EXHIBIT 99.5
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On January 21, 2005, Dow Jones completed its merger with MarketWatch and
combined their operations (the "Merger"). The following unaudited pro forma
condensed combined balance sheet at September 30, 2004 and the unaudited
pro forma condensed combined statements of income for the nine months ended
September 30, 2004 and for the year ended December 31, 2003, and the
accompanying notes thereto, have been prepared to illustrate the effects of
the Merger on the historical financial position and results of operations
of Dow Jones and MarketWatch. However, the pro forma condensed combined
financial statements and related notes do not give effect to any
refinancing of the commercial paper borrowings incurred in connection with
the Merger.
The unaudited pro forma condensed combined statements of income combine the
historical consolidated statements of income of Dow Jones and MarketWatch
as if the Merger occurred on January 1, 2003. The unaudited pro forma
condensed combined balance sheet combines the historical consolidated
balance sheets of Dow Jones and MarketWatch as if the Merger occurred on
September 30, 2004. The assumptions and adjustments, using the purchase
method of accounting, are described in the accompanying notes to the
unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements and related
notes are presented for informational purposes only. The pro forma data is
not necessarily indicative of what our financial position or results of
operations actually would have been had we completed the Merger at the
respective dates indicated and do not include or reflect potential cost
savings from operating efficiencies or synergies that may result from the
Merger. In addition, the unaudited pro forma condensed combined financial
statements do not purport to project the future financial position or
operating results of the combined company. The historical consolidated
financial statements have been adjusted to give effect to pro forma events
that are (1) directly attributable to the Merger; (2) factually
supportable; and (3) as they relate to the statements of income, expected
to have a continuing impact on the combined results. The unaudited pro
forma condensed combined financial statements should be read in conjunction
with the accompanying notes to the unaudited pro forma condensed combined
financial statements and the respective historical financial information
from which it has been derived, which includes:
o separate historical audited financial statements of Dow Jones and
MarketWatch, including notes thereto, for the year ended December
31, 2003 included in Dow Jones' Annual Report on Form 10-K for the
year then ended and MarketWatch's amended Annual Report on Form
10-K/A for the year then ended; and
o separate historical unaudited financial statements of Dow Jones and
MarketWatch, including notes thereto, as of and for the nine months
ended September 30, 2004 included in Dow Jones' Quarterly Report on
Form 10-Q for the period then ended and MarketWatch's Quarterly
Report on Form 10-Q for the period then ended.
The unaudited pro forma condensed combined financial statements have been
prepared using the purchase method of accounting with Dow Jones treated as
the acquirer. Accordingly, Dow Jones' estimated cost to acquire MarketWatch
of approximately $538 million (including transaction costs) has been
preliminarily allocated to the assets acquired and the liabilities assumed
according to their respective estimated fair values at the date of
acquisition. The excess of the purchase price over the estimated fair value
of the net assets acquired has been recorded as goodwill. Management, with
the assistance of independent valuation specialists, is currently
determining the estimated fair values of a significant portion of these net
assets. The final determination of the estimated fair value of the acquired
net assets will be completed as soon as possible, but no later than one
year from the January 21, 2005 acquisition date.
The final valuation will be based on the actual assets acquired and
liabilities assumed at the acquisition date and management's consideration
of the independent valuation work. Although the final determination may
result in asset and liability fair values that are different than the
preliminary estimates of these amounts included herein, it is not expected
that those differences will be material to an understanding of the impact
of this transaction to Dow Jones.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT SEPTEMBER 30, 2004
(DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA
-------------------------- --------------------------
DOW JONES MARKETWATCH ADJUSTMENTS COMBINED
-------------------------- --------------------------
ASSETS
------
Current assets:
Cash and cash equivalents $ 21,006 $ 56,383 $ (69,039)(a)$ 8,350
Restricted cash -- 920 -- 920
Accounts receivable -- trade, net 160,596 12,687 -- 173,283
Accounts receivable -- other 27,569 -- -- 27,569
Newsprint inventory 12,047 -- -- 12,047
Prepaid expenses 18,117 2,298 -- 20,415
Deferred income taxes 14,290 -- -- 14,290
---------- ----------- ------------ -----------
Total current assets 253,625 72,288 (69,039) 256,874
---------- ----------- ------------ -----------
Investments in associated companies, at
equity 83,786 -- -- 83,786
Other investments 13,969 -- -- 13,969
Plant, property and equipment, at cost 1,763,076 22,793 -- 1,785,869
Less, accumulated depreciation 1,110,016 18,949 -- 1,128,965
---------- ----------- ------------ -----------
Plant, property and equipment, net 653,060 3,844 -- 656,904
Goodwill 242,259 88,389 315,862 (b) 646,510
Other intangible assets 86,974 6,973 53,027 (b) 146,974
Deferred income taxes 15,786 -- 29,881 (c) 45,667
Restricted cash -- 175 -- 175
Other assets 30,100 1,165 -- 31,265
---------- ----------- ------------ -----------
Total assets $1,379,559 $ 172,834 $ 329,731 $ 1,882,124
========== =========== ============ ===========
LIABILITIES
-----------
Current liabilities:
Short-term borrowings $ -- $ -- $ 438,700 (a)$ 438,700
Accounts payable and accrued expenses 116,839 16,125 14,100 (d) 147,064
Retirement plan contributions payable 19,483 -- -- 19,483
Other payables 65,684 487 -- 66,171
Dividend payable 20,486 -- -- 20,486
Contract guarantee obligation 205,402 -- -- 205,402
Income tax payable 56,315 -- -- 56,315
Unearned revenue 199,380 7,058 -- 206,438
---------- ----------- ------------ -----------
Total current liabilities 683,589 23,670 452,800 1,160,059
---------- ----------- ------------ -----------
Long-term debt 196,553 -- -- 196,553
Deferred compensation, principally
postretirement 302,395 -- -- 302,395
Contract guarantee obligation 53,779 -- -- 53,779
Other noncurrent liabilities 18,079 1,095 -- 19,174
---------- ----------- ------------ -----------
Total liabilities 1,254,395 24,765 452,800 1,731,960
---------- ----------- ------------ -----------
Minority interests in subsidiaries 3,310 -- -- 3,310
STOCKHOLDERS' EQUITY
--------------------
Common stock 102,181 254 (254)(e) 102,181
Additional paid-in capital 124,687 394,239 (394,239)(e) 124,687
25,000 (f) 25,000
Retained earnings (accumulated deficit) 803,824 (246,409) 246,409 (e) 803,824
Accumulated other comprehensive income
(loss), net 8,960 (15) 15 (e) 8,960
---------- ----------- ------------ -----------
1,039,652 148,069 (123,069) 1,064,652
Less, treasury stock, at cost 917,798 -- -- 917,798
---------- ----------- ------------ -----------
Total stockholders' equity 121,854 148,069 (123,069) 146,854
---------- ----------- ------------ -----------
Total liabilities and stockholders' equity $1,379,559 $ 172,834 $ 329,731 $ 1,882,124
========== =========== ============ ===========
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA
-------------------------- --------------------------
DOW JONES MARKETWATCH ADJUSTMENTS COMBINED
-------------------------- --------------------------
REVENUES:
Advertising $ 694,683 $ 22,812 $ -- $ 717,495
Information services 242,251 33,578 (225)(g) 275,604
Circulation and other 297,369 1,389 -- 298,758
---------- ----------- ---------- -----------
Total revenues 1,234,303 57,779 (225) 1,291,857
EXPENSES:
News, production and technology 386,665 29,769 -- 416,434
Selling, administrative and general 434,026 22,902 (225)(g) 456,703
Newsprint 84,960 -- -- 84,960
Print delivery costs 141,285 -- -- 141,285
Depreciation and amortization 79,651 3,670 3,640 (b) 86,961
Restructuring charges and
September 11-related items, net (2,761) -- -- (2,761)
---------- ----------- ---------- -----------
Operating expenses 1,123,826 56,341 3,415 1,183,582
Operating income 110,477 1,438 (3,640) 108,275
OTHER INCOME (DEDUCTIONS):
Interest income (expense), net (2,080) 363 (8,384)(a) (10,101)
Equity in earnings of associated
companies 1,386 -- -- 1,386
Gain on disposition of investment 3,260 -- -- 3,260
Contract guarantee, net (5,455) -- -- (5,455)
Other, net (506) -- -- (506)
---------- ----------- ---------- -----------
Income before income taxes and
minority interests 107,082 1,801 (12,024) 96,859
Income taxes 44,694 54 (4,143)(c) 40,605
---------- ----------- ---------- -----------
Income before minority interests 62,388 1,747 (7,881) 56,254
Minority interests in losses of 1,536 -- -- 1,536
subsidiaries ---------- ----------- ---------- -----------
NET INCOME $ 63,924 $ 1,747 $ (7,881) $ 57,790
========== =========== ========== ===========
PER SHARE:
Net income:
Basic $ 0.78 $ 0.07 -- $ 0.71
Diluted 0.78 0.07 -- 0.70
Weighted-average shares outstanding:
Basic 81,825 24,427 -- 81,825
Diluted 82,239 26,468 -- 82,601
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA
-------------------------- --------------------------
DOW JONES MARKETWATCH ADJUSTMENTS COMBINED
-------------------------- --------------------------
REVENUES:
Advertising $ 871,817 $ 24,084 $ -- $ 895,901
Information services 286,863 21,281 (164)(g) 307,980
Circulation and other 389,805 1,808 -- 391,613
---------- ----------- ---------- -----------
Total revenues 1,548,485 47,173 (164) 1,595,494
EXPENSES:
News, production and technology 483,709 22,519 -- 506,228
Selling, administrative and general 540,529 18,596 (164)(g) 558,961
Newsprint 105,066 -- -- 105,066
Print delivery costs 188,662 -- -- 188,662
Depreciation and amortization 106,014 3,755 6,794 (b) 116,563
Restructuring charges and
September 11-related items, net (18,408) -- -- (18,408)
---------- ----------- ---------- -----------
Operating expenses 1,405,572 44,870 6,630 1,457,072
Operating income 142,913 2,303 (6,794) 138,422
OTHER INCOME (DEDUCTIONS):
Interest income (expense), net 4,941 502 (11,178)(a) (5,735)
Equity in earnings of associated
companies 2,869 -- -- 2,869
Gain on non-monetary exchange of
equity holdings 18,699 -- -- 18,699
Gain on resolution of Telerate
sale loss contingencies 59,821 -- -- 59,821
Contract guarantee, net (9,523) -- -- (9,523)
Other, net 1,138 -- -- 1,138
---------- ----------- ---------- -----------
Income before income taxes and
minority interests 220,858 2,805 (17,972) 205,691
Income taxes 51,704 150 (6,217)(c) 45,637
---------- ----------- ---------- -----------
Income before minority interests 169,154 2,655 (11,755) 160,054
Minority interests in losses of
subsidiaries 1,445 -- -- 1,445
---------- ----------- ---------- -----------
NET INCOME $ 170,599 $ 2,655 $ (11,755) $ 161,499
========== =========== ========== ===========
PER SHARE:
Net income:
Basic $ 2.09 $ 0.15 -- $ 1.98
Diluted 2.08 0.14 -- 1.96
Weighted-average shares
outstanding:
Basic 81,593 17,317 -- 81,593
Diluted 81,950 18,594 -- 82,293
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. Basis of Pro Forma Presentation
On January 21, 2005, Dow Jones acquired MarketWatch for a purchase price of
$18 per share in cash for each share of MarketWatch common stock
outstanding on the effective date of the Merger. Each outstanding option to
purchase shares of MarketWatch common stock has been assumed using an
exchange ratio based on the five day trading average of Dow Jones common
stock immediately preceding and excluding the effective date of the Merger
using a $18 value. Based on the number of shares of MarketWatch common
stock and options outstanding as of the acquisition date, Dow Jones made a
payment of approximately $507.7 million and issued options to purchase
approximately 1.2 million shares of Dow Jones common stock. The estimated
fair value of the Dow Jones common stock options issued to replace the
outstanding MarketWatch common stock options, approximately $25 million,
was determined using the Black-Scholes model.
The estimated total purchase price for the MarketWatch acquisition is as
follows (in thousands):
Cash $ 507,739
Fair value of Dow Jones options to be issued 25,000
Estimated direct Merger costs 5,100
-----------
Total estimated purchase price $ 537,839
===========
The unaudited pro forma condensed combined statements of income combine the
historical consolidated statements of income of Dow Jones and MarketWatch
as if the transaction occurred on January 1, 2003. The unaudited pro forma
condensed combined balance sheet combines the historical consolidated
balance sheets of Dow Jones and MarketWatch as if the transaction occurred
on September 30, 2004.
The Merger has been accounted for as a purchase by Dow Jones under
accounting principles generally accepted in the United States of America.
Under the purchase method of accounting, the total estimated purchase price
is allocated to MarketWatch's net tangible and intangible assets based upon
their estimated fair value as of the date of completion of the Merger.
Based upon the estimated purchase price and the preliminary valuation
performed, the preliminary purchase price allocation, which is subject to
change based on Dow Jones' final analysis, is as follows (in thousands):
TANGIBLE ASSETS:
Cash, cash equivalents and restricted cash $ 57,478
Accounts receivable and other current assets 14,985
Property, plant and equipment, net 3,844
Deferred tax assets, net 29,881
Other assets -- long term 1,165
-----------
Total tangible assets 107,353
-----------
INTANGIBLE ASSETS:
Customer relationships 16,800
Developed technology 13,200
Trade name 30,000
Goodwill 404,251
-----------
Total intangible assets 464,251
-----------
LIABILITIES ASSUMED:
Accounts payable and other accrued liabilities (25,612)
Deferred revenue (7,058)
Other liabilities -- long term (1,095)
-----------
Total liabilities assumed (33,765)
-----------
Net assets acquired $ 537,839
-----------
A preliminary estimate of $30 million has been allocated to amortizable
intangible assets consisting of customer-related intangible assets and
developed technology with useful lives between four and seven years. In
addition, a preliminary estimate of $30 million has been allocated to
indefinite lived intangible assets, principally trade names, which will not
be amortized.
A preliminary estimate of $404.3 million has been allocated to goodwill.
Goodwill represents the excess of the purchase price over the fair value of
the net tangible and intangible assets acquired, and is not deductible for
tax purposes. In accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets", goodwill and
acquired indefinite-lived intangibles associated with the Merger will not
be amortized and will be tested for impairment at least annually. The
preliminary purchase price allocation for MarketWatch is subject to
revision as more detailed analysis is completed and additional information
concerning the fair values of MarketWatch's assets and liabilities becomes
available. Any change in the fair value of the net assets of MarketWatch
will change the amount of the purchase price allocable to goodwill. Final
purchase accounting adjustments, which may differ materially from the pro
forma adjustments presented here, will be completed no later than one year
from the January 21, 2005 acquisition date.
2. Pro Forma Adjustments
Certain reclassifications have been made to conform MarketWatch's
historical amounts to Dow Jones' financial statement presentation. Dow
Jones is currently reviewing accounting policies and financial statement
classifications used by MarketWatch. As a result of this review, it may
become necessary to make certain additional reclassifications to the
combined financial statements.
The accompanying unaudited pro forma condensed combined financial
statements have been prepared as if the Merger was completed as of
September 30, 2004 and January 1, 2003 for balance sheet and statements of
operations purposes, respectively. The following pro forma adjustments are
included:
(a) To record the cash expended ($69 million) and debt incurred
($438.7 million) to purchase all outstanding shares of
MarketWatch for the Merger.
To record the corresponding interest expense ($8.4 million for
the nine months ended September 30, 2004 and $11.2 million for
the year ended December 31, 2003) related to the debt incurred.
The debt initially incurred for the Merger was commercial paper
which has a variable interest rate. The interest expense
presented in these pro forma adjustments reflects the actual
interest rate in effect for commercial paper at the Merger date
which was approximately 2.52%. A variation in the actual interest
rate of 1/8% would correspond to a change in the interest expense
presented in these pro forma adjustments of approximately $0.4
million for the nine months ended September 30, 2004 and
approximately $0.6 million for the year ended December 31, 2003.
(b) To eliminate the historical goodwill ($88.4 million) and
intangible assets ($7 million) and record the estimated acquired
goodwill ($404.3 million) and other intangible assets ($60
million) as a result of the Merger. The weighted average life of
amortizable intangible assets (approximately $30 million),
customer relationships and developed technology, is between 4 and
7 years.
To eliminate the historical amortization of the intangible assets
of $1.5 million for the nine months ended September 30, 2004 and
record amortization of the amortizable intangible assets ($5.1
million for the nine months ended September 30, 2004 and $6.8
million for the year ended December 31, 2003) related to the
estimated fair value of identifiable intangible assets from the
purchase price allocation.
(c) To record a net deferred tax asset ($29.9 million), which
consists primarily of (i) MarketWatch's federal and state net
operating loss carryforwards ("NOLs") for which a full valuation
allowance was recorded by MarketWatch due to the uncertainty of
realization ($53.9 million) and (ii) deferred tax liabilities
associated with the acquired identifiable definite-lived
intangible assets ($24 million). The realization by Dow Jones of
the MarketWatch NOLs is subject to certain limitations, both
annually and in total, under Section 382 of the Internal Revenue
Code.
To adjust for income tax effects of pro forma adjustments and
MarketWatch results at the estimated effective rate of 40% ($4.1
million for the nine months ended September 30, 2004 and $6.2
million for the year ended December 31, 2003).
(d) To record estimated direct transaction costs for the Merger ($5.1
million and $9 million to be incurred by Dow Jones and
MarketWatch, respectively).
(e) To eliminate the historical MarketWatch (1) par value balance of
Common stock ($0.3 million); (2) Additional paid in capital
($394.2 million); (3) Accumulated deficit ($246.4 million); and,
(4) Other comprehensive loss ($0.02 million).
(f) To record the estimated fair value, under the Black-Scholes
model, of Dow Jones shares of common stock and options to be
issued to holders of MarketWatch options, which fully vested in
connection with the Merger ($25 million).
(g) To eliminate transactions between Dow Jones and MarketWatch,
which are primarily related to license fees. Upon completion of
the Merger, transactions that occur in connection with these
arrangements would be considered intercompany transactions. All
significant balances and transactions related to these
arrangements have been eliminated from the unaudited pro forma
condensed combined financial statements. Eliminations primarily
relate to revenue and expense between Dow Jones and MarketWatch
($0.2 million for the nine months ended September 30, 2004 and
the year ended December 31, 2003).
3. Pro Forma Condensed Combined Net Income Per Share
Unaudited pro forma condensed combined net income per basic share was
computed using Dow Jones' weighted average shares outstanding during the
respective periods. Unaudited pro forma condensed combined net income per
diluted share was computed by adding approximately 1.2 million options
(using the treasury stock method) assumed to be issued to Dow Jones'
weighted average shares outstanding during the respective periods.