NEW YORK, March 31 /PRNewswire-FirstCall/ -- RiskMetrics Group Inc.
(NYSE: RMG), a leading provider of risk management and corporate
governance products and services to participants in the global
financial markets, today announced financial results for the fourth
quarter and year ended December 31, 2007. Earnings Highlights (The
following pro forma results give effect to the January 11, 2007,
acquisition of Institutional Shareholder Services as if the
transaction had closed on January 1, 2006. The ISS acquisition was
material for the company and the pro forma results provide a better
comparison of the ongoing business) -- Fourth quarter 2007 revenue
increased 28.5% on a pro forma basis to $67.6 million from $52.6
million in the comparable period of 2006. 2007 annual revenue
increased 19.1% on a pro forma basis to $243.6 million from $204.5
million in 2006. -- Fourth quarter Consolidated Adjusted EBITDA
increased 38.8% in the fourth quarter to $21.5 million from $15.5
million in the fourth quarter of 2006. For the year, Consolidated
Adjusted EBITDA was up 27.1% to $73.7 million in 2007, compared
with $58.0 million in 2006. -- Annualized contract value (ACV)
increased 30.6% to approximately $250.2 million at December 31,
2007, on a pro forma basis. -- Renewal rate stood at an all-time
high at 91.4% for the year ended December 31, 2007. "Our strong
financial results reflect the market's continuing need for
comprehensive risk systems, transparency in financial reporting and
strong corporate governance" said Ethan Berman, Chief Executive
Officer of RiskMetrics Group. "These factors, along with higher
market volatility, have increased the demand for RiskMetrics'
products, resulting in a more than 30% increase in average contract
value and a renewal rate of 91.4%. We expect these trends to
continue into the new year as institutions focus on implementing
enhanced risk systems." Selected Consolidated Pro Forma Financial
Information** The pro forma results below give effect to the
acquisition of ISS as if the transaction had closed on January 1,
2006. Pro Forma Financial Information (1)** Three months Year ended
ended December 31, December 31, 2006 2007 % Change 2006 2007 %
Change (Unaudited and all amounts in thousands) Revenues: Risk (2)
$25,934 $33,422 28.9% $101,235 $121,126 19.6% ISS (3) 26,696 34,205
28.2% 103,269 122,502 18.6% Total Revenues 52,629 67,627 28.5%
204,505 243,628 19.1% Operating Cost and Expenses: Adjusted EBITDA
expenses (4) 37,160 46,155 24.2% 146,551 169,946 16.0% Other
operating expenses (5) 7,369 10,454 41.8% 30,681 34,074 11.1% Total
operating costs and expenses 44,529 56,609 27.1% 177,232 204,020
15.1% Income from operations 8,100 11,018 36.0% 27,272 39,608 45.2%
Interest, dividend and investment Income (loss), net (8,569)
(9,160) 6.9% (34,222) (36,451) 6.5% Income (loss) before income
taxes (469) 1,858 * (6,948) 3,157 * Provision (benefit) for income
taxes (188) 655 * (2,779) 1,263 * Net income (loss) $(281) $1,203 *
$(4,169) $1,894 * Adjusted EBITDA (3)(6) $15,469 $21,472 38.8%
$57,954 $73,682 27.1% Adjusted EBITDA margin (7) 29.4% 31.8% 28.3%
30.2% * Exceeds 100% ** See Notes in accompanying Table D Fourth
Quarter 2007 Pro forma Financial Results Revenues Total revenues
for the fourth quarter of 2007 were $67.6 million, up 28.5% from
$52.6 million in the fourth quarter of 2006 on a pro forma basis,
assuming RiskMetrics' January 11, 2007, acquisition of
Institutional Shareholder Services (ISS) occurred January 1, 2006.
Excluding the contribution from Center for Financial Research and
Analysis (CFRA) revenues in Q4 2007, total revenues grew by 20.2%.
On a business level, Risk revenues were $33.4 million, a 28.9%
increase over Q4 2006 due mainly to a 33.0% increase in total
Market Risk revenues. The Risk business experienced strong revenue
growth in both the Americas and EMEA as a result of increased
demand on the part of asset managers for RiskMetrics' Risk Manager
solutions, which help firms meet both internal management and
regulatory compliance requirements. ISS revenues were $34.2 million
in the fourth quarter of 2007, a 28.2% increase from Q4 2006 due
mainly to growth of more than 100% in the Financial Research and
Analysis (FR&A) product lines due to the inclusion of $4.4
million of revenue from the August 2007 CFRA acquisition, as well
as strong growth in other FR&A product lines. ISS growth in the
fourth quarter was particularly strong in the EMEA region.
Excluding the contribution from CFRA revenues in Q4 2007, ISS
revenues grew by 11.6%. "RiskMetrics has a highly diversified
business, both by customers and geography, with no single contract
comprising more than one percent of our total revenues," Mr. Berman
continued. "This balance helps ensure we mitigate our own risk
while allowing us to take advantage of product and geographical
cross-selling opportunities." Adjusted EBITDA Expenses Adjusted
EBITDA Expenses, which exclude interest expense, income tax
expense, depreciation and amortization of property and equipment,
amortization of intangible assets, and non-cash stock-based
compensation expense, increased 24.2% to $46.2 million for the
fourth quarter. Excluding the $3.3 million of CFRA Adjusted EBITDA
Expenses, expenses would have increased by 15.3%. Compensation
Expenses which accounted for 66.1% of total expenses, increased by
20.4% to $30.5 million. Compensation Expenses increased mainly due
to the CFRA acquisition as well as an increase in headcount.
Excluding CFRA, Compensation Expenses increased 9.5%. As a
percentage of revenues, Compensation Expenses decreased to 45.1% of
revenues in fourth quarter 2007 from 49.4% of revenues in fourth
quarter 2006. Non-Compensation Expenses increased by 32.2% to $15.6
million from $11.8 million in fourth quarter 2006 mainly due to
increases in marketing expenses due to rebranding efforts,
increased occupancy costs related to the consolidation of the
London office, and increased costs related to the Company's IPO.
Excluding CFRA, Non- Compensation Expenses increased by 27.1%.
Adjusted EBITDA Expenses represented approximately 68.2% of total
revenues for the quarter, compared with 70.6% in the year-ago
period. Adjusted EBITDA Consolidated Adjusted EBITDA increased
38.8% to $21.5 million in the fourth quarter of 2007 from $15.5
million in the fourth quarter of 2006 due to growth in both the
Risk and ISS businesses, as well as the acquisition of CFRA.
Adjusted EBITDA margin increased to 31.8% in the fourth quarter of
2007, compared with 29.4% in the fourth quarter of 2006, as
revenues grew at a higher rate than Adjusted EBITDA Expenses.
Fiscal Year 2007 Pro forma Financial Results Revenues Total pro
forma revenues for the 2007 fiscal year were $243.6 million, up
19.1% from $204.5 million in 2006. Excluding revenues generated
from the JP Morgan online agreement in 2006 and CFRA in 2007,
revenues increased by 18.1%. On a business level, Risk revenues
increased 19.6% to $121.1 million in 2007 from $101.2 million in
2006. Excluding revenues generated from the JP Morgan online
agreement, 2007 Risk revenues increased 24.9% for the year. "Led by
a 27.1% increase in revenues from our Market Risk solutions,
RiskMetrics achieved strong growth in 2007," said David Obstler,
Chief Financial Officer of RiskMetrics Group. "This trend is
largely attributable to an increased need for regulatory, internal
compliance and investor reporting by asset managers across all
regions of the world. Revenue growth was also driven by our sales
in the EMEA region as revenues increased 38.2% from 2007, driven by
strong sales of Risk Manager as asset managers look to comply with
regulatory requirements." ISS revenues increased 19.6% to $122.5
million for the full-year 2007 from $103.3 million in 2006. The
increase was primarily attributable to a 48.6% increase in FR&A
revenues due the inclusion of $7.2 million of annual CFRA revenues,
as well as growth in revenues from other FR&A product lines.
Governance Services, largely consisting of Proxy Research and
Voting Services, generated $86.8 million in revenues in 2007, which
was a 10% increase over 2006. Revenue in Europe and Asia grew 31.5%
as the Company invested in its international product lines and
international customers increasingly adopted governance and
research products. Excluding revenues from CFRA in 2007, ISS
revenues grew by 11.6%. Additionally, growth in both business
segments was driven by increased contract renewal rates, growth in
recurring revenue and an increase in ACV as discussed below.
Adjusted EBITDA Expenses Adjusted EBITDA Expenses increased 16.0%
to $169.9 million in 2007 from $146.6 million in 2006. Excluding
the $5.1 million of CFRA Adjusted EBITDA Expenses from August 1,
2007, Adjusted EBITDA Expenses would have increased by 12.5%.
Compensation Expenses, which accounted for 67.4% of total Adjusted
EBITDA Expenses, increased by 17.4% to $114.6 million in 2007 from
$97.7 million in 2006. Compensation Expenses increased mainly due
to the CFRA acquisition as well as an increase in headcount.
Excluding CFRA, Compensation Expenses increased 13.1%. As a
percentage of revenues, Compensation Expenses decreased to 47.0% of
revenues in 2007 from 48.2% of revenues in 2006. Non-Compensation
Expenses increased by 15.2% to $55.3 million from $48.0 million in
2006 mainly due to increases in legal, accounting and consulting
costs related to business integration and increased rent and
technology infrastructure related to the growth of the business. As
a percentage of revenue, non-compensation expenses decreased to
22.7% of revenues in 2007 from 23.5% in 2006. Adjusted EBITDA
Expenses represented approximately 69.8% of total revenues for
2007, compared with 71.7% in 2006. Adjusted EBITDA Consolidated
Adjusted EBITDA increased 27.1% to $73.7 million for 2007 from
$58.0 million in 2006, due to growth in both the Risk and
Governance businesses, as well as the acquisition of CFRA. Adjusted
EBITDA margin increased to 30.2% in 2007, compared with 28.3% in
2006, as revenue grew at a higher rate than expenses. "RiskMetrics
experienced a 190 b.p. expansion in Adjusted EBITDA margins in 2007
as revenues grew in excess of both Compensation and
Non-Compensation Expenses," said Mr. Obstler. "We have a highly
leverageable cost structure because we deliver our products from a
common data and technology infrastructure and have been growing our
headcount at a lower rate than revenues. Despite continued
investments in our products and technology, we expect these trends
to continue in 2008." Consolidated Fiscal 2007 Pro Forma Annual
Operating Data The Company believes that the supplemental
consolidated pro forma financial information below, which reflects
the results of the ISS acquisition for all periods presented, is
helpful in understanding the Company's overall results. Year Ended
December 31, Operating Data 2006 2007 (amounts in thousands except
for percentages) Annualized Contract Value (1) Risk 101,686 131,716
% Growth - 28.9% ISS (1) 89,938 118,522 % Growth - 31.8% Annualized
Contract Value 191,624 250,238 % Growth - 30.6% Recurring Revenue
as a % of total revenue (2) Risk 96.6% 97.6% ISS 85.8% 87.7%
Recurring Revenue as a % of total revenue 91.7% 92.7% Renewal Rate
(3) Risk (3) 85.9% 91.1% ISS 91.0% 91.8% Renewal Rate 88.3% 91.4%
Notes to Operating Data Table: (1) We define annualized contract
value ("ACV") as the aggregate value, on an annualized basis, of
all recurring subscription contracts in effect on a reporting date.
CFRA was acquired on August 1, 2007 and is not included in ISS ACV
as of December 31, 2006. (2) We define recurring revenue as a
percentage of total revenue as revenue from subscription contracts
divided by total revenue during the applicable period. (3) We
define renewal rate as the amount of annualized contract value that
renews in a period divided by the amount of annualized contract
value with an expiration date during that period. Renewal rate for
the year ended December 31, 2006 excludes the cancellation of the
JP Morgan Online services agreement which was terminated in April
2006. Had the termination of the JP Morgan Online services
agreement been included, the December 31, 2006 renewal rate would
have been 75.5%. Overall, renewal rates stood at an all time high
of 91.4% in 2007 compared with 88.3% (excluding Morgan online) in
2006. Risk achieved a 2007 renewal rate of 91.1% while ISS had a
renewal rate of 91.8%, both higher than in 2006. This increase was
largely driven by investment in the Company's global account
management function as well as strong customer acceptance of the
Company's RiskManager and Proxy Research and Voting Products.
Recurring revenue as a percent of total revenue increased to 92.7%
in 2007 from 91.7% in 2006. This increase is the result of
RiskMetrics' strategy to emphasize its fully outsourced managed
services offerings such as RiskManager. Annualized Contract Value
increased 30.6% in 2007 as compared to 2006 with Risk increasing
28.9% from $101.7 million to $131.2 million and Governance growing
31.8% from $89.9 million to $118.5 million. The total increase in
ACV was driven by higher renewal rates, the CFRA acquisition as
well as a 18.7% increase of new ACV from $49.1 million in 2006 to
$58.2 million in 2007. Approximately 55% of RiskMetrics new ACV in
2007 was from existing clients. Fourth Quarter and Full Year 2007
GAAP Financial Results -- Refer to Table A Total GAAP revenues for
the quarter was $67.6 million, up 160.8% from $25.9 million in
2006, including an increase of $34.2 million attributable to the
acquisitions of ISS and CFRA as well as a $7.5 million, or 28.9%
from an increase in Risk. For the full year, revenues increased
137.4% from $101.2 million in 2006, including an increase of $119.2
million attributable to ISS and CFRA as well as $19.9 million, or
19.6%, from Risk. Total operating expenses increased $35.5 million
to $56.6 million in the fourth quarter of 2007, consisting
primarily of operating expenses of $32.6 million attributable to
the acquisition of ISS and CFRA as well as a $2.9 million increase
in Risk. Total operating expenses increased $121.3 million to
$200.8 million for the full fiscal 2007 year, consisting primarily
of $110.9 million attributable to the acquisition of ISS and CFRA
as well as a $10.4 million increase in Risk. Operating expenses for
the fourth quarter and full year 2007 include amortization expense
of $5.4 million and $18.3 million, respectively, as a result of the
ISS and CFRA acquisitions. Income from operations increased $6.2
million to $11.0 million in the fourth quarter of 2007 primarily
due increased revenue growth partially offset by a $6.5 million
increase in depreciation and amortization expense and a $1.3
million increase in stock based compensation expense. Income from
operations for the full year 2007 increased $17.7 million to $39.4
million primarily due to increased revenue growth that was
partially offset by a $21.7 million increase in depreciation and
amortization expense Total interest, dividend and investment
income, net, for the fourth quarter and full fiscal 2007 was an
expense of $9.2 million and $35.4 million, respectively. The change
from 2006 was due to interest expense incurred on the $425 million
of debt incurred as a result of the ISS acquisition and $15.0
million of additional indebtedness under the Company's first lien
revolving credit facility incurred in connection with the
acquisition of CFRA. The provision for income taxes represents an
effective tax rate of 41.6% for the full fiscal 2007 year compared
to an effective rate of 33.9% in the prior year. The effective rate
changed from 2006 to 2007 mainly due to an increase in
non-deductible stock-based compensation expense attributable to
incentive stock options as well as a decline in pre-tax income. Net
income decreased to $1.2 million for the fourth quarter 2007 from
$3.7 million in the year-ago period. For the full fiscal year, net
income decreased to $2.4 million in 2007 compared with $16.0
million in 2006. Diluted earnings per share decreased to $0.02 and
$0.04 per share for the fourth quarter 2007 and full fiscal 2007,
respectively, from $0.07 and $0.33 per share in the comparable year
ago period. Discussion of Cash Flow -Refer to Tables B, C and E As
of December 31, 2007, cash, cash equivalents and investments were
$27.5 million compared to $105.4 million as of December 31, 2006.
Operating activities for 2007 provided cash of $45.3 million and
capital expenditures used $11.1 million, resulting in free cash
flow (defined as cash provided from operations less capital
expenditures) of $34.2 million. Cash flow from operations in 2007
was reduced by $36.0 million in interest and $0.9 million in
payroll tax payments acquired and paid as a result of the ISS
acquisition. Contribution to cash from working capital for the
fiscal 2007 year was $9.3 million and decreased compared to the
prior year to the exclusion of 11 days of ISS working capital
contributions and payment of ISS acquisition costs following the
acquisition. IPO Summary In January 2008, RiskMetrics completed an
initial public offering of 14,000,000 shares of common stock,
including 4,035,816 shares sold by selling stockholders. The
Company did not receive any proceeds from the sale of the shares by
the selling stockholders. In addition, it granted the underwriters
an option to purchase a maximum of 2,100,000 additional shares of
common stock to cover over-allotments, which was exercised in full
in January 2008. Net proceeds from the offering, including the
exercise of the underwriters' allotment, were $194.0 million, after
deducting underwriting discounts and commissions and approximately
$3.4 million of offering expenses. A portion of IPO proceeds was
used in January 2008 to prepay the entire outstanding indebtedness
under the second loan lien, which amounted to $125.0 million. In
addition, the Company paid a 1% prepayment penalty fee, or $1.25
million, as set forth in the credit agreement. In addition, it
reduced the notional amount of its interest rate swap by $19.3
million which resulted in additional expense of $1.4 million in
2008. The interest expense on the second lien, which had an
interest rate of approximately 10.7%, was $13.7 million for pro
forma 2007. 2008 Outlook As of March 31, 2008, the Company
anticipates revenue for the fiscal year ending December 31, 2008 to
be in the range of $285 million to $295 million. Renewal rates are
expected to be between 89% and 91%. Adjusted EBITDA is expected to
be $90 million to $95 million in 2008 with Adjusted EBITDA margin
expansion in the 150 to 200 basis points range. The Company further
expects that its Unlevered Free Cash Flow (Adjusted EBITDA less
Working Capital Changes less Capital Expenditures) will be in
excess of Adjusted EBITDA. Working capital contribution from cash
flow is expected to be weighted toward the second half of 2008 due
to seasonality in RiskMetrics' business and the timing of the
payment of employee bonuses. Capital expenditures are expected to
be between $11.0 million and $12.0 million. Intangible amortization
expense is expected to be $21.5 million to $22.0 million,
stock-based compensation charges are expected to be between $10.0
million and $11.0 million, fully diluted share count is anticipated
to be 67 million to 69 million, and the tax rate is expected to be
38% to 40%. Due to the timing of reporting for this quarter, the
Company is also providing select information for the first quarter
of 2008. -- New ACV increased 24.2% to $14.0 million in the first
two months of 2008 from $11.3 million in the comparable period of
2007. -- Renewal rate was 90% with continued diversity among
clients, products and geography. As in prior periods, no single
contract represents more than 1% of RiskMetrics' revenues.
Conference Call Information The Company will hold a conference call
to discuss results for the fourth quarter and full year 2007 at 5
p.m. Eastern on March 31, 2008. The call will be hosted by Ethan
Berman, Chief Executive Officer, and David Obstler, Chief Financial
Officer, of RiskMetrics Group. Investors can participate in the
conference call by using the following dial-in details: US Toll
free dial-in 800.299.7098 International dials-in 617.801.9715 Pass
code 93432695 In addition, investors can access the conference call
directly from the RiskMetrics Group Investor Relations Web Site at
http://investor.riskmetrics.com/ and the call will be archived on
this site for future access. RiskMetrics Group Media Contacts:
Cheryl Gustitus Sarah Cohn 301.556.0538 212.354.4643 RiskMetrics
Group Investor Relations Contact: Dan Concannon 866-884-3450 About
RiskMetrics Group RiskMetrics Group is a leading provider of risk
management and corporate governance products and services to
participants in the global financial markets. By bringing
transparency, expertise and access to the financial markets,
RiskMetrics Group helps investors better understand and manage the
risks associated with their financial holdings. Our solutions
address a broad spectrum of risk across our clients' financial
assets. Headquartered in New York with 19 global offices,
RiskMetrics Group services some of the most prestigious
institutions and corporations worldwide. Forward-Looking Statements
This release contains forward-looking statements. These statements
relate to future events or to future financial performance and
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity, performance,
or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or
implied by these forward-looking statements. In some cases, you can
identify forward-looking statements by the use of words such as
"may," "could," "expect," "intend," "plan," "seek," "anticipate,"
"believe," "estimate," "predict," "potential," or "continue" or the
negative of these terms or other comparable terminology. You should
not place undue reliance on forward-looking statements because they
involve known and unknown risks, uncertainties and other factors
that are, in some cases, beyond our control and that could
materially affect actual results, levels of activity, performance,
or achievements. Other factors that could materially affect actual
results, levels of activity, performance or achievements can be
found in the Company's Prospectus dated January 24, 2008 and filed
with the Securities and Exchange Commission on January 25, 2008. If
any of these risks or uncertainties materialize, or if our
underlying assumptions prove to be incorrect, actual results may
vary significantly from what we projected. Any forward-looking
statement in this release reflects our current views with respect
to future events and is subject to these and other risks,
uncertainties and assumptions relating to our operations, results
of operations, growth strategy and liquidity. We assume no
obligation to publicly update or revise these forward-looking
statements for any reason, whether as a result of new information,
future events, or otherwise. Notes Regarding Pro forma Presentation
The pro forma results discussed above and presented in Tables D and
F through I give effect to the January 11, 2007 acquisition of
Institutional Shareholder Services ("ISS") closed on January 1,
2006. No pro forma financial information has been presented in
Table D in respect of the acquisition of Center for Financial
Research and Analysis ("CFRA"), which closed on August 1, 2007. On
January 11, 2007, we acquired ISS for a purchase price of
approximately $542.8 million. The unaudited pro forma statements of
operations for the years ended December 31, 2006 and 2007 and the
three months ended December 31, 2006 presented in Tables D and F
through I give pro forma effect to the acquisition of ISS as if it
had occurred on January 1, 2006. The unaudited pro forma financial
statements are based on estimates and assumptions. These estimates
and assumptions are preliminary and have been made solely for
purposes of developing this pro forma information. Unaudited pro
forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the operating results
that would have been achieved if the acquisition of ISS had been
consummated as of the date indicated, nor is it necessarily
indicative of the results of future operations. The pro forma
financial information does not give effect to any cost savings or
restructuring and integration costs that may result from the
integration of ISS' business. Notes Regarding the Use of Non-GAAP
Financial Measures RiskMetrics Group, Inc. (the "Company") has
provided certain non-GAAP financial information as additional
information for its operating results. These measures are not in
accordance with, or an alternative for, generally accepted
accounting principles in the United States ("GAAP") and may be
different from non-GAAP measures reported by other companies. The
Company believes that its presentation of non-GAAP measures, such
as Adjusted EBITDA, Adjusted EBITDA expenses, other operating
expenses and free cash flow, provides useful information to
management and investors regarding certain financial and business
trends relating to its financial condition and results of
operations. In addition, the Company's management uses these
measures for reviewing the financial results of the Company and for
budgeting and planning purposes. Adjusted EBITDA Adjusted EBITDA,
as defined in our credit facilities, represents net income (loss)
before interest expense, interest income, income tax expense
(benefit), depreciation and amortization of property and equipment,
amortization of intangible assets, non-cash stock-based
compensation expense and extraordinary or non-recurring charges or
expenses. It is a material metric used by our lenders in evaluating
compliance with the maximum consolidated leverage ratio covenant in
our credit facilities. The maximum consolidated leverage ratio
covenant, as defined in our credit facilities, represents the ratio
of total indebtedness as compared to Adjusted EBITDA, and can not
exceed a maximum ratio range which declines from 8.50 to 3.00 over
the life of the credit facilities. Non-compliance with this
covenant could result in us being required to immediately repay our
outstanding indebtedness under our credit facilities. Adjusted
EBITDA is also a metric used by management to measure operating
performance and for planning, including preparation of annual
budgets, analyzing investment decisions and evaluating
profitability. We also present Adjusted EBITDA as a supplemental
performance measure because we believe that this measure provides
our board of directors, management and investors with additional
information to measure our performance, provide comparisons from
period to period by excluding potential differences caused by
variations in capital structure (affecting interest expense), tax
position (such as the impact on periods of changes in effective tax
rates or net operating losses), the age and book depreciation of
fixed assets (affecting relative depreciation expense),
acquisitions (affecting amortization expense) and compensation
plans (affecting stock-based compensation expense). Adjusted EBITDA
is not a measurement of our financial performance under U.S. GAAP
and should not be considered as an alternative to net income,
operating income or any other performance measures derived in
accordance with U.S. GAAP or as an alternative to cash flow from
operating activities as a measure of our profitability or
liquidity. Adjusted EBITDA Expenses Adjusted EBITDA expenses
represents cost of revenues, research and development, selling and
marketing and general administrative expenses, excluding
stock-based compensation. Adjusted EBITDA expenses represent
expenses which are classified as reductions to Adjusted EBITDA, as
defined in our credit facilities. Adjusted EBITDA is also a metric
used by management to measure operating performance and for
planning, including preparation of annual budgets, analyzing
investment decisions and evaluating profitability. Other Operating
Expenses Other operating expenses represent stock-based
compensation, depreciation and amortization of property and
equipment, amortization of intangible assets and loss on disposal
of property and equipment. Other operating expenses represent
expenses which are classified as reductions to Adjusted EBITDA, as
defined in our credit facilities. Free Cash Flow We define free
cash flow as net cash provided by operating activities from
continuing operations minus capital expenditures. We believe free
cash flow is an important non-GAAP measure as it provides useful
cash flow information regarding our ability to service, incur or
pay down indebtedness. We use free cash flow as a measure to
reflect cash available to service our debt as well as to fund our
expenditures. A limitation of using free cash flow versus the GAAP
measure of net cash provided by operating activities is that free
cash flow does not represent the total increase or decrease in the
cash balance from operations for the period since it excludes cash
used for capital expenditures during the period. Table A -
Consolidated Statements of Income RISKMETRICS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share and
per share amounts) For the For the three months ended years ended
December 31, December 31, (unaudited) 2006 2007 2006 2007 REVENUES
$25,934 67,627 $101,236 $240,301 OPERATING COSTS AND EXPENSES: Cost
of revenues 6,690 20,651 25,618 77,317 Research and development
expenses 4,926 8,665 21,202 31,142 Selling and marketing expenses
4,165 10,091 14,977 35,420 General and administrative expenses
4,255 8,826 12,852 29,654 Depreciation and amortization of property
and equipment 1,075 2,227 4,081 7,419 Amortization of intangible
assets - 5,417 770 19,145 Loss on disposal of property and
equipment - 732 15 734 Total operating costs and expenses 21,111
56,609 79,515 200,831 INCOME FROM OPERATIONS 4,823 11,018 21,721
39,470 INTEREST, DIVIDEND AND INVESTMENT INCOME, NET: Interest,
dividend and investment income 818 449 2,549 2,159 Interest expense
(11) (9,609) (49) (37,517) Total interest, dividend and investment
income, net 807 (9,160) 2,500 (35,358) INCOME BEFORE PROVISION FOR
INCOME TAXES 5,630 1,858 24,221 4,112 PROVISION FOR INCOME TAXES
1,907 655 8,200 1,711 NET INCOME $3,723 $1,203 $16,021 $2,401
INCOME PER SHARE: Basic $0.09 $0.03 $0.38 $0.05 Diluted $0.07 $0.02
$0.33 $0.04 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic 42,537,643 47,626,734 42,655,069 46,380,175 Diluted
50,059,888 55,173,774 47,963,666 54,364,746 Table B RISKMETRICS
GROUP, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2006 AND 2007
(In thousands, except share amounts) 2006 2007 ASSETS CURRENT
ASSETS: Cash and cash equivalents $37,313 $27,455 Investments, at
fair market value (cost of $68,075 at December 31,2006) 68,071 -
Accounts receivable, net of allowance for doubtful accounts of $265
and $405 at December 31, 2006 and 2007, respectively 16,216 37,010
Deferred tax asset 79 140 Income taxes receivable 938 8,300 Other
receivables and prepaid expenses 3,869 5,910 Total current assets
126,486 78,815 Deferred Tax Asset - Noncurrent portion 1,168 -
Intangibles - Net - 174,154 Goodwill - 460,951 Property and
Equipment - Net 8,047 16,225 Deferred Financing Costs - 8,677 Other
Assets 1,246 4,361 TOTAL ASSETS $136,947 $743,183 LIABILITIES AND
STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable
$2,841 $6,235 Accrued expenses 17,795 34,189 Debt, current portion
- 3,000 Deferred revenue 58,309 100,557 Other current liabilities -
227 Total current liabilities 78,945 144,208 LONG-TERM LIABILITIES
Debt - 419,750 Deferred tax liabilities - 28,626 Deferred revenue
533 722 Other long term liabilities 971 13,785 Total liabilities
80,449 607,091 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - 150,000,000 authorized; 52,859,460
and 47,850,652 issued and 42,530,055 and 47,642,460 outstanding at
December 31, 2006 and 2007, respectively 529 479 Treasury stock -
10,329,405 and 208,192 shares at December 31, 2006 and 2007,
respectively (103) (2) Additional paid-in capital 130,765 217,355
Accumulated other comprehensive loss (508) (7,262) Accumulated
deficit (74,185) (74,478) Total stockholders' equity 56,498 136,092
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $136,947 $743,183 Table
C RISKMETRICS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, AND 2007 (Amounts in thousands) 2006
2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $16,021
$2,401 Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation and amortization of property and
equipment 4,081 7,419 Provision (recovery) for bad debt (53) 140
Amortization of intangible assets 770 19,145 Amortization of debt
issuance costs - 1,397 Impairment of goodwill - - Stock-based
compensation 3,636 6,033 Tax benefit associated with exercise of
stock options (1,236) (201) Loss on disposal of property and
equipment 15 734 Decrease (increase) in deferred tax benefit 812
(1,115) Changes in assets and liabilities: (Increase) decrease in
accounts receivable 3,923 8,599 Increase in other receivables and
prepaid expenses (1,171) (934) Increase in other assets (420) (88)
Increase in deferred revenue 5,098 (4,370) (Increase) decrease in
income taxes receivable 532 2,561 Increase in trade accounts
payable 1,771 2,631 Increase in other accrued expenses and
liabilities 2,303 996 Net cash provided by operating activities
36,082 45,348 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of
property and equipment (3,724) (11,091) Cash paid to acquire
Institutional Shareholder Services Inc. ("ISS") and related
acquisition costs (net of cash acquired of $12,250) - (471,764)
Payment of acquired ISS acquisition related costs - (7,413) Cash
paid to acquire CFRA and related acquisition costs (net of cash
acquired of $1,213) - (45,946) Payment of deferred purchase price -
(128) Purchase of intangible asset - (250) Purchase of investments
(70,755) (21,289) Proceeds from sale of investments 72,169 89,364
Net cash used in investing activities (2,310) (468,517) CASH FLOWS
FROM FINANCING ACTIVITIES: Proceeds from debt borrowings - 440,000
Repayment of debt - (17,250) Payment of debt issuance costs -
(10,074) Principal payments on capital lease obligations - (23)
Equity offering expenses - (1,928) Excess tax benefit associated
with exercise of stock options 1,236 201 Proceeds from exercise of
stock options 255 5,944 Repurchase of stock (9,018) (3,257) Net
cash (used in) provided by financing activities (7,527) 413,613
EFFECT OF EXCHANGE RATE CHANGES ON CASH 102 (302) NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS 26,347 9,858 CASH AND CASH
EQUIVALENTS - Beginning of year 10,966 37,313 CASH AND CASH
EQUIVALENTS - End of year $37,313 $27,455 SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION: Cash paid for interest $- $35,973 Cash
paid for taxes (net of refunds) $8,236 $(50) NON CASH INVESTING AND
FINANCING ACTIVITIES: Issuance of common stock to purchase ISS $-
$42,426 Issuance of stock options to purchase ISS $- $16,331
Retirement of treasury stock $- $103 Tax benefit associated with
exercise of ISS stock options $- $3,061 Issuance of common stock to
purchase CFRA $- $16,634 Supplemental Information and Non-GAAP
Reconciliations On the pages that follow, the Company has provided
certain supplemental information that we believe will assist the
reader in assessing our business operations and performance,
including certain non-GAAP financial information and required
reconciliations to the most comparable GAAP measure. Table D -
Condensed Consolidated Pro Forma Statement of Operations Data The
pro forma results below give effect to the acquisition of
Institutional Shareholder Services ("ISS") as if the transaction
had closed on January 1, 2006. Pro Forma Financial Information (1)
Three months Year ended ended December 31, December 31, 2006 2007 %
Change 2006 2007 % Change (Unaudited and all amounts in thousands)
Revenues: Risk (2) $25,934 $33,422 28.9% $101,235 $121,126 19.6%
ISS (3) 26,696 34,205 28.2% 103,269 122,502 18.6% Total Revenues
52,629 67,627 28.5% 204,505 243,628 19.1% Operating Cost and
Expenses: Adjusted EBITDA expenses (4) 37,160 46,155 24.2% 146,551
169,946 16.0% Other operating expenses (5) 7,369 10,454 41.8%
30,681 34,074 11.1% Total operating costs and expenses 44,529
56,609 27.1% 177,232 204,020 15.1% Income from operations 8,100
11,018 36.0% 27,272 39,608 45.2% Interest, dividend and investment
Income (loss), net (8,569) (9,160) 6.9% (34,222) (36,451) 6.5%
Income (loss) before income taxes (469) 1,858 * (6,948) 3,157 *
Provision (benefit) for income taxes (188) 655 * (2,779) 1,263 *
Net income (loss) $(281) $1,203 * $(4,169) $1,894 * Adjusted EBITDA
(3) (6) $15,469 $21,472 38.8% $57,954 $73,682 27.1% Adjusted EBITDA
margin (7) 29.4% 31.8% 28.3% 30.2% * Exceeds 100% Notes to Table D:
(1) Refer to tables F, G, H and I, respectively, for a
reconciliation of the condensed consolidated pro forma financial
information for the three months ended December 31, 2006 and 2007
and years ended December 31, 2006 and 2007 to the historical
financial statements. The three months ended December 31, 2007 does
not include pro forma adjustments of ISS, which was acquired on
January 11, 2007. (2) For the year ended December 31, 2006, we
derived $4.3 million of revenue from a JPMorgan online services
agreement and no revenue in the year ended December 31, 2007. (3)
The acquisition of CFRA on August 1, 2007 generated additional
revenues of $4.4 million and $7.2 million during the three months
ended December 31, 2007 and year ended December 31, 2007,
respectively. The pro forma financial information for the year
ended December 31, 2007, includes $3.3 million of revenue and $0.9
million of Adjusted EBITDA generated from ISS during the period of
January 1, 2007 to January 11, 2007. (4) Adjusted EBITDA expenses
represents cost of revenues, research and development, selling and
marketing and general administrative expenses, excluding
stock-based compensation of $1,203 and $2,078 for the three months
ended December 31, 2006 and 2007, respectively and $5,451 and
$6,033 for the years ended December 31, 2006 and 2007,
respectively. (5) Other operating expenses represent stock-based
compensation, depreciation and amortization of property and
equipment, amortization of intangible assets and loss on disposal
of property and equipment. (6) The table below sets forth a
reconciliation of Adjusted EBITDA to net income (loss) for our pro
forma results: Three months ended Year ended December 31, December
31, 2006 2007 2006 2007 (amounts in thousands) Net income (loss)
$(281) $1,203 $(4,169) $1,894 Interest (income) expense, net 8,570
9,160 34,222 36,451 Income tax expense (benefit) (189) 655 (2,780)
1,263 Depreciation and amortization of property and equipment 1,583
2,227 6,114 7,621 Amortization of intangible assets 4,583 5,417
19,101 19,686 Stock -based compensation 1,203 2,078 5,451 6,033
Loss on disposal of property and equipment - 732 15 734 Adjusted
EBITDA $15,469 $21,472 $57,954 $73,682 (7) Adjusted EBITDA margin
is defined as Adjusted EBITDA divided by total revenues. Table E -
Consolidated Balance Sheet and Cash Flow Data Balance Sheet Data -
as of December 31, 2006 2007(1) (amounts in thousands) Cash and
cash equivalents $37,313 $27,455 Short-term investments 68,071 -
Goodwill and intangibles, net - 635,105 Total assets 136,947
743,183 Deferred revenue 58,842 101,279 Total debt, including
current portion - 422,750 Stockholders' equity 56,498 136,092 Cash
Flow Data - For the year ended December 31, Net cash provided by
operating activities $36,082 $45,348 Capital expenditures (3,724)
(11,091) Free cash flow (2) $32,358 $34,257 Notes to Table E: (1)
On January 11, 2007, we acquired ISS for $542.8 million and
incurred indebtedness of $425.0 million to complete the
acquisition, of which $2.25 million has been repaid. In addition,
on August 1, 2007, we acquired CFRA for $63.8 million and incurred
additional indebtedness of $15.0 million to complete the
acquisition which was repaid in October and November of 2007. (2)
We define free cash flow as cash provided by operating activities
less capital expenditures. Our management uses free cash flow, and
we present it to investors, because it is an important measure of
the cash generation of our business and our ability to repay
indebtedness and invest in our business. The following tables (F,
G, H and I) reconcile the consolidated statements of income in
Table A to the Condensed Consolidated Pro Forma Statement of
Operations Data in Table D: Table F UNAUDITED PRO FORMA STATEMENT
OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 (AMOUNTS
IN THOUSANDS) Institutional Reclassif- Shareholder ication Services
Pro Forma of Stock- RiskMetrics Holdings, Adjustments Pro Forma
based Group, Inc. Inc. For ISS for ISS Compen- Pro (Historical)
(Historical) Acquis- Acquis- sation forma ition ition Revenues
$25,934 $26,695 $52,629 $52,629 Operating costs and expenses: Cost
of revenues 6,690 9,826 (18)(A) 16,498 16,498 Research and
development expenses 4,926 1,425 - 6,351 6,351 Selling and
marketing expenses 4,165 3,445 (5)(A) 7,605 7,605 General and
administrative expenses 4,255 4,687 (1,033)(A) 7,909 7,909 Total
Adjusted EBITDA expenses 38,363 (1,203)(G) 37,160 Depreciation and
amortization of property and equipment 1,075 1,274 (766)(B) 1,583
1,583 Amortization of intangible assets - 673 3,910 (C) 4,583 4,583
Loss on disposal of property and equipment - - - - Total other
operating expenses 6,166 1,203 (G) 7,369 Total operating costs and
expenses 21,111 21,330 44,529 44,529 Income from operations 4,823
5,365 8,100 8,100 Other income and expenses: Interest, dividend and
investment income 818 111 929 929 Interest expense (11) (1,079)
(8,109)(D) (9,498) (9,498) (299)(E) Total other income and
expenses, net 807 (968) (8,569) (8,569) Income (loss) before income
taxes 5,630 4,397 (469) (469) Provision (benefit) for income taxes
1,907 1,811 (3,906)(F) (188) (188) Net income (loss) $3,723 $2,586
$(281) $(281) TABLE G UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2006 (AMOUNTS IN THOUSANDS)
Institutional Reclassif- Shareholder ication Services Pro Forma of
Stock- RiskMetrics Holdings, Adjustments Pro Forma based Group,
Inc. Inc. For ISS for ISS Compen- Pro (Historical) (Historical)
Acquis- acquis- sation forma ition ition Revenues $101,236 $103,269
$204,505 $204,505 Operating costs and expenses: Cost of revenues
25,618 39,933 (18)(A) 65,533 65,533 Research and develop- ment
expenses 21,202 6,070 - 27,272 27,272 Selling and marketing
expenses 14,977 15,728 (5)(A) 30,700 30,700 General and admini-
strative expenses 12,852 16,678 (1,033)(A) 28,497 28,497 Total
Adjusted EBITDA expenses 152,002 (5,451)(G)146,551 Depreciat- ion
and amort- ization of property and equipment 4,081 3,578 (1,545)(B)
6,114 6,114 Amortizat- ion of intang- ible assets 770 2,520 15,811
(C) 19,101 19,101 Loss on disposal of prop- erty and equipment 15 -
15 15 Total other operat- ing expen- ses 25,230 5,451(G) 30,681
Total operating costs and expenses 79,515 84,507 177,232 177,232
Income from operations 21,721 18,762 27,273 27,273 Other income and
expenses: Interest, dividend and inv- estment income 2,549 419
2,968 2,968 Interest expense (49) (4,042) (31,902)(D)(37,189)
(37,189) (1,196)(E) Total other income and expenses, net 2,500
(3,623) (34,221) (34,221) Income (loss) before income taxes 24,221
15,139 (6,948) (6,948) Provision (benefit) for income taxes 8,200
6,236 (17,215)(F) (2,779) (2,779) Net income (loss) $16,021 $8,903
$(4,169) $(4,169) Table H UNAUDITED PRO FORMA STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 (AMOUNTS IN
THOUSANDS) Institutional Shareholder Services RiskMetrics Holdings,
Pro Reclassif- Group, Inc. Inc. Forma ication January 1 to January
1 to Adjust- Pro of Stock- December 31, January 11, ments Forma
based 2007 2007 For ISS for ISS Compen- Pro (Historical)
(Historical) Acquis- acquis- sation forma ition ition Revenues
240,301 $3,327 $ $243,628 $243,628 Operating costs and expenses:
Cost of revenues 77,317 2,350 (867)(A) 78,800 78,800 Research and
development expenses 31,142 597 (226)(A) 31,513 31,513 Selling and
marketing expenses 35,420 823 (281)(A) 35,962 35,962 General and
administrative expenses 29,654 13,698 (13,648)(A) 29,704 29,704
Total Adjusted EBITDA expenses 175,979 (6,033)(G) 169,946
Depreciation and amortization of property and equipment 7,419 132
70(B) 7,621 7,621 Amortization of intangible assets 19,145 84
457(C) 19,686 19,686 Loss on disposal of property and equipment 734
- 734 734 Total other operating expenses 28,041 6,033(G) 34,074
Total operating costs and expenses 200,831 17,684 204,020 204,020
Income from operations 39,470 (14,357) 39,608 39,608 Other income
and expenses: Interest, dividend and investment income 2,159 20
2,179 2,179 Interest expense (37,517) (112) (965)(D) (38,630)
(38,630) (36)(E) Total other income and expenses, net (35,358) (92)
(36,451) (36,451) Income (loss) before income taxes 4,112 (14,449)
3,157 3,157 Provision (benefit) for income taxes 1,711 (5,951)
5,503(F) 1,263 1,263 Net income (loss) $2,401 $(8,498) $1,894
$1,894 Table I UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE
THREE MONTHS ENDED DECEMBER 31, 2007 (AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE AMOUNTS) RiskMetrics Group, Inc. October 1 to
December Reclassification 31, 2007 of Stock Based Pro (Historical)
Compensation Forma Revenues $67,627 $67,627 Operating costs and
expenses: Cost of revenue 20,651 20,651 Research and development
expenses 8,665 8,665 Selling and marketing expenses 10,091 10,091
General and administrative expenses 8,826 8,826 Total Adjusted
EBITDA expenses 48,233 (2,078)(G) 46,155 Depreciation and
amortization of property and equipment 2,227 2,227 Amortization of
intangible assets 5,417 5,417 Loss on disposal of property and
equipment 732 732 Total other operating expenses 8,376 2,078 (G)
10,454 Total operating costs and expenses 56,609 56,609 Income
(loss) from operations 11,018 11,018 Other income and expenses:
Interest, dividend and investment income 449 449 Interest expense
(9,609) (9,609) Total other income and expenses, net (9,160)
(9,160) Income (loss) before income taxes 1,858 1,858 Provision
(benefit) for income taxes 655 655 Net income (loss) $1,203 $1,203
Notes for Tables F, G, H and I: The following pro forma adjustments
for the ISS acquisition are included in the preparation of the pro
forma statement of operations: (A) Adjustment to exclude ISS
non-recurring expenses associated with the ISS acquisition, which
constitute non-recurring items as defined in our credit facilities.
These costs were incurred by ISS prior to the acquisition and
include legal costs of $0.8 million and other charges of $0.3
million for the quarter and year ended December 31, 2006. Non-
recurring expenses for the period of January 1, 2007 through
January 11, 2007 consist of: a transaction fee of $6.7 million,
non- cash stock based compensation of $3.0 million and cash
compensation and other charges of $5.3 million. (B) Adjustment to
historical depreciation and amortization of property and equipment
to reflect the incremental expense from the preliminary allocation
of fair market value of such assets. (C) Adjustment to historical
amortization of intangible assets expense to reflect the
incremental expense for the preliminary purchase price allocation
and estimated lives. (D) ISS had pre-existing debt which was repaid
upon the consummation of our acquisition of ISS. This adjustment
reflects the additional interest expense on debt incurred in
connection with the ISS acquisition in excess of ISS' historical
interest on its then existing indebtedness. (E) This entry reflects
the additional amortization of debt issuance costs over the amounts
that ISS historically recognized on its pre-existing outstanding
indebtedness: (F) Pro forma provision for income taxes represents
our statutory rate of 40%, comprised of 35% federal and 5% blended
state, foreign and local income tax applied against income (loss)
before income taxes. Adjustment G reflects the reclassification of
stock-based compensation from Adjusted EBITDA expenses to other
operating expenses. DATASOURCE: RiskMetrics Group CONTACT: Media,
Cheryl Gustitus, +1-301-556-0538, , or Sarah Cohn, +1-212-354-4643
, or Investor Relations, Dan Concannon, +1-866-884-3450, , all for
RiskMetrics Group Web site: http://investor.riskmetrics.com/
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