EX-99.5 5 lhexh99_5.txt UNAUDITED PRO FORMA COND. COMB. FIN. STATEMENTS 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.