*Formatting of these documents may vary from those filed with the Division of Insurance due to the conversion process to make them available through the web.

 

 

COMMONWEALTH OF MASSACHUSETTS

DIVISION OF INSURANCE

_______________________
Plan of Reorganization of    )
John Hancock Mutual Life )                                                                                       Docket No. F99-04
Insurance Company             )
_______________________)

 

 

WRITTEN STATEMENT OF WILLIAM C. FEELEY

 

Introduction

My name is William C. Feeley. I am a Managing Director and Head of Capital Markets of Wit Capital Corporation ("Wit Capital"). I have reviewed a letter dated May 26, 1999, regarding "John Hancock Subscription Rights" that was provided to Mr. John M. DeCiccio of the John Hancock Mutual Life Insurance Company by Derek G. Kirkland of Morgan Stanley Dean Witter. I have also reviewed a Memorandum to Ms. Julie Bowler, First Deputy Commissioner & Chief of Staff, Massachusetts Division of Insurance regarding "Policyholder Subscription Rights" that was dated June 7, 1999 and submitted by Thomas M. Kelley of Debevoise & Plimpton.

My testimony will do the following: (1) outline my background and qualifications; (2) describe how policy holders could benefit from Subscription Rights or a similar program for administering Directed Stock; and (3) provide a rebuttal to the concerns described and conclusion drawn by Morgan Stanley Dean Witter regarding the advisability of a Policyholder Subscription Rights.

 

Qualifications

Personal Qualifications

I have been employed by Wit Capital Corporation since September 1997 and currently hold the title of Managing Director and Head of Capital Markets. My primary responsibilities involve participating in and managing the origination, structuring, and valuation, marketing and pricing public offerings of Investment Banking clients of Wit Capital Corporation. My experience and responsibilities include supervision of Reserved Share, Directed Share and Affinity Marketing Programs conducted by issuer clients in connection with their public offerings.

I have more than seventeen years of Investment Banking experience during which I have focused on providing investment banking services to hundreds of issuers of initial public and secondary offerings of equity securities. Many of these engagements have been for clients in the financial services industry and have involved demutualizations as well as public equity offerings for insurance companies.

Prior to joining Wit Capital Corporation, I worked for two years as Managing Director, Equity Capital Markets at Bankers Trust Company. I also spent two years as Senior Vice President and Head of Equities at The First Albany Corporation and thirteen years at Kemper Securities Corporation and a predecessor most recently as Executive Vice President and Director of Corporate Finance and Syndicate Services.

In 1980 I received a Bachelor of Science in Business Administration from Georgetown University and in 1985 was conferred Master of Business Administration at Loyola University of Chicago.

 

Wit Capital’s Qualifications

Introduction. Wit Capital is the world’s first online investment bank. It is frequently recognized as the leading online investment bank with respect to managing the sale of initial public offering securities using the Internet to interact with its customers. Wit Capital has a strong reputation for innovation and its use of technology in connection with its activities in strategic and financial advisory work, public and private offerings of securities and administration of large scale reserved share, directed share and affinity marketing programs.

Wit Capital is recognized as a leader in its work with the securities industry regulators. It expends significant resources to assist regulators in the formation of policies and procedures that sustain and advance public policy goals while encouraging the integration of technological advances into the capital formation process. I consider it noteworthy to point out that Wit Capital’s Board of Directors includes a former Commissioner of the Securities and Exchange Commission and a former President of the National Association of Securities Dealers.

Equity Offering Qualifications.

Wit Capital is the leading underwriter of equity offerings utilizing the Internet to distribute securities in connection with initial public offerings ("IPOs") as well as follow-on, secondary and combination offerings of public equity securities.

Wit Capital often seeks and executes the role of co-manager of public offerings of securities. Wit Capital has been an underwriter of 154 public offerings including 125 IPOs and has acted as co-managing underwriter of 47 these offerings. During the period from January 1, 1999 through October 31, 1999 Wit Capital has co-managed 45 public offerings. This level of activity ranks Wit Capital among the most active managers of IPOs in the domestic U.S. investment banking industry.

Qualifications as Administrator of Reserved Shares, Directed Share and Affinity Marketing Programs.

Wit Capital has pioneered the development and execution of large scale, Reserve Share, Directed Share, and Affinity Marketing Programs utilizing the Internet. It conducts these programs in a manner that is less costly and less time consuming than traditional offline programs. By conducting such programs utilizing the Internet, the issuer, the managing underwriters, the Division of Insurance and in this case, the Policyholders can all be provided with administrative feedback in a timely and accurate manner. This will enhance rather than impede the marketing flexibility and the success of the proposed offering. Participant’s Exhibits for a further description of Wit Capital.

In order to avoid multiple and unnecessary definitions during this testimony, I’ll jump ahead to state that Wit Capital’s recommendation is that John Hancock conduct a Policyholder Directed Stock Program ("PDSP") rather than a Policyholder Subscription Rights program. I am pleased to take this one step beyond traditional expert witness testimony. Wit Capital is prepared to detail how this would be done in the form of a proposal to administer such a program and has attached as Appendix A to this testimony, a Summary Form of Proposal to Act as Administrator for a Policyholder Directed Share Program in connection with the Demutualization of the John Hancock Mutual Life Insurance Company.

We suggest that a Policyholder Directed Share Program would be announced in a letter to all policyholders. We suggest that this letter would piggyback on the mailing that will announce the results of the special meeting. The Policyholders would be invited to register their potential interest in participating in a program that would give them the opportunity to subscribe to a minimum of 100 shares and a maximum of 500 shares of the IPO of John Hancock in connection with the demutualization of the Company.

We propose that a portion of the shares in the IPO up to some maximum amount (perhaps 15% to 25% of the number of shares issued in the IPO) would be designated for the PDSP. Any shares not sold as part of the PDSP would be sold by the underwriters on the same terms as other shares in the offering. In the event of demand that exceeds the shares set aside for the PDSP, shares could be allocated on a first come, first served basis or in some other manner deemed acceptable to John Hancock, the managing underwriters, the Division of Insurance and Wasserstein, Perella & Co, Inc.

Wit Capital has administered directed share programs that have effectively and efficiently permitted thousands of individual participants to express their demand for millions of shares of selected public offerings. In our judgment and experience, utilizing the Internet to distribute prospectus materials, program instructions and tutorials and aggregate conditional offers has produced measurable benefits. These include dramatically lower costs of program administration and significantly higher program investor participation than would be likely in a traditional offline program such as a Policyholder Subscription Rights offering in this case.

Wit Capital has taken a pioneering position in seeking and receiving permission from the securities regulators to permit online registration and administrative perfection of the necessary documents to make an individual eligible to participate in a directed share program, BEFORE the preliminary prospectus is available.

Wit Capital maintains a dedicated staff that focuses on administering online Directed Share Programs. It believes that it is uniquely qualified to propose administration of a PDSP for John Hancock. It believes that it has the required understanding of the regulatory requirements, technical capabilities, management and administrative and customer service support and a track record of success in executing large scale programs similar to the PDSP that is described and proposed for John Hancock in Exhibit A.

Please note that while Wit Capital has most effectively used the internet as a means of delivering prospectus information and collecting conditional offers, Wit Capital is by no means alone in its use of this overall process for communicating to large numbers of people as part of a program in advance of the availability of the Preliminary Prospectus. This is of course, because it is necessary to understand the group of persons that are even interested in learning more about the offering so that a prospectus may be sent to that group.

Some notable transactions where rather large scale Directed Share Programs were orchestrated on behalf of a less "ownership" based group than Hancock have been recently performed for the following companies’ IPOs, each with tens of thousands, if not hundreds of thousands of employees being invited:

  1. Conoco, Inc. ("COC.A/B")
  2. Hartford Life, Inc. ("HLI")
  3. Nationwide Financial Services, Inc. ("NFS")
  4. Federated Investors, Inc. ("FII")
  5. Associates First Capital Group ("AFS")

What is most notable from the above is that even though there was no analogous ownership interest in the above offerings, as compared to the strong ownership interest that is part of Hancock’s demutualization process, the companies above went so far as to bear increased costs for printing and mailing program and prospectus information to their large target groups. Here, John Hancock is being given a means for considering the management and administration of a similar process that removes many of the costs on burdens that the companies above have in fact born on behalf of their target group.

It is in fact quite typical for an issuing company to reserve 10% or more of it’s IPO for the benefit of a targeted group. Examples can readily be found by turning to the "Underwriting" section of most prospectuses.

Rebuttal to the concerns and conclusions drawn by Morgan Stanley Dean Witter and Debevoise & Plimpton Regarding a Policyholder Subscription Program.

Non-confrontation.

Although we disagree with a number of the positions and statements that are made by Morgan Stanley Dean Witter ("MSDW") and Debevoise & Plimpton regarding the advisability of a Policyholder Subscription Rights offering, we acknowledge: (1) MSDW’s significant expertise in respectively conducting public offerings such as the transaction broadly contemplated in connection with the plan for demutualization of the Company; and (2) D & P’s experience in advising clients regarding legal matters for such an offering. As a result, the alternative proposal that we suggest calls for cooperation rather than a competitive position as relates to the resolution of this matter. More generally, my testimony is offered to demonstrate that the traditional method of managing IPOs has been supplanted and is no longer adequate especially in this context.

The technological and regulatory environment pursuant to capital formation transactions is changing rapidly. As a result, issuers have found it useful to ask Wit Capital to work alongside a variety of bulge bracket investment banks, including Morgan Stanley Dean Witter, to produce a stronger team – one that more successfully meets issuing clients needs by addressing the increasingly important digital channel of distribution.

"Full and fair compensation."

We object to the opinion that the structure that Hancock is pursuing "already gives full and fair compensation to policyholders for the loss of their membership rights" as: (1) the plan forces the realization of an immediately recognizable tax event through the use of cash or policy credits; (2) the plan caps the benefit to the receiving policyholders to the greater of the IPO price or the average closing price during the first 20 days of trading UP TO A MAXIMUM OF 120% OF THE IPO PRICE; (3) as a byproduct of points one and two above, the policyholders are being denied the opportunity to exercise their true ownership rights as policyholders of a mutual company to exercise their investment discretion to capture of the full amount of the goodwill associated with Hancock’s good name and business prospects. In addition it does not prevent the dilution of their ownership interest in the Company following the demutualization. All this has been removed from their control.

"Novel approach."

The "novel approach" to address potential post-IPO price appreciation only demonstrates the Company’s acknowledgement of the rights that they have taken from the policyholders. The data provided by Wasserstein further establishes the substantial appreciation that occurs in demutualizations and generally.

Delay, expense and logistical burden.

MSDW’s points regarding delay, expense and logistical burden would be well taken were it not for the existence of a much less costly, less time consuming and more accountable method of conducting an offering that would be similar to a Policyholder Subscription Rights offering and achieve its benefits without its disadvantages. The alternative that Wit Capital suggests is an Internet based Policyholder Directed Share Program. A PDSP attempts to solve the problems of otherwise dismissing the full ownership considerations of the existing policyholders on the basis of costs, administrative burden, low projected response rates and importance of institutional ownership.

Timing.

Wit Capital believes that it can conduct a PDSP that would provide initial notice, description of the program and an opportunity to register interest in receiving a preliminary prospectus once it becomes available well BEFORE the preliminary prospectus is printed. (See the advanced written testimony of Robert Mendelson, Esq., for a description of legal comfort on engaging in this course of action.) In addition, after conditional offers are placed by Policyholders in the program, under the terms of a no action letter and related requests dated July 14, 1999, the S.E.C. has permitted Wit Capital to seek reconfirmations of individuals’ conditional offers up to 48 business hours prior to the anticipated effective date of the IPO.

A more detailed timeline and plan of distribution for a PDSP is included in Appendix B.

Response rates.

In contrast to the statistics that were cited to support the contention of a low i.e. 2.2% subscription rate among similar offerings, Wit Capital has experienced very high rates of participation among Directed Share Program participants in a number of our online programs. Specifically, we have received registration rates in excess of 25% from those invited to register. Further, we have experienced rates of registrants that have completed the requirements and placed a conditional offer for shares in a program that has run as high as 15% of all eligible potential participants. A collateral benefit of conducting a successful online PDSP, particularly given the large number of policyholders, is that demand for shares in the IPO would constitute a substantial portion of the total number offered. This would strengthen the tone of the deal.

Even in today’s environment of Free Internet access and Free computer giveaways, it is true that not all policyholders would feel enabled to participate if a PDSP were conducted online because they would lack the money, knowledge or desire to interact on the Internet. This however is not reason to deny this opportunity to the millions of policyholders that are or easily could be connected to the Internet. Moreover, alternative means for reaching this group can and should e developed to provide access to them.

 

Institutional Ownership.

We agree with MSDW that significant institutional ownership is desirable for a variety of reasons, but we take issue with the matter of degree. First, we consider it very desirable to align the interests of Hancock by allowing its policyholders to become shareholders in a manner that is likely to produce stability among these new shareholders. Second, it has been our observation that although most companies’ IPO shares are still distributed 80% to 85% to institutions by traditional investment banks, much of the stock immediately begins to migrate into the hands of individual investors. MSDW’s own analysis of the institutional holdings of comparable companies would seem to bear this out. This is unsurprising in a world where better and lower cost information flows is driving individuals to greater levels of direct participation in the control of their financial futures.

 

Summary

The Subscription Rights Offering in the form of the PDSP via the Internet is more equitable and more ubiquitous for existing Policyholders than the MSDW proposal that eliminates an investment opportunity on the meritless grounds of potential delays and high costs. We believe that the Wit Capital proposal answers these concerns very constructively and calls for a re-examination of the plan of distribution for the John Hancock IPO. Absent an offering in the form outlined herein, we find that the Plan is prejudicial to Hancock policyholders and that the financial loss associated with the transfer to outside investors at the expense of policyholder-owners is unfair and prejudicial to them.

William C. Feeley
Managing Director
Wit Capital Corporation

Attached: Appendix A

 

November 8, 1999

Appendix A

 

Form of Proposal from Wit Capital Corporation to Administer a Policyholder Subscription Rights -Directed Share Program in connection with the proposed Demutualization of John Hancock Mutual Life Insurance Company

 

Wit Capital Corporation is prepared to act as Administrator of a Policyholder Directed Share Program (PDSP) in connection with the Initial Public Offering of John Hancock

Traditionally, in order to make a legal sale of IPO securities the offering needs to be declared effective by the S.E.C. and the customer needs to reconfirm their order. Wit Capital has sought and been grated the permission to seek pre-effective reconfirmation of conditional offers up to 48 hours prior to the time that the offering is expected to be declared effective.

The ability to collect pre-effective reconfirmation of conditional offers prior to the effective date is an important advantage because it allows the managing underwriters to accurately gauge the size of the PDSP and therefore determine the size of the balance of the offering.

 

Cost Considerations

If the mailing of the initial one page program description and invitation were coordinated with another mailing to policyholders regarding the plan of conversion, the costs would be negligible. If this is accomplished as a separate mailing, we estimate the cost at not more than $400,000 dollars.

Wit Capital can deliver up to 3,000,000 preliminary prospectus for the John Hancock IPO via email with negligible costs. The savings versus delivering hard copies of this document reaches into millions of dollars.

Wit Capital would seek to receive and answer via email and phone all policyholder questions regarding the PDSP. Wit Capital will provide the required staffing and services to provide the proper level of policyholder customer service. It is inevitable that some questions and email traffic will be directed to John Hancock or MSDW. As a result, we project that a policyholder service center regarding the PDSP would need to be established for a period of approximately one-month. We estimate that such a center would require a staffing level of one dozen qualified individuals to handle these questions, and could consist of Hancock’s already existing center.

Wit Capital would expect to be compensated by earning the selling concession portion of the gross underwriting spread in the IPO on the shares sold to policyholders in the PDSP. In addition, Wit Capital would seek to earn appropriate management and underwriting fees by accepting the role of co-manager or underwriter of the IPO.

 

Marketing Considerations

Wit Capital estimates that although nearly all policyholders can have cheap access to the Internet, at least one-third of policyholders regularly uses the Internet.

Based upon previous experience with online Directed Share Programs and upon our assessment of the demographic of the average policyholder, Wit Capital would estimate a response rate of 4% to 10% of policyholders that would place conditional offers for shares in the John Hancock IPO.

We estimate that the average dollar amount of the conditional offers would be approximately $5,000 dollars.

As a result, John Hancock might expect to generate demand for between $200 million and $500 million dollars of the IPO securities of the Company. In the judgement of Wit Capital, this could have a very positive effect on the overall success of the Initial Public Offering.