Table ofContents

 

 

 

**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 September 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 telephone number, 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 October 29, 2009 was:

 

| **Class**                   | ** ** | **Outstanding** |
|-----------------------------|------------|-----------------|
| Common stock $.01 par value |       | 62,798,622      |

 

 

 

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Table of Contents

 

**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 September 30,  2009 and December 31, 2008 and for the three and nine months ended  September 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                                                                              | 19                   |
| Item 3 — Quantitative  and Qualitative Disclosures About Market Risk                                                                                                               | 36                   |
| Item 4 —  Controls and Procedures                                                                                                                                                  | 36                   |
|                                                                                                                                                                                         |                 |
| **PART II  — OTHER INFORMATION**                                                                                                                                                   | ** **           |
| Item 1 — Legal  Proceedings                                                                                                                                                        | 37                   |
| Item1A—Risk Factors                                                                                                                                                                     | 37                   |
| Item 2 —  Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                              | 37                   |
| Item 3 —  Defaults Upon Senior Securities                                                                                                                                          | 37                   |
| Item 4 —  Submission of Matters to a Vote of Security Holders                                                                                                                      | 37                   |
| Item 5 — Other  Information                                                                                                                                                        | 37                   |
| Item 6 — Exhibits                                                                                                                                                                  | 37                   |

 

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**RISKMETRICSGROUP, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

**(Inthousands, except share amounts)**

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

 

See notes to condensedconsolidated financial statements.

 

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**RISKMETRICSGROUP, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THETHREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008**

 

**(UNAUDITED)**

 

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

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

 

----

(1) Includesstock-based compensation expense of:

 
| ** **                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine  months ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | **2009**                                             | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                             | ** ** | ** **                                           | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of revenues                       |       | $                                                    | 733        |                                            | $          | 721 |   | $ | 2,104 |   | $ | 2,719 |   |
| Research and development               |       | 595                                                  |       | 608                                             |       | 1,724 |   | 2,060 |   |
| Selling and marketing                  |       | 302                                                  |       | 422                                             |       | 1,065 |   | 1,375 |   |
| General and administrative             |       | 693                                                  |       | 494                                             |       | 1,513 |   | 1,468 |   |
| Total stock-based compensation expense |       | $                                                    | 2,323      |                                            | $          | 2,245 |   | $ | 6,406 |   | $ | 7,622 |   |

 

See notes to condensedconsolidated financial statements.

 

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**RISKMETRICSGROUP, INC.**

 

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

**FOR THEYEAR ENDED DECEMBER 31, 2008 AND NINE MONTHS ENDED SEPTEMBER 30, 2009**

 

**(UNAUDITED)**

 

**(Inthousands, except share amounts)**

 
| ** **                                                                             | ** ** | ** **                             | ** ** | ** ** | ** ** | ** **          | ** ** | **Accumulated**      | ** ** | ** **              | ** ** | ** **               | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|---------------------|------------|----------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                                                             | ** ** | **Common Shares**                 | ** ** | ** ** | ** ** | **Additional**      | ** ** | **Other**            | ** ** | ** **              | ** ** | **Total**                | ** ** |
| ** **                                                                             | ** ** | **Number of  Shares Issued** | ** ** | **Amount** | ** ** | **Treasury  Stock** | ** ** | **Paid-In  Capital** | ** ** | **Comprehensive  Loss** | ** ** | **Accumulated  Deficit** | ** ** | **Stockholders’  Equity** | ** ** |
|                                                                                   |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| BALANCE—January 1,  2008                                                     |       | 47,850,652                             |       | $          | 479        |                | $          | (2                   | )          | $                       | 217,355    |                     | $          | (7,262 | ) | $ | (74,478 | ) | $ | 136,092 |   |
| Comprehensive  loss:                                                                   |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| Net  loss                                                                              |       | —                                 |       | —     |       | —              |       | —               |       | —                  |       | (136,919                 | )          | (136,919 | ) |
| Foreign  currency translation adjustment                                               |       | —                                 |       | —     |       | —              |       | —               |       | (3,048                  | )          | —                   |       | (3,048 | ) |
| Net  unrealized loss on cash flow hedge, net of deferred tax benefit of  $4,376   |       | —                                 |       | —     |       | —              |       | —               |       | (6,945                  | )          | —                   |       | (6,945 | ) |
| Total  comprehensive loss                                                              |       | —                                 |       | —     |       | —              |       | —               |       | —                  |       | —                   |       | (146,912 | ) |
|                                                                                   |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| Common  shares issued upon exercise of stock options                                   |       | 1,611,358                              |       | 16         |       | —              |       | 5,901                |       | —                  |       | —                   |       | 5,917 |   |
| Tax  benefit associated with exercise of stock options                                 |       | —                                 |       | —     |       | —              |       | 4,861                |       | —                  |       | —                   |       | 4,861 |   |
| Stock-based  compensation                                                              |       | —                                 |       | —     |       | —              |       | 9,893                |       | —                  |       | —                   |       | 9,893 |   |
| Issuance  of common stock                                                              |       | 147,766                                |       | 1          |       | —              |       | (1                   | )          | —                  |       | —                   |       | — |   |
| Common  shares recovered in connection with the acquisition of CFRA                    |       | —                                 |       | —     |       | (577                | )          | —               |       | —                  |       | —                   |       | (577 | ) |
| Net  proceeds from equity offering                                                     |       | 12,064,184                             |       | 121        |       | —              |       | 193,772              |       | —                  |       | —                   |       | 193,893 |   |
|                                                                                   |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| BALANCE—December 31,  2008                                                   |       | 61,673,960                             |       | 617        |       | (579                | )          | 431,781              |       | (17,255                 | )          | (211,397                 | )          | 203,167 |   |
| Comprehensive  income:                                                                 |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| Net  income                                                                            |       | —                                 |       | —     |       | —              |       | —               |       | —                  |       | 23,521                   |       | 23,521 |   |
| Foreign  currency translation adjustment                                               |       | —                                 |       | —     |       | —              |       | —               |       | 2,926                   |       | —                   |       | 2,926 |   |
| Net  unrealized gain on cash flow hedge, net of deferred tax liability of  $1,897 |       | —                                 |       | —     |       | —              |       | —               |       | 3,094                   |       | —                   |       | 3,094 |   |
| Total  comprehensive income                                                            |       | —                                 |       | —     |       | —              |       | —               |       | —                  |       | —                   |       | 29,541 |   |
|                                                                                   |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| Common  shares issued upon exercise of stock options                                   |       | 1,015,340                              |       | 10         |       | —              |       | 4,595                |       | —                  |       | —                   |       | 4,605 |   |
| Tax  benefit associated with exercise of stock options                                 |       | —                                 |       | —     |       | —              |       | 2,957                |       | —                  |       | —                   |       | 2,957 |   |
| Stock-based  compensation                                                              |       | —                                 |       | —     |       | —              |       | 6,406                |       | —                  |       | —                   |       | 6,406 |   |
| Issuance  of common stock (Note 11)                                               |       | 34,367                                 |       | —     |       | —              |       | —               |       | —                  |       | —                   |       | — |   |
|                                                                                   |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| BALANCE—September 30,  2009                                                  |       | 62,723,667                             |       | $          | 627        |                | $          | (579                 | )          | $                       | 445,739    |                     | $          | (11,235 | ) | $ | (187,876 | ) | $ | 246,676 |   |
|                                                                                   |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| Disclosure  of realized gain:                                                          |       |                                   |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| Unrealized  loss on cash flow hedge                                                    |       | $                                      | (1,821     | )          |       |                |       |                 |       |                    |       |                     |       |   |   |   |
| Realized  loss for cash flow hedge settlement, net of tax benefit(Note 8)         |       | 4,915                                  |       |       |       |                |       |                 |       |                    |       |                     |       |   |   |
| Net  unrealized gain on cash flow hedge                                                |       | $                                      | 3,094      |       |       |                |       |                 |       |                    |       |                     |       |   |   |   |

 

See notes to condensedconsolidated financial statements.

 

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**RISKMETRICS GROUP, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDEDSEPTEMBER 30, 2009 AND 2008**

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

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

 

See notes to condensedconsolidated financial statements.

 

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**RISKMETRICS GROUP, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE THREE AND NINE MONTHSENDED SEPTEMBER 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 external constituencies,satisfy regulatory and reporting requirements and make more informed investmentdecisions. The Company provides its products and services across multiple assetclasses, markets and geographies to a diverse client base including assetmanagers, hedge funds, pension funds, banks, insurance companies, financialadvisors and corporations. The Company operates in two business segments, the “RiskMetricsbusiness” 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 (“U.S. GAAP”). All intercompany accounts and transactionshave been eliminated in consolidation.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared pursuant to the rules of the United States Securities andExchange Commission (the “SEC”). Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with U.S. GAAPhave been condensed or omitted pursuant to SEC rules. These financialstatements should be read in conjunction with the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

Thecondensed consolidated financial statements as of September 30, 2009 andfor the three and nine months ended September 30, 2009 and 2008 in theopinion of management, include all adjustments, consisting only of normalrecurring accruals, necessary to present fairly the Company’s financialposition, results of operations and cash flows. The operating results for thethree and nine months ended September 30, 2009 are not necessarilyindicative of the results to be expected for the full year.  The December 31,2008 condensed consolidated financial statement information has been derivedfrom the 2008 audited 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 U.S. 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***—

 

*FASB Accounting Standards Codification*

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued new guidance concerning the organization ofauthoritative guidance under U.S. GAAP. This new guidance created the FASB AccountingStandards Codification (“Codification”). The Codification has become the sourceof authoritative U.S. GAAP recognized by the FASB to be applied bynongovernmental entities. The Codification became effective for the Company inthe quarter ended September 30, 2009. As the Codification is not intendedto change or alter existing U.S. GAAP, it did not have any impact on theCompany’s condensed consolidated financial statements. On its effective date,the Codification superseded all then-existing non-SEC accounting and reportingstandards.

 

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*Accounting for Business Combinations*

 

On December 4, 2007, the FASB amended its authoritative guidancefor business combinations and noncontrolling interests in consolidatedfinancial statements. Effective January 1, 2009, the Company adopted theamended guidance for business combinations and noncontrolling interests.  These new standards significantly change thefinancial accounting and reporting of business combination transactions andnoncontrolling interests in consolidated financial statements.  The Company accounted for the acquisition ofInnovest Strategic Value Advisors, Inc. (“Innovest”) in accordance withthis amended guidance (see Note 4).

 

*Disclosures for Derivative Financial Instruments*

 

In March 2008,the FASB amended its guidance for disclosures about derivativeinstruments and hedging activities. On January 1, 2009 the Company adoptedthis amended guidance for its disclosures about derivative instruments andhedging activitiesand has included the required disclosures regarding the fair value ofderivative instruments in Note 8.

 

*Determination of the Useful Life of Intangible Assets*

 

In April 2008,the FASB amended its guidance for the factors that an entity shouldconsider in developing renewal or extension assumptions used in thedetermination of the useful life of recognized intangible assets. This amended guidance appliesprospectively to intangible assets that are acquired individually or with agroup of other assets in business combinations and asset acquisitions.  On January 1, 2009, the Company adoptedthis amended guidance for determination of the useful life of intangibleassets and suchadoption did not have a material impact on the condensed consolidated financialstatements.

 

*Disclosures for Fair Value of Financial Instruments*

 

In April 2009, the FASB issuednew authoritative guidance for interim disclosures about fair value offinancial instruments.  Thisauthoritative guidance requirescertain disclosures in interim financial statements that previously wererequired only annually.  In addition,this guidance requires disclosures regarding the methods and significantassumptions used to estimate the fair value of financial instruments.  On April 1, 2009, the Company adoptedthe authoritative guidance for interim disclosures about fair value offinancial instruments.The adoption of this guidance did not have a material impact on the condensedconsolidated financial statements.

 

*Subsequent Events*

 

In May 2009,the FASB issuednew authoritative guidance for subsequent events. Such authoritative guidance establishes general standards ofaccounting for, and disclosure of, events that occur after the balance sheetdate but before 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.  This authoritativeguidance is effectivefor the interim or annual financial periods ending after June 15,2009.  On June 30, 2009, the Company adopted the authoritativeguidance for subsequent events. Such adoption did not have a material impact on theCompany’s condensed consolidated financial statements.  The Company evaluated subsequent events throughthe date the accompanying financial statements were issued, which was November 3,2009.

 

*Multiple-DeliverableRevenue Arrangements*

 

In October 2009, theFASB revised certain accounting guidance for revenue arrangements with multipledeliverables, in particular when vendor specific objective evidence or thirdparty evidence for deliverables in an arrangement cannot be determined, a bestestimate of the selling price is required to separate deliverables and toallocate the arrangement consideration. This revised guidance is effective forthe first quarter of 2011, with early adoption permitted. The Company does notexpect the adoption of this revised guidance to have a material impact on thecondensed consolidated financial statements.

 

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**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 receive 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$1.6 million were paid during the nine months ended September 30,2008. The Company utilized a portion of the proceeds to prepay the entireoutstanding indebtedness under the Company’s second loan lien credit facility(See Note 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  |   |
| 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 |   |

 

The Company has provided for a deferred tax liability representing thedifference between the estimated book and tax basis of the net assets acquired.The excess of the purchase price over the estimated fair values of the assetsacquired and liabilities assumed was allocated to goodwill, which is notexpected to be deductible for tax purposes. The Company recorded a deferred taxasset for acquired net operating losses which are expected to be utilized overa period of approximately 6 years.

 

Revenue included in the condensed consolidated statements of operationsfor the three and nine months ended September 30, 2009 pertaining toInnovest was approximately $1.6 million and $3.6 million, respectively, and netearnings were not significant.

 

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 nine months ended September 30, 2009. In addition,the purchase consideration was reduced by $0.2 million of employee severancecosts and during the nine months ended September 30, 2009 the Companyincurred a total of $0.5 million of employee severance costs as a 

 

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resultof reorganizing the ISS business due to the Innovest acquisition.  Suchexpenses have been included in general and administrative expenses in theaccompanying statement of 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 and is therefore reflected as goodwill within the ISSsegment.  The amounts and useful livesallocated 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 thenine months ended September 30, 2009 and 2008 assuming the Innovestacquisition had occurred on January 1, 2008.

 
| ** **             | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------|------------|------------------------------------------------|------------|
| ** **             | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| Revenues               |       | $                                              | 228,209    |   | $ | 226,022 |   |
| Income from operations |       | 50,074                                         |       | 40,613 |   |
| Net income             |       | 23,252                                         |       | 11,837 |   |
| Net income per share:  |       |                                           |       |   |   |
| Diluted                |       | $                                              | 0.34       |   | $ | 0.18 |   |

 

Theseunaudited proforma results are intended for informational purposes only and arenot 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 September 30, 2009 and December 31, 2008 consist of thefollowing:

 
| ** **              | ** ** | **September 30, 2009** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Useful Lives**            | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Customer relationships  |       | 7–11 years             |       | $ | 132,450 |   | $ | (33,351 | ) | $ | 99,099 |   |
| Acquired technology     |       | 5 years                     |       | 27,123 |   | (14,049 | ) | 13,074 |   |
| Covenant not to compete |       | 1–3 years              |       | 1,650 |   | (1,127 | ) | 523 |   |
| Proprietary process     |       | 5-7 years                   |       | 9,180 |   | (2,782 | ) | 6,398 |   |
| Trade names             |       | 1–10 years             |       | 23,950 |   | (6,554 | ) | 17,396 |   |
| Customer contracts      |       | 1 year                      |       | 670 |   | (391 | ) | 279 |   |
| Total                   |       |                             |       | $ | 195,023 |   | $ | (58,254 | ) | $ | 136,769 |   |

 
| ** **              | ** ** | **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 |   |

 

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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 |   | $      | 5,883  |   |
|-------------------------------------------------|--------|--------|--------|--------|
| Years ending December 31,                  |   |   |   |
| 2010                                            |   | $      | 22,576 |   |
| 2011                                            |   | $      | 22,031 |   |
| 2012                                            |   | $      | 17,141 |   |
| 2013                                            |   | $      | 16,871 |   |

 

Goodwill changed during the nine months ended September 30, 2009as follows:

 
| Balance at January 1, 2009                                          |   | $      | 308,613 |   |
|--------------------------------------------------------------------------|--------|--------|---------|--------|
| Goodwill from Innovest acquisition                                       |   | 10,162 |    |
| Tax benefit on exercise of stock options granted  during ISS acquisition |   | (183   | )       |
| Balance as of September 30, 2009                                    |   | $      | 318,592 |   |

 

**6. ACCRUED EXPENSES**

 

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

 
| ** **                            | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accrued compensation and related tax  |       | $                            | 25,900     |                        | $          | 29,492 |   |
| Accrued data and web hosting expenses |       | 982                          |       | 1,907                       |       |
| Accrued travel and entertainment      |       | 424                          |       | 393                         |       |
| Accrued professional fees             |       | 1,362                        |       | 1,392                       |       |
| Current portion of deferred rent      |       | 189                          |       | 273                         |       |
| Other accrued expenses                |       | 6,508                        |       | 6,717                       |       |
|                                  |       | $                            | 35,365     |                        | $          | 40,174 |   |

 

**7. DEBT**

 

The Company’s debt is comprised of two term loan facilities and arevolving credit facility.  As of September 30,2009, and December 31, 2008, $289.1 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 first lien term loan facilityand accumulates interest, at the option of the Company at: (a) the LIBORrate plus a margin of 1.75% to 2.25% depending on the Company’s consolidatedleverage ratio, or (b) the higher of (i) the Federal Funds EffectiveRate plus 0.5% and (ii) Bank of America’s “prime rate,” plus a margin of0.75% or 1.25% depending on the consolidated leverage ratio.  Amounts repaid under the first lien term loanfacility may not be re-borrowed. Amounts repaid under the revolving creditfacility 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) theLIBOR rate plus a margin of 5.50%, or (b) the higher of (i) theFederal Funds Effective Rate plus 5.0% and (ii) Bank of America’s “primerate,” plus a margin of 4.50%. In January 2008, the Company utilized aportion of proceeds from the initial public offering to prepay the entireoutstanding indebtedness 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,which has been included in other expenses for the nine months ended September 30,2008.

 

The effective interest rate on the Company’s debt was 6.8% and 7.4% forthe nine months ended September 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 onDecember 31, 2009. Furthermore, the Company is required to make amandatory payment equal to each year’s excess cash flow depending on leverageratios, as defined 

 

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inthe first lien term loan facility, within five days of delivery of auditedfinancial statements. Based on the Company’s consolidated leverage ratio as of September 30,2009, no future excess cash flow payments would be required as long as thatratio is maintained. The Company is required to repay the aggregate principalremaining on the first lien term loan facility on the maturity date. TheCompany may voluntarily prepay the first lien credit facilities in whole or inpart without penalty.

 

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

 
| For  the twelve months ending September 30, |   |    |    |
|--------------------------------------------------|--------|---------|---------|
| 2010                                             |   | $       | 2,966   |   |
| 2011                                             |   | 2,966   |    |
| 2012                                             |   | 2,966   |    |
| 2013                                             |   | 2,966   |    |
| 2014                                             |   | 277,273 |    |
|                                             |   | $       | 289,137 |   |

 

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 accompanyingcondensed consolidated statement of operations. In conjunction with theprepayment of the second lien loan during the nine months ended September 30,2008, the Company wrote-off debt issuance costs of $2,377.  The following table summarizes amortizationof debt issuance costs, including the write-off of debt issuance costs in theaccompanying condensed consolidated statements of operations:

 
| ** **                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                             | ** ** | **2008**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Amortization of debt issuance costs |       | $                                                    | 260        |                                           | $          | 260 |   | $ | 780 |   | $ | 3,190 |   |
|                                     |            |                                                      |            |                                                |            |  |  |  |  |  |  |  |  |

 

**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 September 30, 2009 the Company had interest rateswap agreements which are valued using level 2 inputs as shown in the followingtable:

 
| ** **                                                               | ** ** | **Fair value at September 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) |       | $                                                                          | 17,319     |   | $ | — |   | $ | 17,319 |   | $ | — |   |
|                                                                          |            |                                                                            |            |  |  |  |  |  |  |  |  |  |  |

 

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 September 30, 2009 and December 31, 2008, the swap agreementshad a notional amount of $251,925 and $279,375, respectively. As of September 30,2009 and December 31, 2008, the swap agreements had a fair value 

 

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liabilityof $17,319 and $22,311, respectively, which is included in other long-term liabilitieson the accompanying condensed consolidated balance sheets.

 

In conjunction with the prepayment of the second lien term loan duringthe nine months ended September 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 nine months ended September 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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **               | ** ** | **2009**                                             | ** ** | **2008**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Loss from swap agreement |       | $                                                    | 2,905      |                                           | $          | 1,648 |   | $ | 7,928 |   | $ | 3,562 |   |
|                          |            |                                                      |            |                                                |            |  |  |  |  |  |  |  |  |

 

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 inoffsetting the change in the value of the interest payments being hedged, anychanges in fair value relating to the ineffective portion of such agreementwill be immediately recognized in earnings. Effective gains and losses havebeen included in the unrealized loss on cash flow hedges as a component ofother comprehensive 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 September 30, 2009 and December 31,2008 is as follows:

 
| ** **            | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------|------------|------------------------------|------------|-----------------------------|------------|
| Carrying  value       |       | $                            | 289,137    |                        | $          | 290,619 |   |
| Estimated  fair value |       | 283,000                      |       | 253,000                     |       |
|                       |            |                              |            |                             |            |  |  |

 

**9. INCOME TAXES**

 

The Company’s effective tax rate for the provision for income taxes was33.2% and 39.1% for the nine months ended September 30, 2009 and 2008,respectively.  The effective tax rate of 33.2% for the nine monthsended September 30, 2009 reflects the Company’s estimate of the effectivetax rate during the period and was positively impacted by a $814 reduction inunrecognized tax benefits.

 

As of September 30, 2009, the Company’s unrecognized tax benefitstotaled $1,478, all of which would favorably impact the Company’s effective taxrate, if recognized. Over the next three months, an increase of $92 will berecorded for unrecognized tax benefits and such increase will unfavorablyimpact the Company’s income tax provision. Interest and penalties accrued during the nine months ended September 30,2009 and 2008 were not material.

 

The Company’s tax returns for 2006-2008 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 InternalRevenue Service for 2006 and 2007, and Canada Revenue Agency for 2005-2006. Asof September 30, 2009 and December 31, 2008, $313 and $457 wereaccrued for the payment of interest 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                                  |   | 179  |   |
| Additions for tax positions of prior years                                                     |   | 96   |   |
| Reductions for tax positions of prior years due to  lapse of applicable statute of limitations |   | (694 | )      |
| Other reductions for tax positions of prior years                                              |   | (120 | )      |
| Balance at September 30, 2009                                                             |   | $    | 1,478  |   |

 

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**10. COMMITMENTS AND CONTINGENCIES**

 

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

 
| For the twelve months ending September 30, |   |   |   |
|-------------------------------------------------|--------|--------|--------|
| 2010                                            |   | $      | 6,151  |   |
| 2011                                            |   | 5,598  |   |
| 2012                                            |   | 4,846  |   |
| 2013                                            |   | 1,279  |   |
| 2014                                            |   | 467    |   |
| Total minimum lease payments                    |   | $      | 18,341 |   |

 

Duringthe first quarter of 2009 the Company entered into a lease commitment forits new ISS headquarters.  During the three months ended September 30,2009, as a result of certain actions by the landlord, the Companyalleged the landlord to be in default of the leaseand considers the lease terminated.  As a result ofthe termination, the Company wrote off in process leaseholdimprovements associated with the lease and recorded a $0.2 million loss ondisposal during the three months ended September 30, 2009.

 

Duringthe nine months ended September 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 and Web Hosting Agreements***—The Companyhas entered into agreements with various vendors to supply the Company withdata and web hosting. The aggregate minimum payments with respect to these dataand web hosting agreements as of September 30, 2009, are as follows:

 
| For the twelve months ending September 30, |   |   |   |
|-------------------------------------------------|--------|--------|--------|
| 2010                                            |   | $      | 10,943 |   |
| 2011                                            |   | 3,347  |   |
| 2012                                            |   | 203    |   |
| 2013                                            |   | 136    |   |
| Total                                           |   | $      | 14,629 |   |

 

***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”).

 

*Stock Options*

 

During 2000, the Company’s Board of Directors adopted a Stock OptionPlan (the “2000 Plan”) that provided for the grant of options to employees,consultants, and non-employee directors to purchase common stock, which vestover a one to four year period and have a ten-year contractual term. Themaximum number of shares of the Company’s common stock available for issuanceunder the 2000 Plan was 12,500,000, and no more than 4,000,000 were allowed tobe issued in any calendar year. The Company retired the 2000 Plan and adopted anew option plan (the “2004 Plan”). As of September 30, 2009, 4,959,809options issued under the 2000 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 

 

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retiredthe 2004 Plan and adopted a new option plan in January 2007. As of September 30,2009, 4,067,382 options issued under the 2004 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 September 30, 2009, 3,581,556options and 252,001 shares of non-vested stock granted under the 2007 Planremain 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 September 30, 2009,127,068 options issued under the ISS Plan remain outstanding.

 

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                                |       | (1,015,340                 | )          | $                                       | 4.54       |   |
| Forfeited                                |       | (441,932                   | )          | $                                       | 14.95      |   |
| Outstanding—September 30, 2009 |       | 12,735,815                 |       | $                                       | 7.82       |   |

 

TheCompany’s stock options outstanding as of September 30, 2009 were asfollows:

 
| ** **                         | ** ** | **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                         |       | 6,418,031                    |       | 3.50                                                                |       | $ | 2.58 |   | 6,418,029 |   | $ | 2.58 |   |
| 5.01-10.00                         |       | 1,745,337                    |       | 6.07                                                                |       | 7.02 |   | 1,336,294 |   | 6.97 |   |
| 10.01-15.00                        |       | 888,500                      |       | 9.41                                                                |       | 11.83 |   | — |   | — |   |
| 15.01-20.00                        |       | 3,683,947                    |       | 7.94                                                                |       | 16.37 |   | 1,431,748 |   | 16.03 |   |
|                               |       | 12,735,815                   |       | 5.55                                                                |       | $ | 7.82 |   | 9,186,071 |   | $ | 5.31 |   |

 

Of the unvested options as of September 30, 2009, 3,123,775 areexpected to vest in the future.  As of September 30,2009 the intrinsic value of stock options outstanding and exercisable wasapproximately $86,604 and $85,522, respectively. The intrinsic value of stockoptions exercised during the nine months ended September 30, 2009 was$9,605.

 

The fair value of stock options at date of grant was estimated usingthe Black-Scholes option-pricing model utilizing the following weighted-averageassumptions:

 
| ** **                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                             | ** ** | **2008**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Risk-free interest rate         |       | —                                               |       | 3.2                                            | %          | 2.0 | % | 2.6 | % |
| Expected term (in years)        |       | —                                               |       | 4.5                                            |       | 5.5 |   | 4.5 |   |
| Expected stock price volatility |       | —                                               |       | 35.0                                           | %          | 45.8 | % | 35.0 | % |
| Expected dividend yield         |       | —                                               |       | None                                           |       | None |   | None |   |

 

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

 
| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Weighted average per share fair value of options  granted |       | $                                                    | —     |                                                | $          | 5.81 |   | $ | 6.02 |   | $ | 5.81 |   |
|                                                           |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

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No stock options were granted during the three months ended September 30,2009.

 

*Non-vested Stock*

 

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

 
| ** **                                 | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|-------------------------------------------------------------|------------|
| Unvested shares at January 1, 2009    |       | 235,039                    |       | $                                                           | 18.01      |   |
| Granted                                    |       | 58,743                     |       | $                                                           | 16.04      |   |
| Vested                                     |       | (34,367                    | )          | $                                                           | 14.42      |   |
| Forfeited                                  |       | (7,414                     | )          | $                                                           | 16.50      |   |
| Unvested Shares at September 30, 2009 |       | 252,001                    |       | $                                                           | 17.16      |   |

 

The total fair value of shares vested during the nine months ended September 30,2009 was $496.  As of September 30,2009, there was approximately $16,289 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 nine months ended September 30,2009 and 2008, the difference between basic and diluted number of sharesoutstanding is as follows:

 
| ** **                                                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                                             | ** ** | **2008**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Basic number of weighted-average shares  outstanding                             |       | 62,097,967                                           |       | 60,780,651                                     |       | 61,745,222 |   | 59,493,052 |   |
| Effect of dilutive securities— Employee stock  options and non-vested stock |       | 6,070,929                                            |       | 7,628,692                                      |       | 6,093,298 |   | 7,547,659 |   |
| Diluted number of weighted-average shares  outstanding                           |       | 68,168,896                                           |       | 68,409,343                                     |       | 67,838,520 |   | 67,040,711 |   |

 

Options and non-vested stock of 2,966,565 and 2,568,962 common sharesduring the three months ended September 30, 2009 and 2008, and 4,488,661and 1,560,000 common shares during the nine months ended September 30,2009 and 2008, respectively, were anti-dilutive and were therefore excludedfrom the computation of diluted earnings per share.

 

**13. SEGMENT INFORMATION**

 

The Company has two reportable segments, the RiskMetrics business and theISS 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 informed investmentdecisions, monitor and comply with exposure and risk limits, provide greatertransparency to both internal audiences and external constituencies and meetregulatory and reporting requirements.

 

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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 fullyintegrated products and services, from policy creation to comprehensiveresearch, vote recommendations, reliable vote execution, post-vote disclosureand reporting and analytical tools.

 

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

 
| ** **                                               | ** ** | **RiskMetrics  Business** | ** ** | **ISS  Business** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|
| **Three months ended  September 30, 2009:**         |       |                      |       |              |       |      |       |
| Revenues                                                 |       | $                         | 39,487     |              | $          | 34,493    |       | $ | 73,980 |   |
| Depreciation and amortization of property and  equipment |       | 1,163                     |       | 1,026             |       | 2,189     |       |
| Amortization of intangible assets                        |       | 86                        |       | 5,790             |       | 5,876     |       |
| Other operating expenses                                 |       | 24,855                    |       | 25,865            |       | 50,720    |       |
| Income from operations                                   |       | $                         | 13,383     |              | $          | 1,812     |       | 15,195 |   |
| Interest, dividend and investment income                 |       |                      |       |              |       | 168       |       |
| Interest expense                                         |       |                      |       |              |       | (5,154    | )          |
| Income before provision for income taxes                 |       |                      |       |              |       | 10,209    |       |
| Provision for income taxes                               |       |                      |       |              |       | 2,426     |       |
| Net income                                               |       |                      |       |              |       | $         | 7,783      |   |

 

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| ** **                                               | ** ** | **RiskMetrics  Business** | ** ** | **ISS  Business** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|
| **Three months ended  September 30, 2008:**         |       |                      |       |              |       |      |       |
| Revenues                                                 |       | $                         | 40,846     |              | $          | 34,708    |       | $ | 75,554 |   |
| Depreciation and amortization of property and  equipment |       | 1,152                     |       | 1,001             |       | 2,153     |       |
| Amortization of intangible assets                        |       | —                    |       | 5,398             |       | 5,398     |       |
| Other operating expenses                                 |       | 27,438                    |       | 25,378            |       | 52,816    |       |
| Income from operations                                   |       | $                         | 12,256     |              | $          | 2,931     |       | 15,187 |   |
| Interest, dividend and investment income                 |       |                      |       |              |       | 686       |       |
| Interest expense                                         |       |                      |       |              |       | (5,546    | )          |
| Income before provision for income taxes                 |       |                      |       |              |       | 10,327    |       |
| Provision for income taxes                               |       |                      |       |              |       | 4,045     |       |
| Net income                                               |       |                      |       |              |       | $         | 6,282      |   |

 
| ** **                                               | ** ** | **RiskMetrics  Business** | ** ** | **ISS  Business** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|
| **Nine months ended  September 30, 2009:**          |       |                      |       |              |       |      |       |
| Revenues                                                 |       | $                         | 119,102    |              | $          | 107,787   |       | $ | 226,889 |   |
| Depreciation and amortization of property and  equipment |       | 3,353                     |       | 2,900             |       | 6,253     |       |
| Amortization of intangible assets                        |       | 244                       |       | 17,107            |       | 17,351    |       |
| Other operating expenses                                 |       | 73,046                    |       | 79,797            |       | 152,843   |       |
| Income from operations                                   |       | $                         | 42,459     |              | $          | 7,983     |       | 50,442 |   |
| Interest, dividend and investment income                 |       |                      |       |              |       | 461       |       |
| Interest expense                                         |       |                      |       |              |       | (15,713   | )          |
| Income before provision for income taxes                 |       |                      |       |              |       | 35,190    |       |
| Provision for income taxes                               |       |                      |       |              |       | 11,669    |       |
| Net income                                               |       |                      |       |              |       | $         | 23,521     |   |
| Asset information at September 30, 2009:            |       |                      |       |              |       |      |       |
| Segment assets                                           |       | $                         | 213,388    |              | $          | 514,328   |       | $ | 727,716 |   |
| Goodwill                                                 |       | $                         | —     |              | $          | 318,592   |       | $ | 318,592 |   |

 
| ** **                                               | ** ** | **RiskMetrics  Business** | ** ** | **ISS  Business** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|-------------------|------------|-----------|------------|
| **Nine months ended  September 30, 2008:**          |       |                      |       |              |       |      |       |
| Revenues                                                 |       | $                         | 114,110    |              | $          | 106,790   |       | $ | 220,900 |   |
| Depreciation and amortization of property and  equipment |       | 3,496                     |       | 2,937             |       | 6,433     |       |
| Amortization of intangible assets                        |       | —                    |       | 16,310            |       | 16,310    |       |
| Other operating expenses                                 |       | 76,967                    |       | 79,850            |       | 156,817   |       |
| Income from operations                                   |       | $                         | 33,647     |              | $          | 7,693     |       | 41,340 |   |
| Interest, dividend and investment income                 |       |                      |       |              |       | 1,927     |       |
| Interest expense                                         |       |                      |       |              |       | (20,651   | )          |
| Other expenses                                           |       |                      |       |              |       | (2,613    | )          |
| Income before provision for income taxes                 |       |                      |       |              |       | 20,003    |       |
| Provision for income taxes                               |       |                      |       |              |       | 7,828     |       |
| Net income                                               |       |                      |       |              |       | $         | 12,175     |   |
| Asset information at September 30, 2008:            |       |                      |       |              |       |      |       |
| Segment assets                                           |       | $                         | 174,162    |              | $          | 675,471   |       | $ | 849,633 |   |
| Goodwill                                                 |       | —                    |       | $                 | 461,218    |      | $          | 461,218 |   |

 

**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 $422 for the Duff Capital Advisors contract forthe nine months ended September 30, 2009 and 2008, respectively.

 

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**15. SUBSEQUENT EVENT**

 

OnOctober 30, 2009, the Company acquired all of the outstanding capitalstock of KLD Research & Analytics, Inc. (“KLD”) for approximately$10 million in cash, including a working capital adjustment. KLD is anindependent investment research firm providing management tools toprofessionals integrating environmental, social and governance factors (ESG)into their investment decisions.  The purpose of this acquisition is toenhance the product offerings and services the Company may offer its customersin assessing risk within the environmental, social and governance sectors.  The initial accounting for the acquisition ofKLD is not yet available due to the recent closing date.

 

**********

 

**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.*

 

**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 92.7% of our total revenuesduring the nine months ended September 30, 2009, and we had a renewal rateof 81.5% 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 and wehave generally been able to increase margins.

 

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**Favorable cash flow characteristics:**  Our subscription-based revenues andleveragable cost structure, combined with our positive working capitalcharacteristics and low capital expenditure requirements, have historicallyallowed us to generate significant cash flow.

 

In evaluating our results, we focus on several key financial andoperating data 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.

 

We expect 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 marketenvironment that includes illiquidity, market volatility, wideningcredit spreads, changes in interest rates, currency exchange fluctuations andnew legal and compliance requirements.  These market conditionsand the reduced business activity have had a negative impact on anumber of our clients and could negatively impact our future revenues due tothe potential 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.

 

***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 nine monthsended September 30, 2009, approximately 92.7% 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 81.5% for the ninemonths ended September 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 September 30,2009 was $276.6 million.

 

We also generate non-recurring revenue from sales of products andservices without a subscription contract, which represented 7.3% of totalrevenues during the nine months ended September 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:

 

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·                  new subscription-basedrevenues;

 

·                  additional one-time revenue;

 

·                  changes in the contractvalue of our subscription contracts;

 

·                  cancellations and non-renewalsof subscription contracts; and

 

·                  revenue recognition timingdifferences due to the provisions of U.S. GAAP.

 

Our annualized contract value for the RiskMetrics business and ISSbusiness as of September 30, 2009 and 2008, as well as the percentagegrowth is set forth, separately for each business, in the tables below.

 

**Year-Over-Year Comparison**

 
| ** **                                     | ** ** | **As of September 30,** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| RiskMetrics business annualized contract value |       | $                                      | 153,713    |   | $ | 159,603 |   |
| Percent decline                                |       | (3.7                                   | )%         | * * | * * |
| ISS business annualized contract value (1)     |       | $                                      | 122,929    |   | $ | 128,486 |   |
| Percent decline                                |       | (4.3                                   | )%         | * * | * * |

 

----

(1)  Innovest was acquired on March 2, 2009 with $5.2 millionof ACV, which is not included in ISS ACV as of September 30, 2008.  Innovest ACV does not include any contractswhere fees are based on the clients’ AUM, which at September 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 thenine months ended September 30, 2009 and 2008 is set forth separately foreach business in the table below.

 
| ** **                        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| RiskMetrics business renewal rate |       | 81.3                                                | %          | 88.9 | % |
| ISS business renewal rate         |       | 81.8                                                | %          | 88.0 | % |

 

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 lower renewal rates inCorporate 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 nine months ended September 30, 2009 and 2008 are set forth inthe table below. Our non-subscription services include AUM fees,implementation, compensation advisory services and similar services andoverages related to ISS’ Proxy Research and Voting business. Revenues fromimplementation and AUM are recognized as the related subscription service isprovided, some Compensation Advisory Services revenues are recognized over athree month period and other non-recurring revenues are recognized once theservice is provided. To the extent that clients’ actual usage of proxy votingservices or proxy 

 

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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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                             | ** ** | **2008**                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| RiskMetrics business percent non-recurring revenue |       | 1.4                                                  | %          | 1.6                                            | %          | 1.6 | % | 1.4 | % |
| ISS business percent non-recurring revenue         |       | 10.1                                                 | %          | 7.9                                            | %          | 13.7 | % | 11.6 | % |

 

***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, we expectthese expenses generally to increase at less than the rate of revenue growth.Overall, our goal is to keep the rate of growth of these operating expensesbelow the rate of growth of our revenues. However, in order to take advantageof growth opportunities, we may invest in our business in order to supportincreased revenue growth. This might result in variability in our operatingmargin 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 employee. Other costs associated with the employees, suchas 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 of Revenues*

 

Costs of revenues include costs related to production of proxy researchand voting, web hosting, data, account management, implementation and systemsoperations and bad debt expense. Costs in this area consist primarily of staffcompensation and related costs and payments to third party vendors, includingthird party web hosting and data providers.

 

*Research and Development*

 

Research and development expenses include costs related to productdevelopment, research technology, application design, technology infrastructureand analytics development. Costs in this area consist primarily of staffcompensation costs and related expenses and consultant expenses.

 

*Selling and Marketing*

 

Selling and marketing expenses consist of costs related to our salesforce, product management and marketing professionals. These costs includestaff compensation costs and related expenses, including commissions andgeneral marketing costs.

 

*General and Administrative*

 

General and administrative expenses consist of expenses for finance,legal, accounting, human resources and information technology personnel. Costsin this area primarily consist of staff compensation and related expenses,legal costs, insurance costs, accounting fees and other professional servicesfees.

 

*Depreciation and Amortization of Property andEquipment*

 

Depreciation and amortization of property and equipment includesdepreciation of software, computer and related equipment, furniture andfixtures and telecommunications equipment, which is recorded over therespective useful lives of the related assets. Depreciation also includes theamortization of leasehold improvements which are amortized over the shorter ofthe term of the lease or the assets’ useful life, and the amortization ofcapitalized software costs. Amortization expenses for leasehold improvementsand capitalized software development costs are included in depreciation andamortization of property and equipment in the statement of 

 

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operations.

 

*Amortization of Intangible Assets*

 

Amortization expense includes the amortization of finite lifeintangible assets such as acquired technology, customer relationships, tradenames, license agreements, proprietary process and non-compete agreements,which are amortized over their estimated useful lives.

 

***Adjusted EBITDA***

 

The Adjusted EBITDA data below sets forth supplementary informationthat we believe is useful for investors in evaluating our underlyingoperations:

 
| ** **      | ** ** | **Three months ended  September 30,** | ** ** | **% Growth for** | ** ** | **Nine months ended  September 30,** | ** ** | **% Growth for** | ** ** |
|-----------------|------------|------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|----------------------------|------------|
| ** **      | ** ** | **2009**                                             | ** ** | **2008**                   | ** ** | **three months**                          | ** ** | **2009**                   | ** ** | **2008** | ** ** | **nine months** | ** ** |
|            |       |                                                 |       |                       |       |                                           |       |                       |       |   |   |   |   |
| Adjusted EBITDA |       | $                                                    | 25,761     |                       | $          | 25,040                                         |       | 2.9                        | %          | $ | 82,250 |   | $ | 71,986 |   | 14.3 | % |
|                 |            |                                                      |            |                            |            |                                                |            |                            |            |  |  |  |  |  |  |  |  |

 

Adjusted EBITDA,as defined in our credit facilities, represents net income before interestexpense, interest income, other income (expense), income tax expense (benefit),depreciation and amortization of property and equipment, amortization ofintangible assets, non-cash stock-based compensation expense and extraordinaryor non-recurring charges or expenses. It is a material metric used by ourlenders in evaluating compliance with the maximum consolidated leverage ratiocovenant in our credit facilities. The maximum consolidated leverage ratiocovenant, as defined in our credit facilities, represents the ratio of totalindebtedness as compared to Adjusted EBITDA, and can not exceed a maximum ratiorange which declines from 8.50 to 3.00 over the life of the credit facilities.Non-compliance with this covenant could result in us being required 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 presentAdjusted EBITDA as a supplemental performance measure because we believe thatthis measure provides our board of directors, management and investors withadditional information to measure our performance, provide comparisons fromperiod to period by excluding potential differences caused by variations incapital structure (affecting interest expense), tax position (such as theimpact on periods of changes in effective tax rates or net operating losses),the age and book depreciation of fixed assets (affecting relative depreciationexpense), acquisitions (affecting amortization expense) and compensation plans(affecting stock-based compensation expense).

 

Adjusted EBITDA isnot a measurement of our financial performance under U.S. GAAP and shouldnot be considered as an alternative to net income, operating income or anyother performance measures derived in accordance with U.S. GAAP or as analternative to cash flow from operating activities as a measure of ourprofitability or liquidity.

 

We understandthat, although Adjusted EBITDA is frequently used by securities analysts,lenders and others in their evaluation of companies, Adjusted EBITDA haslimitations as an analytical tool, and you should not consider it in isolation,or as a substitute for an analysis of our results as reported underU.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 stock basedcompensation expense;

 

·                                          Adjusted EBITDA does not reflect changesin, or cash requirements for, our working capital needs;

 

·                                          Adjusted EBITDA does not reflect thesignificant interest expense, or the cash requirements necessary to serviceinterest or principal payments on our indebtedness;

 

·                                          Although depreciation and amortizationare non-cash charges, the assets being depreciated and amortized often willhave to be replaced in the future, and Adjusted EBITDA does not reflect anycash requirements for such replacements; and

 

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·                                          Other companies in our industry maycalculate Adjusted EBITDA differently than we do, limiting its usefulness as acomparative measure.

 

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

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

 

----

(a)         Represents employee severance costs, acquisitioncosts, and lease exit costs.

(b)         Represents lease exit costs.

 

**Critical Accounting Policies and Estimates**

 

Ourcondensed consolidated financial statements are prepared in conformity withU.S. GAAP. Our critical accounting policies, including the assumptions andjudgments underlying them, require the application of significant judgment inthe preparation of our financial statements, and as a result they are subjectto a greater degree of uncertainty. In applying these policies, we use ourjudgment to determine the appropriate assumptions to be used in calculating estimatesthat affect the reported amounts of assets, liabilities, revenues and expenses.Estimates and assumptions are based on historical experience and on variousother factors that are believed to be reasonable under the circumstances.Accordingly, actual results could differ from those estimates. Significantestimates and assumptions made by management include the deferral andrecognition of revenue, impairment of goodwill and intangible assets, the fairvalue of acquired assets and liabilities, stock-based compensation, gains orlosses on derivative instruments, accounting for income taxes and other mattersthat affect the condensed consolidated financial statements and relateddisclosures.  There have been no changes to our significant accounting policiessince December 31, 2008 except as discussed below in Effects of RecentlyIssued Accounting Pronouncements.

 

**Results of Operations**

 

*Segments and Periods Presented*

 

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

 

*Factors Affecting the Comparability of Results*

 

The results of Innovest are not included in our results of operationsuntil the acquisition date of March 2, 2009. Innovest supplements the ISSbusiness to support its Financial Research and Analysis (“FR&A”) productand services offerings.

 

OnJanuary 25, 2008, we completed an initial public offering of16,100,000 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. We received net proceeds of $193.9 million from the offering. We did notreceive any proceeds from the sale of the shares by the sellingstockholders.  As such, weighted average common sharesoutstanding for the nine months ended September 30, 2008 only includes the12,100,000 additional shares sold in the initial public offering for a portionof 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 $207 and $1,807 for the three and nine months ended September 30,2008, respectively.

 

InJanuary 2008, we utilized a portion of proceeds from the initial publicoffering to prepay the entire outstanding indebtedness under the second lienloan, in the amount of $125.0 million. As a result of the prepayment weincurred $5.0 million in 

 

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expensesduring the nine months ended September 30, 2008, which were comprised of a$1.25 million debt prepayment penalty fee, a $2.4 million write-off ofdebt issuance costs and a $1.4 million loss on an interest rate swapsettlement. Such costs have been included in interest, dividend, investment andother income (expense), net in the statement of operations for the nine monthsended September 30, 2008.

 

*Three months ended September 30, 2009 comparedto the three months ended September 30, 2008*

 

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

 

**Consolidated RiskMetrics Group, Inc.**

 
| ** **                                                       | ** ** | **Three months ended  September 30,**               | ** ** | **Increase (decrease)** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                       | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                       | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                         |       | $                                                                  | 73,980     |                         | $          | 75,554 |   | $ | (1,574 | ) | (2.1 | )% |
| Operating costs and expenses:                                    |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                                 |       | 22,002                                                             |       | 23,507                       |       | (1,505 | ) | (6.4 | )% |
| Research and development                                         |       | 11,302                                                             |       | 11,248                       |       | 54 |   | 0.5 | % |
| Selling and marketing                                            |       | 7,487                                                              |       | 9,045                        |       | (1,558 | ) | (17.2 | )% |
| General and administrative                                       |       | 9,751                                                              |       | 8,959                        |       | 792 |   | 8.8 | % |
| Depreciation and amortization of property and  equipment         |       | 2,189                                                              |       | 2,153                        |       | 36 |   | 1.7 | % |
| Amortization of intangible assets                                |       | 5,876                                                              |       | 5,398                        |       | 478 |   | 8.9 | % |
| Loss on disposal of property and equipment                       |       | 178                                                                |       | 57                           |       | 121 |   | * | % |
| Total operating costs and expenses(1)                            |       | 58,785                                                             |       | 60,367                       |       | (1,582 | ) | (2.6 | )% |
| Income from operations                                           |       | 15,195                                                             |       | 15,187                       |       | 8 |   | 0.1 | % |
| Interest, dividend, investment, and other income  (expense), net |       | (4,986                                                             | )          | (4,860                       | )          | (126 | ) | (2.6 | )% |
| Income before provision for income taxes                         |       | 10,209                                                             |       | 10,327                       |       | (118 | ) | (1.1 | )% |
| Provision for income taxes                                       |       | 2,426                                                              |       | 4,045                        |       | (1,619 | ) | (40.0 | )% |
| Net income                                                       |       | $                                                                  | 7,783      |                         | $          | 6,282 |   | $ | 1,501 |   | 23.9 | % |

 

----

*Exceeds 100%

 

(1) Includesstock-based compensation expense of $2,323 and $2,245 for the three monthsended September 30, 2009 and 2008, respectively.

 

**RiskMetrics Business**

 
| ** **                                               | ** ** | **Three months ended  September 30,**               | ** ** | **Increase (decrease)** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                 |       | $                                                                  | 39,487     |                         | $          | 40,846 |   | $ | (1,359 | ) | (3.3 | )% |
| Operating costs and expenses:                            |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                         |       | 8,114                                                              |       | 10,148                       |       | (2,034 | ) | (20.0 | )% |
| Research and development                                 |       | 7,613                                                              |       | 7,471                        |       | 142 |   | 1.9 | % |
| Selling and marketing                                    |       | 3,827                                                              |       | 4,738                        |       | (911 | ) | (19.2 | )% |
| General and administrative                               |       | 5,301                                                              |       | 5,081                        |       | 220 |   | 4.3 | % |
| Depreciation and amortization of property and  equipment |       | 1,163                                                              |       | 1,152                        |       | 11 |   | 1.0 | % |
| Amortization of intangible assets                        |       | 86                                                                 |       | —                       |       | 86 |   | * | % |
| Total operating costs and expenses(2)                    |       | 26,104                                                             |       | 28,590                       |       | (2,486 | ) | (8.7 | )% |
| Income from operations                                   |       | $                                                                  | 13,383     |                         | $          | 12,256 |   | $ | 1,127 |   | 9.2 | % |

 

----

*Exceeds 100%

 

(2) Includesstock-based compensation expense of $1,114 and $980 for the three months ended September 30,2009 and 2008, 

 

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respectively.

 

**ISS Business**

 
| ** **                                               | ** ** | **Three months ended  September 30,**               | ** ** | **Increase (decrease)** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                 |       | $                                                                  | 34,493     |                         | $          | 34,708 |   | $ | (215 | ) | (0.6 | )% |
| Operating costs and expenses:                            |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                         |       | 13,888                                                             |       | 13,359                       |       | 529 |   | 4.0 | % |
| Research and development                                 |       | 3,689                                                              |       | 3,777                        |       | (88 | ) | (2.3 | )% |
| Selling and marketing                                    |       | 3,660                                                              |       | 4,307                        |       | (647 | ) | (15.0 | )% |
| General and administrative                               |       | 4,450                                                              |       | 3,878                        |       | 572 |   | 14.7 | % |
| Depreciation and amortization of property and  equipment |       | 1,026                                                              |       | 1,001                        |       | 25 |   | 2.5 | % |
| Amortization of intangible assets                        |       | 5,790                                                              |       | 5,398                        |       | 392 |   | 7.3 | % |
| Loss on disposal of property and equipment               |       | 178                                                                |       | 57                           |       | 121 |   | * | % |
| Total operating costs and expenses(3)                    |       | 32,681                                                             |       | 31,777                       |       | 904 |   | 2.8 | % |
| Income from operations                                   |       | $                                                                  | 1,812      |                         | $          | 2,931 |   | $ | (1,119 | ) | (38.2 | )% |

 

----

*Exceeds 100%

 

(3) Includesstock-based compensation expense of $1,209 and $1,265 the three months ended September 30,2009 and 2008, respectively.

 

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

 

**Consolidated RiskMetrics Group, Inc.**

 
| ** **                            | ** ** | **Three months ended  September 30, 2009**     | ** ** | **Three months ended  September 30, 2008** | ** ** | ** **  | ** ** | ** **           | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of  Total**                                           | ** ** | ** **  | ** ** | **% of  Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                                    | ** ** | **Revenue** | ** ** | **Revenue**          | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 43,264     |                                                           | 58.5       | %           | $          | 45,648               |       | 60.4 | % | (2,384 | ) | (5.2 | )% |
| Europe, Middle East and Africa (EMEA) |       | 26,215                                                             |       | 35.4                                                           | %          | 25,615      |       | 33.9                 | %          | 600 |   | 2.3 | % |
| Asia                                  |       | 4,501                                                              |       | 6.1                                                            | %          | 4,291       |       | 5.7                  | %          | 210 |   | 4.9 | % |
| Total                                 |       | $                                                                  | 73,980     |                                                           | 100.0      | %           | $          | 75,554               |       | 100.0 | % | $ | (1,574 | ) | (2.1 | )% |
|                                       |            |                                                                    |            |                                                                |            |             |            |                      |            |  |  |  |  |  |  |  |

 

**RiskMetrics Business**

 
| ** **                            | ** ** | **Three months ended  September 30, 2009**     | ** ** | **Three months ended  September 30, 2008** | ** ** | ** **  | ** ** | ** **           | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of  Total**                                           | ** ** | ** **  | ** ** | **% of  Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                                    | ** ** | **Revenue** | ** ** | **Revenue**          | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 17,643     |                                                           | 44.7       | %           | $          | 18,776               |       | 46.0 | % | (1,133 | ) | (6.0 | )% |
| Europe, Middle East and Africa (EMEA) |       | 18,986                                                             |       | 48.1                                                           | %          | 19,309      |       | 47.3                 | %          | (323 | ) | (1.7 | )% |
| Asia                                  |       | 2,858                                                              |       | 7.2                                                            | %          | 2,761       |       | 6.7                  | %          | 97 |   | 3.5 | % |
| Total                                 |       | $                                                                  | 39,487     |                                                           | 100.0      | %           | $          | 40,846               |       | 100.0 | % | $ | (1,359 | ) | (3.3 | )% |
|                                       |            |                                                                    |            |                                                                |            |             |            |                      |            |  |  |  |  |  |  |  |

 

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**ISS Business**

 
| ** **                            | ** ** | **Three months ended  September 30, 2009**     | ** ** | **Three months ended  September 30, 2008** | ** ** | ** **  | ** ** | ** **               | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------|------------|--------------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of Total**                                       | ** ** | ** **  | ** ** | **% of Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                                    | ** ** | **Revenue** | ** ** | **Revenue**              | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 25,621     |                                                           | 74.3       | %           | $          | 26,872                   |       | 77.4 | % | $ | (1,251 | ) | (4.7 | )% |
| Europe, Middle East and Africa (EMEA) |       | 7,229                                                              |       | 21.0                                                           | %          | 6,306       |       | 18.2                     | %          | 923 |   | 14.6 | % |
| Asia                                  |       | 1,643                                                              |       | 4.7                                                            | %          | 1,530       |       | 4.4                      | %          | 113 |   | 7.4 | % |
| Total                                 |       | $                                                                  | 34,493     |                                                           | 100.0      | %           | $          | 34,708                   |       | 100.0 | % | $ | (215 | ) | (0.6 | )% |

 

Set forth below is a discussion of our results for the three monthsended September 30, 2009 compared to the three months ended September 30,2008.

 

*Revenues.* Consolidated revenues for the threemonths ended September 30, 2009 decreased $1.6 million, or 2.1%, to $74.0million from $75.6 million. The revenue decline was driven by a 3.3% and 0.6% decrease in the RiskMetricsand ISS business, respectively.  ISS revenues for three months ended September 30,2009 includes $1.6 million of revenue from Innovest, which was acquired in March 2009.

 

RiskMetrics revenues for the three months ended September 30, 2009decreased $1.4 million, or 3.3%, to $39.5 million from $40.8 million.  The $1.4 million decrease in revenues wasprimarily due to lower new sales, negative currency impacts and increasednon-renewals from alternative investment customers.

 

ISS revenues for the threemonths ended September 30, 2009 decreased by $0.2 million, or 0.6%, to$34.5 million from $34.7 million. On aproduct level, total Governance Services (mainly Proxy Research and VotingServices) revenues of $22.7 million for the three months ended September 30,2009 decreased 4.1% from the prior year primarily due to a decrease in proxyresearch and voting revenues partially offset by an increase in SCASrevenues.  FR&A revenues of $11.8 million for the three months ended September 30,2009 increased 6.8%, or $0.7 million, compared to prior year.  Theincrease in FR&A revenue was primarily due to the Innovest acquisitionpartially offset by a decline in CFRA revenue due to lower renewal rates.

 

*Operatingcosts and expenses.*  Consolidated operating expenses for the threemonths ended September 30, 2009 decreased 2.6% to $58.8 million from $60.4million. As a percentage of revenues, operating expenses decreased to 79.5% from79.9%.   The $1.6 million decline in operating expenses was primarilydue to the following:

 

·                  $0.7 million decrease in travel andentertainment due to lower travel and increased cost control,

·                  $2.6 million increase in foreign currencyexchange gains. Changes in foreign exchange rates (principally thestrengthening of the US dollar versus the British Pound and Euro) in 2009compared to 2008 had a favorable impact on reported operating expenses, and

·                  $0.5 million decline in professionalfees, primarily due to lower legal fees and reductions in Sarbanes-Oxley Section 404compliance costs.

 

The above declines werepartially offset by:

 

·                  $0.4 million increase in data costs tofulfill client services,

·                  $0.4 million increase in compensation dueto increased salaries and benefits partially offset by a decline in commissionsas a result of a decline in new sales,

·                  $0.5 million increase in amortizationexpense due to intangibles acquired in connection with the Innovestacquisition, and

·                  $0.6 million increase in technology costs due to increased web hostingcosts.

 

RiskMetrics operating expenses for the three months ended September 30,2009 decreased 8.7% to $26.1 million from $28.6 million in the prior year. As apercentage of revenues, RiskMetrics operating expenses decreased to 66.1% from70.0%.

 

ISS operating expenses for the three months ended September 30,2009 increased 2.8% to $32.7 million from $31.8 million in the prior year.  As a percentage of revenues, ISS operatingexpenses increased to 94.7% from 91.6%.

 

*Cost of revenues.*  Consolidated cost of revenues for the threemonths ended September 30, 2009 decreased to $22.0 million, 

 

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or6.4%, from $23.5 million. The decrease in cost of revenues resultedprimarily from increased foreign currency transaction gains of $2.9 million dueto the weakening Euro and British pound partially offset by increased datacosts of $0.3 million and increased compensation costs of $1.0 million.  As a percentage of revenues, cost of revenuesdecreased to 29.7% from 31.1%.

 

RiskMetrics cost of revenues for the three months ended September 30,2009 decreased to $8.1 million, or 20.0%, from $10.1 million due to a $2.4million increase in foreign currency transaction gains partially offset byincreased data and web hosting costs.  Asa percentage of revenues, RiskMetrics cost of revenues decreased to 20.5% from24.8%.

 

ISS cost of revenues for thethree months ended September 30, 2009 increased to $13.9 million, or 4.0%from $13.4 million. The increase was primarily due to increased compensationcosts, including stock-based compensation. As a percentage of revenues, ISS cost of revenues increased to 40.3%from 38.5%.

 

*Research and development expenses.*  Consolidated research and developmentexpenses for the three months ended September 30, 2009 increased to $11.3million, or 0.5%, from $11.2 million primarily due to increased compensationand consulting costs. As a percentage of revenues, research and developmentexpenses increased to 15.2% from 14.9%.

 

*Selling and marketing expenses.*  Consolidated selling and marketing expensesfor the three months ended September 30, 2009 decreased to $7.5 million,or 17.2%, from $9.0 million.  The $1.5million decrease was primarily due to a $0.8 million decline in compensationcosts, including commissions as a result of reduced sales, $0.4 milliondecrease in marketing expenses and $0.5 million reduction in travel andentertainment costs.  As a percentage ofrevenues, selling and marketing expenses decreased to 10.1% from 12.0%.

 

RiskMetrics selling and marketing expenses for the three months ended September 30,2009 decreased to $3.8 million, or 19.2%, from $4.7 million. The decreasewas primarily due to a $1.0 million decline in compensation costs as a resultof a decline in commissions due to lower new sales.

 

ISS selling and marketingexpenses for the three months ended September 30, 2009 decreased to $3.7million, or 15.0%, from $4.3 million. The decrease was primarily due to a $0.3million decline in marketing expenses as well as a $0.4 million reduction intravel and entertainment expenses.

 

*General and administrative expenses*.  Consolidated general and administrativeexpenses for the three months ended September 30, 2009 increased to $9.8 million,or 8.8%, from $9.0 million primarily due to increased compensation costs,including stock-based compensation, and telephone and communications costspartially offset by a decline in professional fees and travel and entertainmentexpenses.  As a percentage of revenues,general and administrative expenses increased to 13.2% from 11.9%.

 

RiskMetrics general and administrative expenses for the three monthsended September 30, 2009 increased to $5.3 million, or 4.3%, from $5.1million. The increase was primarily due to a $0.2 million increase incompensation expenses, partially offset by reduced Sarbanes-Oxley Section 404compliance costs.

 

ISS general and administrativeexpenses for the three months ended September 30, 2009 increased to $4.5million, or 14.8%, from $3.9 million. The $0.6 million increase was primarilydue to increased compensation costs and occupancy costs partially offset bylower professional fees.

 

*Depreciation and amortization of property andequipment.*  Depreciationand amortization of property and equipment for the three months ended September 30,2009 of $2.2 million was consistent with prior year.

 

*Amortization of intangible assets.*  Amortization of intangible assets for threemonths ended September 30, 2009 increased $0.5 million to $5.9 millionfrom $5.4 million primarily due to amortization of intangibles acquired inconnection with the Innovest acquisition.

 

*Interest, dividend and investment income (expense),net.*  Net interest, dividend andinvestment expense for the three months ended September 30, 2009 increasedto $5.0 million from $4.9 million due to reduced interest yields on cashbalances 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 23.8% for the three months ended September 30,2009 as compared to an effective rate of 39.1% for the comparable prior yearperiod.  The effective rate declinedprimarily due to reversals of previously accrued income tax contingencies as aresult of statute of limitations expirations, as well as increased research anddevelopment tax credits and a decline in non-deductible stock-basedcompensation expense. In addition, effective tax rates are subject to changebased on the taxable income in all the jurisdictions in which we do business.

 

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*Nine months ended September 30, 2009 compared tothe Nine months ended September 30, 2008*

 

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

 

**Consolidated RiskMetrics Group, Inc.**

 
| ** **                                                      | ** ** | **Nine months ended  September 30,**                | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                      | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                      | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                        |       | $                                                                  | 226,889    |                         | $          | 220,900 |   | $ | 5,989 |   | 2.7 | % |
| Operating costs and expenses:                                   |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                                |       | 68,259                                                             |       | 69,387                       |       | (1,128 | ) | (1.6 | )% |
| Research and development                                        |       | 32,610                                                             |       | 32,114                       |       | 496 |   | 1.5 | % |
| Selling and marketing                                           |       | 22,055                                                             |       | 27,531                       |       | (5,476 | ) | (19.9 | )% |
| General and administrative                                      |       | 29,614                                                             |       | 27,702                       |       | 1,912 |   | 6.9 | % |
| Depreciation and amortization of property and  equipment        |       | 6,253                                                              |       | 6,433                        |       | (180 | ) | (2.8 | )% |
| Amortization of intangible assets                               |       | 17,351                                                             |       | 16,310                       |       | 1,041 |   | 6.4 | % |
| Loss on disposal of property and equipment                      |       | 305                                                                |       | 83                           |       | 222 |   | * | % |
| Total operating costs and expenses(1)                           |       | 176,447                                                            |       | 179,560                      |       | (3,113 | ) | (1.7 | )% |
| Income from operations                                          |       | 50,442                                                             |       | 41,340                       |       | 9,102 |   | 22.0 | % |
| Interest, dividend, investment and other income  (expense), net |       | (15,252                                                            | )          | (21,337                      | )          | 6,085 |   | 28.5 | % |
| Income before provision for income taxes                        |       | 35,190                                                             |       | 20,003                       |       | 15,187 |   | 75.9 | % |
| Provision for income taxes                                      |       | 11,669                                                             |       | 7,828                        |       | 3,841 |   | 49.1 | % |
| Net income                                                      |       | $                                                                  | 23,521     |                         | $          | 12,175 |   | $ | 11,346 |   | 93.2 | % |

 

----

*Exceeds 100%

 

(1) Includesstock-based compensation expense of $6,406 and $7,622 for the nine months endedSeptember 30, 2009 and 2008, respectively.

 

**RiskMetrics Business**

 
| ** **                                               | ** ** | **Nine months ended  September 30,**                | ** ** | **Increase (decrease)** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                 |       | $                                                                  | 119,102    |                         | $          | 114,110 |   | $ | 4,992 |   | 4.4 | % |
| Operating costs and expenses:                            |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                         |       | 23,955                                                             |       | 26,928                       |       | (2,973 | ) | (11.0 | )% |
| Research and development                                 |       | 22,449                                                             |       | 21,627                       |       | 822 |   | 3.8 | % |
| Selling and marketing                                    |       | 11,261                                                             |       | 14,091                       |       | (2,830 | ) | (20.1 | )% |
| General and administrative                               |       | 15,254                                                             |       | 14,321                       |       | 933 |   | 6.5 | % |
| Depreciation and amortization of property and  equipment |       | 3,353                                                              |       | 3,496                        |       | (143 | ) | (4.1 | )% |
| Amortization of intangible assets                        |       | 244                                                                |       | —                       |       | 244 |   | * | % |
| Loss on disposal of property and equipment               |       | 127                                                                |       | —                       |       | 127 |   | * | % |
| Total operating costs and expenses(2)                    |       | 76,643                                                             |       | 80,463                       |       | (3,820 | ) | (4.7 | )% |
| Income from operations                                   |       | $                                                                  | 42,459     |                         | $          | 33,647 |   | $ | 8,812 |   | 26.2 | % |

 

----

*Exceeds 100%

 

(2) Includesstock-based compensation expense of $2,932 and $3,106 for the nine months endedSeptember 30, 2009 and 2008, respectively.

 

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**ISS Business**

 
| ** **                                               | ** ** | **Nine months ended  September 30,**                | ** ** | **Increase (decrease)** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **2009**                                                           | ** ** | **2008**                     | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                               | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Revenues                                                 |       | $                                                                  | 107,787    |                         | $          | 106,790 |   | $ | 997 |   | 0.9 | % |
| Operating costs and expenses:                            |       |                                                               |       |                         |       |   |   |   |   |
| Cost of revenues                                         |       | 44,304                                                             |       | 42,459                       |       | 1,845 |   | 4.3 | % |
| Research and development                                 |       | 10,161                                                             |       | 10,487                       |       | (326 | ) | (3.1 | )% |
| Selling and marketing                                    |       | 10,794                                                             |       | 13,440                       |       | (2,646 | ) | (19.7 | )% |
| General and administrative                               |       | 14,360                                                             |       | 13,381                       |       | 979 |   | 7.3 | % |
| Depreciation and amortization of property and  equipment |       | 2,900                                                              |       | 2,937                        |       | (37 | ) | (1.3 | )% |
| Amortization of intangible assets                        |       | 17,107                                                             |       | 16,310                       |       | 797 |   | 4.9 | % |
| Loss on disposal of property and equipment               |       | 178                                                                |       | 83                           |       | 95 |   | * | % |
| Total operating costs and expenses(3)                    |       | 99,804                                                             |       | 99,097                       |       | 707 |   | 0.7 | % |
| Income from operations                                   |       | $                                                                  | 7,983      |                         | $          | 7,693 |   | $ | 290 |   | 3.8 | % |

 

----

*Exceeds 100%

 

(3) Includesstock-based compensation expense of $3,474 and $4,516 the nine months ended September 30,2009 and 2008, respectively.

 

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

 

**Consolidated RiskMetrics Group, Inc.**

 
| ** **                            | ** ** | **Nine months ended  September 30, 2009**      | ** ** | **Nine months ended  September 30, 2008** | ** ** | ** **  | ** ** | ** **           | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of  Total**                                          | ** ** | ** **  | ** ** | **% of  Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                                   | ** ** | **Revenue** | ** ** | **Revenue**          | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 134,854    |                                                          | 59.4       | %           | $          | 135,887              |       | 61.5 | % | $ | (1,033 | ) | (0.8 | )% |
| Europe, Middle East and Africa (EMEA) |       | 78,835                                                             |       | 34.7                                                          | %          | 72,179      |       | 32.7                 | %          | 6,656 |   | 9.2 | % |
| Asia                                  |       | 13,200                                                             |       | 5.9                                                           | %          | 12,834      |       | 5.8                  | %          | 366 |   | 2.9 | % |
| Total                                 |       | $                                                                  | 226,889    |                                                          | 100.0      | %           | $          | 220,900              |       | 100.0 | % | $ | 5,989 |   | 2.7 | % |

 

**RiskMetrics Business**

 
| ** **                            | ** ** | **Nine months ended  September 30, 2009**      | ** ** | **Nine months ended  September 30, 2008** | ** ** | ** **  | ** ** | ** **           | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------|------------|----------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of  Total**                                          | ** ** | ** **  | ** ** | **% of  Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                                   | ** ** | **Revenue** | ** ** | **Revenue**          | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 53,442     |                                                          | 44.9       | %           | $          | 52,203               |       | 45.7 | % | $ | 1,239 |   | 2.4 | % |
| Europe, Middle East and Africa (EMEA) |       | 57,417                                                             |       | 48.2                                                          | %          | 53,800      |       | 47.1                 | %          | 3,617 |   | 6.7 | % |
| Asia                                  |       | 8,243                                                              |       | 6.9                                                           | %          | 8,107       |       | 7.2                  | %          | 136 |   | 1.7 | % |
| Total                                 |       | $                                                                  | 119,102    |                                                          | 100.0      | %           | $          | 114,110              |       | 100.0 | % | $ | 4,992 |   | 4.4 | % |

 

**ISS Business**

 
| ** **                            | ** ** | **Nine months ended  September 30, 2009**      | ** ** | **Nine months ended  September 30, 2008** | ** ** | ** **  | ** ** | ** **               | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------|------------|--------------------------|------------|
| ** **                            | ** ** | ** **                                                         | ** ** | **% of Total**                                      | ** ** | ** **  | ** ** | **% of Total** | ** ** | **Increase (decrease)** | ** ** |
| **Region**                            | ** ** | **Revenue**                                                        | ** ** | **Revenue**                                                   | ** ** | **Revenue** | ** ** | **Revenue**              | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **(Amounts in thousands, except percentages)** | ** ** |
| Americas                              |       | $                                                                  | 81,412     |                                                          | 75.5       | %           | $          | 83,684                   |       | 78.4 | % | $ | (2,272 | ) | (2.7 | )% |
| Europe, Middle East and Africa (EMEA) |       | 21,418                                                             |       | 19.9                                                          | %          | 18,379      |       | 17.2                     | %          | 3,039 |   | 16.5 | % |
| Asia                                  |       | 4,957                                                              |       | 4.6                                                           | %          | 4,727       |       | 4.4                      | %          | 230 |   | 4.9 | % |
| Total                                 |       | $                                                                  | 107,787    |                                                          | 100.0      | %           | $          | 106,790                  |       | 100.0 | % | $ | 997 |   | 0.9 | % |

 

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Set forth below is a discussion of our results forthe nine months ended September 30, 2009 compared to the nine months endedSeptember 30, 2008.

 

*Revenues.* Consolidated revenues forthe nine months ended September 30, 2009 increased by $6.0 million, or2.7%, to $226.9 million from $220.9 million. Revenue growth was driven by a 4.4% increase in the RiskMetrics businessand 0.9% increasein the ISS business.  ISS revenues for nine months ended September 30,2009 includes $3.6 million of revenue from Innovest, which was acquired in March 2009.

 

RiskMetrics revenues for the nine months ended September 30,2009 increased $5.0 million, or 4.4%, to $119.1 million from $114.1million.  The $5.0 million increase inrevenues was primarily due to a 3.3% increase in revenues from our Market Riskproducts, primarily from 2008 sales of RiskManager to asset managers and hedgefunds as they increased their outsourcing of risk reporting services partiallyoffset by increased hedge fund non-renewals and negative currency effects.

 

ISS revenues for the nine months ended September 30,2009 increased $1.0 million, or 0.9%, to $107.8 million from $106.8 million. Ona product level, total Governance Services (mainly Proxy Research and VotingServices) revenues of $68.4 million for the nine months ended September 30,2009 decreased by 1.5% compared to the period in 2008.  FR&A revenuesof $39.4 million for the nine months ended September 30, 2009 increased5.4%, or $2.0 million, over the comparable period in 2008.  The increasein FR&A revenue was primarily due to the Innovest acquisition, increasedES&G and Corporate Advisory Service revenue partially offset by a declinein CFRA revenue.

 

Operating costs and expenses.  Consolidating operating expenses for the ninemonths ended September 30, 2009 decreased 1.7% to $176.4 million from$179.6 million.  As a percentage ofrevenues, operating expenses decreased to 77.8% from 81.3% due to increasedmonitoring of costs, including headcount, while gaining economies of scale fromour increased revenue.   The $3.1 million decline in operatingexpenses was primarily due to the following:

 

·                  $1.2 million decline in stock basedcompensation primarily due to the Company’s IPO stock option grant in January 2008,

·                  $2.4 million decrease in travel andentertainment due to lower travel,

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

·                  $0.9 million decline in marketingexpenses,

·                  $1.4 million decline in professional feesdue to lower Sarbanes-Oxley Section 404 compliance, accounting and legalfees, and

·                  $2.9 million increase in foreign exchange gainsdue to favorable changes in foreign exchange rates (principally thestrengthening of the US dollar) in 2009 compared to 2008.

 

The above declines werepartially offset by:

 

·                  $1.5 million in non-recurring expensesduring the nine months ended September 30, 2009 which consisted of $0.8million in lease exit costs, $0.5 million of employee severance expenses and$0.2 million of Innovest acquisition costs,

·                  $2.1 million increase in technology costsdue to increased research and development consulting, and higher web hostingand maintenance costs,

·                  $1.7 million increase in compensation dueto increased salaries partially offset by a decrease in commissions as a resultof a decline in new sales, and

·                  $1.0 million increase in amortizationexpenses due to intangibles acquired in connection with the Innovestacquisition.

 

RiskMetrics operating expenses for the nine monthsended September 30, 2009 decreased 4.7% to $76.6 million from $80.5million compared to prior year. The $3.8 million decrease was primarily due toa $3.1 million increase in foreign currency gains, a $1.0 million decrease intravel costs, $0.2 million decline in stock-based compensation expense and $0.5million decline in professional fees partially offset by increased technologycosts of $1.2 million.  As a percentageof revenues, operating expenses decreased to 64.4% from 70.5% due to revenuegrowth of 4.4% and operating expenses decline of 4.7% as compared to the prioryear.

 

ISS operating expenses for the nine months ended September 30,2009 increased 0.7% to $99.8 million from $99.1 million.  The $0.7 million increase in operating expenseswas primarily due to an increase in compensation costs of $1.7 million, a $1.5million increase in one-time costs and $0.9 million increase in technologycosts, partially offset by a $1.0 million decrease in stock based compensation,a $1.5 million decrease in travel and $0.9 million decline in professionalfees.  As a percentage of revenues,operating expenses decreased to 92.6% from 92.8%.

 

*Cost of revenues.*  Consolidated cost of revenues for the ninemonths ended September 30, 2009 decreased to $68.3 million, or 1.6% from$69.4 million. The $1.1 million decrease in cost of revenues resultedprimarily from increased foreign currency 

 

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transactiongains of $2.9 million, a $0.6 million decline in stock-based compensationexpense and $0.5 million decline in travel and entertainment expenses,partially offset by an increase of $3.3 million in compensation costs.  As a percentage of revenues, cost of revenuesdecreased to 30.1% from 31.4%.

 

RiskMetrics cost of revenues for the nine monthsended September 30, 2009 of $24.0 million decreased $2.9million, or 11.0%,compared to $26.9 million of the prior year due to increased foreign currencytransaction gains of $3.0 million, a decrease of $0.4 in travel andentertainment costs and $0.5 million decline in compensation costs, partiallyoffset by a $1.1 million increase in telephone and communications costs.  As a percentage of revenues, RiskMetrics costof revenues decreased to 20.1% from 23.6%.

 

ISS cost ofrevenues for the nine months ended September 30, 2009 increased to $44.3million, or 4.3%, from $42.5 million. The $1.8 million increase was primarilydue to increased compensation costs partially offset by a decline instock-based compensation.  As apercentage of revenues, ISS cost of revenues increased to 41.1% from 39.8%.

 

*Research and development expenses.*  Consolidated research and developmentexpenses for the nine months ended September 30, 2009 increased to $32.6million, or 1.5%, from $32.1 million due to increased compensation costs of$1.3 million partially offset by decreased stock-based compensation and traveland entertainment costs.   As a percentageof revenues, research and development expenses decreased to 14.4% from 14.5%.

 

RiskMetrics research and development expenses forthe nine months ended September 30, 2009 increased to $22.4 million, or3.8%, from $21.6 million. The increase was primarily due to increasedcompensation costs of $1.9 million, partially offset by a decline in travel andentertainment costs.

 

ISS research anddevelopment expenses for the nine months ended September 30, 2009decreased to $10.2 million from $10.5 million primarily due to a decline incompensation costs partially offset by increased stock-based compensationcosts.

 

*Selling and marketing expenses.*  Consolidated selling and marketing expensesfor the nine months ended September 30, 2009 decreased to $22.1 million,or 19.9%, from $27.5 million.  The $5.5million decrease is due to a $3.5 million decline in compensation costs, a $0.9million decrease in marketing expenses and $1.0 million decline in travel andentertainment costs.  As a percentage ofrevenues, selling and marketing expenses decreased to 9.7% from 12.5%.

 

RiskMetrics selling and marketing expenses for thenine months ended September 30, 2009 decreased to $11.3 million, or 20.1%,from $14.1 million. The decrease was primarily due to a decrease incompensation costs of $2.7 million as a result a decline in commissions due tolower new sales.

 

ISS selling andmarketing expenses for the nine months ended September 30, 2009 decreasedto $10.8 million, or 19.7%, from $13.4 million. The decrease was primarily due toa $0.8 million decline in compensation costs due to lower commissions, $1.5million decline in marketing expenses and a reduction in travel expenses.

 

*General and administrativeexpenses*. Consolidated general and administrative expenses for the nine monthsended September 30, 2009 increased to $29.6 million, or 6.9%, from $27.7million. The $1.9 million increase in general and administrative costs isprimarily due to increased compensation costs of $0.5 million and non-recurringcosts of $1.5 million incurred during the nine months ended September 30,2009 which are comprised of $0.8 million in lease exit costs, $0.5 million inemployee severance and $0.2 million in Innovest acquisition costs partiallyoffset by a decline in professional fees. As a percentage of revenues, general and administrative expensesincreased to 13.1% from 12.5%.

 

RiskMetrics general and administrative expenses forthe nine months ended September 30, 2009 increased to $15.3 million, or6.5%, from $14.3 million. The increase was primarily due to increasedcompensation, telephone and communication costs.

 

ISS general andadministrative expenses for the nine months ended September 30, 2009increased to $14.4 million, or 7.3%, from $13.4 million. The increase wasprimarily due to $1.5 million of non-recurring costs discussed above, partiallyoffset by a decline in professional fees.

 

*Depreciation and amortization ofproperty and equipment.* Depreciation and amortization of property and equipment for the ninemonths ended September 30, 2009 decreased to $6.3 million from $6.4million.

 

*Amortization of intangible assets.*  Amortization of intangible assets for ninemonths ended September 30, 2009 increased to $17.4 million from $16.3million primarily due to intangibles acquired in connection with the Innovestacquisition.

 

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*Interest, dividend,investment, andother income (expense), net.*  Net interest, dividend and investment expensefor the nine months ended September 30, 2009 decreased to $15.3 millionfrom $21.3 million.  This $6.0million decrease in expense was due to decreased interest expense (net ofamortization) as a result of reduced debt borrowings and one-time chargesincurred 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 nine months ended September 30, 2008, which werecomprised of a $1.2 million debt prepayment penalty fee, a $2.4 millionwrite-off of debt issuance costs and a $1.4 million loss on an interest rateswap settlement.

 

*Provision for income taxes. *The provision for incometaxes represents an effective tax rate of 33.2% for the nine months ended September 30,2009 as compared to an effective rate of 39.1% for the comparable prior yearperiod.  The effective rate declinedprimarily due to reversals of previously accrued income tax contingencies as aresult of statute of limitations expirations, as well as increased research anddevelopment tax credits and a decline in non-deductible stock-based compensationexpense.  In addition, effective taxrates are subject to change based on the taxable income in all thejurisdictions in which we do business.

 

**Liquidity and Capital Resources**

 

At September 30, 2009, we had cash and cashequivalents of $198.6 million.  Webelieve our existing cash and cash equivalents, our cash flow from operatingactivities and borrowing capacity under our existing credit facilities will besufficient to meet our anticipated cash needs for at least the next12 months, during which time we expect to make approximately$8.0 million to $9.0 million of capital expenditures. Our futureworking capital requirements will depend on many factors, including our revenuegrowth, debt service, future acquisitions of businesses and investments in ourown business. To the extent our liquidity sources are insufficient to fund ourfuture activities we may need to raise additional funding through a public orprivate equity or debt offering. No assurances can be given that additionalfinancing will be available in the future or that if available, such financingwill be on favorable terms.

 

*Cash Flows*

 

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

 

Cash flows from operating activities decreased by$18.3 million in the nine months ended September 30, 2009 compared to 2008due primarily to an increase in income taxes paid in 2009 as the Companyutilized substantially all available net operating losses in 2008.   Operatingactivities for the nine months ended September 30, 2009 provided cash of$40.5 million primarily reflectingnet income of $23.5 million, plus $23.6 million in depreciation andamortization (excluding amortization of debt issuance costs), $6.4 million instock based compensation partially offset by a $6.5 million decline in accruedexpenses due to the payment of bonuses.  Cash provided by operating activities was $58.8 million for the ninemonths ended September 30, 2008 primarily reflecting net income of $12.2million plus stock based compensation of $7.6 million, depreciation andamortization (excluding amortization of debt issuance costs) of $22.7 million,a $11.3 million increase in income and deferred taxes, a $7.2 million increasein accrued expenses and a $1.8 million net increase in accounts receivable anddeferred revenue.

 

Investing activities for the nine months ended September 30,2009 used cash of $20.5 million primarily due to the acquisition of Innovestfor $14.8 million and $5.5 million for capital expenditures.  Investing activities for the nine monthsended September 30, 2008 used cash of $6.7 million, primarily due tocapital expenditures of $5.8 million and a $1.0 million payment for anintangible asset.

 

Financing activities for the nine months ended September 30,2009 provided cash of $6.1 million primarily from the exercise of stock optionsand related tax benefits of $7.6 million partially offset by $1.5 million indebt payments. Financing activities for the nine months ended September 30,2008 provided cash of $74.4 million as a result of $197.4 million raised from ourinitial public offering and $5.7 million from stock option proceeds, partiallyoffset by $132.1 million in debt payments and $1.6 million from equity offeringexpenses.

 

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*Long Term Debt*

 

The Company’s debt is comprised of two term loanfacilities and a $25.0 million revolving credit facility.  As of September 30, 2009, $289.1 millionof debt remains outstanding under the first lien loan and no indebtedness remainsoutstanding under the second lien term loan or revolving credit facility.  The maturity date of the first lien term loanis December 2013. The next principal debt payment of $0.7 million is dueon December 31, 2009.  The terms ofthe indebtedness include various covenant compliance requirements, includingmaintaining certain Adjusted EBITDA earning levels, as defined in our creditfacilities. The Company has pledged substantially all of its assets ascollateral against the debt. Amounts paid under the term loans may not bere-borrowed.

 

In February 2007, we entered into twointerest-rate swap agreements to reduce interest rate risks and to manageinterest expense. By entering into these agreements, we changed thefixed/variable interest-rate mix of our debt portfolio. As of September 30,2009, the interest rate swaps had notional amounts totaling $251.9 million anda fair value liability totaling $17.3 million. The agreements effectively convert our floating-rate debt intofixed-rate debt. This reduces our risk of incurring higher interest costs inperiods of rising interest rates and increases our risk of paying higherinterest costs in periods of decreasing interest rates. Our interest-rate swapagreements hedge a significant portion of the interest rate risk exposure underour indebtedness. The interest rate swap agreements increased our weightedaverage effective interest rate on the first lien term loan facility to 6.8%during the nine months ended September 30, 2009.

 

As of September 30, 2009, we were in compliancewith our credit agreement and we are not aware of any future events ortransactions that will impact such compliance.

 

*Commitments*

 

In addition to the indebtedness discussed above, weenter into routine operating lease obligations for our facilities and purchaseobligations to operate our business. Our contractual commitments, includingthose related to our indebtedness, were comprised of the following as of September 30,2009:

 
| ** **                            | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligation**       | ** ** | **Total**                                 | ** ** | **Within 1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **Thereafter** | ** ** |
| Debt, including estimated interest    |       | $                                         | 385,427    |   | $ | 22,627 |   | $ | 44,649 |   | $ | 318,151 |   | $ | — |   |
| Interest rate swaps                   |       | 17,319                                    |       | 10,466 |   | 6,853 |   | — |   | — |   |
| Operating leases                      |       | 18,341                                    |       | 6,151 |   | 10,444 |   | 1,746 |   | — |   |
| Data and web hosting agreements       |       | 14,629                                    |       | 10,943 |   | 3,550 |   | 136 |   | — |   |
| Deferred purchase price obligation(1) |       | 954                                       |       | 221 |   | 477 |   | 256 |   | — |   |
| Total (2)                             |       | $                                         | 436,670    |   | $ | 50,408 |   | $ | 65,973 |   | $ | 320,289 |   | $ | — |   |

 

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(1)                                  Obligationrelates to prior acquisitions made by ISS.

(2)                                  Does notinclude $1.5 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 sheetarrangements, transactions, obligations or other relationships withunconsolidated entities that would be expected to have a material current or futureimpact upon our financial condition or results of operations.

 

*Impact of Inflation*

 

Our business may be significantly or adverselyaffected by inflation. Due to the high degree of competition in themarketplace, inflation rate increases might lead to an erosion of our profitmargins.

 

*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 we 

 

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believe are consistentwith (and not preferential to) those provided to our other clients. Werecognized $0.3 million in revenue from the Duff Capital Advisors contract forthe nine months ended September 30, 2009.

 

**Effects of Recently Issued Accounting Pronouncements**

 

*FASB Accounting Standards Codification*

 

In June 2009, the Financial AccountingStandards Board (“FASB”) issued new guidance concerning the organization ofauthoritative guidance under U.S. GAAP. This new guidance created the FASBAccounting Standards Codification (“Codification”). The Codification has becomethe source of authoritative U.S. GAAP recognized by the FASB to be applied bynongovernmental entities. The Codification became effective for the Company inthe quarter ended September 30, 2009. As the Codification is not intendedto change or alter existing U.S. GAAP, it did not have any impact on theCompany’s condensed consolidated financial statements. On its effective date,the Codification superseded all then-existing non-SEC accounting and reportingstandards.

 

*Accounting for Business Combinations*

 

On December 4, 2007, the FASB amended itsauthoritative guidance for business combinations and noncontrolling interestsin consolidated financial statements. Effective January 1, 2009, theCompany adopted the amended guidance for business combinations andnoncontrolling interests.  These newstandards significantly change the financial accounting and reporting ofbusiness combination transactions and noncontrolling interests in consolidatedfinancial statements.  The Companyaccounted for the acquisition of Innovest Strategic Value Advisors, Inc. (“Innovest”)in accordance with this amended guidance (see Note 4).

 

*Disclosures for Derivative Financial Instruments*

 

In March 2008,the FASB amended its guidance for disclosures about derivativeinstruments and hedging activities. On January 1, 2009 the Company adoptedthis amended guidance for its disclosures about derivative instruments andhedging activitiesand has included the required disclosures regarding the fair value ofderivative instruments in Note 8.

 

*Determination of the Useful Life of Intangible Assets*

 

In April 2008,the FASB amended its guidance for the factors that an entity shouldconsider in developing renewal or extension assumptions used in thedetermination of the useful life of recognized intangible assets. This amended guidance appliesprospectively to intangible assets that are acquired individually or with a groupof other assets in business combinations and asset acquisitions.  On January 1, 2009, the Company adoptedthis amended guidance for determination of the useful life of intangibleassets and suchadoption did not have a material impact on the condensed consolidated financialstatements.

 

*Disclosures for Fair Value of Financial Instruments*

 

In April 2009, the FASB issuednew authoritative guidance for interim disclosures about fair value offinancial instruments.  Thisauthoritative guidance requirescertain disclosures in interim financial statements that previously wererequired only annually.  In addition,this guidance requires disclosures regarding the methods and significantassumptions used to estimate the fair value of financial instruments.  On April 1, 2009, the Company adoptedthe authoritative guidance for interim disclosures about fair value offinancial instruments.The adoption of this guidance did not have a material impact on the condensedconsolidated financial statements.

 

*Subsequent Events*

 

In May 2009,the FASBissued new authoritative guidance for subsequent events. Such authoritative guidance establishes general standards ofaccounting for, and disclosure of, events that occur after the balance sheetdate but before 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.  This authoritativeguidance is effectivefor the interim or annual financial periods ending after June 15, 

 

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2009.  On June 30,2009, the Company adopted the authoritative guidance forsubsequent events.Such 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 November 3, 2009.

 

*Multiple-DeliverableRevenue Arrangements*

 

In October 2009, theFASB revised certain accounting guidance for revenue arrangements with multipledeliverables, in particular when vendor specific objective evidence or thirdparty evidence for deliverables in an arrangement cannot be determined, a bestestimate of the selling price is required to separate deliverables and toallocate the arrangement consideration. This revised guidance is effective forthe first quarter of 2011, with early adoption permitted. We do not expect theadoption of this revised guidance to have a material impact on the condensedconsolidated financial statements.

 

**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Our primary market risk exposure is interest raterisk associated with short and long-term debt bearing variable interest rates.To manage this interest rate risk exposure, we enter into interest rate swapagreements. We are also exposed to foreign currency risk, which can adverselyaffect our sales and operating profits. The following discussion should be readin conjunction with Note 8 of our condensed consolidated financialstatements appearing elsewhere in this Form 10-Q, which provides furtherinformation on our derivative instruments.

 

*Interest Rate Sensitivity*

 

To reduce the exposure associated with our variablerate debt, we entered into two interest-rate swap agreements to reduce interestrate risks and to manage interest expense. By entering into these agreements,we change the fixed/variable interest-rate mix of our debt portfolio. As of September 30,2009, the interest rate swaps had notional amounts totaling $251.9 millionand a fair value liability totaling $17.3 million. The agreementseffectively convert our floating-rate debt into fixed-rate debt. This reducesour risk of incurring higher interest costs in periods of rising interestrates. Our interest-rate swap agreements hedge a substantial majority of theinterest rate risk exposure under our indebtedness. The interest rate swapagreements increased our weighted average effective interest rate on the firstlien term loan facility to 6.8% during the nine months ended September 30,2009. A hypothetical, instantaneous increase of one percentage point in theinterest rates applicable to the variable interest rate debt would haveincreased our net interest expense for the nine months ended September 30,2009 by approximately $0.4 million.

 

*Exchange Rate Sensitivity*

 

We have two separate exposures to currencyfluctuation risk—subsidiaries outside the United States which use a foreigncurrency as their functional currency which are translated into U.S. dollars forconsolidation of assets and liabilities and non-U.S. dollar invoiced revenues.Changes in foreign exchange rates for our subsidiaries that use a foreigncurrency as their functional currency are translated into U.S. dollars andresult in cumulative translation adjustments, which are included in accumulatedother comprehensive loss. At September 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 September 30, 2009, amounts to$4.8 million.

 

We primarily invoice our clients in U.S. dollars;however, we also invoice a portion of our clients in Euro, Sterling, CanadianDollar, Japanese Yen and a limited number of other non-U.S. dollar currencies.As such, the fluctuations in such currencies could impact our operatingresults.

 

**Item 4. Controls and Procedures**

 

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

 

Wecarried out an evaluation, under the supervision and with the participation ofour management, including our chief executive officer and chief financialofficer, of the design and operation of our disclosure controls and procedures(as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934 (the “Exchange Act”) as of September 30,2009, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,the chief executive officer and chief financial officer concluded that ourdisclosure controls and procedures as of September 30, 2009 are effectivefor gathering, analyzing and disclosing the information the Company is requiredto disclose in the reports it files under the Exchange Act, within the timeperiods specified in the Securities and Exchange Commission’s rules andforms.

 

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

 

Therewere no changes in our internal controls over financial reporting during ourfiscal quarter ended September 30, 2009 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

**Part II**

 

**Item 1. Legal Proceedings**

 

Weare not presently involved in any legal proceedings which we believe would havea material adverse effect on our condensed consolidated financial statements.However, during the ordinary course of business, we are, from time to time,threatened with, or may become a party to, legal actions and other proceedings.

 

**Item 1A. Risk Factors**

 

Therehave been no material changes in our risk factors from those disclosed in Part 1,Item 1A of our 2008 Annual Report on Form 10-K.

 

**Item 2. Unregistered Sales of Equity Securities andUse of Proceeds**

 

None

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

None

 

**Item 5. Other Information**

 

None.

 

**Item 6. Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                 |
|---------------------|------------|-----------------------------------------------------------------|
| 31.1                |       | Section 302  Certification of Principal Executive Officer* |
| 31.2                |       | Section 302  Certification of Principal Financial 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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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned; thereunto duly authorized this 3rd day of November, 2009.

 
|     | RiskMetrics Group, Inc. |
|----------|------------------------------|
|     |                         |
|     | /s/ M. ETHAN BERMAN          |
|     | M. Ethan Berman              |
| * * | *Chief Executive Officer*    |

 

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