009   |       | 205,939                    |       | $                                                           | 17.48      |   |

 

The total fair value of shares vested during the six months ended June 30,2009 was $467.   As of June 30,2009, there was approximately $17,755 of unrecognized compensation costsrelated to stock options and non-vested share-based compensation awards grantedunder the stock option plans, which is expected to be recognized over a periodof approximately four years.

 

**12. EARNINGS PER SHARE**

 

Basic earnings per common share are computed by dividing net incomeattributable to common shareholders by the weighted average number of commonshares outstanding. Diluted earnings per common share is computed by dividingnet income attributable to common shareholders by a diluted weighted averagenumber of common shares outstanding. Diluted earnings per common share reflectsthe potential dilution that would occur if securities or other contracts toissue common stock were exercised or converted into common stock, unless theyare anti-dilutive.

 

In computing earnings per share for the three and six months ended June 30,2009 and 2008, the difference between basic and diluted number of sharesoutstanding is as follows:

 
| ** **                                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                                        | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Basic number of weighted-average shares  outstanding                             |       | 61,665,981                                      |       | 60,522,656                               |       | 61,565,927 |   | 58,842,179 |   |
| Effect of dilutive securities— Employee stock  options and non-vested stock |       | 6,384,563                                       |       | 7,524,271                                |       | 6,163,272 |   | 7,586,706 |   |
| Diluted number of weighted-average shares  outstanding                           |       | 68,050,544                                      |       | 68,046,927                               |       | 67,729,199 |   | 66,428,885 |   |

 

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Options and non-vested stock of 2,852,332 and 1,673,826 common sharesduring the three months ended June 30, 2009 and 2008, and 4,386,259 and1,524,477 common shares during the six months ended June 30, 2009 and2008, respectively, were anti-dilutive and were therefore excluded from thecomputation of diluted earnings per share.

 

**13. SEGMENT INFORMATION**

 

The Company has two reportable segments, the RiskMetrics business andthe ISS business. These designations have been made as the discrete operatingresults of these segments are reviewed by the Company’s chief operatingdecision maker to assess performance and make operating and asset allocationdecisions. The Company allocates corporate and other shared services to eachsegment based on the employees’ geographic location, revenue allocation andheadcount.

 

The RiskMetrics business is a provider of multi-asset, position-basedrisk and wealth management products and services. The business provides clientswith comprehensive, interactive products and services that allow them tomeasure and quantify portfolio risk across security types, geographies andmarkets. The products and services enable the clients to make more informedinvestment decisions, monitor and comply with exposure and risk limits, providegreater transparency to both internal audiences and external constituencies andmeet regulatory and reporting requirements.

 

The ISS business is a provider of corporate governance services toinstitutional shareholders and corporations around the world. The businessfacilitates the voting of proxies by institutional investors and providesin-depth research and analysis to help inform their voting decisions and assessissuer-specific risk. It offers both global security coverage and fully integratedproducts and services, from policy creation to comprehensive research, voterecommendations, reliable vote execution, post-vote disclosure and reportingand analytical tools.

 

Resultsof operations by segment for the three and six months ended June 30, 2009and 2008 is as follows:

 
| ** **                                               | ** ** | **RiskMetrics  Business** | ** ** | **ISS  Business** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|
| **Three months ended  June 30, 2009:**              |       |                      |       |              |       |      |       |
| Revenues                                                 |       | $                         | 39,421     |              | $          | 36,107    |       | $ | 75,528 |   |
| Depreciation and amortization of property and  equipment |       | 1,104                     |       | 1,005             |       | 2,109     |       |
| Amortization of intangible assets                        |       | 83                        |       | 5,800             |       | 5,883     |       |
| Other operating expenses                                 |       | 24,368                    |       | 26,622            |       | 50,990    |       |
| Income from operations                                   |       | $                         | 13,866     |              | $          | 2,680     |       | $ | 16,546 |   |
| Interest, dividend and investment income                 |       |                      |       |              |       | 100       |       |
| Interest expense                                         |       |                      |       |              |       | (5,173    | )          |
| Income before provision for income taxes                 |       |                      |       |              |       | 11,473    |       |
| Provision for income taxes                               |       |                      |       |              |       | 4, 262    |       |
| Net income                                               |       |                      |       |              |       | $         | 7,211      |   |

 
| ** **                                               | ** ** | **RiskMetrics  Business** | ** ** | **ISS  Business** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|
| **Three months ended  June 30, 2008:**              |       |                      |       |              |       |      |       |
| Revenues                                                 |       | $                         | 38,828     |              | $          | 35,298    |       | $ | 74,126 |   |
| Depreciation and amortization of property and  equipment |       | 1,184                     |       | 981               |       | 2,165     |       |
| Amortization of intangible assets                        |       | —                    |       | 5,456             |       | 5,456     |       |
| Other operating expenses                                 |       | 25,540                    |       | 26,863            |       | 52,403    |       |
| Income from operations                                   |       | $                         | 12,104     |              | $          | 1,998     |       | $ | 14,102 |   |
| Interest, dividend and investment income                 |       |                      |       |              |       | 618       |       |
| Interest expense                                         |       |                      |       |              |       | (5,618    | )          |
| Income before provision for income taxes                 |       |                      |       |              |       | 9,102     |       |
| Provision for income taxes                               |       |                      |       |              |       | 3,556     |       |
| Net income                                               |       |                      |       |              |       | $         | 5,546      |   |

 

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| ** **                                               | ** ** | **RiskMetrics  Business** | ** ** | **ISS  Business** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|
| **Six months ended June 30,  2009:**                |       |                      |       |              |       |      |       |
| Revenues                                                 |       | $                         | 79,615     |              | $          | 73,294    |       | $ | 152,909 |   |
| Depreciation and amortization of property and  equipment |       | 2,190                     |       | 1,874             |       | 4,064     |       |
| Amortization of intangible assets                        |       | 158                       |       | 11,317            |       | 11,475    |       |
| Other operating expenses                                 |       | 48,192                    |       | 53,931            |       | 102,123   |       |
| Income from operations                                   |       | $                         | 29,075     |              | $          | 6,172     |       | $ | 35,247 |   |
| Interest, dividend and investment income                 |       |                      |       |              |       | 293       |       |
| Interest expense                                         |       |                      |       |              |       | (10,559   | )          |
| Income before provision for income taxes                 |       |                      |       |              |       | 24,981    |       |
| Provision for income taxes                               |       |                      |       |              |       | 9,243     |       |
| Net income                                               |       |                      |       |              |       | $         | 15,738     |   |
| Asset information at June 30, 2009:                 |       |                      |       |              |       |      |       |
| Segment assets                                           |       | $                         | 192,501    |              | $          | 524,731   |       | $ | 717,232 |   |
| Goodwill                                                 |       | $                         | —     |              | $          | 318,700   |       | $ | 318,700 |   |

 
| ** **                                               | ** ** | **RiskMetrics  Business** | ** ** | **ISS  Business** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|
| **Six months ended June 30,  2008:**                |       |                      |       |              |       |      |       |
| Revenues                                                 |       | $                         | 73,264     |              | $          | 72,082    |       | $ | 145,346 |   |
| Depreciation and amortization of property and  equipment |       | 2,344                     |       | 1,936             |       | 4,280     |       |
| Amortization of intangible assets                        |       | —                    |       | 10,912            |       | 10,912    |       |
| Other operating expenses                                 |       | 49,529                    |       | 54,472            |       | 104,001   |       |
| Income from operations                                   |       | $                         | 21,391     |              | $          | 4,762     |       | $ | 26,153 |   |
| Interest, dividend and investment income                 |       |                      |       |              |       | 1,241     |       |
| Interest expense                                         |       |                      |       |              |       | (15,105   | )          |
| Other expenses                                           |       |                      |       |              |       | (2,613    | )          |
| Income before provision for income taxes                 |       |                      |       |              |       | 9,676     |       |
| Provision for income taxes                               |       |                      |       |              |       | 3,783     |       |
| Net income                                               |       |                      |       |              |       | $         | 5,893      |   |
| Asset information at June 30, 2008:                 |       |                      |       |              |       |      |       |
| Segment assets                                           |       | $                         | 138,999    |              | $          | 691,828   |       | $ | 830,827 |   |
| Goodwill                                                 |       | —                    |       | $                 | 460,855    |      | $          | 460,855 |   |

 

**14. RELATED PARTY TRANSACTION**

 

InMay 2008, the Company entered into a contract for the sale of Market Riskproducts to Duff Capital Advisors which was subsequently terminated. PhilipDuff, a director of the Company, was the founder, CEO and General Partner ofDuff Capital Advisors, but is no longer employed by that firm. The Companyrecognized revenue of $326 and $170 for the Duff Capital Advisors contract forthe six months ended June 30, 2009 and 2008, respectively.

 

**********

 

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*Unlessthe context otherwise indicates or requires, as used in this Form 10-Q,references to “we,” “us,” “our” or the “company” refer to RiskMetrics Group, Inc.,and its subsidiaries. References to “RiskMetrics” refer only to our subsidiary,RiskMetrics Solutions, Inc. and its subsidiaries, references to “ISS”refer only to our subsidiary Institutional Shareholder Services, Inc. andits subsidiaries.  In this Form 10-Q, all dollar amounts areexpressed in thousands, unless indicated otherwise. References to our “clients”include each business unit, division or wholly-owned subsidiary of a parentcompany which has entered into a separate customer contract with us.*

 

*Thefollowing discussion should be read in conjunction with our historicalfinancial statements and the related notes included elsewhere in this Form 10-Qand in our Annual Report on Form 10-K for the year ended December 31,2008 (the “Form 10-K”). This discussion contains forward-lookingstatements that are subject to known and unknown risks and uncertainties.Actual results and timing of events may differ significantly from thoseexpressed or implied due to a number of factors, including those set forth in “Item1A.—Risk Factors,” on our Form 10-K.*

 

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**Overview**

 

We are a leading provider of risk management and corporate governanceproducts and services to participants in the global financial markets, asmeasured by revenues. Our products and services enable investors to measure andmanage the market, credit, portfolio, governance, accounting, legal andenvironmental risks associated with their financial holdings. These offeringsaddress multiple asset classes, markets and geographies to a broad group ofmarket participants, including asset managers, hedge funds, pension funds,banks, insurance companies, financial advisors and corporations. Clients relyon us to better understand and manage risk of their financial holdings, toprovide greater transparency to both their internal and externalconstituencies, to satisfy regulatory and reporting requirements and to makebetter investment decisions.

 

Our growth strategy is focused on the following:

 

·                  increasing sales to existingclients by providing additional data, research, analytical products andprocessing services, which we believe will be enhanced by leveraging ourcombined RiskMetrics and ISS sales forces;

 

·                  expanding our client base byfurther penetrating our markets, including expanding our global footprint andattracting new clients, especially financial institutions which currently relyon internally developed risk management and proxy voting solutions; and

 

·                  enhancing and extending ourproducts and services, including the creation of new product and serviceofferings and by selectively pursuing acquisitions; while leveraging theeconomies of scale in our cost structure to grow revenues at a greater ratethan operating expenses and thereby increase our operating margin.

 

We benefit from a number of favorable attributes of our business model.These attributes include:

 

**Subscription-based revenue model:**  We sell our services primarily on an annualsubscription basis and have historically experienced high renewal rates.Recurring revenues accounted for approximately 91.8% of our total revenuesduring the six months ended June 30, 2009, and we had a renewal rate of80.8% during that time. Our subscription model and historically high renewalrates minimize volatility in our revenues and provide significant visibilityfor our future results.  Renewal ratesare still considered high but they are currently below historical levels.

 

**Leveragable cost structure:**  Because we provide our services from a commontechnology and data infrastructure, we benefit from economies of scale. As aresult, we have generally been able to increase margins as our revenues havegrown.

 

**Favorable cash flow characteristics:**  Our subscription-based revenues and leveragablecost structure, combined with our positive working capital characteristics andlow capital expenditure requirements, have historically allowed us to generatesignificant cash flow.

 

In evaluating our results, we focus on several key financial and operatingdata including annualized contract value, renewal rates, sales to newcustomers, non-recurring revenues and Adjusted EBITDA (refer to definitionbelow). Our annualized contract value, which is described in detail below, is aleading indicator of our business and represents a large portion of our revenuein any given period. We track our performance across geographies and productand service lines.

 

Weexpect to invest in our business to continue to grow our revenues.Compensation, data acquisition and technology infrastructure costs representsignificant components of our operating expense structure. While we expect toincrease our operating expenses over time to take advantage of marketopportunities, we believe that the economies of scale in our operating modelwill allow us to grow our operating expenses at a lower rate than revenues andthereby increase our operating margins.

 

The vast majority of ourbusiness involves the sale of products and services to clients in thefinancial services industry, including asset managers, banks, insurancecompanies, hedge funds, pension funds as well as professionalorganizations that serve the financial services industry.  The globalfinancial markets have been adversely impacted by the current market environment thatincludes illiquidity, market volatility, widening credit spreads, changesin interest rates, currency exchange fluctuations and new legaland compliance requirements.  These market conditions andthe reduced business activity have had a negative impact on a numberof our clients and could negatively impact our future revenues due to thepotential for declining sales and renewal rates.

 

We do not believe thatour liquidity has been affected by the recent events in the global financialmarkets.  Refer to Liquidity and CapitalResources discussion.

 

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***Our Revenues***

 

We generate a substantial majority of our revenues from annualsubscriptions to our products and services, for which our clients generally payus in advance. These contracts generally renew automatically on an annualbasis. Our products and services are generally priced based on the access toour applications and services, including research, voting and reportspurchased. We do not generally price our products and services based on ourclients’ assets under management (“AUM”). As a result, we are not directlysubject to revenue fluctuations resulting from changes in our clients’ AUM. Ourexperience has been that, over time, our clients have often added users andpurchased additional products and services from us, which has led to increasesin our revenues per client.

 

Revenues from subscription contracts are referred to as recurringrevenues. Recurring revenues are generated through the renewal of existingcontracts and the signing of new subscription contracts. For the six monthsended June 30, 2009, approximately 91.8% of our total revenues weregenerated from these subscription contracts. The subscription fees receivedfrom our clients are recorded as deferred revenues and recognized each month asour services are rendered. Our renewal rate, which was 80.8% for the six monthsended June 30, 2009, combined with our level of new subscriptioncontracts, determine our annualized contract value, which is a leadingindicator of our recurring revenues. Our annualized contract value as of June 30,2009 was $279.2 million.

 

We also generate non-recurring revenue from sales of products andservices without a subscription contract, which represented 8.2% of totalrevenues during the six months ended June 30, 2009.

 

*Annualized Contract Value (“ACV”)*

 

As a result of our subscription-based model and historically highrenewal rates, at the end of any period, we generally have subscriptioncontracts in place for a high percentage of our total revenues for the next12 months. We monitor the contracted revenues from these agreements andrefer to them as annualized contract value. We define our annualized contractvalue as the aggregate value on an annualized basis of all recurringsubscription contracts in effect on a reporting date. Any revenues associatedwith subscription contracts that are entered into during a reporting periodwill be reflected in the annualized contract value beginning at the end of thatperiod. As a result, annualized contract value at the end of any period is theannualized contract value at the beginning of the period plus the annualizedcontract revenue associated with new subscription contracts signed during thatperiod minus the annualized contract revenues associated with subscriptioncontracts not renewed. Annualized contract value does not include any feesassociated with any non-recurring revenues.

 

Annualized contract value is an important metric for our business.However, annualized contract value may differ from our future reported revenuesdue to a number of factors, which include:

 

·                  new subscription-basedrevenues;

 

·                  additional one-time revenue;

 

·                  changes in the contractvalue of our subscription contracts;

 

·                  cancellations andnon-renewals of subscription contracts; and

 

·                  revenue recognition timingdifferences due to the provisions of generally accepted accounting principlesin the United States (“ U.S. GAAP”).

 

Our annualized contract value for the RiskMetrics business and ISSbusiness as of June 30, 2009 and 2008, as well as the percentage growth isset forth, separately for each business, in the tables below.

 

**Year-Over-Year Comparison**

 
| ** **                                     | ** ** | **As of June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                     | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| RiskMetrics business annualized contract value |       | $                                 | 154,457    |   | $ | 155,435 |   |
| Percent growth                                 |       | (0.6                              | )%         | * * | * * |
| ISS business annualized contract value (1)     |       | $                                 | 124,752    |   | $ | 126,411 |   |
| Percent growth                                 |       | (1.3                              | )%         | * * | * * |

 

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(1)  Innovest was acquired on March 2, 2009 with $5.2 millionof ACV, which is not included in ISS ACV as of June 30, 2008.  Innovest ACV does not include any contractswhere fees are based on the clients’ AUM, which at June 30, 2009 haveapproximately $0.8 million of annual revenue.

 

*Renewal Rate*

 

Because non-renewals of subscription contracts decrease our annualizedcontract value, which in turn decreases our revenues, a key operating metric isrenewal rate. Our renewal rate for any period is defined as the amount ofannualized contract value that renews in a period divided by the amount ofannualized contract value with an expiration date during that period. If aclient has a higher contract value upon renewal of its existing contract, theamount in excess of the prior period’s contract is considered new contractrevenue for purposes of this calculation.

 

The renewal rate for our RiskMetrics business and ISS business for thesix months ended June 30, 2009 and 2008 is set forth separately for eachbusiness in the table below.

 
| ** **                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| RiskMetrics business renewal rate |       | 80.5                                          | %          | 90.3 | % |
| ISS business renewal rate         |       | 81.2                                          | %          | 89.4 | % |

 

The Risk renewal rate declined mainly due to higher non-renewals ratesin the alternative investment segment as well as smaller decreases in therenewal rates in the asset management and bank segments.  The ISS renewalrate declined primarily due to a decline in the proxy business renewal ratedriven by budget constraints of clients, as well as significantly lower renewalrates in Corporate Services and CFRA products.

 

*Non-Recurring Revenues*

 

Non-recurring revenues result from sales on a non-subscription basis.Non-recurring revenues for the RiskMetrics business and ISS business for thethree and six months ended June 30, 2009 and 2008 are set forth in thetable below. Our non-subscription services include AUM fees, implementation,compensation advisory services and similar services and overages related to ISS’Proxy Research and Voting business. Revenues from implementation and AUM arerecognized as the related subscription service is provided, some CompensationAdvisory Services revenues are recognized over a three month period and othernon-recurring revenues are recognized once the service is provided. To theextent that clients’ actual usage of proxy voting services or proxy researchreports exceeds contracted-for limits, the excess usage is considered to be anoverage and clients are charged additional fees. Our clients’ overages aretypically an indication of larger proxy voting contract renewals.

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                        | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| RiskMetrics business percent non-recurring revenue |       | 1.8                                             | %          | 1.6                                      | %          | 1.7 | % | 1.3 | % |
| ISS business percent non-recurring revenue         |       | 14.4                                            | %          | 11.5                                     | %          | 15.4 | % | 13.5 | % |

 

***Operating Costs and Expenses***

 

Compensation expense represents a substantial majority of our expensesacross all of our operating functions. Compensation expenses before stock-basedcompensation expense are comprised of base salary, bonuses, benefits, payrolltaxes and sales commissions. While we expect to grow our headcount over time totake advantage of our market opportunity, we believe that the economies ofscale in our operating model will allow us to grow our compensation expenses ata lower rate than revenues.

 

Other significant operating expenses are data, proxy voting fees,occupancy, telecommunications and web hosting costs. Since we deliver ourproducts and services using a common data and technology infrastructure, weexpect these expenses generally to increase at less than the rate of revenuegrowth. Overall, our goal is to keep the rate of growth of these operatingexpenses below the rate of growth of our revenues. However, in order to takeadvantage of growth opportunities, we may invest in our business in order tosupport increased revenue growth. This might result in variability in ouroperating margin in the short term.

 

We allocate compensation expenses, including stock-based compensationexpense, to our cost of revenues, sales and marketing, research and developmentand general and administrative expense categories based on the actual costsassociated with each

 

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employee. Other costs associated with the employees,such as occupancy, travel and telecommunications, are included in the same costcategories as the corresponding employees. We allocate shared services to eachsegment based on revenue, usage or headcount. The following summarizes oursignificant operating expenses:

 

*Costs ofRevenues*

 

Costs of revenues includecosts related to production of proxy research and voting, web hosting, data,account management, implementation and systems operations and allowances fordoubtful accounts. Costs in this area consist primarily of staff compensationand related costs and payments to third party vendors, including third party webhosting and data providers.

 

*Researchand Development*

 

Research and developmentexpenses include costs related to product development, research technology,application design, technology infrastructure and analytics development. Costsin this area consist primarily of staff compensation costs and related expensesand consultant expenses.

 

*Sellingand Marketing*

 

Selling and marketingexpenses consist of costs related to our sales force, product management andmarketing professionals. These costs include staff compensation costs andrelated expenses, including commissions and general marketing costs.

 

*Generaland Administrative*

 

General and administrativeexpenses consist of expenses for finance, legal, accounting, human resourcesand information technology personnel. Costs in this area primarily consist ofstaff compensation and related expenses, legal costs, insurance costs,accounting fees and other professional services fees.

 

*Depreciationand Amortization of Property and Equipment*

 

Depreciation and amortizationof property and equipment includes depreciation of software, computer andrelated equipment, furniture and fixtures and telecommunications equipment,which is recorded over the respective useful lives of the related assets.Depreciation also includes the amortization of leasehold improvements which areamortized over the shorter of the term of the lease or the assets’ useful life,and the amortization of capitalized software costs. Amortization expenses forleasehold improvements and capitalized software development costs are includedin depreciation and amortization of property and equipment in the statement ofoperations.

 

*Amortizationof Intangible Assets*

 

Amortization expenseincludes the amortization of finite life intangible assets such as acquiredtechnology, customer relationships, trade names, license agreements,proprietary process and non-compete agreements, which are amortized over theirestimated useful lives.

 

***Adjusted EBITDA***

 

The Adjusted EBITDA databelow sets forth supplementary information that we believe is useful forinvestors in evaluating our underlying operations:

 
| ** **      | ** ** | **Three months ended  June 30,** | ** ** | **% Growth for** | ** ** | **Six months ended  June 30,** | ** ** | **% Growth for** | ** ** |
|-----------------|------------|-------------------------------------------------|------------|----------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **      | ** ** | **2009**                                        | ** ** | **2008**                   | ** ** | **three months**                    | ** ** | **2009**                   | ** ** | **2008** | ** ** | **six months** | ** ** |
|            |       |                                            |       |                       |       |                                     |       |                       |       |   |   |   |   |
| Adjusted EBITDA |       | $                                               | 27,130     |                       | $          | 23,743                                   |       | 14.3                       | %          | $ | 56,489 |   | $ | 46,946 |   | 20.3 | % |
|                 |            |                                                 |            |                            |            |                                          |            |                            |            |  |  |  |  |  |  |  |  |

 

Adjusted EBITDA, as defined in our credit facilities,represents net income (loss) before interest expense, interest income, otherincome (expense), income tax expense (benefit), depreciation and amortizationof property and equipment, amortization of intangible assets, non-cashstock-based compensation expense and extraordinary or non-recurring charges orexpenses. It is a material metric used by our lenders in evaluating compliancewith the maximum consolidated leverage ratio covenant in our credit facilities.The maximum consolidated leverage ratio covenant, as defined in our creditfacilities, represents the ratio of total indebtedness as compared to AdjustedEBITDA, and can not exceed a maximum ratio range which declines from 

 

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8.50 to 3.00 over the life of the credit facilities.Non-compliance with this covenant could result in us being required toimmediately repay our outstanding indebtedness under our credit facilities.Adjusted EBITDA is also a metric used by management to measure operatingperformance and for planning, including preparation of annual budgets,analyzing investment decisions and evaluating profitability.

 

We also present Adjusted EBITDA as a supplementalperformance measure because we believe that this measure provides our board ofdirectors, management and investors with additional information to measure ourperformance, provide comparisons from period to period by excluding potentialdifferences caused by variations in capital structure (affecting interestexpense), tax position (such as the impact on periods of changes in effectivetax rates or net operating losses), the age and book depreciation of fixedassets (affecting relative depreciation expense), acquisitions (affectingamortization expense) and compensation plans (affecting stock-basedcompensation expense).

 

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

 

We understand that, although Adjusted EBITDA isfrequently used by securities analysts, lenders and others in their evaluationof companies, Adjusted EBITDA has limitations as an analytical tool, and youshould not consider it in isolation, or as a substitute for an analysis of ourresults as reported under U.S. GAAP. Some of these limitations are:

 

·                                          Adjusted EBITDA does not reflect our cashexpenditures, or future requirements for capital expenditures or contractualcommitments;

 

·                                          Adjusted EBITDA does not include stockbased compensation expense;

 

·                                          Adjusted EBITDA does not reflect changes in, or cashrequirements for, our working capital needs;

 

·                                          Adjusted EBITDA does not reflect the significantinterest expense, or the cash requirements necessary to service interest orprincipal payments on our indebtedness;

 

·                                          Although depreciation and amortization are non-cashcharges, the assets being depreciated and amortized often will have to bereplaced in the future, and Adjusted EBITDA does not reflect any cashrequirements for such replacements; and

 

·                                          Other companies in our industry may calculate AdjustedEBITDA differently than we do, limiting its usefulness as a comparativemeasure.

 

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

 
| ** **                                               | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                               | ** ** | **2009**                                        | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                               |       | $                                               | 7,211      |                                     | $          | 5,546 |   | $ | 15,738 |   | $ | 5,893 |   |
| Interest, other (income)  expense, net                   |       | 5,073                                           |       | 5,000                                    |       | 10,266 |   | 16,477 |   |
| Income tax expense                                       |       | 4,262                                           |       | 3,556                                    |       | 9,243 |   | 3,783 |   |
| Depreciation and  amortization of property and equipment |       | 2,109                                           |       | 2,165                                    |       | 4,064 |   | 4,280 |   |
| Amortization of intangible  assets                       |       | 5,883                                           |       | 5,456                                    |       | 11,475 |   | 10,912 |   |
| Stock-based compensation                                 |       | 2,275                                           |       | 2,016                                    |       | 4,083 |   | 5,377 |   |
| Non-recurring expenses                                   |       | 190                                             | (a)        | —                                   |       | 1,493 | (b) | 198 | (a) |
| Loss on disposal of  property and equipment              |       | 127                                             |       | 4                                        |       | 127 |   | 26 |   |
| Adjusted EBITDA                                          |       | $                                               | 27,130     |                                     | $          | 23,743 |   | $ | 56,489 |   | $ | 46,946 |   |

 

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(a)          Represents lease exit costs.

(b)         Represents employeeseverance costs, acquisition costs, and lease exit costs.

 

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**CriticalAccounting Policies and Estimates**

 

Our condensed consolidated financial statements areprepared in conformity with US GAAP. Our critical accounting policies,including the assumptions and judgments underlying them, require theapplication of significant judgment in the preparation of our financialstatements, and as a result they are subject to a greater degree ofuncertainty. In applying these policies, we use our judgment to determine theappropriate assumptions to be used in calculating estimates that affect thereported amounts of assets, liabilities, revenues and expenses. Estimates andassumptions are based on historical experience and on various other factorsthat are believed to be reasonable under the circumstances. Accordingly, actualresults could differ from those estimates. Significant estimates andassumptions made by management include the deferral and recognition of revenue,impairment of goodwill and intangible assets, the fair value of acquired assetsand liabilities, stock-based compensation, gains or losses on derivativeinstruments, accounting for income taxes and other matters that affect thecondensed consolidated financial statements and related disclosures. There have been no changes to our significant accounting policies since December 31,2008 except as discussed below in Effects of Recently Issued AccountingPronouncements.

 

**Results ofOperations**

 

*Segmentsand Periods Presented*

 

We operate in two segments,the “RiskMetrics business” and the “ISS business.”

 

*Factors Affecting the Comparability of Results*

 

The results of Innovest arenot included in our results of operations until the acquisition date of March 2,2009. Innovest supplements the ISS business to support its Financial Researchand Analysis (“FR&A”) product and services offerings.

 

On January 25, 2008, we completed aninitial public offering of 16,100,000 shares of common stock, which included4,035,816 shares sold by selling stockholders and 2,100,000 shares to coverover-allotments, which was exercised in full in January 2008.  We received net proceeds of $193.9 millionfrom the offering. We did not receive any proceeds from the sale of the sharesby the selling stockholders.  As such, weighted average common sharesoutstanding for the three and six months ended June 30, 2008 only includesthe 12,100,000 additional shares sold in the initial public offering for aportion of that period. In addition, immediately prior to the completion ofour initial public offering we granted each of our full-time employees anoption to acquire 500 shares of our common stock, at an exercise price equal tothe initial public offering price. Such grant resulted in stock-basedcompensation expense of $244 and $1,601 for the three and six months ended June 30,2008, respectively.

 

In January 2008, we utilized a portion ofproceeds from the initial public offering to prepay the entire outstandingindebtedness under the second lien loan, in the amount of $125.0 million.As a result of the prepayment we incurred $5.0 million in expenses during the sixmonths ended June 30, 2008, which were comprised of a $1.25 milliondebt prepayment penalty fee, a $2.4 million write-off of debt issuance costsand a $1.4 million loss on an interest rate swap settlement. Such costshave been included in interest, dividend, investment and other income(expense), net in the statement of operations for the six months ended June 30,2008.

 

*Threemonths ended June 30, 2009 compared to the three months ended June 30,2008*

 

Thefollowing tables provide information with respect to our consolidated andsegment operating results:

 

**Consolidated RiskMetrics Group, Inc.**

 
|                                                            |   | **Three months ended  June 30,**                    |       | **Increase (decrease)** |       |
|-----------------------------------------------------------------|--------|--------------------------------------------------------------------|------------|------------------------------|------------|
|                                                            |   | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** |   |
|                                                            |   | **(Amounts in thousands, except percentages)** |       |
| Revenues                                                        |   | $                                                                  | 75,528     |                         | $          | 74,126 |   | $ | 1,402 |   | 1.9 | % |
| Operating costs and  expenses:                                  |   |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                                |   | 22,935                                                             |       | 23,176                       |       | (241 | ) | (1.0 | )% |
| Research and development                                        |   | 11,171                                                             |       | 10,405                       |       | 766 |   | 7.4 | % |
| Selling and marketing                                           |   | 7,501                                                              |       | 9,280                        |       | (1,779 | ) | (19.2 | )% |
| General and administrative                                      |   | 9,256                                                              |       | 9,538                        |       | (282 | ) | (3.0 | )% |
| Depreciation and  amortization of property and equipment        |   | 2,109                                                              |       | 2,165                        |       | (56 | ) | (2.6 | )% |
| Amortization of intangible  assets                              |   | 5,883                                                              |       | 5,456                        |       | 427 |   | 7.8 | % |
| Loss on disposal of fixed  assets                               |   | 127                                                                |       | 4                            |       | 123 |   | * | % |
| Total operating costs and  expenses(1)                          |   | 58,982                                                             |       | 60,024                       |       | (1,042 | ) | (1.7 | )% |
| Income from operations                                          |   | 16,546                                                             |       | 14,102                       |       | 2,444 |   | 17.3 | % |
| Interest, dividend,  investment and other income (expense), net |   | (5,073                                                             | )          | (5,000                       | )          | (73 | ) | (1.5 | )% |
| Income before provision  for income taxes                       |   | 11,473                                                             |       | 9,102                        |       | 2,371 |   | 26.0 | % |
| Provision for income taxes                                      |   | 4,262                                                              |       | 3,556                        |       | 706 |   | 19.9 | % |
| Net income                                                      |   | $                                                                  | 7,211      |                         | $          | 5,546 |   | $ | 1,665 |   | 30.0 | % |

 

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*Exceeds 100%

 

(1) Includesstock-based compensation expense of $2,275 and $2,016 for the three monthsended June 30, 2009 and 2008, respectively.

 

**RiskMetrics Business**

 
|                                                     |   | **Three months ended  June 30,**                    |       | **Increase (decrease)** |       |
|----------------------------------------------------------|--------|--------------------------------------------------------------------|------------|------------------------------|------------|
|                                                     |   | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** |   |
|                                                     |   | **(Amounts in thousands, except percentages)** |       |
| Revenues                                                 |   | $                                                                  | 39,421     |                         | $          | 38,828 |   | $ | 593 |   | 1.5 | % |
| Operating costs and  expenses:                           |   |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                         |   | 7,787                                                              |       | 8,647                        |       | (860 | ) | (9.9 | )% |
| Research and development                                 |   | 7,635                                                              |       | 7,077                        |       | 558 |   | 7.9 | % |
| Selling and marketing                                    |   | 3,786                                                              |       | 5,023                        |       | (1,237 | ) | (24.6 | )% |
| General and administrative                               |   | 5,033                                                              |       | 4,802                        |       | 231 |   | 4.8 | % |
| Depreciation and  amortization of property and equipment |   | 1,104                                                              |       | 1,184                        |       | (80 | ) | (6.7 | )% |
| Amortization of intangible  assets                       |   | 83                                                                 |       | —                       |       | 83 |   | * | % |
| Loss (gain) on disposal of  fixed assets                 |   | 127                                                                |       | (9                           | )          | 136 |   | * | % |
| Total operating costs and  expenses(2)                   |   | 25,555                                                             |       | 26,724                       |       | (1,169 | ) | (4.3 | )% |
| Income from operations                                   |   | $                                                                  | 13,866     |                         | $          | 12,104 |   | $ | 1,762 |   | 14.6 | % |

 

----

*Exceeds 100%

 

(2) Includesstock-based compensation expense of $1,033 and $788 for the three months ended June 30,2009 and 2008, respectively.

 

**ISS Business**

 
|                                                     |   | **Three months ended  June 30,**                    |       | **Increase (decrease)** |       |
|----------------------------------------------------------|--------|--------------------------------------------------------------------|------------|------------------------------|------------|
|                                                     |   | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** |   |
|                                                     |   | **(Amounts in thousands, except percentages)** |       |
| Revenues                                                 |   | $                                                                  | 36,107     |                         | $          | 35,298 |   | $ | 809 |   | 2.3 | % |
| Operating costs and  expenses:                           |   |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                         |   | 15,148                                                             |       | 14,529                       |       | 619 |   | 4.3 | % |
| Research and development                                 |   | 3,536                                                              |       | 3,328                        |       | 208 |   | 6.3 | % |
| Selling and marketing                                    |   | 3,715                                                              |       | 4,257                        |       | (542 | ) | (12.7 | )% |
| General and administrative                               |   | 4,223                                                              |       | 4,736                        |       | (513 | ) | (10.9 | )% |
| Depreciation and  amortization of property and equipment |   | 1,005                                                              |       | 981                          |       | 24 |   | 2.4 | % |
| Amortization of intangible  assets                       |   | 5,800                                                              |       | 5,456                        |       | 344 |   | 6.3 | % |
| Loss on disposal of fixed  assets                        |   | —                                                             |       | 13                           |       | (13 | ) | * | % |
| Total operating costs and  expenses(3)                   |   | 33,427                                                             |       | 33,300                       |       | 127 |   | 0.4 | % |
| Income from operations                                   |   | $                                                                  | 2,680      |                         | $          | 1,998 |   | $ | 682 |   | 34.2 | % |

 

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*Exceeds 100%

 

(3) Includesstock-based compensation expense of $1,242 and $1,228 the three months ended June 30,2009 and 2008, respectively.

 

The following tables provide information withrespect to our consolidated and segment revenues in certain geographic regions:

 

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**Consolidated RiskMetrics Group, Inc.**

 
|                                   |       | **Three months ended  June 30, 2009**          | ** ** | **Three months ended  June 30, 2008** |       |        |       |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------|------------|
| ** **                             | ** ** | ** **                                                         | ** ** | **% of  Total**                                      | ** ** | ** **  | ** ** | **% of  Total** | ** ** | **Increase (decrease)** |   |
| **Region**                             | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                               | ** ** | **Revenue** | ** ** | **Revenue** | ** ** | **$** | ** ** | **%** |   |
|                                   |       | **(Amounts in thousands, except percentages)** |       |
| Americas                               |       | $                                                                  | 44,673     |                                                      | 59.1       | %           | $          | 45,106 |   | 60.9 | % | $ | (433 | ) | (1.0 | )% |
| Europe, Middle East and Africa  (EMEA) |       | 26,327                                                             |       | 35.0                                                      | %          | 24,681      |       | 33.3 | % | 1,646 |   | 6.7 | % |
| Asia                                   |       | 4,528                                                              |       | 6.0                                                       | %          | 4,339       |       | 5.8 | % | 189 |   | 4.3 | % |
| Total                                  |       | $                                                                  | 75,528     |                                                      | 100.0      | %           | $          | 74,126 |   | 100.0 | % | $ | 1,402 |   | 1.9 | % |

 

**RiskMetrics Business**

 
| ** **                             | ** ** | **Three months ended  June 30, 2009**          | ** ** | **Three months ended  June 30, 2008** | ** ** | ** **  | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------|------------|
| ** **                             | ** ** | ** **                                                         | ** ** | **% of  Total**                                      | ** ** | ** **  | ** ** | **% of  Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                             | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                               | ** ** | **Revenue** | ** ** | **Revenue** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                               |       | $                                                                  | 17,528     |                                                      | 44.5       | %           | $          | 17,893 |   | 46.1 | % | $ | (365 | ) | (2.0 | )% |
| Europe, Middle East and  Africa (EMEA) |       | 19,177                                                             |       | 48.6                                                      | %          | 18,216      |       | 46.9 | % | 961 |   | 5.3 | % |
| Asia                                   |       | 2,716                                                              |       | 6.9                                                       | %          | 2,719       |       | 7.0 | % | (3 | ) | (0.1 | )% |
| Total                                  |       | $                                                                  | 39,421     |                                                      | 100.0      | %           | $          | 38,828 |   | 100.0 | % | $ | 593 |   | 1.5 | % |

 

**ISSBusiness**

 
| ** **                             | ** ** | **Three months ended  June 30, 2009**          | ** ** | **Three months ended  June 30, 2008** | ** ** | ** **  | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------|------------|
| ** **                             | ** ** | ** **                                                         | ** ** | **% of Total**                                  | ** ** | ** **  | ** ** | **% of Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                             | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                               | ** ** | **Revenue** | ** ** | **Revenue** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                               |       | $                                                                  | 27,145     |                                                      | 74.9       | %           | $          | 27,213 |   | 77.1 | % | $ | (68 | ) | (0.2 | )% |
| Europe, Middle East and  Africa (EMEA) |       | 7,150                                                              |       | 20.1                                                      | %          | 6,465       |       | 18.3 | % | 685 |   | 10.6 | % |
| Asia                                   |       | 1,812                                                              |       | 5.0                                                       | %          | 1,620       |       | 4.6 | % | 192 |   | 11.9 | % |
| Total                                  |       | $                                                                  | 36,107     |                                                      | 100.0      | %           | $          | 35,298 |   | 100.0 | % | $ | 809 |   | 2.3 | % |

 

Set forth below is adiscussion of our results for the three months ended June 30, 2009compared to the three months ended June 30, 2008.

 

*Revenues.* Consolidated revenues forthe three months ended June 30, 2009 increased by $1.4 million, or 1.9%,to $75.5 million from $74.1 million. Revenue growth was driven by a 1.5% increase in the RiskMetrics businessand 2.3% increasein the ISS business.  ISS revenues for three months ended June 30,2009 includes $1.5 million of revenue from Innovest, which was acquired in March 2009.

 

RiskMetrics revenues for thethree months ended June 30, 2009 increased by $0.6 million, or 1.5%, to$39.4 million from $38.8 million.  The$0.6 million increase in revenues was primarily due to increased revenues fromCredit Risk and Wealth Management products and services.  Market risk product revenues are essentiallythe same as prior year as new sales growth has been offset by increasednon-renewals from alternative investment customers .

 

ISS revenues forthe three months ended June 30, 2009 increased by $0.8 million, or 2.3%,to $36.1 million from $35.3 million. The increase in revenue was primarily dueto a $1.6 million increase in FR&A products and services to $13.5 millionfrom $11.9 million due to the acquisition of Innovest and increased CorporateAdvisory services revenue partially offset by a reduction in CFRA revenue as aresult of declining renewal rates. Revenues from our Governance Servicesproducts decreased 3.3% to $22.6 million from $23.4 million primarily due todecreased revenue in proxy research services and voting services partiallyoffset by an increase in SCAS revenues.

 

*Operating costs and expenses.*  Consolidatedoperating expenses for the three months ended June 30, 2009 decreased by 1.7% to $59.0 million from $60.0million. As a percentage of revenues, operating expenses decreased to 78.1% from81.0% due to increased monitoring of costs, including headcount, while gainingeconomies of scale for increased revenue.   The $1.0 million declinein operating expenses was primarily due to the following:

 

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·                  $0.9 million decrease in travel and entertainment due to lower traveland increased cost control,

·                  $1.5 million increase in foreign currency exchange gains. Changes inforeign exchange rates (principally the strengthening of the US dollar versusthe British Pound and Euro) in 2009 compared to 2008 had a favorable impact onreported operating expenses, and

·                  $0.7 million decline in professional fees, primarily due to lower legalfees and reductions in Sarbanes-Oxley Section 404 compliance costs.

 

Theabove declines were partially offset by:

 

·                  $0.8 million increase in compensation due to increased salaries andbenefits partially offset by a decline in commissions as a result of a declinein new sales,

·                  $0.4 million increase in amortization expense due to intangiblesacquired in connection with the Innovest acquisition, and

·                  $0.7 million increase in technology costs due toincreased research and development consulting and web hosting costs.

 

RiskMetrics operating expensesfor the three months ended June 30, 2009 decreased 4.3% to $25.6 millionfrom $26.7 million compared to prior year. As a percentage of revenues,operating expenses decreased to 64.8% from 68.8% due to revenue growth of 1.5%and an operating expense decline of 4.3% as compared to the prior year.

 

ISS operating expenses forthe three months ended June 30, 2009 of $33.4 million remainedapproximately the same as the prior year. As a percentage of revenues, operating expenses decreased to 92.6% from94.3%.

 

*Cost ofrevenues.*  Consolidatedcost of revenues for the three months ended June 30, 2009 decreased to$22.9 million, or 1.0%, from $23.2 million. The decrease in cost ofrevenues resulted primarily from increased foreign currency transaction gainsof $1.5 million due to the weakening Euro and British pound partially offset byincreased data costs of $0.3 million, increased stock based compensation of$0.2 million and increased compensation costs. As a percentage of revenues, cost of revenues decreased to 30.4% from31.3%.

 

RiskMetrics cost of revenuesfor the three months ended June 30, 2009 decreased to $7.8 million, or9.9%, from $8.6 million due to an increase in foreign currency transactiongains partially offset by increased data and web hosting costs.  As a percentage of revenues, RiskMetrics costof revenues decreased to 19.8% from 22.3%.

 

ISScost of revenues for the three months ended June 30, 2009increased to $15.1 million, or 4.3% from $14.5 million. The increase wasprimarily due to increased compensation costs, including stock-basedcompensation.  As a percentage ofrevenues, ISS cost of revenues increased to 42.0% from 41.2%.

 

*Researchand development expenses.* Consolidated research and development expenses for the three monthsended June 30, 2009 increased to $11.2 million, or 7.4%, from $10.4million primarily due to a $0.7 million increase in compensation and consultingcosts. As a percentage of revenues, research and development expenses increasedto 14.8% from 14.0%.

 

RiskMetrics research anddevelopment expenses for the three months ended June 30, 2009 increased to$7.6 million, or 7.9%, from $7.1 million primarily due to increasedcompensation costs.

 

ISSresearch and development expenses for the three months ended June 30,2009 increased to $3.5 million from $3.3 million primarily due to increasedstock based compensation and consulting costs.

 

*Sellingand marketing expenses.*  Consolidatedselling and marketing expenses for the three months ended June 30, 2009decreased to $7.5 million, or 19.2%, from $9.3 million primarily due to a $1.3million decline in compensation costs, including commissions as a result ofreduced sales and $0.2 million decline in stock based compensation. As apercentage of revenues, selling and marketing expenses decreased to 9.9% from12.5%.

 

RiskMetrics selling andmarketing expenses for the three months ended June 30, 2009 decreased to$3.8 million, or 24.6%, from $5.0 million. The decrease was primarily dueto a decrease in compensation costs of $1.0 million as a result of a decline incommissions due to lower new sales.

 

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ISS selling and marketingexpenses for the three months ended June 30, 2009 decreased to $3.7million, or 12.7%, from $4.3 million. The decrease was primarily due to a $0.2million decline in stock-based compensation costs as well as a $0.3 milliondecline in travel and entertainment expenses.

 

*General and administrative expenses*.  Consolidated general and administrativeexpenses for the three months ended June 30, 2009 decreased to $9.3million, or 3.0%, from $9.5 million primarily due a decline in professionalfees and travel and entertainment expenses partially offset by increased stockbased compensation expense.  As a percentageof revenues, general and administrative expenses decreased to 12.3% from 12.9%.

 

RiskMetrics general and administrative expenses for the three monthsended June 30, 2009 increased to $5.0 million, or 4.8%, from $4.8 million.The increase was primarily due to a $0.2 million increase in stock basedcompensation expense and increased occupancy costs, partially offset by reducedSarbanes-Oxley Section 404 compliance costs.

 

ISS general and administrativeexpenses for the three months ended June 30, 2009 decreased to $4.2million, or 10.9%, from $4.7 million. The $0.5 million decrease was primarilydue to lower professional fees and travel and entertainment costs.

 

*Depreciation and amortization of property andequipment.*  Depreciationand amortization of property and equipment for the three months ended June 30,2009 decreased to $2.1 million from $2.2 million.

 

*Amortization of intangible assets.*  Amortization of intangible assets for threemonths ended June 30, 2009 increased to $5.9 million from $5.5 millionprimarily due to amortization of intangibles acquired in connection with theInnovest acquisition.

 

*Interest, dividend and investment income (expense),net.*  Net interest, dividend andinvestment expense for the three months ended June 30, 2009 increased to$5.1 million from $5.0 million due to reduced interest yields on interestincome offset by decreased interest expense (net of amortization) as a resultof reduced outstanding debt.

 

*Provision for income taxes. *The provision for incometaxes represents an effective tax rate of 37.0% for the three months ended June 30,2009 as compared to an effective rate of 39.1% for the comparable prior yearperiod.  The effective rate declinedprimarily due to an increase in pre-tax income and a decline in non-deductiblestock-based compensation expense. In addition, effective tax rates are subjectto change based on the taxable income in all the jurisdictions in which we dobusiness.

 

*Six months ended June 30, 2009 compared to theSix months ended June 30, 2008*

 

Thefollowing tables provide information with respect to our consolidated andsegment operating results:

 

**Consolidated RiskMetrics Group, Inc.**

 
| ** **                                                      | ** ** | **Six months ended  June 30,**                      | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                      | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                        |       | $                                                                  | 152,909    |                         | $          | 145,346 |   | $ | 7,563 |   | 5.2 | % |
| Operating costs and expenses:                                   |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                                |       | 46,257                                                             |       | 45,880                       |       | 377 |   | 0.8 | % |
| Research and development                                        |       | 21,308                                                             |       | 20,866                       |       | 442 |   | 2.1 | % |
| Selling and marketing                                           |       | 14,568                                                             |       | 18,486                       |       | (3,918 | ) | (21.2 | )% |
| General and administrative                                      |       | 19,863                                                             |       | 18,743                       |       | 1,120 |   | 6.0 | % |
| Depreciation and amortization of property and  equipment        |       | 4,064                                                              |       | 4,280                        |       | (216 | ) | (5.0 | )% |
| Amortization of intangible assets                               |       | 11,475                                                             |       | 10,912                       |       | 563 |   | 5.2 | % |
| Loss on disposal of fixed assets                                |       | 127                                                                |       | 26                           |       | 101 |   | * | % |
| Total operating costs and expenses(1)                           |       | 117,662                                                            |       | 119,193                      |       | (1,531 | ) | (1.3 | )% |
| Income from operations                                          |       | 35,247                                                             |       | 26,153                       |       | 9,094 |   | 34.8 | % |
| Interest, dividend, investment and other income  (expense), net |       | (10,266                                                            | )          | (16,477                      | )          | 6,211 |   | 37.7 | % |
| Income before provision for income taxes                        |       | 24,981                                                             |       | 9,676                        |       | 15,305 |   | * | % |
| Provision for income taxes                                      |       | 9,243                                                              |       | 3,783                        |       | 5,460 |   | * | % |
| Net income                                                      |       | $                                                                  | 15,738     |                         | $          | 5,893 |   | $ | 9,845 |   | * | % |

 

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*Exceeds 100%

 

(1) Includesstock-based compensation expense of $4,083 and $5,377 for the six months ended June 30,2009 and 2008, respectively.

 

**RiskMetrics Business**

 
| ** **                                               | ** ** | **Six months ended  June 30,**                      | ** ** | **Increase (decrease)** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                 |       | $                                                                  | 79,615     |                         | $          | 73,264 |   | $ | 6,351 |   | 8.7 | % |
| Operating costs and expenses:                            |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                         |       | 15,841                                                             |       | 16,780                       |       | (939 | ) | (5.6 | )% |
| Research and development                                 |       | 14,836                                                             |       | 14,156                       |       | 680 |   | 4.8 | % |
| Selling and marketing                                    |       | 7,434                                                              |       | 9,353                        |       | (1,919 | ) | (20.5 | )% |
| General and administrative                               |       | 9,954                                                              |       | 9,240                        |       | 714 |   | 7.7 | % |
| Depreciation and amortization of property and  equipment |       | 2,190                                                              |       | 2,344                        |       | (154 | ) | (6.6 | )% |
| Amortization of intangible assets                        |       | 158                                                                |       | —                       |       | 158 |   | * | % |
| Loss on disposal of fixed assets                         |       | 127                                                                |       | —                       |       | 127 |   | * | % |
| Total operating costs and expenses(2)                    |       | 50,540                                                             |       | 51,873                       |       | (1,333 | ) | (2.6 | )% |
| Income from operations                                   |       | $                                                                  | 29,075     |                         | $          | 21,391 |   | $ | 7,684 |   | 35.9 | % |

 

----

*Exceeds 100%

 

(2) Includesstock-based compensation expense of $1,818 and $2,126 for the six months ended June 30,2009 and 2008, respectively.

 

**ISS Business**

 
| ** **                                               | ** ** | **Six months ended  June 30,**                      | ** ** | **Increase (decrease)** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                 |       | $                                                                  | 73,294     |                         | $          | 72,082 |   | $ | 1,212 |   | 1.7 | % |
| Operating costs and expenses:                            |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                         |       | 30,416                                                             |       | 29,100                       |       | 1,316 |   | 4.5 | % |
| Research and development                                 |       | 6,472                                                              |       | 6,710                        |       | (238 | ) | (3.5 | )% |
| Selling and marketing                                    |       | 7,134                                                              |       | 9,133                        |       | (1,999 | ) | (21.9 | )% |
| General and administrative                               |       | 9,909                                                              |       | 9,503                        |       | 406 |   | 4.3 | % |
| Depreciation and amortization of property and  equipment |       | 1,874                                                              |       | 1,936                        |       | (62 | ) | (3.2 | )% |
| Amortization of intangible assets                        |       | 11,317                                                             |       | 10,912                       |       | 405 |   | 3.7 | % |
| Loss on disposal of fixed assets                         |       | —                                                             |       | 26                           |       | (26 | ) | (100.0 | )% |
| Total operating costs and expenses(3)                    |       | 67,122                                                             |       | 67,320                       |       | (198 | ) | (0.3 | )% |
| Income from operations                                   |       | $                                                                  | 6,172      |                         | $          | 4,762 |   | $ | 1,410 |   | 29.6 | % |

 

----

(3) Includesstock-based compensation expense of $2,265 and $3,251 the six months ended June 30,2009 and 2008, respectively.

 

Thefollowing tables provide information with respect to our consolidated andsegment revenues in certain geographic regions:

 

**Consolidated RiskMetrics Group, Inc.**

 
| ** **                            | ** ** | **Six months ended  June 30, 2009**            | ** ** | **Six months ended  June 30, 2008** | ** ** | ** **  | ** ** | ** **           | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of  Total**                                    | ** ** | ** **  | ** ** | **% of  Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                             | ** ** | **Revenue** | ** ** | **Revenue**          | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 91,590     |                                                    | 59.8       | %           | $          | 89,737               |       | 61.7 | % | $ | 1,853 |   | 2.1 | % |
| Europe, Middle East and Africa (EMEA) |       | 52,620                                                             |       | 34.5                                                    | %          | 47,066      |       | 32.4                 | %          | 5,554 |   | 11.8 | % |
| Asia                                  |       | 8,699                                                              |       | 5.7                                                     | %          | 8,543       |       | 5.9                  | %          | 156 |   | 1.8 | % |
| Total                                 |       | $                                                                  | 152,909    |                                                    | 100.0      | %           | $          | 145,346              |       | 100.0 | % | $ | 7,563 |   | 5.2 | % |

 

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**RiskMetrics Business**

 
| ** **                            | ** ** | **Six months ended  June 30, 2009**            | ** ** | **Six months ended  June 30, 2008** | ** ** | ** **  | ** ** | ** **           | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of  Total**                                    | ** ** | ** **  | ** ** | **% of  Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                             | ** ** | **Revenue** | ** ** | **Revenue**          | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 35,799     |                                                    | 45.0       | %           | $          | 33,427               |       | 45.6 | % | $ | 2,372 |   | 7.1 | % |
| Europe, Middle East and Africa (EMEA) |       | 38,431                                                             |       | 48.3                                                    | %          | 34,491      |       | 47.1                 | %          | 3,940 |   | 11.4 | % |
| Asia                                  |       | 5,385                                                              |       | 6.7                                                     | %          | 5,346       |       | 7.3                  | %          | 39 |   | 0.7 | % |
| Total                                 |       | $                                                                  | 79,615     |                                                    | 100.0      | %           | $          | 73,264               |       | 100.0 | % | $ | 6,351 |   | 8.7 | % |

 

**ISS Business**

 
| ** **                            | ** ** | **Six months ended  June 30, 2009**            | ** ** | **Six months ended  June 30, 2008** | ** ** | ** **  | ** ** | ** **               | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------|------------|--------------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of Total**                                | ** ** | ** **  | ** ** | **% of Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                             | ** ** | **Revenue** | ** ** | **Revenue**              | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 55,791     |                                                    | 76.0       | %           | $          | 56,310                   |       | 78.1 | % | $ | (519 | ) | (1.1 | )% |
| Europe, Middle East and Africa (EMEA) |       | 14,189                                                             |       | 19.5                                                    | %          | 12,575      |       | 17.5                     | %          | 1,614 |   | 13.6 | % |
| Asia                                  |       | 3,314                                                              |       | 4.5                                                     | %          | 3,197       |       | 4.4                      | %          | 117 |   | 3.7 | % |
| Total                                 |       | $                                                                  | 73,294     |                                                    | 100.0      | %           | $          | 72,082                   |       | 100.0 | % | $ | 1,212 |   | 1.7 | % |

 

Set forth below is a discussion of our results for the six months endedJune 30, 2009 compared to the six months ended June 30, 2008.

 

*Revenues.* Consolidated revenues for the six monthsended June 30, 2009 increased by $7.6 million, or 5.2%, to $152.9 millionfrom $145.3 million. Revenuegrowth was driven by an 8.7% increase in the RiskMetrics business and 1.7% increase in the ISS business.  ISSrevenues for six months ended June 30, 2009 includes $2.0 million ofrevenue from Innovest, which was acquired in March 2009.

 

RiskMetrics revenues for the six months ended June 30, 2009increased by $6.4 million, or 8.7%, to $79.6 million from $73.3 million.  The $6.4 million increase in revenues wasprimarily due to a 7.1% increase in revenues from our Market Risk products,primarily from RiskManager due to 2008 sales of RiskManager to asset managersand hedge funds as they increased their outsourcing of risk reporting servicespartially offset by increased hedge fund non-renewals.

 

ISSrevenues were $73.3 million for the six months ended June 30, 2009, a 1.7%increase over the comparable 2008 period. On a product level, total GovernanceServices (mainly Proxy Research and Voting Services) revenues of $45.7 millionfor six months ended June 30, 2009 were essentially the same as thecomparable period in 2008.  FR&Arevenues of $27.6 million for six months ended June 30, 2009 increased 4.8%,or $1.3 million, over the comparable period in 2008.  The increase in FR&A revenue wasprimarily due to the Innovest acquisition, increased ES&G and CorporateAdvisory Service revenue partially offset by a decline in CFRA revenue due tolower renewal rates.

 

*Operatingcosts and expenses.*  Consolidating operating expenses for the sixmonths June 30, 2009 decreased by 1.3% to $117.7 million from $119.2million. As a percentage of revenues, operating expenses decreased to 76.9% from82.0% due to increased monitoring of costs, including headcount, while gainingeconomies of scale from our increased revenue.   The $1.5 milliondecline in operating expenses was primarily due to the following:

 

·                  $1.3 million decline in stock basedcompensation primarily due to the Company’s IPO stock option grant in January 2008,

·                  $1.7 million decrease in travel andentertainment due to lower travel,

·                  $0.4 million decrease in HR costs due tolower recruiting fees,

·                  $0.5 million decline in marketingexpenses,

·                  $0.9 million decline in professional feesdue to lower Sarbanes-Oxley Section 404 compliance, consulting and legalfees,

 

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·                  A decline in data costs due primarily to a one-time $0.8 millionexpense reduction for the settlement of a data vendor liability for less thanthe amounts previously accrued, and

·                  Changes inforeign exchange rates (principally the strengthening of the US dollar) in 2009compared to 2008 had a favorable impact on reported operating expenses.

 

The above declines werepartially offset by:

 

·                  $1.5 million in non-recurring expensesduring the six months ended June 30, 2009 which consisted of $0.8 millionin lease exit costs, $0.5 million of employee severance and $0.2 million ofInnovest acquisition costs.

·                  $1.5 million increase in technology costsdue to increased research and development consulting, and higher web hostingand maintenance costs.

·                  $1.3 million increase in compensation dueto increased salaries partially offset by a decrease in commissions as a resultof a decline in new sales.

 

RiskMetrics operating expenses for the six months ended June 30,2009 decreased 2.6% to $50.5 million from $51.9 million compared to prior year.The $1.3 million decrease was primarily due to a $0.6 million increase inforeign currency gains, a $0.7 million decrease in travel costs, $0.3 milliondecline in stock based compensation and $0.3 million decline in professionalfees partially offset by increased compensation costs of $0.4 million.  As a percentage of revenues, operatingexpenses decreased to 63.5% from 70.8% due to revenue growth of 8.7% andoperating expenses decreasing 2.6% as compared to the prior year.

 

ISS operating expenses for the six months ended June 30, 2009decreased to $67.1 million from $67.3 million. The decrease in operating expenses was primarily due to a decrease instock based compensation, travel and professional fees partially offset by an increasein one-time costs.  As a percentage ofrevenues, operating expenses decreased to 91.6% from 93.4%.

 

*Cost of revenues.*  Consolidated cost of revenues for the sixmonths ended June 30, 2009 increased to $46.3 million, or 0.8% from$45.9 million. The $0.4 million increase in cost of revenues resultedprimarily from increased technology costs of $0.9 million as a result ofincreased web hosting costs partially offset by a $0.6 million decline in stockbased compensation.  As a percentage ofrevenues, cost of revenues decreased to 30.3% from 31.6%.

 

RiskMetrics cost of revenues for the six months ended June 30,2009 of $15.8 million decreased $0.9 million, or 5.6%, compared to $16.8million of the prior year due to increased foreign currency transaction gainsof $0.6 million and decreased data and travel costs.  As a percentage of revenues, RiskMetrics costof revenues decreased to 19.9% from 22.9%.

 

ISS cost of revenues for the sixmonths ended June 30, 2009 increased to $30.4 million, or 4.5%, from $29.1million. The $1.3 million increase was primarily due to increased compensationcosts.  As a percentage of revenues, ISScost of revenues increased to 41.5% from 40.3%.

 

*Research and development expenses.*  Consolidated research and developmentexpenses for the six months ended June 30, 2009 increased to $21.3million, or 2.1%, from $20.9 million due to increased compensation costs of$1.0 million partially offset by decreased stock based compensation of $0.3 andlower travel costs. As a percentage of revenues, research and developmentexpenses decreased to 13.9% from 14.4%.

 

RiskMetrics research and development expenses for the six months ended June 30,2009 increased to $14.8 million, or 4.8%, from $14.2 million. The increase wasprimarily due to increased compensation costs, partially offset by a decline instock based compensation and travel and entertainment costs.

 

ISS research and developmentexpenses for the six months ended June 30, 2009 decreased to $6.5 millionfrom $6.7 million primarily due to a decline in compensation costs partiallyoffset by increased research and development consulting costs.

 

*Selling and marketing expenses.*  Consolidated selling and marketing expensesfor the six months ended June 30, 2009 decreased to $14.6 million, or21.2%, from $18.5 million. As a percentage of revenues, selling and marketingexpenses decreased to 9.5% from 12.7% due to a decline in compensation costs,lower marketing expenses, and a decline in travel and entertainment costs.

 

RiskMetrics selling and marketing expenses for the six months ended June 30,2009 decreased to $7.4 million, or 20.5%, from $9.4 million. The decreasewas primarily due to a decrease in compensation of $1.7 million as a result adecline in commissions due to lower new sales.

 

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ISS selling and marketingexpenses for the six months ended June 30, 2009 decreased to $7.1 million,or 21.9%, from $9.1 million. The decrease was primarily due to a $0.9 milliondecline in compensation costs,  $0.4million decline in marketing expenses and a reduction in travel expenses.

 

*General and administrative expenses*.  Consolidated general and administrativeexpenses for the six months ended June 30, 2009 increased to $19.9million, or 6.0%, from $18.7 million. The $1.1 million increase in general andadministrative costs is primarily due to non-recurring costs of $1.5 millionincurred during the six months ended June 30, 2009 which is comprised of$0.8 million in lease exit costs, $0.5 million in employee severance and $0.2million in Innovest acquisition costs. As a percentage of revenues, general and administrative expenses increasedto 13.0% from 12.9%.

 

RiskMetrics general and administrative expenses for the six monthsended June 30, 2009 increased to $10.0 million, or 7.7%, from $9.2million. The increase was primarily due to increased compensation costs,occupancy costs and technology costs.

 

ISS general and administrativeexpenses for the six months ended June 30, 2009 increased to $9.9 million,or 4.3%, from $9.5 million. The increase was primarily due to $1.5 million ofnon-recurring costs discussed above, partially offset by a decline incompensation costs and professional fees.

 

*Depreciation and amortization of property andequipment.*  Depreciationand amortization of property and equipment for the six months ended June 30,2009 decreased to $4.1 million from $4.3 million.

 

*Amortization of intangible assets.*  Amortization of intangible assets for sixmonths ended June 30, 2009 increased to $11.5 million from $10.9 millionprimarily due to intangibles acquired in connection with the Innovestacquisition.

 

*Interest, dividend and investment income (expense),net.*  Net interest, dividend andinvestment expense for the six months ended June 30, 2009 decreased to$10.3 million from $16.5 million. This $6.2 million decrease in expense was due to decreased interestexpense (net of amortization) as a result of reduced debt borrowings andone-time charges incurred in 2008.  In January 2008,we utilized a portion of proceeds from the initial public offering to prepaythe entire outstanding indebtedness under the second lien loan, in the amountof $125.0 million. As a result of the prepayment we incurred $5.0 millionin expenses during the six months ended June 30, 2008, which werecomprised of a $1.25 million debt prepayment penalty fee, a $2.4 millionwrite-off of debt issuance costs and a $1.4 million loss on an interestrate swap settlement.

 

*Provision for income taxes. *The provision for incometaxes represents an effective tax rate of 37.0% for the six months ended June 30,2009 as compared to an effective rate of 39.1% for the comparable prior yearperiod.  The effective rate declinedprimarily due to an increase in pre-tax income and a decline in non-deductiblestock-based compensation expense.

 

**Liquidity and Capital Resources**

 

At June 30, 2009, we had cash and cash equivalents of $184.8million.  We believe our existing cashand cash equivalents, our cash flow from operating activities and borrowingcapacity under our existing credit facilities will be sufficient to meet ouranticipated cash needs for at least the next 12 months, during which timewe expect to make approximately $10.0 million to $11.0 million ofcapital expenditures. Our future working capital requirements will depend onmany factors, including our revenue growth, debt service, future acquisitionsof businesses and investments in our own business. To the extent our liquiditysources are insufficient to fund our future activities we may need to raiseadditional funding through a public or private equity or debt offering. Noassurances can be given that additional financing will be available in the futureor that if available, such financing will be on favorable terms.

 

*Cash Flows*

 

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

 

Cash flows from operating activities increased by $9.6 million in thesix months ended June 30, 2009 compared to 2008 due to increased netincome and increased contribution from working capital.   Operatingactivities for the six months ended June 30, 2009 provided cash of $28.1million primarily reflectingnet income of $15.7 million, plus $15.5 million in depreciation andamortization (excluding amortization of debt issuance costs), $4.1 million instock based compensation and a $8.2 million decrease in accounts receivablepartially offset by a $13.1 million decline in accrued expenses due to thepayment of bonuses.   Cash providedby operating activities was $18.5 million for the six months ended June 30,2008 reflecting net income of $5.9 million plus depreciation and amortization (excludingamortization of debt issuance costs) of $15.2 million, a $2.7 million decreasein income and deferred taxes partially offset by a $4.5 million decline inaccrued expenses due to bonus payments and a $7.5 million net 

 

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decrease in accounts receivableand deferred revenue.  Cash flow fromoperating activities for 2008 was negatively impacted by $1.3 million of cashused for a debt pre-payment penalty fee and $1.4 million for an interest rateswap settlement in connection with the pre-payment of debt in 2008.

 

Investing activities for the six months ended June 30, 2009 usedcash of $19.3 million due to the acquisition of Innovest for $14.8 million and$4.3 million for capital expenditures. Investing activities for the six months ended June 30, 2008 usedcash of $5.1 million, primarily due to capital expenditures of $4.0 million anda $1.0 million payment for an intangible asset.

 

Financing activities for the six months ended June 30, 2009provided cash of $2.2 million primarily from the exercise of stock options andrelated tax benefits partially offset by a $0.7 million debt payment. Financingactivities for the six months ended June 30, 2008 provided cash of $68.4million as a result of $197.4million raised from our initial public offering and $4.4 million fromstock option proceeds, partially offset by $132.1 million in debt payments and$1.3 million from equity offering expenses.

 

*Long Term Debt*

 

The Company’s debt is comprised of two term loan facilities and a $25.0million revolving credit facility.  As ofJune 30, 2009 $289.9 million of debt remains outstanding under the firstlien loan and no indebtedness remain outstanding under the second lien termloan or revolving credit facility.  Thematurity date of the first lien term loan is December 2013. The nextprincipal debt payment of $0.7 million is due on September 30, 2009.  The terms of the indebtedness include variouscovenant compliance requirements, including maintaining certain Adjusted EBITDAearning levels, as defined in our credit facilities. The Company has pledged substantiallyall of its assets as collateral against the debt. Amounts paid under the termloans may not be re-borrowed.

 

In February 2007, we entered into two interest-rate swapagreements to reduce interest rate risks and to manage interest expense. Byentering into these agreements, we change the fixed/variable interest-rate mixof our debt portfolio. As of June 30, 2009, the interest rate swaps hadnotional amounts totaling $252.5 million and a fair value liability totaling$17.7 million.  The agreementseffectively convert our floating-rate debt into fixed-rate debt. This reducesour risk of incurring higher interest costs in periods of rising interest ratesand increases our risk of paying higher interest costs in periods of decreasinginterest rates. Our interest-rate swap agreements hedge a significant portionof the interest rate risk exposure under our indebtedness. The interest rateswap agreements increased our weighted average effective interest rate on thefirst lien term loan facility to 6.9% during the six months ended June 30,2009.

 

As of June 30, 2009, we were in compliance with our creditagreement and we are not aware of any future events or transactions that willimpact such compliance.

 

*Commitments*

 

In addition to the indebtedness discussed above, we enter into routineoperating lease obligations for our facilities and purchase obligations tooperate our business. Our contractual commitments, including those related toour indebtedness, were comprised of the following as of June 30, 2009:

 
| ** **                            | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligation**       | ** ** | **Total**                                 | ** ** | **Within 1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Debt, including estimated interest    |       | $                                         | 390,395    |   | $ | 23,489 |   | $ | 46,348 |   | $ | 320,558 |   | $ | — |   |
| Interest rate swaps                   |       | 17,658                                    |       | 10,319 |   | 7,339 |   | — |   | — |   |
| Operating leases                      |       | 31,492                                    |       | 7,166 |   | 13,460 |   | 4,705 |   | 6,161 |   |
| Purchase obligation for data          |       | 8,306                                     |       | 7,061 |   | 1,245 |   | — |   | — |   |
| Deferred purchase price obligation(1) |       | 953                                       |       | 221 |   | 476 |   | 256 |   | — |   |
| Total (2)                             |       | $                                         | 448,804    |   | $ | 48,256 |   | $ | 68,868 |   | $ | 325,519 |   | $ | 6,161 |   |

 

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(1)                                  Obligationrelates to prior acquisitions made by ISS.

(2)                                  Does notinclude $2.1 million of liabilities for uncertain tax liabilities.  The timing of future cash flows associatedwith our liabilities for uncertain tax positions is highly uncertain and we areunable to make reasonably reliable estimates of the period of cash settlementwith the respective taxing authorities.

 

*Off-Balance Sheet Arrangements*

 

We do not maintain any off-balance sheet arrangements, transactions,obligations or other relationships with unconsolidated entities that would beexpected to have a material current or future impact upon our financialcondition or results of operations.

 

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*Impact of Inflation*

 

Our business may be significantly or adversely affected by inflation.Due to the high degree of competition in the marketplace, inflation rateincreases might lead to an erosion of our profit margins.

 

*RelatedParty Transaction*

 

In May 2008, weentered into a contract for the sale of Market Risk products to Duff CapitalAdvisors, which was subsequently terminated. Philip Duff, a director of the Company, was the founder, CEO and GeneralPartner of Duff Capital Advisors, but is no longer employed by that firm. Thecontract was entered into in the normal course of business on terms that webelieve are consistent with (and not preferential to) those provided to ourother clients. We recognized $0.3 million in revenue from the Duff CapitalAdvisors contract for the six months ended June 30, 2009.

 

**Effects of Recently Issued Accounting Pronouncements**

 

OnDecember 4, 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) 141(R), *Business Combinations, as ammended* (“SFAS 141(R)”)and Statement 160, *NoncontrollingInterests in Consolidated Financial Statements*, *an amendmentof ARB No. 51* (SFAS 160). These new standards will significantlychange the financial accounting and reporting of business combinationtransactions and noncontrolling (or minority) interests in consolidatedfinancial statements. SFAS 141(R) is required to be adoptedconcurrently with Statement 160 and is effective for business combinationtransactions for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008.Application of SFAS 141(R) and SFAS 160 is generally required tobe adopted prospectively, except for certain provisions of SFAS 141(R) andSFAS 160, which are required to be adopted retrospectively upon adoption.Business combination transactions accounted for before adoption ofSFAS 141(R) should be accounted for in accordance with SFAS 141 andthat accounting previously completed under SFAS 141 should not be modified asof or after the date of adoption of Statement 141(R).  We adopted SFAS 141(R) and SFAS 160effective January 1, 2009 and the impact of such adoption will be dependentupon the business combinations we pursue.

 

In March 2008, theFASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASB**Statement No. 133* (“SFAS No. 161”).SFAS No. 161 establishes, among other things, the disclosure requirementsfor derivative instruments and for hedging activities. We adopted SFAS 161 on January 1,2009 and have included the required disclosures regarding the fair value ofderivative instruments in Note 8 to the condensed consolidated financialstatements.

 

In April 2008, theFASB issued FASB Staff Position (“FSP”) FAS 142-3, *Determination of the Useful Life of Intangible Assets* (“FSPFAS 142-3”). FSP FAS 142-3 amends the factors an entity should consider indeveloping renewal or extension assumptions used in determining the useful lifeof recognized intangible assets under SFAS 142, *Goodwill andOther Intangible Assets*. This new guidance applies prospectively tointangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions. We adopted FSP FAS142-3 on January 1, 2009 and such adoption did not have a material impacton the condensed consolidated financial statements.

 

In April 2009,the FASB issued FSP FAS 107-1 and APB 28-1, *InterimDisclosures about Fair Value of Financial Instruments*. This FSPessentially expands the disclosure about fair value of financial instrumentsthat were previously required only annually to also be required for interimperiod reporting. In addition, the FSP requires certain additional disclosuresregarding the methods and significant assumptions used to estimate the fairvalue of financial instruments. We adopted FSP FAS 107-1 and APB 28-1 on April 1,2009 and such adoption did not have a material impact on the condensedconsolidated financial statements.

 

In May 2009, theFASB issued SFAS No. 165, *SubsequentEvents* (“SFAS 165”). SFAS 165 establishes generalstandards of accounting for, and disclosure of, events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  In particular, this statement sets forth: (1) theperiod after the balance sheet date during which management of a reportingentity should evaluate events or transactions that may occur for potentialrecognition or disclosure in the financial statements, (2) thecircumstances under which an entity should recognize events or transactionsoccurring after the balance sheet date in its financial statements and (3) thedisclosures that an entity should make about events or transactions thatoccurred after the balance sheet date.  SFAS 165 is effectivefor the interim or annual financial periods ending after June 15,2009.  The Company adopted SFAS 165 on June 30, 2009 andsuch adoption did not have a material impact on the condensed consolidatedfinancial statements.

 

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**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

Our primary market risk exposure is interest rate risk associated withshort and long-term debt bearing variable interest rates. To manage thisinterest rate risk exposure, we enter into interest rate swap agreements. Weare also exposed to foreign currency risk, which can adversely affect our salesand operating profits. The following discussion should be read in conjunctionwith Note 8 of our condensed consolidated financial statements appearingelsewhere in this Form 10-Q, which provides further information on ourderivative instruments.

 

*InterestRate Sensitivity*

 

To reduce the exposureassociated with our variable rate debt, we entered into two interest-rate swapagreements to reduce interest rate risks and to manage interest expense. Byentering into these agreements, we change the fixed/variable interest-rate mixof our debt portfolio. As of June 30, 2009, the interest rate swaps hadnotional amounts totaling $252.5 million and a fair value liability totaling$17.7 million. The agreements effectively convert our floating-rate debtinto fixed-rate debt. This reduces our risk of incurring higher interest costsin periods of rising interest rates. Our interest-rate swap agreements hedge asubstantial majority of the interest rate risk exposure under our indebtedness.The interest rate swap agreements increased our weighted average effectiveinterest rate on the first lien term loan facility to 6.9% during the sixmonths ended June 30, 2009. A hypothetical, instantaneous increase of onepercentage point in the interest rates applicable to the variable interest ratedebt would have increased our net interest expense for the six months ended June 30,2009 by approximately $0.3 million.

 

*ExchangeRate Sensitivity*

 

We have two separateexposures to currency fluctuation risk—subsidiaries outside the United Stateswhich use a foreign currency as their functional currency which are translatedinto U.S. dollars for consolidation of assets and liabilities and non-U.S. dollarinvoiced revenues. Changes in foreign exchange rates for our subsidiaries thatuse a foreign currency as their functional currency are translated into U.S.dollars and result in cumulative translation adjustments, which are included inaccumulated other comprehensive loss. At June 30, 2009, we had translationexposure to various foreign currencies including the Euro, Pounds Sterling,Canadian Dollar, and a limited number of other non-U.S. dollar currencies. Thenet potential loss resulting from a hypothetical 10% adverse change in quotedforeign currency exchange rates partially offset by a correspondingappreciation of the US dollar, as of June 30, 2009, amounts to$4.1 million.

 

We primarily invoice ourclients in U.S. dollars; however, we also invoice a portion of our clients inEuro, Sterling, Canadian Dollar, Japanese Yen and a limited number of othernon-U.S. dollar currencies. As such, the fluctuations in such currencies couldimpact our operating results.

 

**Item 4. Controls andProcedures**

 

**(a)****          ****Evaluationof Disclosure Controls and Procedures**

 

We carried out an evaluation, under the supervisionand with the participation of our management, including our chief executiveofficer and chief financial officer, of the design and operation of ourdisclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)as of June 30, 2009, pursuant to Exchange Act Rule 13a-15. Based uponthat evaluation, the chief executive officer and chief financial officerconcluded that the our disclosure controls and procedures as of June 30,2009 are effective for gathering, analyzing and disclosing the information theCompany is required to disclose in the reports it files under the Exchange Act,within the time periods specified in the Securities and Exchange Commission’s rules andforms.

 

**(b)****                                ****Changes in Internal Controls Over Financial Reporting**

 

There were no changes in our internal controls overfinancial reporting during our fiscal quarter ended June 30, 2009 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Part II**

 

**Item 1. Legal Proceedings**

 

We are not presently involved in any legalproceedings which we believe would have a material adverse effect on ourcondensed consolidated financial statements. However, during the ordinarycourse of business, we are, from time to time, threatened with, or may become aparty to, legal actions and other proceedings.

 

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**Item 1A. Risk Factors**

 

There have been no material changes in our riskfactors from those disclosed in Part 1, Item 1A of our 2008 AnnualReport on Form 10-K.

 

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

 

None

 

**Item 3. Defaults Upon SeniorSecurities**

 

None

 

**Item 4. Submission of Matters to aVote of Security Holders**

 

The Company’sannual meeting of shareholders was held on June 16, 2009 in NewYork,  New York, and at such meeting the shareholders considered and votedupon the following:

 

(1)  Theelection of eleven (11) directors to serve for one-year terms.

 

The votes werecast for this matter as follows:

 
| ** **               | ** ** | **FOR**    | ** ** | **AGAINST/ABSTAIN** | ** ** |
|--------------------------|------------|------------|------------|---------------------|------------|
|                     |       |       |       |                |       |
| Ethan  Berman            |       | 58,300,022 |       | 225,894             |       |
| Lovida Coleman, Jr. |       | 58,393,803 |       | 132,113             |       |
| Philip  Duff             |       | 51,002,599 |       | 7,523,317           |       |
| Stephanie  Hanbury-Brown |       | 58,464,089 |       | 61,827              |       |
| Rene  Kern               |       | 58,206,745 |       | 319,171             |       |
| Christopher  Mitchell    |       | 57,342,013 |       | 1,183,903           |       |
| Frank  Noonan            |       | 58,456,289 |       | 69,627              |       |
| Lynn  Sharp Paine        |       | 57,386,769 |       | 1,139,147           |       |
| Thomas  Renyi            |       | 58,455,189 |       | 70,727              |       |
| Stephen  Thieke          |       | 58,456,589 |       | 69,327              |       |
| Robert  Trudeau          |       | 57,376,175 |       | 1,149,741           |       |

 

Each nominee waselected a Director of the Company.

 

(2)  Toratify the appointment of Deloitte & Touche LLP as the Company’sindependent auditor for the fiscal year ending December 31, 2009.

 

The votes werecast for this matter as follows:

 
|   |   | **FOR**    |   | **AGAINST/ABSTAIN** |   | ** ** |   |
|--------|--------|------------|--------|---------------------|--------|------------|--------|
|   |   | ** ** |   | ** **          |   | ** ** |   |
|   |   | 58,406,160 |   | 119,756             |   | ** ** |   |

 

The selection of Deloitte &Touche LLP as the Company’s independent auditor for the fiscal year ending December 31,2009 was ratified.

 

(3)  To approveamendments to the Company’s 2007 Omnibus Incentive Compensation Plan.

 

The votes werecast for this matter as follows:

 
|   |   | **FOR**    | ** ** | **AGAINST/ABSTAIN** | ** ** | **NON-VOTES** | ** ** |
|--------|--------|------------|------------|---------------------|------------|---------------|------------|
|   |   |       |       |                |       |          |       |
|   |   | 53,827,963 |       | 1,537,997           |       | 3,159,956     |       |

 

The amendments to the2007 Omnibus Incentive Compensation Plan were approved.

 

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(4)  To approve twoadvisory (non-binding) proposals concerning the Company’s executivecompensation philosophy and 2008 compensation decisions.

 

The votes werecast for these matters as follows:

 
|                         |   | **FOR**    | ** ** | **AGAINST/ABSTAIN** | ** ** | **NON-VOTES** | ** ** |
|------------------------------|--------|------------|------------|---------------------|------------|---------------|------------|
|                         |   |       |       |                |       |          |       |
| Compensation  Philosophy     |   | 58,297,327 |       | 228,589             |       | 0             |       |
| 2008  Compensation Decisions |   | 55,225,846 |       | 140,114             |       | 3,159,956     |       |

 

The two advisoryproposals were approved.

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                |
|---------------------|------------|----------------------------------------------------------------|
| 10.1                |       | Knut Kjaer Employment Agreement *                              |
| 31.1                |       | Section 302 Certification of Principal Executive Officer* |
| 31.2                |       | Section 302 Certification of Principal Executive Officer* |
| 32.1                |       | Section 906 Certification of Principal Executive Officer* |
| 32.2                |       | Section 906 Certification of Principal Financial Officer* |

 

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*                                         Filed herewith.

 

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