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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission file number 0-17224
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Doral Financial Corporation
---------------------------
(Exact name of the registrant as specified in its charter)
Puerto Rico 66-0312162
----------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1159 F.D. Roosevelt Avenue,
San Juan, Puerto Rico 00920-2998
--------------------- ----------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, (787) 749-7100
including area code --------------
First Financial Caribbean Corporation
------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock outstanding at November 10, 1997 - 18,397,460
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DORAL FINANCIAL CORPORATION
<TABLE>
<CAPTION>
INDEX
PAGE
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1997 (Unaudited) and
December 31, 1996..............................................................................3
Consolidated Statements of Income and Retained Earnings (Unaudited) - Quarters
ended September 30, 1997 and September 30, 1996 and nine months ended
September 30, 1997 and September 30, 1996......................................................4
Consolidated Statement of Cash Flows (Unaudited) - Nine-month period ended
September 30, 1997 and September 30, 1996......................................................5
Notes to Consolidated Financial Statements.....................................................6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................................8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.............................................................................17
Item 2 - Changes in Securities.........................................................................17
Item 3 - Defaults Upon Senior Securities...............................................................17
Item 4 - Submission of Matters to a Vote of Security Holders...........................................17
Item 5 - Other Information.............................................................................18
Item 6 - Exhibits and Reports on Form 8-K..............................................................20
SIGNATURES......................................................................................................21
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project" or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities, competitive and regulatory
factors and legislative changes, could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
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DORAL FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS OF DOLLARS EXCEPT FOR SHARE INFORMATION)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
(unaudited) (audited)
----------- ---------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 82,586 $ 81,213
Mortgage loans held for sale, net 326,252 261,608
Securities held for trading, net 611,297 436,125
Securities held to maturity 191,024 109,055
Securities available for sale 71,548 12,007
Loans receivable, net 165,702 128,766
Accounts receivable and mortgage servicing advances, net 20,224 15,882
Accrued interest receivable 12,393 10,091
Servicing asset 30,624 20,969
Property, leasehold improvements and equipment, net 10,861 9,359
Cost in excess of fair value of net assets acquired 6,299 6,562
Real estate held for sale, net 2,948 2,246
Prepaid expenses and other assets 14,347 13,113
-------------- -------------
$ 1,546,105 $ 1,106,996
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Loans payable $ 218,670 $ 196,643
Securities sold under agreements to repurchase 688,386 388,213
Deposit accounts 250,945 158,902
Notes payable 150,141 152,126
Advances from Federal Home Loan Bank 15,000 15,000
Convertible Subordinated Debentures 8,460 10,000
Accounts payable and other liabilities 32,935 26,992
Income tax payable 1,656 217
Deferred tax liability 9,233 8,372
-------------- -------------
Total liabilities 1,375,426 956,465
-------------- -------------
Commitments and contingencies -------------- -------------
Stockholders' equity:
Serial Preferred Stock, $1 par value, 2,000,000 shares
authorized; no shares outstanding --- ---
Common Stock, $1 par value, 50,000,000 shares authorized;
18,425,460 shares issued (including 9,212,730 shares issued on 18,425 18,249
August 28, 1997 as stock split) (1996-18,249,460); 18,397,460
shares outstanding (1996-18,221,460)
Paid-in capital 30,924 29,563
Retained earnings 121,327 102,925
Unrealized gain (loss) on securities available for sale, net of
deferred tax 55 (81)
Treasury stock at par value, 28,000 shares
(1996-28,000 shares) (28) (28)
Unearned compensation under employment contracts (24) (97)
-------------- -------------
Total stockholders' equity 170,679 150,531
-------------- -------------
Total liabilities and stockholders' equity $ 1,546,105 $ 1,106,996
============== =============
</TABLE>
The accompanying notes are an integral part of this statement.
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DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(In thousands of dollars, except for per share data)
Unaudited
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
----------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Mortgage loans sales and fees 7,166 7,049 18,223 20,471
Servicing income 3,816 2,645 10,863 8,342
Interest income 23,026 16,430 64,099 49,030
Gain on sale of servicing rights -- 1,813 -- 1,813
Rental and other income 398 211 1,128 511
------------- ----------- ----------- -----------
34,406 28,148 94,313 80,167
------------- ----------- ----------- -----------
Expenses:
Interest 15,100 10,941 43,214 32,759
Employee cost, net (See Note g) 3,174 1,735 6,308 6,268
Taxes, other than payroll and income taxes 375 303 1,019 785
Maintenance 253 199 701 488
Advertising 791 938 2,520 2,561
Professional services 831 634 2,395 2,021
Telephone 544 444 1,531 1,364
Rent 647 505 1,844 1,552
Other, net (See Note g) 3,111 3,523 7,960 8,768
------------- ----------- ----------- -----------
24,826 19,222 67,492 56,566
------------- ----------- ----------- -----------
Income before income taxes 9,580 8,926 26,821 23,601
Income taxes:
Current 1,038 (5) 2,397 663
Deferred (50) 1,507 793 2,127
------------- ----------- ----------- -----------
988 1,502 3,190 2,790
------------- ----------- ----------- -----------
Net Income 8,592 7,424 23,631 20,811
Retained earnings at beginning of period 114,575 92,368 102,925 81,892
Less cash dividends paid:
Convertible preferred stock --- --- --- 14
Common stock 1,840 1,548 5,229 4,445
------------- ----------- ----------- -----------
Retained earnings at the end of period $ 121,327 $ 98,244 $ 121,327 $ 98,244
============= =========== =========== ===========
Earnings per share:
Primary:
Net Income $ 0.47 $ 0.41 $ 1.29 $ 1.15
============= =========== =========== ===========
Fully Diluted:
Net Income $ 0.45 $ 0.39 $ 1.24 $ 1.10
============= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
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DORAL FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Nine-Month Period Ended
September 30,
-----------------------
1997 1996
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income.................................................................................... $ 23,631 $ 20,811
----------- -------------
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of interest-only strip receivable........................................... 2,791 996
Amortization of cost in excess of fair value of net assets acquired...................... 280 282
Amortization of servicing assets........................................................ 1,932 722
Depreciation and amortization............................................................ 1,656 1,308
Gain on Sale of Servicing Rights......................................................... -- (1,813)
Allowances for losses.................................................................... 609 609
Origination and purchases of mortgage loans held for sale................................ (599,372) (542,745)
Principal repayment and sales of loans held for sale .................................... 271,455 325,795
Purchases of securities held for trading................................................. (214,679) (67,840)
Principal repayments and sales of securities held for trading............................ 306,634 263,977
Increase in interest-only strip receivable............................................... (6,644) (10,821)
Increase in accounts receivable and mortgage servicing advances.......................... (4,952) (3,698)
Increase in servicing asset.............................................................. (11,587) (8,239)
Purchase of securities available for sale................................................ (75,003) (4,639)
Principal repayments and sales of securities available for sale.......................... 15,462 7,012
Increase in interest receivable.......................................................... (2,302) (1,504)
Increase (decrease) in loans payable..................................................... 22,027 (11,352)
Increase in interest payable............................................................. 2,282 397
Increase in securities sold under agreements to repurchase............................... 300,173 23,745
Increase in payables and accrued liabilities............................................. 3,661 5,750
Increase (decrease) in income tax payable................................................ 1,439 (383)
Deferred tax provision................................................................... 793 2,127
Amortization of unearned compensation under employment contracts......................... 72 64
----------- -------------
Total adjustments..................................................................... 16,727 (20,250)
----------- -------------
Net cash provided by operating activities................................................ 40,358 561
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities held to maturity................................................... (104,274) (41,480)
Principal repayments of investments held to maturity....................................... 22,510 6,767
Origination of loans receivable ........................................................... (117,055) (66,333)
Principal repayments of loans receivable................................................... 80,119 9,864
Purchase of property, leasehold improvements and equipment................................. (3,158) (1,291)
Additions to cost in excess of fair value of net assets required........................... (18) (309)
Increase in real estate held for sale...................................................... (702) (354)
Increase in other assets................................................................... (1,235) (3,463)
Proceeds from sale of servicing rights..................................................... -- 1,813
----------- -------------
Net cash used by investing activities.................................................... (123,813) (94,786)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in common stock................................................................... -- 475
(Decrease) increase in notes payable....................................................... (1,986) 39,548
Increase in deposits....................................................................... 92,043 51,525
Dividends declared and paid............................................................. (5,229) (4,459)
Decrease in advances from FHLB............................................................. -- 4,593
Net cash provided by financing activities................................................ 84,828 91,682
----------- -------------
Net (increase) decrease in cash and cash equivalents....................................... 1,373 (2,543)
Cash and cash equivalents at beginning of period........................................... 81,213 59,872
----------- -------------
Cash and cash equivalents at the end of period............................................. $ 82,586 $ 57,329
=========== =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Noncash financing activities-conversion of preferred stock................................. $ -- $ 1,080
=========== =============
Noncash investing activities-conversion of subordinated debentures......................... $ 1,540 $ -----
=========== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash used to pay interest.................................................................. $ 41,547 $ 32,362
=========== =============
Cash used to pay income taxes.............................................................. $ 958 $ 1,046
=========== =============
</TABLE>
The accompanying notes are an integral part of this statement.
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DORAL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a. The Consolidated Financial Statements (unaudited) include the accounts of
Doral Financial Corporation, formerly First Financial Caribbean Corporation
and its wholly-owned subsidiaries, Doral Mortgage Corporation ("Doral
Mortgage"), Centro Hipotecario, Inc., Doral Securities, Inc., formerly AAA
Financial Services Corporation, ("Doral Securities") and Doral Bank,
formerly Doral Federal Savings Bank ("Doral Bank"). Doral Bank converted
its charter from that of a federal savings association to that of a Puerto
Rico commercial bank effective October 1, 1997. See "Item 5 - Other
Information - Status as a Bank Holding Company." References herein to the
"Company" or "DFC" shall be deemed to refer to the Company and its
consolidated subsidiaries, unless otherwise provided. All significant
intercompany accounts and transactions have been eliminated in
consolidation. The Consolidated Financial Statements (unaudited) have been
prepared in conformity with the accounting policies stated in the Company's
Annual Audited Financial Statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, and should be read in
conjunction with the Notes to the Consolidated Financial Statements
appearing in that report. All adjustments (consisting only of normal
recurring accruals) which are, in the opinion of management, necessary for
a fair presentation of results for the interim periods have been reflected.
b. The results of operations for the quarter and nine-month period ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
c. Cash dividends per share paid for the quarter and nine-month period ended
September 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
-------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Series A Preferred Stock $ ---- $ ---- $ ---- $0.3825
Common Stock $ 0.10 $.0850 $0.2850 $0.2450
</TABLE>
All outstanding shares of Series A Preferred Stock were redeemed on May
10, 1996.
d. At September 30, 1997, escrow funds include approximately $38.0 million
deposited with Doral Bank. These funds are included in the Company's
financial statements. Escrow funds also include approximately $9.3 million
deposited with other banks excluded from the Company's assets and
liabilities.
e. Certain reclassifications of prior years' data have been made to conform
to 1997 classifications. In connection with the adoption by the Company,
effective January 1, 1997, of SFAS No. 125 "Accounting for Transfers of
Servicing Assets and Extinguishment of Liabilities" ("SFAS 125"), the
Company reclassified the asset previously shown on the Company's
Consolidated Balance Sheet as "Mortgage Servicing Rights"to "Servicing
Asset". In addition, the asset previously shown as "Excess Servicing Fees
Receivable" was reclassified as "Interest Only Strips" and is now included
in the Company's Consolidated Balance Sheet as a component of "Securities
held for trading, net". See Note (h) herein.
f. The number of average shares of common stock used for computing the
primary and fully diluted net income per share was as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
------------------------------------ ----------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary 18,397,460 18,222,184 18,320,742 18,103,110
Fully diluted 19,364,316 19,366,788 19,364,316 19,361,294
</TABLE>
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g. Employee costs and other expenses are shown in the Consolidated Statement
of Income and Retained Earnings net of direct loan origination costs that,
pursuant to SFAS No. 91, are capitalized as part of the carrying cost of
mortgage loans and are offset against mortgage loan sales and fees when
the loans are sold. Set forth below is a reconciliation of the application
of SFAS No. 91 to employee costs and other expenses:
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
-------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Employee costs, gross $ 9,581 $7,272 $ 26,840 $ 22,341
Deferred costs pursuant
to SFAS 91 6,407 5 ,537 20,532 16,073
------- ---------- ----------- ----------
Employee cost, net $ 3,174 $ 1,735 $ 6,308 $ 6,268
======= ========== =========== ==========
Other expenses, gross $ 4,070 $ 4,376 $ 11,136 $ 11,773
Deferred costs pursuant
to SFAS 91 959 853 3,176 3,005
------- ---------- ----------- ----------
Other, net $ 3,111 $ 3,523 $ 7,960 $ 8,768
======= ========== =========== ==========
</TABLE>
Set forth below is a breakdown of direct loan origination costs that were
capitalized as part of the carrying cost of mortgage loan inventory or offset
against mortgage loan sales and fees.
<TABLE>
<CAPTION>
Quarter Ended Nine-Month Period Ended
September 30, September 30,
-------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Offset against mortgage
loan sales and fees $ 7,759 $ 6,418 $ 20,661 $ 14,664
Capitalized as part of
loan inventory (150) --- 3,763 4,213
------- ------- -------- --------
$ 7,609 $ 6,418 $ 24,424 $ 18,877
======= ======= ======== ========
</TABLE>
h. In June 1996, the Financial Accounting Standards Board ("FASB") issued
SFAS 125. SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on the application of a financial-components approach
that focuses on control. That approach requires the recognition of
financial assets and servicing assets controlled by the reporting entity,
the derecognition of financial assets when control is surrendered, and the
derecognition of liabilities when they are extinguished. Specific criteria
are established for determining when control has been surrendered in the
transfer of financial assets.
This Statement requires that liabilities and derivatives incurred or
obtained by transferors as part of a transfer of financial assets be
initially measured at fair value, if practicable. It also requires that
servicing assets and other retained interests in the transferred assets be
measured by allocating the previous carrying amount between the assets
sold, if any, and retained interest, if any, based on their relative fair
values at the date of the transfer. Servicing assets and liabilities must
be subsequently measured by (a) amortization in proportion to and over the
period of estimated net servicing income and loss and (b) assessment for
asset impairment or increased obligation based on their fair values.
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SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as excess servicing fees receivable,
that can be contractually prepaid or otherwise settled in such a way that
the holder would not recover substantially all of its recorded investment.
In this case, it requires that they be classified as available for sale or
as trading securities. Interest-only strips ("IOs") and retained interests
are to be recorded at market value in accordance with SFAS No. 115.
Changes in market value of IOs are included in operations, if classified
as trading securities, or in shareholders' equity as unrealized gains or
losses, net of taxes, if classified as available for sale
Under the provisions of SFAS 125, management has determined that excess
servicing fees receivable retained by the Company as a result of
securitization transactions or bulk sales will be held as trading
securities as IOs. In addition, all residual interests and mortgage backed
securities previously retained by the Company as part of its
securitization transactions will also be held as trading securities.
The provisions of this Statement, except as indicated below, are effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and must be applied
prospectively. Earlier or retroactive application is not permitted. In
December 1996, the FASB issued a statement that defers for one year the
effective date applicable to the provisions of SFAS 125 that deal with
secured borrowings and collateral. Additionally, the deferment provision
would apply to transfers of financial assets for repurchase agreements,
dollar rolls and securities lending.
Refer to Note e for certain reclassifications made by the Company as a
result of the adoption of SFAS 125.
i. On July 10, 1997, the Board of Directors declared a two-for-one stock
split of the Company's Common Stock $1.00 par value (the "Common Stock").
The stock split was effected on August 28, 1997 in the form of a stock
dividend of one additional share of Common Stock for each share of Common
Stock held of record on August 18, 1997. Prior to the declaration of the
stock split, the Company had 9,682,158 fully diluted shares outstanding.
Following the distribution of the additional shares, the Company had
19,364,316 fully diluted shares outstanding. The stock split did not
dilute shareholders' voting rights or their proportionate interest in the
Company.
All amounts in the financial statements have been restated to reflect the
above stock split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise from loan originations and
purchases, repayments of debt upon maturity, payments of operating and interest
expenses, servicing advances and loan repurchases. The Company's primary sources
of liquidity are sales in the secondary mortgage market of the loans it
originates and purchases, short term borrowings under warehouse, gestation and
repurchase agreement lines of credit secured by pledges of its loans and
mortgage-backed securities (in most cases until such loans are sold and the
lenders repaid) and revenues from operations. In the past, the Company has also
relied on publicly offered and privately-placed debt financings and public
offerings of preferred and common stock. Doral Bank also relies on deposits,
including long term brokered deposits, borrowings from the Federal Home Loan
Bank of New York (the "FHLB-NY") as well as term notes backed by letters of
credit of the FHLB-NY.
The interim Consolidated Statement of Cash Flows reflects the working
capital needs of the Company. Operating activities provided approximately $40.4
million of net cash during the nine month period ended September 30, 1997,
reflecting, in part, increased borrowings under agreements to repurchase used to
finance the Company's portfolio of mortgage-backed securities. The Company held
mortgage loans and securities (excluding mortgage-backed securities held to
maturity and loans receivable held for investment) prior to sale for an average
annualized period of approximately 322 days for the nine month period ended
September 30, 1997 and 259 days during the year ended December 31, 1996. This
increase was mainly due to increases in the time GNMA mortgage-backed
securities were held prior to sale, as the Company decided to hold such
securities for longer periods pending the outcome of the legislative changes
in Puerto Rico affecting the tax
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exempt status of such securities. See "RECENT DEVELOPMENTS -- Modification of
Favorable Puerto Rico Tax Laws Affecting FHA and VA Loans and GNMA Securities."
Investing activities used net cash of approximately $123.8 million during
the nine month period ended September 30, 1997 due primarily to origination of
loans receivable and purchases of securities held to maturity of approximately
$117.1 million and $104.3 million, respectively, that were partially offset by
principal amortization of such securities and loans of approximately $102.6
million.
During the first nine months of 1997, financing activities provided
approximately $84.8 million of net cash primarily due to additional deposits
amounting to approximately $92.0 million received by Doral Bank. During 1997,
Doral Bank opened three additional branches in the San Juan metropolitan area.
Doral Bank now operates a total of five branches, all located in the San Juan
metropolitan area.
DFC borrows money under warehouse lines of credit to fund its mortgage
loan commitments and repays the borrowings as the mortgages are sold. The
warehouse lines of credit then become available for additional borrowings.
Included among DFC's warehouse line of credit facilities are gestation or
presale facilities that permit the Company to obtain more favorable rates once
mortgage loans are in the process of being securitized but prior to actual
issuance of the mortgage-backed securities as well as to finance such
mortgage-backed securities upon their issuance. At September 30, 1997 and
December 31, 1996, DFC had available warehouse lines of credit, including
gestation lines of credit, of $770 million and $595 million, respectively.
DFC's warehouse and gestation lines of credit are generally subject to
termination at the discretion of the lender.
DFC also obtains short-term financing through repurchase agreement lines
of credit with financial institutions and investment banking firms, including
Doral Securities. Under these agreements, DFC sells GNMA, FNMA or
FHLMC-guaranteed mortgage-backed securities or collateralized mortgage
obligations or other securities and simultaneously agrees to repurchase them at
a future date at a fixed price. DFC uses the proceeds of such sales to repay
borrowings under its warehouse lines of credit. The effective cost of funds
under repurchase agreements is typically lower than the cost of funds borrowed
under DFC's warehouse lines of credit. As of September 30, 1997, DFC had
available repurchase lines of credit (excluding the gestation lines of credit
referred to above) of approximately $1.2 billion. Borrowings under certain
repurchase lines of credit are subject to availability of funds by the lender
and of acceptable collateral by the Company. DFC's continued use of repurchase
agreements will depend on the cost of repurchase agreements relative to the
cost of borrowing under its warehouse lines of credit with banks and other
financial institutions.
Certain of the debt obligations of the Company contain various provisions
that may affect the ability of the Company to pay dividends and remain in
compliance with those obligations. These provisions include requirements
concerning net worth, financial ratios, limitations on capital distributions and
other financial covenants. These provisions have not had, and are not expected
to have, an adverse impact on the ability of the Company to pay dividends in the
future.
The monthly weighted-average interest rate of DFC's borrowings for
warehouse lines of credit and for repurchase agreement lines of credit was
6.77% and 5.78%, respectively, for the nine month period ended September 30,
1997 compared to 6.71% for warehouse lines of credit and 5.45% for repurchase
agreements for the year ended December 31, 1996.
Doral Bank obtains funding for its lending activities through the receipt
of deposits, including long term brokered certificates of deposit, FHLB-NY
advances and from other borrowings, such as term notes backed by FHLB-NY
letters of credit and repurchase agreements with brokerage houses. As of
September 30, 1997, Doral Bank held approximately $254 million in deposits
(including $2.9 million in corporate accounts of the Company that are
eliminated in the preparation of the Company's Consolidated Financial
Statements) at a weighted-average interest rate of 4.3%, approximately 23% of
which consisted of non-interest bearing deposits. Approximately $42.7 million
of total deposits consisted of brokered certificates of deposit obtained
through broker-dealers with maturities ranging from three to five years. Doral
Bank, as a member of FHLB-NY, has access to collateralized borrowings from the
FHLB-NY up to a maximum of 30% of its total assets. Advances and reimbursement
obligations with respect to letters of credit must be secured by qualifying
assets with a market value equal to 120% of the advances. At September 30,
1997, Doral Bank had $15 million in outstanding advances from the FHLB-NY at a
weighted-average interest rate cost of 6.24%. In addition, as of September 30,
1997, Doral Bank had $53.1 million outstanding in term notes secured by FHLB-NY
letters of credit at an average interest rate cost of 6.60%. Approximately $5
million principal amount of such term notes bear interest at a fluctuating rate
based on the London Interbank bid rate
9
<PAGE> 10
for dollar deposits ("LIBID"). The interest rate on such floating rate notes has
effectively been fixed pursuant to an interest rate swap agreement with a major
brokerage house. The interest rates on all term notes are subject to an upward
adjustment to a rate equal to 100% of LIBID for a term equal to the remaining
term of the note as a result of the recent changes to Section 936 of the
Internal Revenue Code. Because Doral Bank has the contractual right to prepay
the notes if the investor seeks an upward adjustment, in all but one of the
three cases in which an investor requested an upward adjustment, Doral Bank has
been successful in negotiating a rate adjustment below 100% of LIBID.
As of September 30, 1997, Doral Bank exceeded all its regulatory capital
requirements that were applicable to it as a federal savings association (i.e.
tangible and core capital of at least 1.5% and 3.0%, respectively, of adjusted
assets and total risk based capital of at least 8% of risk weighted assets). As
of September 30, 1997, Doral Bank had tangible capital and core capital of $26.5
million or approximately 7.54% of adjusted assets and total risk-based capital
of $27.7 million or 16.8% of risk weighted assets. For the regulatory capital
requirements applicable to the Company and Doral Bank following the conversion
of Doral Bank to a commercial bank, see "Item 5 - Other Information - Status as
Bank Holding Company."
Servicing agreements relating to the mortgage-backed securities programs
of FNMA, FHLMC and GNMA and certain other investors and mortgage loans sold to
certain other purchasers, require DFC to advance funds to make scheduled
payments of principal, interest, taxes and insurance, if such payments have not
been received from the borrowers. DFC generally recovers funds advanced
pursuant to these arrangements within 30 days. During the nine month period
ended September 30, 1997, the monthly average amount of funds advanced by the
Company under such servicing agreements was approximately $3.5 million.
During the nine month period ended September 30, 1997, the Company
collected an average of approximately $1.2 million per month in net servicing
fees, including late charges. At September 30, 1997 and December 31, 1996, the
servicing portfolio amounted to approximately $3.6 billion and $3.1 billion,
respectively. The Company may, from time to time, determine to sell portions of
its servicing portfolio and to purchase servicing rights in bulk from third
parties. See "Bulk Purchases of Mortgage Servicing Rights."
While the Company normally sells conforming loans on a non-recourse
basis, the Company also engages in the sale or exchange of mortgage loans on a
recourse basis, particularly in the case of non-conforming loans. Recourse
sales generally involve the sale of non-conforming loans to local financial
institutions. Sales with recourse have increased during 1997, due to a shift
from sale of non-conforming loans through securitizations, which are done on a
non-recourse basis (except for the retention of residual and subordinate
interests), to direct sales to local financial institutions which are often
done on a recourse or partial recourse basis. The Company has shifted to
selling non-conforming loans directly to financial institutions because it is
generally able to achieve higher gains through the recognition of IOs. See
"RESULTS OF OPERATIONS FOR QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996". As of
September 30, 1997, the Company was servicing mortgage loans with an aggregate
principal amount of $434 million on a recourse or partial recourse basis. As
of September 30, 1997 recourse obligations related to the Company's mortgage
servicing portfolio equalled $179 million (which includes the Company's
recourse obligations with respect to the sale of approximately $283 million of
mortgage loans sold on a 10% recourse basis). The Company estimates the fair
value of the retained recourse obligation at the time mortgage loans are sold.
From time to time, the Company may sell mortgage-backed securities and
mortgage loans subject to put arrangements. Pursuant to these arrangements, the
Company grants the purchaser of the mortgage-backed securities or mortgage
loans a put option that grants the buyer the right to sell, and obligates the
Company to buy, the securities or mortgage loans at a future date at a
negotiated price. Sales of securities or loans with puts are accounted for as
sales or borrowings in accordance with the provisions of SFAS No. 125 based on
a financial components approach focusing on whether control of the asset has
been surrendered. See Note (h) to the unaudited interim Consolidated Financial
Statements. As of September 30, 1997, the Company had outstanding $182 million
in mortgage-backed securities and mortgage loans sold subject to put
arrangements, which expire in varying amounts from 1998 through 2002 all of
which were accounted for as sales pursuant to SFAS No. 125 because the Company
understands that control of the asset has been surrendered to the purchaser.
The Company has established a reserve of $1.3 million for possible losses
from recourse servicing and put obligations.
DFC expects that it will continue to have adequate liquidity and financing
arrangements to finance its operations. The Company will continue to explore
alternative and supplementary methods of financing its operations, including
both debt and equity financing. There can be no assurance, however, that the
Company will be successful in consummating any such transactions.
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ASSETS AND LIABILITIES
At September 30, 1997, total assets were $1.546 billion compared to $1.107
billion at December 31, 1996. This increase was due primarily to increases in
interest earning assets related to the Company's mortgage loan production and
securitization activities and purchases of securities. The Company increased
its inventory of GNMA securities in anticipation of proposed changes in the tax
exempt status of GNMA securities under Puerto Rico law. See "RECENT
DEVELOPMENTS--Modification of Favorable Puerto Rico Tax Laws Affecting FHA and
VA Loans and GNMA Securities." Total liabilities were $1.375 billion at
September 30, 1997 compared to $956 million at December 31, 1996. The increase
in total liabilities was primarily related to increased deposit accounts held
at Doral Bank and increases in securities sold under
agreements to repurchase and advances under warehouse lines of credit incurred
in connection with the Company's mortgage banking activities.
As of September 30, 1997, Doral Bank had $352.0 million in assets compared
to $280.7 million at December 31, 1996. This increase was due primarily to a net
increase of $39 million, $22 million and $23 million in loans receivable, loans
held for sale and securities held to maturity, respectively. At September 30,
1997, Doral Bank's deposit accounts totaled $253.9 million compared to $187.2
million at December 31, 1996. These amounts include $2.9 million and $28.3
million, respectively, in corporate accounts of the Company which are eliminated
in the preparation of the Company's Consolidated Financial Statements. Deposit
accounts include $38 million as of September 30, 1997 in non-interest bearing
demand deposits representing escrow funds and other servicing accounts from
DFC's servicing operations.
INTEREST RATE FLUCTUATIONS
Changes in interest rates can have a variety of effects on the Company's
business. In particular, changes in interest rates affect the volume of mortgage
loan originations and acquisitions, the interest rate spread on the Company's
portfolio of loans and securities, the amount of gain on sale of loans and the
value of the Company's servicing assets, IOs and securities holdings.
The Company does not generally hedge conventional loans in the pipeline or
in the process of origination because the Company does not generally permit
customers to lock-in an interest rate prior to closing. Instead, the interest
rates on loans are generally fixed at closing based on a certain spread over a
prevailing rate that adjusts weekly. For FNMA and FHLMC conforming loans and
FNMA and FHLMC mortgage-backed securities, the Company seeks to sell or obtain
commitments for the sale of such loans or mortgage-backed securities following
the funding of such loans. These loans are normally sold to institutional
investors or to FNMA and FHLMC. To the extent the Company does engage in
offerings of mortgage products which lock-in the interest rate until the closing
date, it attempts to obtain forward commitments at the time it fixes the rates
for the loans. Non-conforming conventional loans are normally sold in bulk to
local financial institutions or packaged into collateralized mortgage
obligations. The sale of non-conforming conventional loans normally takes longer
than the sale of conforming mortgage loans. Accordingly, the Company attempts to
manage this interest rate risk through the purchase of listed options on U.S.
Treasury Securities, as well as through the purchase of option contracts in the
over-the-counter market on other interest rate sensitive instruments.
In the case of Puerto Rico tax-exempt GNMA securities, the Company
normally holds such securities for longer periods prior to sale to maximize
its net interest income and to take advantage of the fact that the interest on
certain of such securities is exempt from income taxation under Puerto Rico
law. Prices for tax-exempt GNMA securities in Puerto Rico tend to be more
stable than prices for similar securities in the mainland U.S. because the
tax-exempt status of interest paid on these securities under Puerto Rico law
makes them more attractive to retail investors. This relative stability of
prices for Puerto Rico tax-exempt GNMA securities allows the Company to carry
out a less aggressive hedging strategy to attempt to protect the value of these
assets than what might otherwise be required. The Company seeks to protect
itself from interest rate risk associated with its inventory of GNMA securities
by purchasing listed options on treasury bond futures contracts and other
interest rate sensitive instruments, as well as purchasing options on U.S. GNMA
securities in the over-the-counter market. As of September 30, 1997, the
Company had in place $75.2 million of long-term repurchase agreements secured
by collateralized mortgage obligations backed by GNMA certificates with a
principal amount of approximately $86.0 million. The Company does not obtain
forward commitments or otherwise hedge such securities because they are
financed pursuant to long-term repurchase agreements. The Company has the right
to substitute similar securities under the repurchase agreements. For GNMA
securities that do not qualify for Puerto Rico tax exemption, the Company will
implement a less aggressive hedging strategy because it intends to sell such
securities in the United States market as soon as practicable following
completion of the securitization process. For a discussion of recent
amendments to Puerto Rico law that limited the type of FHA and VA loans that
qualify for tax exemption, see "RECENT DEVELOPMENTS -- Modification of
Favorable Puerto Rico Tax Laws Affecting FHA and VA Loans and GNMA Securities."
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Declines in interest rates can adversely affect the Company's revenues by
increasing prepayment rates and causing an increase of the amortization of
the Company's servicing asset (previously classified as Mortgage Servicing
Rights) and interest-only strip receivables ("IOs") (previously classified as
excess servicing fees receivable) or causing an impairment to be recognized
with respect to such assets. Moreover, increased prepayment rates can reduce
the Company's servicing income by decreasing the size of the Company's
servicing portfolio. To date, the Company has not used synthetic instruments to
protect the value of its servicing asset and IOs from future interest rate
fluctuations. The primary means used by the Company to reduce the sensitivity
of the Company's servicing income to possible reductions of its servicing
portfolio has been the development of a strong retail origination network that
has allowed the Company to increase or maintain the size of its servicing
portfolio even during periods of high prepayments, such as those experienced
during 1993.
The net interest income of the Company is also subject to interest rate
risk because its interest-earning assets and interest-bearing liabilities
reprice at different times and varying amounts. Most of the Company's interest
earning assets, including its mortgage-backed securities held for trading, are
fixed rate interest-earning assets that are not subject to repricing (except for
replacement of assets through repayments, sales and new originations) while the
short-term borrowings used to finance these positions normally reprice on a
periodic basis (e.g., daily, monthly or quarterly). To protect against major
fluctuations in short-term interest rates, the Company purchases listed put and
call options and sells call options on financial instruments, including
Eurodollar contracts. This policy attempts to ensure a relatively stable
short-term cost of funds. With respect to its loans receivable and securities
held to maturity, Doral Bank attempts to obtain long-term deposits and other
long-term debt financing, including long-term brokered certificates of
deposits, advances from the FHLB-NY and term notes backed by FHLB-NY letters of
credit.
In the future, DFC may utilize alternative hedging techniques including
futures, options or other hedge vehicles to help mitigate interest rate and
market risk. However, there can be no assurance that any of the above hedging
techniques will be successful. To the extent they are not successful, the
Company's profitability may be adversely affected.
INFLATION
DFC is affected by inflation in the areas of loan production and servicing
fees. General and administrative expenses increase with inflation. However, the
increase in real estate values in Puerto Rico in recent years has been a
positive factor for the Company's mortgage banking business. The average size of
loans originated tends to increase as home values appreciate, which serves to
increase loan origination fees and servicing income faster than the cost of
providing such services. Interest rates normally increase during periods of high
inflation and decrease during periods of low inflation. See "-Interest Rate
Fluctuations" for a discussion of the effects of changes of interest rates on
the Company's operations.
RESULTS OF OPERATIONS FOR QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for the quarter ended September 30, 1997 increased to $8.6
million from $7.4 million for the comparable period of 1996. Doral Bank
contributed approximately $1.3 million in net income for the third quarter of
1997 compared to $337,000 for the third quarter of 1996. The increase in net
income for the quarter of $1.2 million from 1996 was due mainly to an increase
of $2.4 million in net interest income during the same period and higher
servicing fees. Doral Bank contributed approximately $2.6 million and $1.7
million to the consolidated net interest income of the Company for the quarters
ended September 30, 1997 and 1996, respectively. Revenues for the quarter ended
September 30, 1996 include a gain on the sale of mortgage loan servicing rights
of approximately $1.8 million. There were no such sales of servicing rights
during the third quarter of 1997.
The weighted average interest rate spread was 241 basis points during the
third quarter of 1997 compared to 242 basis points for the comparable period of
1996.
Revenues from mortgage loan sales and fees increased to $7.2 million for
the quarter ended September 30, 1997 from $7.0 million for the comparable
period of 1996. The total volume of loans originated and purchased for the
quarter ended September 30, 1997 was $282 million compared to $186 million for
the quarter ended September 30, 1996. The total volume of loans purchased was
approximately $18 million for the quarter ended September 30, 1997 compared to
$16 million for the comparable period of 1996.
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When DFC sells the mortgage loans it has originated or purchased, it
generally retains the rights to service such loans and receives the related
servicing fees. Mortgage loan servicing fees are based on a percentage of the
principal balances of the mortgages serviced and are credited to income as
mortgage payments are collected. Loan servicing income was $3.8 million for the
quarter ended September 30, 1997 compared to $2.6 million for the same period in
1996. The Company's servicing portfolio totaled $3.6 billion at September 30,
1997 compared to $2.9 billion at the same date a year ago. The Company's
servicing portfolio at September 30, 1997 increased by approximately $500
million over the size of the servicing portfolio at December 31, 1996. The
increase in the servicing income is due to the overall increase in the portfolio
and to a moderate change in its composition. The portion of the portfolio
composed of GNMA securities, which is the most profitable in terms of servicing
fees, now represents a larger part of the portfolio. As of September 30, 1997,
approximately 44.4% of the Company's total servicing portfolio consisted of FHA
and VA loans backing GNMA securities compared to 42.6% as of December 31, 1996.
The increase is due to the strong retail origination capacity of the Company for
FHA and VA loans, which are originated in greater frequency in new housing
projects.
The Company capitalized approximately $6.1 million in servicing assets
during the quarter ended September 30, 1997, compared to $2.4 million for the
quarter ended September 30, 1996. During the third quarter of 1997, the Company
acquired rights to service loans with a principal balance of $170.7 million from
a non-affiliated financial institution. At September 30, 1997, the unamortized
balance of servicing assets approximated their fair value. The amortization of
servicing assets for the quarters ended September 30, 1997 and 1996 was $688,000
and $255,000, respectively, and is recorded in the accompanying Consolidated
Statement of Income and Retained Earnings under "Other Expenses."
The Company creates IOs (previously classified as excess servicing fees
receivable) as a result of the sale of loans in bulk or securitization
transactions. IOs are created on the sale of loans by computing the present
value of the excess of the weighted average coupon on the loans sold over the
sum of: (i) the pass-through interest paid to the investor and (ii) a base
servicing fee, and adjusting such amount for expected losses and prepayment
assumptions. The Company capitalized approximately $3.6 million in IOs during
the quarter ended September 30, 1997, compared to $3.1 million for the quarter
ended September 30, 1996. Amortization of IOs for each of the quarters ended
September 30, 1997 and 1996 was approximately $943,000 and $367,000,
respectively. Effective January 1, 1997, this amortization is recorded as a
reduction of interest income. For prior periods, such amortization was recorded
as a reduction of servicing income. SFAS No. 125 requires that effective
January 1, 1997, assets previously classified as excess servicing fee
receivable be classified as IOs. Such IOs are reflected in the Company's
Consolidated Balance Sheet as part of securities held for trading.
Aggregate expenses, excluding interest expenses, for the quarter ended
September 30, 1997 increased by approximately $1.4 million compared to the same
period of 1996, primarily because of additional costs associated with the
expansion of the Company's customer base and loan origination capacity and the
rapid expansion of Doral Bank.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996.
The Company's net income for the nine months ended September 30, 1997
increased to $23.6 million, compared to $20.8 million for the corresponding
period of 1996. For the nine-month period ended September 30, 1997, Doral Bank
contributed approximately $3.1 million in net income compared to $1.5 million
for the nine months ended September 30, 1996.
Revenues from mortgage loan sales and fees for the first nine months of
1997 decreased to $18.2 million for the first nine months of 1997 from $20.5
million for the comparable period of 1996. This decrease was due primarily to
lower gains on sales of mortgage-backed securities and loans during the first
and second quarters of 1997. The total volume of loans originated and purchased
was approximately $716 million for the nine-month period ended September 30,
1997 compared to approximately $609 million for the nine-month period ended
September 30, 1996 reflecting higher mortgage activities in refinancing and
home purchase loans. Refinancing loans comprised 51% of production during the
first nine months of 1997 versus 48% for the comparable period of 1996.
Revenues for the nine month period of 1996 include a gain on the sale of
mortgage servicing rights of approximately $1.8 million. There were no sales of
servicing rights during the first nine months of 1997.
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Net interest income was $20.9 million for the nine months ended September
30, 1997 an increase of approximately $4.6 million over the comparable period of
1996. The weighted average interest rate spread was 243 basis points during the
nine months ended September 30, 1997 compared to 254 basis points for the
comparable period of 1996. Doral Bank contributed approximately $7.3 million and
$4.9 million to the consolidated net interest income of the Company for the
nine month periods ended September 30, 1997 and 1996, respectively.
For the nine month period ended September 30, 1997 loan servicing income
was $10.9 million compared to $8.3 million for the same period in 1996
reflecting the increase in the size of the Company's servicing portfolio.
Effective January 1, 1997, certain amounts previously classified as servicing
income are now required to be classified as interest income pursuant to SFAS
No. 125.
Sales of mortgage loans during the first nine months of 1997 resulted in
the recording of approximately $12.7 million in IOs compared to $10.8 million
for the first nine months of 1996 reflecting an increase in bulk sales of
non-conforming loans during such period. During the nine month period ended
September 30, 1997, the Company sold $6.1 million of IOs for their carrying
amount. Amortization of IOs for each of the nine month periods ended September
30, 1997 and 1996 was approximately $2.8 million and $1.0 million,
respectively. Effective January 1, 1997, the amortization of IOs is recorded as
a reduction of interest income. For prior periods, amortization of IOs was
recorded as a reduction of servicing income. For the nine months ended
September 30, 1997, the Company capitalized servicing assets of $11.6 million
compared to $8.2 million for the comparable period of 1996. For the nine month
periods ended September 30, 1997 and 1996, amortization of servicing assets was
$1.9 million and $722,000, respectively. Amortization of servicing assets is
recorded as a component of "Other Expenses."
CHANGES IN ACCOUNTING STANDARDS
SFAS No. 128. In February 1997, the Financial Accounting Standard Board
"FASB" issued SFAS No. 128, "Earnings Per Share." This Statement simplifies the
standards for computing earnings per share ("EPS") previously found on APB
Opinion No. 15, "Earnings Per Share," and makes it comparable to international
EPS standards. It replaces the presentation of the primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS computation on the face of the income statement for all entities
with complex capital structures and requires reconciliation of the numerator
and denominator of the diluted EPS computation.
This Statement is effective for financial statements issued after periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. This Statement requires restatement of prior-period EPS data
presented. The capital structure of the Company is such that the adoption of
this new standard will not affect current or prior period presentation of basic
or diluted EPS. Accordingly, DFC's basic EPS would amount to $0.47, $0.41,
$1.29 and $1.15 for the quarters ended September 30, 1997 and 1996 and for the
nine months ended September 30, 1997 and 1996, respectively, while diluted EPS
would amount to $0.45, $0.39, $1.24 and $1.10 and for such periods, which is
equivalent to the primary EPS and fully diluted EPS currently presented.
SFAS No. 130. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and display of comprehensive income and its
components (revenue, expenses, gains and losses) in a full set of general
purpose financial statements. This Statement requires that an enterprise
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. In Doral's case, unrealized
gains and losses on certain investments in debt securities will be the only
other comprehensive income item to be included in comprehensive income.
This Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This Statement affects only financial
statement presentation and, therefore, management understands that its adoption
will not have a material effect, if any, on the Company's financial position or
results of operations.
SFAS No. 131. In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." This Statement establishes the standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim reports issued to shareholders.
This Statement requires that a public business enterprise report financial
and descriptive information about its reportable segments. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. It also
requires reporting descriptive information about the way that the operating
segments were determined, the products and the services provided by the
operating segments, differences between the
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measurements used in reporting segment information and those used in the
enterprises general purpose financial statements, and the changes in the
measurement of segment amount from period to period. DFC's management has not
yet made a determination on the business lines of the Company that fulfill the
segment definition described above.
This Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This statement affects only financial
statement presentation and disclosure and therefore management understands it
will not have a material effect, if any, on the Company's financial position or
results of operations.
RECENT DEVELOPMENTS
INCREASE IN CAPITAL AND NON-CASH CHARGE TO EARNINGS FOR FOURTH QUARTER RELATED
TO EXCHANGE OF CONVERTIBLE DEBENTURES FOR CONVERTIBLE PREFERRED SHARES.
On October 22, 1997, the Company completed the exchange of the $8,460,000
outstanding principal amount of the Company's 8.25% Convertible Subordinated
Debentures due January 1, 2006 (the "Debentures") previously held by a private
investor for 8460 shares of its 8% Convertible Cumulative Preferred Stock
(Liquidation Preference $1,000 per share) (the "8% Preferred Stock"). See
"Item 2 - Changes in Securities" for details of the exchange.
Notwithstanding the fact that the conversion rights of the 8% Preferred
Stock and the Debentures are identical, Accounting Principals Board Opinion No.
26("APB 26") requires that the Company record a non-cash charge to earnings of
approximately $12.3 million for the fourth quarter of 1997, which amount is
equal to the difference between the fair market value of the shares of 8%
Preferred Stock issued pursuant to the exchange and the net carrying amount of
the Debentures on the Company's financial statements. As a result of the
appreciation in the price of the Company's Common Stock since the issuance of
the Debentures in 1995, the fair market value of the shares of 8% Preferred
Stock, which is directly related to the value of the Company's Common Stock,
exceeded the net carrying amount of the Debentures by approximately $12.3
million.
This non-cash charge will be recorded during the fourth quarter as an
extraordinary item on the Company's financial statements and will not affect the
Company's net income from operations.
As a result of the application of APB 26, the Company's retained earnings
will be reduced by the amount of the charge, approximately $12.3 million, and
the Company's paid-in-capital account will be simultaneously increased by
approximately $20.8 million, which represents the sum of the charge and the
elimination of the indebtedness represented by Debentures, resulting in a net
increase to the Company's stockholders' equity of approximately $8.5 million.
MODIFICATION OF FAVORABLE PUERTO RICO TAX LAWS AFFECTING FHA AND VA LOANS AND
GNMA SECURITIES
The Company has historically benefited from Puerto Rico tax laws that
exempt from Puerto Rico income taxes the interest received on mortgage loans
secured by real property in Puerto Rico and insured by the Federal Housing
Administration or guaranteed by the Veteran's Administration ("FHA-VA loans")
and on GNMA mortgage-backed securities backed by such FHA-VA loans. This
favorable tax treatment has permitted the Company to sell Puerto Rico tax-
exempt GNMA mortgage-backed securities to local investors at higher prices
than those at which comparable instruments trade in the mainland United Sates
and to reduce its effective tax rate through the receipt of tax exempt
interest income.
On July 22, 1997, an amendment (the "Amendment") was passed to the Puerto
Rico Internal Revenue Code that modified the tax exempt treatment of FHA-VA
loans. Under the terms of the Amendment, effective August 1, 1997, only FHA-VA
loans used to finance the original acquisition of newly constructed housing
and mortgage-backed securities backed by such loans qualify for tax-exempt
treatment. The Amendment, however, provides a preferential flat tax rate of 17%
for individuals to be withheld at source with respect to interest received on
FHA-VA loans not qualifying for tax exemption. In addition, the Amendment
grandfatherly the tax-exempt status of FHA-VA loans originated on or prior to
July 31, 1997 and mortgage-backed securities backed by such loans. Since the
effective date of the Amendment, approximately 38% of the Company's total
FHA-VA loan originations consisted of mortgage loans to finance the acquisition
of newly constructed housing that qualified for tax exemption under the
Amendment. Management believes that the adoption of the Amendment will not have
a material adverse effect on the Company's financial condition or results of
operation.
BULK PURCHASES OF MORTGAGE SERVICING RIGHTS
During the second and third quarters of 1997, the Company engaged in
several bulk purchases of mortgage servicing rights, aggregating approximately
$1.0 billion.
During the second quarter of 1997, the Company entered into a series of
purchase transactions with a local financial institution whereby it acquired
servicing rights with respect to approximately $270 principal amount of mortgage
loans, of which $200 million represented servicing rights to FHA-VA loans
backing GNMA mortgage-backed securities. As of September 30, 1997, $170.7
million of such
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servicing rights had been transferred to the Company and were included in the
Company's servicing portfolio as of such date.
During the third quarter, the Company entered into a transaction with
another local financial institution whereby it acquired the rights to service
approximately $800 million principal amount of mortgage loans, of which
approximately $350 million consisted of servicing rights with respect to FHA
and VA loans backing GNMA mortgage-backed securities. As of September 30,
1997, none of the above servicing rights had been transferred to the Company,
and, therefore, were not included in the Company's servicing portfolio as of
such date.
EXPANSION OF DORAL BANK AND GEOGRAPHIC EXPANSION WITHIN MAINLAND UNITED
STATES. The Company intends to continue to increase the assets of Doral Bank
as well as to expand its branch network and deposit base. The Company also
intends to continue to pursue opportunities to expand geographically within the
mainland United States, particularly within the New York City metropolitan area
and other areas with large Hispanic populations, through acquisitions, the
establishment of new operations or a combination of both.
PRODUCT DIVERSIFICATION
The Company has recently been more active in the origination of
construction mortgage loans and mortgage loans secured income producing
commercial properties. While many of these loans are funded through Doral Bank
for investment, the Company's mortgage banking units also originate such loans
for resale to investors. For the nine months ended September 30, 1997, the
Company originated approximately $51.2 million of constructions mortgage loans
and mortgages secured by income producing commercial properties, $24.4 million
of which were funded by Doral Bank. For larger commercial loans, the Company has
entered into a preferred broker agreement with GMAC Commercial Mortgage
Corporation ("GMAC") whereby the Company will act as the exclusive broker of
commercial loans for GMAC in Puerto Rico. Construction loans and mortgage
loans secured by commercial properties together constituted approximately 7%
and 3% of the total dollar volume of loans originated and purchased by the
Company for the nine-months ended September 30, 1997.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In the opinion of the Company's management, the pending and threatened
legal proceedings of which management is aware will not have a material adverse
effect on the financial condition of the Company.
ITEM 2 - CHANGES IN SECURITIES
(a) The Company entered into an Exchange Agreement, dated July 9, 1997,
with Popular, Inc. ("Popular"), whereby the Company agreed to exchange (the
"Exchange") 8,460 newly issued shares of a new series of preferred stock to be
designated 8% Convertible Cumulative Preferred Stock (Liquidation Preference
$1,000 per share) (the "8% Preferred Stock") for the $8.46 million principal
amount of the Company's 8.25% Convertible Subordinated Debentures due January
1, 2006 (the "Debentures") held by Popular at the time. On October 22, 1997,
the Exchange took place and the 8,460 shares of 8% Preferred Stock were issued.
The shares of 8% Preferred Stock are convertible into shares of Common Stock at
the same conversion price previously applicable to the Debentures (adjusted for
the two-for-one stock split effective August 28, 1997), $8.75 per share
(subject to adjustment in certain circumstances). The 8,460 shares of 8%
Preferred Stock held by Popular are convertible into the same aggregate number
of shares of Common Stock (966,857 shares) or approximately 4.99% of the
Company's outstanding Common Stock (after giving effect to such conversion) as
of September 30, 1997, as were the Debentures outstanding immediately prior to
the Exchange.
The shares of 8% Preferred Stock count as Tier 1 capital for purposes
of compliance with the regulatory capital requirements applicable to bank
holding companies. See "Item 5 - Other Information - Status as a Bank Holding
Company".
The shares of 8% Preferred Stock are entitled to a preference in
liquidation over the shares of Common Stock of $1,000 per share plus accrued and
unpaid dividends thereon to the date of such preferential payment. In addition,
the terms of the 8% Preferred Stock do not permit the payment of cash dividends
on the Company's Common Stock if dividends on the 8% Preferred Stock are in
arrears. The holders of the 8% Preferred Stock are entitled to receive
cumulative cash dividends when, as and if declared by the Board of Directors, at
an annual rate of 8% of the liquidation preference thereof, payable monthly, or
$6.66 2/3 per share per month. In addition, the Exchange Agreement incorporates
a provision previously contained in the Debenture Purchase Agreement which
grants Popular the nontransferable right to acquire up to a maximum of 400,000
additional shares of Common Stock, at a price of $8.75 per share (subject to
adjustment upon the occurence of certain events). Popular may exercise its
purchase rights if, as a result of the issuance of newly issued shares of Common
Stock or of options or securities convertible into shares of common stock,
by the Company, the shares of Common Stock issued or issuable upon conversion
of the 8% Preferred Stock held by Popular (plus any shares previously acquired
by Popular upon conversion of the Debentures or the 8% Preferred Stock)
represent in the aggregate less than 4.99% of the Company's fully diluted
outstanding shares of Common Stock. Popular's right to acquire additional
shares of the Company's Common Stock expires on June 30, 1999 and is subject to
termination upon the occurrence of certain corporate events involving the
acquisition of the Company. The terms of the 8% Preferred Stock are set forth
in the Certificate of Designation creating the 8% Preferred Stock included as
Exhibit 3.1(b) to this Quarterly Report.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special stockholders meeting of the Company was held on September 22,
1997. A quorum was obtained with 7,845,600 shares represented in person or by
proxy, which represented approximately 85.3% of all votes eligible to be cast at
the meeting. The following proposals were voted upon at the meeting with the
following results:
Proposal 1: Amendment to the Company's Restated Certificate of
Incorporation to change the name of the Company to "Doral
Financial Corporation"
<TABLE>
<S> <C>
For:...................................................... 7,795,956
Against:.................................................. 35,795
Abstain:.................................................. 13,849
Broker non-votes:......................................... 0
</TABLE>
17
<PAGE> 18
Proposal 2: Amendment to the Company's Restated Certificate of
Incorporation to increase the number of authorized shares of
Common Stock from 20,000,000 to 50,000,000
<TABLE>
<S> <C>
For:......................................................7,561,262
Against:.................................................. 143,536
Abstain:.................................................. 8,094
Broker non-votes:......................................... 132,708
</TABLE>
ITEM 5 - OTHER INFORMATION
STOCK SPLIT
On July 10, 1997, the Board of Directors of the Company declared a
two-for-one split of the Company's Common Stock. The stock split was effected in
the form of a stock dividend of one additional share of Common Stock issued on
August 28, 1997, for each share of Common Stock held of record as of August 18,
1997.
Prior to the stock split, the Company had 9,682,158 fully diluted shares
outstanding. Following the distribution of the additional shares, the Company
had 19,364,316 fully diluted shares outstanding. The stock split was not
dilutive to voting rights or shareholders' proportionate interest in the
Company.
CHANGE OF NAME
Effective September 22, 1997, the Company changed its name to "Doral
Financial Corporation". The change of name was approved by the Company's
shareholders at a special meeting of shareholders held on September 22, 1997.
See "Item 4 - Submission of Matters to a Vote of Security Holders", above.
In connection with the change in name, the Company also changed the
trading symbol for the Company's Common Stock on the NASDAQ National Market
System to "DORL".
STATUS AS BANK HOLDING COMPANY
Effective October 1, 1997, the Company's thrift Subsidiary, Doral Federal
Savings Bank, converted its charter from that of a federal savings association
to that of a Puerto Rico chartered commercial bank and changed its name to
"Doral Bank". As a result of the conversion, the Company become a bank holding
company subject to regulation by the Board of Governors of the Federal Reserve
Board (the "Federal Reserve") pursuant to the provisions of the Bank Holding
Company Act of 1956 (the "BHCA"). The BHCA and Federal Reserve regulations
promulgated thereunder generally place limitations on the types of activities in
which a bank holding company and its subsidiaries may engage. In general, such
activities must be banking services or activities so closely related to the
business of banking as to be a proper incident thereto. Regulation K promulgated
by the Federal Reserve, generally grants bank holding companies and their
subsidiaries somewhat broader powers with respect to activities conducted
"outside the United States" than with respect to activities conducted within the
United States. For purposes of Regulation K, Puerto Rico is considered to be
outside the United States.
In addition to the activity restrictions discussed above, the BHCA also
imposes various other restrictions on bank holding companies and their
subsidiaries. Many of these restrictions are similar to those previously imposed
on the Company under the Savings and Loan Holding Company Act (the "SLHCA").
For example, the BHCA contains change of control provisions similar to those
contained in SLHCA. These provisions generally place limitations on the
ability of investors to acquire more than 10% of the outstanding Common Stock
of the Company without first obtaining certain regulatory approvals. Sections
23A and 23B of the Federal Reserve Act, governing transactions between
depositary institutions and their affiliates, also apply in the same manner to
bank holding companies and their subsidiaries as to savings and loan holding
companies.
18
<PAGE> 19
As a bank holding company, the Company, however, is subject to certain
additional regulatory restrictions that are not otherwise applicable to savings
and loan holding companies. For example, unlike savings and loan holding
companies, bank holding companies are subject to certain regulatory capital
requirements. Under the Federal Reserve's risk-based capital guidelines, a bank
holding company must maintain a ratio of total capital (the "Total Capital") to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) equal to 8%. At least half of the Total Capital is to be
comprised of common equity, retained earnings, minority interest in consolidated
subsidiaries, noncumulative perpetual preferred stock and a limited amount of
cumulative perpetual preferred stock, less goodwill and less certain intangible
debt, other preferred stock, certain other instruments, and a limited amount of
loan and lease loss reserves ("Tier 2 capital").
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies and state member banks. These guidelines
provide for a minimum ratio of Tier 1 capital to average quarterly assets of 3%
for bank holding companies that meet certain specified criteria, including that
they have the highest regulatory rating. All other bank holding companies are
required to maintain a leverage ratio of 3% plus an additional cushion of at
least 100 to 200 basis points. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve will continue to
consider a "tangible Tier 1 leverage ratio" (deducting all intangibles) and
other indications of capital strength in evaluating proposals for expansion or
new activities. The tangible Tier 1 leverage ratio is the ratio of a banking
organization's Tier 1 capital, less all intangibles, to total assets, less all
intangibles.
The Federal Reserve has adopted regulations with respect to risk-based and
leverage capital ratios that require most intangibles, including core deposit
intangibles, to be deducted from Tier 1 capital. The regulations, however,
permit the inclusion of a limited amount of intangibles related to mortgage
servicing rights and purchased credit card receivables. The Federal Reserve has
also decided to exclude from regulatory capital the amount of net unrealized
gains and losses on securities available-for-sale, except the net unrealized
losses of equity securities with readily determinable fair values.
The Federal Reserve has issued a policy statement that provides that
insured banks and bank holding companies should generally pay dividends only out
of current operating earnings. In addition, under Federal Reserve policy, a bank
holding company is expected to act as a source of financial strength to each of
its subsidiary banks and to commit resources to support each subsidiary bank.
This support may be required at times, when absent such policy, the bank holding
company might not otherwise provide such support.
The FDIC has established regulatory capital requirements for state
non-member banks, such as Doral Bank, that are substantially similar to those
adopted by the Federal Reserve for state member banks. Set forth below are the
Company's and Doral Bank's capital ratios at September 30, 1997, based on
existing Federal Reserve and FDIC capital guidelines.
<TABLE>
<CAPTION>
THE COMPANY DORAL BANK
----------------------- -----------------------
<S> <C> <C>
Tier 1 risk-based capital ratio 21.2% 16.1%
Total risk-based capital ratio 21.3% 16.8%
Leverage ratio 10.5% 7.5%
</TABLE>
As a result of the conversion of its charter from that of a federal
savings association to that of a commercial bank, Doral Bank is now also subject
to supervision and examination by the Office of the Commissioner of Financial
Institutions of Puerto Rico (the "Office of the Commissioner") and to the
provisions of the Puerto Rico Banking Act and the regulations promulgated
thereunder. It is also subject to the regulatory capital requirements of the
FDIC. The Company does not believe that the application of such laws or
regulations will have a material adverse effect on the manner in what Doral Bank
currently conducts its operations.
Section 12 of the Puerto Rico Banking Act requires the prior approval of
the Office of the Commissioner with respect to a transfer of capital stock of a
bank that results in a change of control of the bank. Under Section 12, a change
of control is presumed to occur if a person or group of persons acting in
concert, directly or indirectly, acquire more than
19
<PAGE> 20
5% of the outstanding voting capital stock of the bank. The Office of the
Commissioner has interpreted the restrictions of Section 12 as applying to
acquisitions of voting securities of entities controlling a bank, such as a bank
holding company. The provisions of the Mortgage Banking Law and of the BHCA
previously applicable to acquisition of the Company's capital stock only require
regulatory approval for the acquisition of more than 10% of the Company's
outstanding voting securities.
The above regulatory restrictions relating to investment in the Company
may have the effect of discouraging takeover attempts against the Company and
may limit the ability of persons, other than Company directors duly authorized
by the Company's board of diretors, to solicit or exercise proxies, or
otherwise exercise voting rights, in connection with matters submitted to a
vote of the Company's stockholders.
SPECIAL SHAREHOLDERS' MEETING
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 - Restated Certificate of Incorporation, as in
effect prior to, amendment.(1)
Exhibit 3.1(a) - Certificate of Amendment to Restated Certificate of
Incorporation.
Exhibit 3.1(b) - Certificate of Designation creating 8% Convertible
Cumulative Preferred Stock (Liquidation Preference
$1,000 per share)
Exhibit 3.1(c) - Second Restated Certificate of Incorporation
Exhibit 4.1 - Form of Common Stock Certificate
Exhibit 4.2 - 1997 Employee Stock Option Plan.(2)
Exhibit 10.74 - Employment Agreement dated as of October 1, 1997,
between the Company and Richard F. Bonini.
Exhibit 27 - Financial Data Schedule (for SEC use only).
(1) Incorporated herein by reference to the same exhibit number
of the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
(2) Incorporated herein by reference to the same exhibit number
of the Company's Registration Statement on Form S-8 (No.
333-31283) filed with the Commission on July 15, 1997.
(b) Reports on Form 8-K
(i) Current Report on Form 8-K, dated September 22, 1997,
reporting under Item 5 - Other Events, the adoption of
amendments to the Company's Certificate of Incorporation to
(1) change the name of the Company and (2) increase the number
of authorized shares of Common Stock.
(ii) Current Report on Form 8-K, dated, October 1, 1997, reporting
under Item 5 - Other Events, the conversion of Doral Bank into
a Puerto Rico commercial bank and the corresponding change in
regulatory structure of the Company from that of a savings and
loan holding company to a bank holding company.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DORAL FINANCIAL CORPORATION
(Registrant)
Date: November 14, 1997 /s/ Salomon Levis
---------------------------------
Salomon Levis
Chairman of the Board
and Chief Executive Officer
Date: November 14, 1997 /s/ Richard F. Bonini
---------------------------------
Richard F. Bonini
Senior Executive Vice President
and Chief Financial Officer
Date: November 14, 1997 /s/ Ricardo Melendez
---------------------------------
Ricardo Melendez
Vice President and
Principal Accounting Officer
21
<PAGE> 1
EXHIBIT 3.1(a)
CERTIFICATE OF AMENDMENT TO
RESTATED CERTIFICATE OF INCORPORATION OF
FIRST FINANCIAL CARIBBEAN CORPORATION
(REGISTRATION NUMBER 29,324)
First Financial Caribbean Corporation (the "Corporation"), a corporation
organized and existing under the laws of the Commonwealth of Puerto Rico, does
hereby certify:
FIRST: That at a meeting of the Board of Directors of the Corporation,
duly held and convened on July 10, 1997, resolutions were duly adopted approving
the following amendments (the "Amendments") to the Restated Certificate of
Incorporation of the Corporation and declaring said Amendments advisable.
SECOND: That Article FIRST of the Restated Certificate of Incorporation
be amended to read in its entirety as follows:
"FIRST: The name of the Corporation (hereinafter called the
"Corporation") is DORAL FINANCIAL CORPORATION."
THIRD: That the first paragraph of Article FOURTH of the Restated
Certificate of Incorporation shall be amended to read in its entirety as
follows:
"FOURTH: The total number of shares of all classes of stock
which the Corporation is authorized to issue is 52,000,000 shares,
consisting of 50,000,000 shares of Common Stock, $1.00 par value, and
2,000,000 shares of Serial Preferred Stock, $1.00 par value."
FOURTH: That at a Special Meeting of Shareholders of the Corporation held
on September 22, 1997, the inspectors of election appointed for the purpose of
conducting and tabulating the votes of the shareholders for and against the
adoption of the Amendments, executed and delivered a certificate to the effect
that more than a majority of the issued and outstanding stock of the Corporation
<PAGE> 2
2
entitled to vote on the Amendments voted in favor of each of said Amendments.
FIFTH: That the Amendments have been adopted in accordance with the
provisions of Article 8.01 of the Puerto Rico General Corporation Law of 1995.
IN WITNESS WHEREOF, First Financial Caribbean Corporation has caused its
corporate seal to be hereunto affixed and this Certificate to be signed by Zoila
Levis, its President and Richard F. Bonini, its Secretary, this 22nd day of
September, 1997.
/s/ Zoila Levis
-----------------------------
Zoila Levis
President
[Corporate Seal]
/s/ Richard F. Bonini
-----------------------------
Richard F. Bonini
Secretary
<PAGE> 1
EXHIBIT 3.1 (b)
CERTIFICATE OF DESIGNATION
OF THE BOARD OF DIRECTORS OF DORAL FINANCIAL CORPORATION
8% CONVERTIBLE CUMULATIVE PREFERRED STOCK
(LIQUIDATION PREFERENCE $1,000 PER SHARE)
(Pursuant to Article 5.01 of the General Corporation Law of the Commonwealth of
Puerto Rico)
We, the undersigned, President and Secretary of DORAL FINANCIAL
CORPORATION (hereinafter called the "Corporation"), a corporation duly
organized and existing under the laws of the Commonwealth of Puerto Rico, do
hereby certify that, pursuant to the authority conferred upon the Board of
Directors of the Corporation by the Restated Certificate of Incorporation of
the Corporation, the said Board of Directors by unanimous written consent to
action dated September 29, 1997, adopted the following resolutions creating a
series of 20,000 shares of Serial Preferred Stock designated as the "8%
Convertible Cumulative Preferred Stock."
RESOLVED, that pursuant to the authority expressly granted to
and vested in the Board of Directors of the Corporation in accordance
with the provisions of its Restated Certificate of Incorporation, a
series of Serial Preferred Stock of the Corporation be and it hereby
is created.
FURTHER RESOLVED, that the directors have determined that the
preferences and relative, participating, optional or other special
rights of the shares of such series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, as stated and
expressed herein, are under the circumstances prevailing on the date
hereof fair and equitable to all the existing shareholders of the
Corporation.
FURTHER RESOLVED, that the designation and amount of such
series and the voting powers, preferences and relative, participating,
optional or other special rights of the shares of such series of
Preferred Stock, and the qualifications, limitations or restrictions
thereof are as follows:
A. DESIGNATION AND AMOUNT
The shares of such series of Preferred Stock shall be
designated as the "8% Convertible Cumulative Preferred Stock
(Liquidation Preference $1,000 per share)" (hereinafter called the "8%
Preferred Stock"), and the number of authorized shares constituting
such series shall be 20,000.
B. DIVIDENDS
1. Holders of record of the 8% Preferred Stock
("Holders") will be entitled to receive, when, as and if declared by
the Board of Directors of the Corporation, out of funds of the
Corporation legally available therefor, cumulative cash dividends at
the annual rate per share of 8% of their liquidation preferences, or
$6.66 2/3 per share per month.
2. Dividends on the 8% Preferred Stock will accrue from
their date of original issuance and will be payable (when, as and if
declared by the Board of Directors of the Corporation out of funds of
the Corporation legally available therefor) monthly in arrears in
United States dollars commencing on the last day of the month in which
the 8% Preferred Stock is issued, and on the last day of each calendar
month of each year thereafter to the holders of record of the 8%
Preferred Stock as they appear on the books of the Corporation on the
Business Day (as defined below) immediately preceding the relevant
date of payment. In the case of the
<PAGE> 2
-2-
dividend payable in the month in which the 8% Preferred Stock is
issued, such dividend shall cover the period from the date of issuance
of the 8% Preferred Stock to the end of such month. In the event that
any date on which dividends are payable is not a Business Day, then
payment of the dividend payable on such date will be made on the next
succeeding Business Day without any interest or other payment in
respect of any such delay, except that, if such Business Day is in the
next succeeding calendar year, such payment will be made on the
Business Day immediately preceding the relevant date of payment, in
each case with the same force and effect as if made on such date. A
"Business Day" is a day other than a Saturday, Sunday or bank holiday
in San Juan, Puerto Rico.
3. Dividends on the 8% Preferred Stock will be
cumulative from their date of issuance, and will accrue, to the extent
not paid, on the last day of each month.
4. The amount of dividends payable for any monthly
dividend period will be computed on the basis of twelve 30-day months
and a 360-day year. The amount of dividends payable for any period
shorter than a full monthly dividend period will be computed on the
basis of the actual number of days elapsed in such period.
5. Subject to any applicable fiscal or other laws and
regulations, each dividend payment will be made by dollar check drawn
on a bank in New York, New York or San Juan, Puerto Rico and mailed to
the record holder thereof at such holder's address as it appears on
the register for such 8% Preferred Stock or, in the case of holders of
$1,000,000 or more in aggregate liquidation preference of the 8%
Preferred Stock, by wire transfer of immediately available funds to
the account of such holders as notified by such holders to the
Corporation.
6. So long as any shares of the 8% Preferred Stock
remain outstanding, the Corporation shall not declare, set apart or
pay any dividend or make any other distribution of assets (other than
dividends paid or other distributions made in stock of the Corporation
ranking junior to the 8% Preferred Stock as to the payment of
dividends and the distribution of assets upon liquidation, dissolution
or winding up of the Corporation) on, or redeem, purchase, set apart
or otherwise acquire (except upon conversion or exchange for stock of
the Corporation ranking junior to the 8% Preferred Stock as to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up of the Corporation), shares of common stock
or of any other class of stock of the Corporation ranking junior to
the 8% Preferred Stock as to the payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up of
the Corporation, unless all accrued and unpaid dividends on the 8%
Preferred Stock shall have been paid or are paid contemporaneously and
the full monthly dividend on the 8% Preferred Stock for the then
current month has been or is contemporaneously declared and paid or
declared and set apart for payment and unless the Corporation has not
defaulted in the payment of the redemption price of any shares of 8%
Preferred Stock called for redemption.
7. When dividends are not paid in full on the 8%
Preferred Stock and any other shares of stock of the Corporation
ranking on a parity as to the payment of dividends with the 8%
Preferred Stock, all dividends declared upon the 8% Preferred Stock
and any such other shares of stock of the Corporation will be declared
pro rata so that the amount of dividends declared per share on the 8%
Preferred Stock and any such other shares of stock will in all cases
bear to each other the same ratio that the liquidation preference per
share of the 8% Preferred Stock and any such other shares of stock
bear to each other.
8. Holders of record of the 8% Preferred Stock will not
be entitled to any dividend, whether payable in cash, property or
stock, in excess of the dividends provided for herein on the shares of
8% Preferred Stock. The Corporation may, however, at its discretion,
declare
<PAGE> 3
-3-
a special dividend in an amount sufficient to allow the Corporation to
pay dividends on any stock of the Corporation ranking junior to the 8%
Preferred Stock in compliance with the provisions of Section B.6
above.
C. CONVERSION
1. A holder of a share of 8% Preferred Stock may convert
it into common stock of the Corporation at any time before the close
of business on December 1, 2005 (the "Expiration Date"). If a share
of 8% Preferred Stock is called for redemption, the holder may convert
it at any time before the close of business on the day preceding the
redemption date. The initial conversion price is $8.75 per share of
common stock of the Corporation, subject to adjustment in certain
events as provided in subsection 4 below (as so adjusted from time to
time, the "Conversion Price"). To determine the number of shares of
common stock of the Corporation issuable upon conversion of a share of
8% Preferred Stock, divide (a) the aggregate liquidation preference of
the shares of 8% Preferred Stock to be converted by (b) the Conversion
Price in effect on the conversion date. The Corporation will deliver
a check for an amount equal to the value of any fractional share plus
the total amount of accrued but unpaid dividends on such shares to the
date of conversion.
2. To convert a share of 8% Preferred Stock a Holder
must (1) complete and sign the conversion election on the back of the
certificate, (2) surrender the certificate to the Corporation, (3)
furnish appropriate endorsements and transfer documents if required by
the Corporation, and (4) pay any transfer or similar tax if required.
3. Reservation, Listing and Issuance of Shares. The
Corporation will at all times have authorized, and reserve and keep
available, free from preemptive rights, for the purpose of enabling it
to satisfy any obligation to issue shares of common stock of the
Corporation upon the conversion of shares of 8% Preferred Stock, the
number of shares of common stock of the Corporation deliverable upon
conversion of the outstanding shares of 8% Preferred Stock. The
Corporation will, at its expense, cause the shares of common stock of
the Corporation deliverable upon conversion of the 8% Preferred Stock
to be listed (subject to issuance or notice of issuance of such
shares) on all stock exchanges on which the common stock is listed not
later than the date such common stock is so listed. The Corporation
agrees to list such shares (subject to issuance or notice of issuance)
on NASDAQ-NMS, to the extent not already listed, promptly after the
date of this Certificate of Designation.
Before taking any action which could cause an
adjustment pursuant to subsection 4 below reducing the Conversion
Price below the then par value (if any) of the shares of common stock
of the Corporation, the Corporation will take any corporate action
which may be necessary in order that the Corporation may validly and
legally issue at the Conversion Price as so adjusted shares of common
stock of the Corporation that are fully paid and non-assessable.
The Corporation covenants that all shares of common
stock of the Corporation deliverable upon conversion of the 8%
Preferred Stock will, upon issuance in accordance with the terms
hereof, be (i) duly authorized, fully paid and non-assessable, and
(ii) free from all taxes with respect to the issuance thereof and from
all liens, charges and security interests created by the Corporation.
4. Adjustments of Conversion Price and Number of Shares
of Common Stock Issuable upon Conversion of the 8% Preferred Stock.
(a) Adjustment of Conversion Price upon Issuance of Common Stock. If
and whenever, after September 25, 1995, the Corporation shall issue
or sell any shares of common stock (except upon conversion of one or
more of the 8.25%
<PAGE> 4
-4-
convertible subordinated debentures due January 1, 2006 or of one or
more shares of the 8% Preferred Stock or upon exercise by Popular,
Inc. of certain rights to purchase shares of common stock of the
Corporation set forth in Article 5 of the Exchange Agreement dated
July 9, 1997, between the Corporation and Popular, Inc.) for a
consideration per share less than the Market Price (as hereinafter
defined) at the time of such issue or sale, then, forthwith upon such
issue or sale, the Conversion Price shall be reduced to the price
(calculated to the nearest cent) determined by multiplying the
Conversion Price in effect immediately prior to the time of such issue
or sale by a fraction, the numerator of which shall be the sum of (a)
the number of shares of common stock of the Corporation outstanding
immediately prior to such issue or sale multiplied by the Market Price
immediately prior to such issue or sale plus (b) the consideration
received by the Corporation upon such issue or sale, and the
denominator of which shall be the product of (c) the total number of
shares of common stock outstanding immediately after such issue or
sale, multiplied by (d) the Market Price immediately prior to such
issue or sale. No adjustment of any Conversion Price, however, shall
be made in an amount less than $0.01 per share, but any such lesser
adjustment shall be carried forward and shall be made at the time of,
and together with, the next subsequent adjustment which together with
any adjustments so carried forward shall amount to $0.01 per share or
more.
(b) For the purposes of this subsection 4, the
following provisions shall also be applicable:
(i) Issuance of Rights or Options. In
case at any time the Corporation shall grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe for or to
purchase, or any options for the purchase of, common stock or any
stock or securities convertible into or exchangeable for common stock
(such convertible or exchangeable stock or securities being herein
called "Convertible Securities") whether or not such rights or options
or the right to convert or exchange any such Convertible Securities
are immediately exercisable, and the price per share for which common
stock is issuable upon the conversion of such rights or options or
upon conversion or exchange of such Convertible Securities (determined
as provided below) shall be less than the Market Price determined as
of the date of granting such rights or options, then the total maximum
number of shares of common stock issuable upon the conversion of such
rights or options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the conversion of
such rights or options shall (as of the date of granting of such
rights or options) be deemed to be outstanding and to have been issued
for such price per share. Except as provided in clause (iii) of this
subsection, no further adjustments of any Conversion Price shall be
made upon the actual issue of such common stock or of such Convertible
Securities upon conversion of such rights or options or upon the
actual issue of such common stock upon conversion or exchange of such
Convertible Securities. For the purposes of this clause (i), the
price per share for which common stock is issuable upon the conversion
of any such rights or options or upon conversion or exchange of any
such Convertible Securities shall be determined by dividing (A) the
total amount, if any, received or receivable by the Corporation as
consideration for the granting of such rights or options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the conversion of all such rights or options, plus,
in the case of such rights or options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration,
if any, payable upon the issue or sale of such Convertible Securities
and upon the conversion or exchange thereof, by (B) the total maximum
number of shares of common stock issuable upon the conversion of such
rights or options or upon the conversion or exchange of all such
Convertible Securities issuable upon the conversion of such rights or
options.
<PAGE> 5
-5-
(ii) Issuance of Convertible Securities.
In case the Corporation shall issue (whether directly or by assumption
in a merger or otherwise) or sell any Convertible Securities, whether
or not the rights to exchange or convert thereunder are immediately
exercisable, and the price per share for which common stock is issuable
upon conversion or exchange of such Convertible Securities (determined
as provided below) shall be less than the Market Price, determined as
of the date of such issue or sale of such Convertible Securities, then
the total maximum number of shares of common stock issuable upon
conversion or exchange of all such Convertible Securities shall (as of
the date of the issue or sale of such Convertible Securities) be deemed
to be outstanding and to have been issued for such price per share,
provided that (1) except as provided in clause (iii) of this
subsection, no further adjustments of any Conversion Price shall be
made upon the actual issue of such common stock upon conversion or
exchange of such Convertible Securities, and (2) if any such issue or
sale of such Convertible Securities is made upon conversion of any
rights to subscribe for or to purchase or any option to purchase any
such Convertible Securities for which adjustments of any Conversion
Price have been or are to be made pursuant to other provisions of this
subsection (b), no further adjustment of any Conversion Price shall be
made by reason of such issue or sale. For the purposes of this clause
(ii), the price per share for which common stock is issuable upon
conversion or exchange of Convertible Securities shall be determined by
dividing (A) the total amount received or receivable by the Corporation
as consideration for the issue or sale of such Convertible Securities,
plus the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the conversion or exchange thereof, by
(B) the total maximum number of shares of common stock issuable upon
the conversion or exchange of all such Convertible Securities.
(iii) Change in Option Price or Conversion
Rate. If the purchase price provided for in any rights or options
referred to in clause (i) above, or the additional consideration, if
any, payable upon the conversion or exchange of Convertible Securities
referred to in clause (i) or (ii) above, or the rate at which any
Convertible Securities referred to in clause (i) or (ii) above are
convertible into or exchangeable for common stock, shall change (other
than under or by reason of provisions designed to protect against
dilution), then the Conversion Price in effect at the time of such
event shall forthwith be readjusted to the Conversion Price which
would have been in effect at such time had such rights, options or
Convertible Securities still outstanding provided for such changed
purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold.
(iv) Expiration of Options, Rights and
Other Similar Conversion Privileges. On the expiration of any such
option or right or the termination of any such right to convert or
exchange such Convertible Securities, the Conversion Price then in
effect hereunder shall forthwith be increased to the Conversion Price
which would have been in effect at the time of such expiration or
termination had such right, option or Convertible Security, to the
extent outstanding immediately prior to such expiration or
termination, never been issued, and the common stock issuable
thereunder shall no longer be deemed to be outstanding. If the
purchase price provided for in any such right or option referred to in
clause (i) above or the rate at which any Convertible Securities
referred to in clause (i) or (ii) above are convertible into or
exchangeable for common stock, shall decrease at any time under or by
reason of provisions with respect thereto designed to protect against
dilution, then in case of the delivery of common stock upon the
conversion of any such right or option or upon conversion or exchange
of any such Convertible Security, the Conversion Price then in effect
hereunder shall forthwith be adjusted to such respective amount as
would have obtained had such right, option or Convertible Security
never been issued as to such common stock and had adjustments been
made upon the
<PAGE> 6
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issuance of the shares of common stock delivered as aforesaid, but
only if as a result of such adjustment the Conversion Price then in
effect hereunder is thereby decreased.
(v) Stock Dividends. In case the
Corporation shall declare a dividend or make any other distribution
upon any stock of the Corporation payable in common stock or
Convertible Securities, any common stock or Convertible Securities, as
the case may be, issuable in payment of such dividend or distribution
shall be deemed to have been issued or sold without consideration.
(vi) Consideration for Stock. In case
any shares of common stock or Convertible Securities or any rights or
options to purchase any such common stock or Convertible Securities
shall be issued or sold for cash, the consideration received therefor
shall be deemed to be the amount received by the Corporation therefor,
without deduction therefrom of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the
Corporation in connection there- with. In case any shares of common
stock or Convertible Securities or any rights or options to purchase
any such common stock or Convertible Securities shall be issued or
sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be
deemed to be the fair value of such consideration as determined, in
good faith and in the exercise of reasonable business judgment, by the
board of directors of the Corporation, without deduction of any
expenses incurred or any underwriting commissions or concessions paid
or allowed by the Corporation in connection therewith. In case any
shares of common stock or Convertible Securities or any rights or
options to purchase such shares of common stock or Convertible
Securities shall be issued in connection with any merger or
consolidation in which the Corporation is the surviving corporation
(other than any consolidation or merger in which the previously
outstanding shares of common stock of the Corporation shall be changed
into or exchanged for the stock or other securities of another
corporation), the amount of consideration therefor shall be deemed to
be the fair value as determined reasonably and in good faith by the
board of directors of the Corporation of such portion of the assets
and business of the non-surviving corporation as such board may
determine to be attributable to such shares of common stock,
Convertible Securities, rights or options, as the case may be. In the
event of any consolidation or merger of the Corporation in which the
Corporation is not the surviving corporation or in which the
previously outstanding shares of common stock of the Corporation shall
be changed into or exchanged for the stock or other securities of
another corporation or in the event of any sale of all or
substantially all of the assets of the Corporation for stock or other
securities of any corporation, the Corporation shall be deemed to have
issued a number of shares of its common stock for stock or securities
or other property of the other corporation computed on the basis of
the actual exchange ratio on which the transaction was predicated and
for a consideration equal to the fair market value on the date of such
transaction of all such stock or securities or other property of the
other corporation, and if any such calculation results in adjustment
of the Conversion Price, the determination of the number of shares of
common stock issuable upon conversion of the Securities immediately
prior to such merger, consolidation or sale, for purposes of
subsection (e) below, shall be made after giving effect to such
adjustment of the Conversion Price.
(vii) Record Date. In case the
Corporation shall take a record of the holders of its common stock for
the purpose of entitling them (A) to receive a dividend or other
distribution payable in common stock or in Convertible Securities, or
(B) to subscribe for or purchase common stock or Convertible
Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of common stock deemed to have been
issued or sold upon the declaration of such dividend or the making of
such other distribution or the date of the granting of such right of
subscription or purchase, as the case may be.
<PAGE> 7
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(viii) Treasury Shares. The number of
shares of common stock outstanding at any given time shall not include
shares owned or held by or for the account of the Corporation, and the
disposition of any such shares shall be considered an issue or sale of
common stock for the purposes of this subsection (b).
(ix) Definition of Market Price. "Market
Price" shall mean the average of the daily closing prices per share of
the common stock for the ten consecutive trading days immediately
preceding the day as of which "Market Price" is being determined,
except that, in the case of an underwritten bona fide public offering,
"Market Price" shall mean the initial public offering price. The
closing price for each day shall be the last sale price regular way
or, in case no such sale takes place on such day, the average of the
closing bid and asked prices regular way, in either case on the New
York Stock Exchange, or, if shares of the common stock are not listed
or admitted to trading on the New York Stock Exchange, on the
principal national securities exchange (including for this purpose the
NASDAQ-NMS) on which the shares are listed or admitted to trading, or
if the shares are not so listed or admitted to trading, the average of
the highest reported bid and lowest reported asked prices as furnished
by the National Association of Securities Dealers, Inc. through NASDAQ
or through a similar organization if NASDAQ is no longer reporting
such information. If shares of the common stock are not listed or
admitted to trading on any exchange or quoted through NASDAQ or any
similar organization, the "Market Price" shall be deemed to be the
higher of (A) the book value of a share of the common stock as
determined by any firm of independent public accountants of recognized
standing, selected by the board of directors of the Corporation, as at
the last day of any month ending within sixty days preceding the date
as of which the determination is to be made or (B) the fair value
thereof determined in good faith by an independent brokerage firm or
Standard & Poor's Corporation as of a date which is within fifteen
days of the date as of which the determination is to be made (the fees
and expenses of any such inde- pendent public accountants, independent
brokerage firm or other firm engaged pursuant to subclauses (A) and
(B) of this clause (ix) to be paid by the Corporation).
(x) Determination of Market Price under
Certain Circumstances. Anything herein to the contrary
notwithstanding, in case the Corporation shall issue any shares of
common stock or Convertible Securities in connection with the
acquisition by the Corporation of the stock or assets of any other
corporation or the merger of any other corporation into the
Corporation, the Market Price shall be determined as of the date the
number of shares of common stock or Convertible Securities (or in the
case of Convertible Securities other than stock, the aggregate
principal amount of Convertible Securities) was determined (as set
forth in a written agreement between the Corporation and the other
party to the transaction) rather than on the date of issuance of such
shares of common stock or Convertible Securities.
(xi) Certain Issues Excepted. Anything
herein to the contrary notwithstanding, the Corporation shall not be
required to make any adjustment of any Conversion Price in case of the
issuance of shares of common stock (1) upon the conversion of options
or rights relating to up to 500,000 shares (subject to adjustment for
stock splits, stock combinations, stock dividends and similar events)
of the Corporation's common stock granted or provided or to be granted
or provided under the Corporation's stock option plan, as in effect on
July 9, 1997, or (2) under the Corporation's restricted stock plan, as
in effect on July 9, 1997, up to a maximum of 250,000 shares (subject
to adjustment for stock splits, stock combinations, stock dividends
and similar events), and shall not be required to make any such
adjustment upon the granting of any options or rights referred to
above if and to the extent that issuance of the shares covered thereby
is excepted by this clause.
<PAGE> 8
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(c) Adjustment for Certain Special Dividends. In
case the Corporation shall declare a dividend upon the common stock
payable otherwise than out of earnings or earned surplus, determined
in accordance with Generally Accepted Accounting Principles, and
otherwise than in common stock or Convertible Securities, the
Conversion Price in effect immediately prior to the declaration of
such dividend shall be reduced by an amount equal, in the case of a
dividend in cash, to the amount per share of the common stock so
declared as payable otherwise than out of earnings or earned surplus
or, in the case of any other dividend, to the fair value per share of
the common stock of the property so declared as payable otherwise than
out of earnings or earned surplus, as determined, reasonably and in
good faith, by the board of directors of the Corporation. For the
purposes of the foregoing a dividend other than in cash shall be
considered payable out of earnings or earned surplus (other than
revaluation or paid-in-surplus) only to the extent that such earnings
or earned surplus are charged an amount equal to the fair value of
such dividend, as determined, reasonably and in good faith, by the
board of directors of the Corporation. Such reductions shall take
effect as of the date on which a record is taken for the purpose of
such dividend, or, if a record is not taken, the date as of which the
holders of common stock of record entitled to such dividend are
determined.
(d) Subdivision or Combination of Stock. In case
the Corporation shall at any time subdivide the outstanding shares of
common stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision shall be proportionately
reduced, and conversely, in case the outstanding shares of common
stock shall be combined into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall
be proportionately increased.
(e) Adjustments for Consolidation, Merger, Sale
of Assets, Reorganization, etc. In case the Corporation (a)
consolidates with or merges into any other corporation and is not the
continuing or surviving corporation of such consolidation or merger, or
(b) permits any other corporation to consolidate with or merge into the
Corporation and the Corporation is the continuing or surviving
corporation but, in connection with such consolidation or merger, the
common stock is changed into or exchanged for stock or other securities
of any other corporation or cash or any other assets, or (c) transfers
all or substantially all of its properties and assets to any other
corporation, or (d) effects a capital reorganization or
reclassification of the capital stock of the Corporation in such a way
that holders of common stock shall be entitled to receive stock,
securities, cash or assets with respect to or in exchange for common
stock, then, and in each such case, proper provision shall be made so
that, upon the basis and upon the terms and in the manner provided in
this subsection (e), the Holders, upon the conversion of each Security
at any time after the consummation of such consolidation, merger,
transfer, reorganization or reclassification, shall be entitled to
receive (at the aggregate Conversion Price in effect for all shares of
common stock issuable upon such conversion immediately prior to such
consummation as adjusted to the time of such transaction), in lieu of
shares of common stock issuable upon such conversion prior to such
consummation, the stock and other securities, cash and assets to which
such Holder would have been entitled upon such consummation if such
Holder had so converted such Security immediately prior thereto
(subject to adjustments subsequent to such corporate action as nearly
equivalent as possible to the adjustments provided for in this
subsection 4).
(f) Notice of Adjustment. Upon any adjustment of
the Conversion Price, then and in each such case the Corporation shall
promptly deliver a notice to the registered holder of the Securities,
which notice shall state the Conversion Price resulting from such
adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
<PAGE> 9
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(g) Other Notices. In case at any time:
(1) the Corporation shall declare or pay
any dividend on or make any distribution with respect to its common
stock, other than quarterly cash dividends consistent with past
practice;
(2) the Corporation shall offer for
subscription pro rata to the holders of its common stock any
additional shares of stock of any class or other rights;
(3) there shall be any capital
reorganization, or reclassification of the capital stock of the
Corporation, or consolidation or merger of the Corporation with
another corporation (other than a Subsidiary of the Corporation in
which the Corporation is the surviving or continuing corporation and
no change occurs in the Corporation's common stock), or sale of all or
substantially all of its assets to, another corporation;
(4) there shall be a voluntary or
involuntary dissolution, liquidation, bankruptcy, assignment for the
benefit of creditors, or winding up of the Corporation; or
(5) the Corporation proposes to take any
other action or an event occurs which would require an adjustment of
the Conversion Price pursuant to subsection (h) below;
then, in any one or more of said cases, the Corporation shall give
written notice, addressed to each Holder at the address of such Holder
as shown on the books of the Corporation, of (1) the date on which the
books of the Corporation shall close or a record shall be taken for
such dividend, distribution or subscription rights, or (2) the date
(or, if not then known, a reasonable approximation thereof by the
Corporation) on which such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, bankruptcy,
assignment for the benefit of creditors, winding up or other action,
as the case may be, shall take place. Such notice shall also specify
(or, if not then known, reasonably approximate) the date as of which
the holders of common stock of record shall participate in such
dividend, distribution or subscription rights, or shall be entitled to
exchange their common stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, bankruptcy, assignment for the
benefit of creditors, winding up, or other action, as the case may be.
Such written notice shall be given at least twenty days prior to the
action in question and not less than twenty days prior to the record
date or the date on which the Corporation's transfer books are closed
in respect thereto.
(h) Certain Events. If any event occurs as to
which in the reasonable opinion of the Corporation, in good faith, the
other provisions of this subsection 4 are not strictly applicable but
the lack of any adjustment would not in the opinion of the Corporation
fairly protect the conversion rights of the Holders in accordance with
the basic intent and principles hereof, or if strictly applicable
would not fairly protect the conversion rights of the Holders in
accordance with the basic intent and principles hereof, then the
Corporation shall appoint a firm of independent certified public
accountants (which may be the regular auditors of the Corporation) of
recognized national standing, which shall give their opinion upon the
adjustment, if any, on a basis consistent with the basic intent and
principles established in the other provisions of this subsection 4,
necessary to preserve, without dilution, the conversion rights of the
Holders. Upon receipt of such opinion, the Corporation shall
forthwith make the adjustments described therein.
<PAGE> 10
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(i) All calculations under this subsection 4
shall be made to the nearest cent or to the nearest one hundredth
(1/100) of a share, as the case may be.
(j) In any case in which the provisions hereof
require that an adjustment shall become effective immediately after a
record date for an event, the Corporation may defer until the
occurrence of such event (i) issuing to the Holder of any Security
converted after such record date and before the occurrence of such
event the additional shares of common stock issuable upon such
conversion by reason of the adjustments required by such event over
and above the shares of common stock issuable upon such conversion
before giving effect to such adjustment and (ii) paying to such Holder
any amount in cash in lieu of a fractional share of common stock;
provided, however, that the Corporation
shall deliver to such Holder a due bill or other appropriate
instrument evidencing such Holder's right to receive such additional
shares and such cash upon the occurrence of the event requiring such
adjust- ment.
D. REDEMPTION AT THE OPTION OF THE CORPORATION
1. The shares of the 8% Preferred Stock are not
redeemable prior to January 1, 2001. On and after that date, the
shares of the 8% Preferred Stock will be redeemable in whole or in
part from time to time at the option of the Corporation, with the
consent of the Board of Governors of the Federal Reserve System, upon
not less than thirty nor more than sixty days' notice by mail, at the
redemption prices set forth below, during the twelve-month periods
beginning on January 1 of the years set forth below, plus accrued and
unpaid dividends to the date fixed for redemption.
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2001 . . . . . . . . . . . . . . . . . . $1,020.00
2002 . . . . . . . . . . . . . . . . . . $1,015.00
2003 . . . . . . . . . . . . . . . . . . $1,010.00
2004 . . . . . . . . . . . . . . . . . . $1,005.00
2005 and thereafter . . . . . . . . . . $1,000.00
</TABLE>
2. In the event that less than all of the outstanding
shares of the 8% Preferred Stock are to be redeemed in any redemption
at the option of the Corporation, the total number of shares to be
redeemed in such redemption shall be determined by the Board of
Directors and the shares to be redeemed shall be allocated pro rata or
by lot as may be determined by the Board of Directors or by such other
method as the Board of Directors may approve and deem equitable,
including any method to conform to any rule or regulation of any
national or regional stock exchange or automated quotation system upon
which the shares of the 8% Preferred Stock may at the time be listed
or eligible for quotation.
3. Notice of any proposed redemption shall be given by
the Corporation by mailing a copy of such notice to the holders of
record of the shares of 8% Preferred Stock to be redeemed, at their
address of record, not more than sixty nor less than thirty days prior
to the redemption date. The notice of redemption to each holder of
shares of 8% Preferred Stock shall specify the number of shares of 8%
Preferred Stock to be redeemed, the redemption date and the redemption
price payable to such holder upon redemption, and shall state that
from and after said date dividends thereon will cease to accrue. If
less than all the shares owned by a holder are then to be redeemed at
the option of the Corporation, the notice shall also specify the
number of shares of 8% Preferred Stock which are to be redeemed and
the numbers of the certificates representing such shares. Any notice
which is mailed as herein provided shall be
<PAGE> 11
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conclusively presumed to have been duly given, whether or not the
stockholder receives such notice; and failure duly to give such notice
by mail, or any defect in such notice, to the holders of any stock
designated for redemption shall not affect the validity of the
proceedings for the redemption of any other shares of 8% Preferred
Stock.
4. Notice having been mailed as aforesaid, from and
after the redemption date (unless default be made in the payment of
the redemption price for any shares to be redeemed), all dividends on
the shares of 8% Preferred Stock called for redemption shall cease to
accrue and all rights of the holders of such shares as stockholders of
the Corporation by reason of the ownership of such shares (except the
right to receive the redemption price, on presentation and surrender
of the respective certificates representing the redeemed shares),
shall cease on the redemption date, and such shares shall not after
the redemption date be deemed to be outstanding. In case less than
all the shares rep- resented by any such certificate are redeemed, a
new certificate shall be issued without cost to the holder thereof
representing the unredeemed shares.
5. At its option, the Corporation may, on or prior to
the redemption date, irrevocably deposit the aggregate amount payable
upon redemption of the shares of the 8% Preferred Stock to be redeemed
with a bank or trust company designated by the Board of Directors
having its principal office in New York, New York, San Juan, Puerto
Rico, or any other city in which the Corporation shall at that time
maintain a transfer agency with respect to its capital stock, and
having a combined capital and surplus (as shown by its latest
published statement) of at least $50,000,000 (hereinafter referred to
as the "Depositary"), to be held in trust by the Depositary for
payment to the holders of the shares of the 8% Preferred Stock then to
be redeemed. If such deposit is made and the funds so deposited are
made immediately available to the holders of the shares of the 8%
Preferred Stock to be redeemed, the Corporation shall thereupon be
released and discharged (subject to the provisions of Section D.6)
from any obligation to make payment of the amount payable upon
redemption of the shares of the 8% Preferred Stock to be redeemed, and
the holders of such shares shall look only to the Depositary for such
payment.
6. Any funds remaining unclaimed at the end of two years
from and after the redemption date in respect of which such funds were
deposited shall be returned to the Corporation forthwith and
thereafter the holders of shares of the 8% Preferred Stock called for
redemption with respect to which such funds were deposited shall look
only to the Corporation for the payment of the redemption price
thereof. Any interest accrued on any funds deposited with the
Depositary shall belong to the Corporation and shall be paid to it
from time to time on demand.
7. Any shares of the 8% Preferred Stock which shall at
any time have been redeemed shall, after such redemption, have the
status of authorized but unissued shares of Preferred Stock, without
designation as to series, until such shares are once more designated
as part of a particular series by the Board of Directors.
E. LIQUIDATION PREFERENCE
1. Upon any voluntary or involuntary liquidation,
dissolution, or winding up of the Corporation, the then record holders
of shares of 8% Preferred Stock will be entitled to receive out of the
assets of the Corporation available for distribution to shareholders,
before any distribution is made to holders of common stock or any
other equity securities of the Corporation ranking junior upon
liquidation to the 8% Preferred Stock, distributions upon liquidation
in the amount of $1,000 per share plus an amount equal to any accrued
and unpaid dividends to the date of payment. Such amount shall be
paid to the holders of the 8% Preferred Stock prior to
<PAGE> 12
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any payment or distribution to the holders of the common stock of the
Corporation or of any other class of stock or series thereof of the
Corporation ranking junior to the 8% Preferred Stock in respect of
dividends or as to the distribution of assets upon liquidation.
2. If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the amounts payable with
respect to the 8% Preferred Stock and any other shares of stock of the
Corporation ranking as to any such distribution on a parity with the
8% Preferred Stock are not paid in full, the holders of the 8%
Preferred Stock and of such other shares will share ratably in any
such distribution of assets of the Corporation in proportion to the
full liquidation preferences to which each is entitled. After payment
of the full amount of the liquidation preference to which they are
entitled, the holders of shares of 8% Preferred Stock will not be
entitled to any further participation in any distribution of assets of
the Corporation.
3. Neither the consolidation or merger of the
Corporation with any other corporation, nor any sale, lease or
conveyance of all or any part of the property or business of the
Corporation, shall be deemed to be a liquidation, dissolution, or
winding up of the Corporation.
4. If the assets distributable upon any dissolution,
liquidation, or winding up of the Corporation shall be insufficient to
permit the payment to the holders of the 8% Preferred Stock of the
full preferential amounts aforesaid, then such assets or the proceeds
thereof shall be distributed among the holders of the 8% Preferred
Stock ratably in proportion to the respective amounts the holders of
such shares of stock would be entitled to receive if they were paid
the full preferential amounts aforesaid.
F. VOTING RIGHTS
1. Except as described in this Section F, or except as
required by applicable law, holders of the 8% Preferred Stock will not
be entitled to receive notice of or attend or vote at any meeting of
stockholders of the Corporation.
2. Any variation or abrogation of the rights,
preferences and privileges of the 8% Preferred Stock by way of
amendment of the Corporation's Restated Certificate of Incorporation
or otherwise (including, without limitation, the authorization or
issuance of any shares of the Corporation ranking, as to dividend
rights or rights on liquidation, winding up and dissolution, senior to
the 8% Preferred Stock) shall not be effective (unless otherwise
required by applicable law) except with the consent in writing of the
holders of at least a majority of the outstanding shares of the 8%
Preferred Stock or with the sanction of a special resolution passed at
a separate general meeting by the holders of at least a majority of
the outstanding shares of the 8% Preferred Stock. Notwithstanding the
foregoing, the Corporation may, without the consent or sanction of the
holders of the 8% Preferred Stock, authorize and issue shares of the
Corporation ranking, as to dividend rights and rights on liquidation,
winding up and dissolution, on a parity with or junior to the 8%
Preferred Stock.
3. No vote of the holders of the 8% Preferred Stock will
be required for the Corporation to redeem or purchase and cancel the
8% Preferred Stock in accordance with the Restated Certificate of
Incorporation of the Corporation.
4. The Corporation will cause a notice of any meeting at
which holders of any series of Preferred Stock are entitled to vote to
be mailed to each record holder of such series of Preferred Stock.
Each such notice will include a statement setting forth (i) the date
of such meeting, (ii) a description of any resolution to be proposed
for adoption at such meeting on which such holders are entitled to
vote and (iii) instructions for deliveries of proxies.
<PAGE> 13
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5. Except as set forth in this Section F, holders of 8%
Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote
as set forth herein) for taking any corporate action.
G. RANK
The 8% Preferred Stock will, with respect to dividend rights
and rights on liquidation, winding up and dissolution, rank (i) senior
to all classes of common stock of the Corporation and to all other
equity securities issued by the Corporation the terms of which
specifically provide that such equity securities will rank junior to
the 8% Preferred Stock (or to a number of series of Preferred Stock
which includes the 8% Preferred Stock); (ii) on a parity with all
equity securities issued by the Corporation the terms of which
specifically provide that such equity securities will rank on a parity
with the 8% Preferred Stock (or with a number of series of Preferred
Stock which includes the 8% Preferred Stock); and (iii) junior to all
equity securities issued by the Corporation the terms of which
specifically provide that such equity securities will rank senior to
the 8% Preferred Stock (or to a number of series of Preferred Stock
which includes the 8% Preferred Stock). For this purpose, the term
"equity securities" does not include debt securities convertible into
or exchangeable for equity securities.
H. FORM OF CERTIFICATE FOR 8% PREFERRED STOCK; TRANSFER AND
REGISTRATION
1. The 8% Preferred Stock shall be issued in registered
form only. The Corporation may treat the record holder of a share of
8% Preferred Stock, including the Depository Trust Company and its
nominee and any other holder that holds such share on behalf of any
other person, as such record holder appears on the books of the
registrar for the 8% Preferred Stock, as the sole owner of such share
for all purposes.
2. The transfer of a share of 8% Preferred Stock may be
registered upon the surrender of the certificate evidencing the share
of 8% Preferred Stock to be transferred, together with the form of
transfer endorsed on it duly completed and executed, at the office of
the transfer agent and registrar.
3. Registration of transfers of shares of 8% Preferred
Stock will be effected without charge by or on behalf of the
Corporation, but upon payment (or the giving of such indemnity as the
transfer agent and registrar may require) in respect of any tax or
other governmental charges which may be imposed in relation to it.
4. The Corporation will not be required to register the
transfer of a share of 8% Preferred Stock after such share has been
called for redemption.
I. REPLACEMENT OF LOST CERTIFICATES
If any certificate for a share of 8% Preferred Stock is
mutilated or alleged to have been lost, stolen or destroyed, a new
certificate representing the same share shall be issued to the holder
upon request subject to delivery of the old certificate or, if alleged
to have been lost, stolen or destroyed, compliance with such
conditions as to evidence, indemnity and the payment of out-of-pocket
expenses of the Corporation in connection with the request as the
Board of Directors of the Corporation may determine.
<PAGE> 14
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J. NO PREEMPTIVE RIGHTS
Holders of the 8% Preferred Stock will have no preemptive
rights to purchase any securities of the Corporation.
The undersigned hereby certify that the capital of the Corporation
will not be reduced under or by reason of the adoption of the above resolutions
providing for the creation of the above described series of Preferred Stock.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to
be hereunto affixed and this Certificate to be signed by its President, Zoila
Levis, and its Secretary, Richard Bonini, this 15th day of October, 1997.
DORAL FINANCIAL CORPORATION
By: /S/ Zoila Levis
---------------------------------
Zoila Levis
President
[CORPORATE SEAL]
By: /S/ Richard F. Bonini
---------------------------------
Richard F. Bonini
Secretary
<PAGE> 1
EXHIBIT 3.1(c)
SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
DORAL FINANCIAL CORPORATION
Doral Financial Corporation, a corporation organized under the laws of the
Commonwealth of Puerto Rico, does hereby certify pursuant to Article 8.05 of the
Puerto Rico General Corporation Law, that
FIRST: The name under which it was originally incorporated was HF, Inc.
The name was subsequently amended to First Financial Caribbean Corporation and
on September 22, 1997 was amended to Doral Financial Corporation.
SECOND: Its original Certificate of Incorporation was filed in the Office
of the Secretary of State of the Commonwealth of Puerto Rico on October 23,
1972, Reg. No. 29,324. The original Certificate of Incorporation as amended to
such date was restated on March 26, 1997.
THIRD: This Second Restated Certificate of Incorporation was approved by
the Board of Directors of Doral Financial Corporation at a meeting duly called
and held on October 6, 1997 and does not further amend the provisions of Doral
Financial Corporation's Restated Certificate of Incorporation as heretofore
amended, and there are no discrepancies between those provisions and of this
Second Restated Certificate of Incorporation.
FOURTH: The text of the Restated Certificate of Incorporation of Doral
Financial Corporation, as amended, is hereby restated without further amendment
or change, effective as of the date of filing of this instrument with the
Secretary of State of the Commonwealth of Puerto Rico, to read as follows:
FIRST: The name of the corporation (hereinafter called the
Corporation) is DORAL FINANCIAL CORPORATION.
SECOND: The principal office of the Corporation in the Commonwealth
of Puerto Rico is located at Avenida F.D. Roosevelt 1159, Puerto Nuevo,
Puerto Rico 00920, in the Municipality of San Juan. The name of the
resident agent of the Corporation is David Levis, the mailing address of
such resident agent is Avenida F.D. Roosevelt 1159, Puerto Nuevo, Puerto
Rico 00920.
THIRD: The nature of the business of the Corporation and the objects
or purposes to be transacted, promoted or carried on by it are as follows:
1. To engage in the business of mortgage banking, including but
not limited to the origination, servicing
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and resale of first and second mortgages, both conventional and Veterans
Administration guaranteed and Federal Housing Administration insured, and
the issuance and brokerage of mortgage-backed certificates.
2. To make, manufacture, produce, prepare, process, purchase or
otherwise acquire, and to hold, own, use, sell, import, export, dispose of
or otherwise trade or deal in and with, machines, machinery, appliances,
apparatus, goods, wares, products and merchandise of every kind, nature
and description; and, in general, to engage or participate in any
manufacturing or other business of any kind or character whatsoever,
whether or not related to, conducive to, incidental to or in any way
connected with the above business.
3. To engage in research, exploration, laboratory and development
work relating to any material, substance, compound or mixture now known or
which may hereafter be known, discovered or developed, and to perfect,
develop, manufacture, use, apply and generally to deal in and with any
such material, substance, compound or mixture.
4. To adopt, apply for, obtain, register, purchase, lease, take
licenses in respect of or otherwise acquire, and to maintain, protect,
hold, use, own, exercise, develop, manufacture under, operate and
introduce, and to sell and grant licenses or other rights in respect of,
assign or otherwise dispose of, turn to account, or in any manner deal
with and contract with reference to, any trademarks, trade names, patents,
patent rights, concessions, franchises, designs, copyrights and
distinctive marks and rights analogous thereto, and inventions, devices,
processes, recipes, formulae and improvements and modifications thereof.
5. To act as agent or broker for any person, firm or corporation
including, but not limited to, acting as agent for any local, municipal,
state or Commonwealth agency or instrumentality.
6. To purchase, lease or otherwise acquire, to hold, own, use,
develop, maintain, manage and operate, and to sell, transfer, lease,
assign, convey, exchange or otherwise turn to account or dispose of, and
otherwise deal in and with such real property, whether located within the
Commonwealth of Puerto Rico or elsewhere, as may be necessary or
convenient in connection with the business of the Corporation, and
personal property, tangible or intangible, without limitation; provided,
however, that the Corporation shall not be authorized, as respects real
<PAGE> 3
3
property located within the Commonwealth of Puerto Rico, to conduct the
business of buying and selling real estate, and shall in all other
respects be subject to the provisions of Section 14 of Article VI of the
Constitution of the Commonwealth of Puerto Rico.
7. To enter into any joint ventures, agreements and any other
lawful arrangements for sharing profits, union of interest, reciprocal
concession or cooperation, with any corporation, association, partnership,
syndicate, entity, person or governmental, municipal or public authority,
domestic or foreign, in the carrying on of any business that the
Corporation is authorized to carry on or any business or transaction
deemed necessary, convenient or incidental to carrying out any of the
purposes of the Corporation.
8. To enter into, make, perform and carry out contracts of every
kind and description, not prohibited by law, with any person, firm,
association, corporation or governmental body; and to guarantee the
contracts or obligations, and the payment of interest or dividends on
securities of any other person, firm, association, corporation or
governmental body.
9. To lend its uninvested funds from time to time to such extent,
to such persons, firms, associations, corporations or governments or
subdivisions, agencies or instrumentalities thereof, and on such terms and
on such security, if any, as the Board of Directors of the Corporation may
determine.
10. To acquire and undertake all or any part of the business
assets and liabilities of any person, firm, association or corporation on
such terms and conditions as may be agreed upon, and to pay for the same
in cash, property or securities of the Corporation, or otherwise, and to
conduct the whole or any part of any business thus acquired, subject only
to the provisions of the laws of the Commonwealth of Puerto Rico.
11. To merge into, merge into itself or consolidate with, and to
enter into agreements and cooperative relations, not in contravention of
law, with any person, firm, association or corporation.
12. To purchase, lease, construct or otherwise acquire, and to
hold, own, use, maintain, manage and operate, buildings, factories,
plants, laboratories, installations, equipment, machinery, pipelines,
rolling stocks, and other structures, facilities and apparatus of
<PAGE> 4
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every kind and description, used or useful in the conduct of the business
of the Corporation.
13. To purchase, lease, construct, or otherwise acquire, and to
hold, own, use, maintain, manage and operate dwelling houses and other
buildings at or near any place of business of the Corporation for the
purpose of furnishing housing and other conveniences to employees of the
Corporation, and others, and to carry on a general mercantile business at
or near any such place of business for the convenience of those residing
in the vicinity thereof, and others.
14. To purchase or otherwise acquire, and to hold, pledge, sell,
exchange, or otherwise dispose of securities (which term, for the purpose
of this Article THIRD, shall include any shares of stock, bonds,
debentures, notes, mortgages or other obligations and any certificates,
receipts or other instruments representing rights to receive, purchase or
subscribe for the same, or representing any other rights or interests
therein or in any property or assets) created or issued by any person,
firm, association, corporation or governmental body, and while the holder
thereof to exercise all the rights, powers and privileges in respect
thereof, including the right to vote, to the same extent as a natural
person might or could do.
15. To borrow money for any of the purposes of the Corporation,
from time to time, and without limit as to amount; from time to time to
issue and sell its own securities in such amounts, on such terms and
conditions, for such purposes and for such consideration, as may now be or
hereafter shall be permitted by the laws of the Commonwealth of Puerto
Rico; and to secure the same by mortgage upon, or the pledge of, or the
conveyance or assignment in trust of, the whole or any part of the
properties, assets, business and goodwill of the Corporation, then owned
or thereafter acquired.
16. To purchase, or otherwise acquire and to hold, cancel,
reissue, sell, exchange, transfer or otherwise deal in its own securities
from time to time to such extent and upon such terms as shall be permitted
by the laws of the Commonwealth of Puerto Rico; provided, however, that
shares of its own capital stock so purchased or held shall not be directly
or indirectly voted, nor shall they be entitled to dividends during such
period or periods as they shall be held by the Corporation.
17. To such extent as a corporation organized under the laws of
the Commonwealth of Puerto Rico may now or
<PAGE> 5
5
hereafter lawfully do, to do, either as principal or agent and either
alone or through subsidiaries or in connection with other persons, firms,
associations or corporations, all and everything necessary, suitable,
convenient or proper for, or in connection with, or incident to, the
accomplishment of any of the purposes or the attainment of any one or more
of the objects herein enumerated, or designed directly or indirectly to
promote the interests of the Corporation or to enhance the value of its
properties; and in general to do any and all things and exercise any and
all powers, rights, and privileges which a corporation may now or
hereafter be organized to do or to exercise under the laws of the
Commonwealth of Puerto Rico.
The foregoing provisions of this Article THIRD shall be construed
both as purposes and powers and each as an independent purpose and power.
The foregoing enumeration of specific purposes and powers shall not be
held to limit or restrict in any manner the purposes and powers of the
Corporation, and the purposes and powers herein specified shall, except
when otherwise provided in this Article THIRD, be in no wise limited or
restricted by reference to, or inference from, the terms of any provisions
of this or any other Article of this Certificate of Incorporation.
The Corporation is to be carried on for pecuniary profit.
FOURTH: The total number of shares of all classes of stock which the
Corporation is authorized to issue is 52,000,000 shares, consisting of
50,000,000 shares of Common Stock, $1.00 par value and 2,000,000 shares of
Serial Preferred Stock, $1.00 par value.
The minimum amount of capital with which the Corpora tion will
commence business is $10,000.00.
The Board of Directors is authorized at any time, and from time to
time, to provide for the issuance of shares of Serial Preferred Stock in
one or more series, and to determine the designations, preferences,
limitations and relative or other rights of the Serial Preferred Stock or
any series thereof. For each series, the Board of Directors shall
determine, by resolution or resolutions adopted prior to the issuance of
any shares thereof, the designations, preferences, limitations and
relative or other rights thereof, including but not limited to the
following relative rights and preferences, as to which there may be
variations among different series:
<PAGE> 6
6
(a) The rates or rates (which may be floating, variable or
adjustable), or the method of determining such rate or rates and the
times and manner of payment of dividends, if any (and whether such
payment should be in cash or securities);
(b) Whether shares may be redeemed or purchased, in whole or
in part, at the option of the holder or the Corporation and, if so,
the price or prices and the terms and conditions of such redemption
or purchase;
(c) The amount payable upon shares in the event of voluntary
or involuntary liquidation, dissolution or other winding up of the
Corporation;
(d) Sinking fund provisions, if any, for the redemption or
purchase of shares;
(e) The terms and conditions, if any, on which shares may be
converted or exchanged into shares of Common Stock or other capital
stock or securities of the Corporation;
(f) Voting rights, if any; and
(g) Any other rights and preferences of such shares, to the
full extent now or hereafter permitted by the laws of the
Commonwealth of Puerto Rico.
All shares of Serial Preferred Stock (i) shall rank senior to the
Common Stock in respect of the right to receive dividends and the right to
receive payments out of the assets of the Corporation upon voluntary or
involuntary liquidation, dissolution or winding up of the Corporation,
(ii) shall be of equal rank, regardless of series, and (iii) shall be
identical in all respects except as provided in (a) through (g) above. The
shares of any series of the Serial Preferred Stock shall be identical with
each other in all respects except as to the dates from and after which
dividends thereof shall be cumulative. In case the stated dividends or the
amounts payable on liquidation are not paid in full, the shares of all
series of the Serial Preferred Stock shall share ratably in the payment of
dividends, including accumulations, if any, in accordance with the sums
which would be payable on said shares if all dividends were declared and
paid in full, and in any distribution of assets other than by way of
dividends in accordance with the sums which would be payable on such
distribution if all sums payable were discharged in full.
<PAGE> 7
7
The Board of Directors shall have the authority to determine the
number of shares that will comprise each series. Unless otherwise provided
in the resolution establishing such series, all shares of Serial Preferred
Stock redeemed, retired by sinking fund payment, repurchased by the
Corporation or converted into Common Stock shall have the status of
authorized but unissued shares of Serial Preferred Stock undesignated as
to series.
Prior to the issuance of any shares of a series, but after adoption
by the Board of Directors of the resolution establishing such series, the
appropriate officers of the Corporation shall file such documents with the
Commonwealth of Puerto Rico as may be required by law.
No holder of shares of Common Stock or Serial Preferred Stock shall
be entitled as a matter right to subscribe for or purchase, or have any
preemptive right with respect to, any part of any new or additional issue
of stock of any class whatsoever, or of securities convertible into any
stock of any class whatsoever, whether now or hereafter authorized and
whether issued for cash or other consideration or by way of dividend.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further creation, definition,
limitation and regulation of the powers of the Corporation and of its
directors and stockholders, it is further provided:
1. The number of directors of the Corporation shall be fixed by,
or in the manner provided in, the By-laws, but in no case shall the number
be less than three. The directors need not be stockholders. Election of
directors need not be by ballot unless the By-laws so require. Meetings of
the Board of Directors may be held at such place or places within or
without the Commonwealth of Puerto Rico as shall be specified in the
respective notices thereof or in the respective waivers of notice thereof
signed by all the directors of the Corporation at the time in office
2. In furtherance and not in limitation of the powers conferred
by the laws of the Commonwealth of Puerto Rico, and subject at all times
to the provisions thereof, the Board of Directors is expressly authorized
and empowered:
(a) To make, alter and repeal the By-laws of the Corporation,
subject to the power of the
<PAGE> 8
8
stockholders to alter or repeal the By-laws made by the Board of
Directors.
(b) To determine, from time to time, whether and to what
extent and at what times and places and under what conditions and
regulations the accounts and books and documents of the Corporation
(other than the stock ledger), or any of them, shall be open to
inspection by the stockholders; and no stockholder shall have any
right to inspect any account or book or document of the Corporation,
except as conferred by the laws of the Commonwealth of Puerto Rico,
unless and until duly authorized to do so by resolution of the Board
of Directors.
(c) To authorize and issue obligations of the Corporation,
secured or unsecured, to include therein such provisions as to
redeemability, convertibility or otherwise, as the Board cf
Directors in its sole discretion may determine, and to authorize the
mortgaging or pledging of, and to authorize and cause to be executed
mortgages and liens upon, any property of the Corporation, real or
personal, including after-acquired property.
(d) To determine whether any, and, if any, what part, of the
net profits of the Corporation or of its net assets in excess of its
capital shall be declared in dividends and paid to the stockholders,
and to direct and determine the use and disposition thereof.
(e) To set apart a reserve or reserves, and to abolish any
such reserve or reserves, or to make such other provisions, if any,
as the Board of Directors may deem necessary or advisable for
working capital, for additions, improvements and betterments to
plant and equipment, for expansion of the business of the
Corporation (including the acquisition of real and personal property
for that purpose) and for any other purpose of the Corporation.
(f) To establish bonus, profit-sharing, pension, thrift, and
other types of incentive, compensation or retirement plans for the
officers and employees (including officers and employees who are
also directors) of the Corporation and to fix the amounts of profits
to be distributed or shared or contributed and the amounts of the
Corporation's funds otherwise to be devoted thereto and to determine
the persons to participate in any such plans and the amounts of
their respective participations.
<PAGE> 9
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(g) To issue, or grant options for the purchase of, shares of
stock of the Corporation to officers and employees (including
officers and employees who are also directors) of the Corporation
and its subsidiaries for such consideration and on such terms and
conditions as the Board of Directors may from time to time
determine.
(h) To enter into contracts for the management of the business
of the Corporation for terms not exceeding three years.
(i) By resolution or resolutions passed by a majority of the
whole Board, to designate one or more committees, each committee to
consist of two or more of the directors of the Corporation, which to
the extent provided in such resolution or resolutions or in the
Bylaws, shall have and may exercise the powers of the Board of
Directors (other than to remove or elect officers) in the management
of the business and affairs of the Corporation and may have power to
authorize the seal of the Corporation to be affixed to all papers
which may require it, such committee or committees to have such name
or names as may be stated in the By-laws or as may be determined
from time to time by resolution adopted by the Board of Directors.
(j) To exercise all the powers of the Corporation, except such
as are conferred by law, or by this Certificate of Incorporation or
by the By-laws of the Corporation, upon the stockholders.
3. Any one or all of the directors may be removed, with or
without cause, at any time, by either (a) the vote of the holders of a
majority of the stock of the Corporation issued and outstanding and
entitled to vote and present in person or by proxy at any meeting of the
stockholders called for the purpose, or (b) an instrument or instruments
in writing addressed to the Board of Directors directing such removal and
signed by the holders of a majority of the stock of the Corporation issued
and outstanding and entitled to vote; and thereupon the term of each such
director who shall be so removed shall terminate.
4. No contract or other transaction between the Corporation and
any other corporation, whether or not such other corporation is related to
the Corporation through the direct or indirect ownership by such other
corporation of a majority of the shares of the capital stock of the
Corporation or by the Corporation of a majority of the
<PAGE> 10
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shares of the capital stock of such other corporation, and no other act of
the Corporation shall, in the absence of fraud, in any way be affected or
invalidated by the fact that any of the directors of the Corporation are
pecuniarily or otherwise interested in, or are directors or officers of,
such other corporation or by the fact that such other corporation is so
related to the Corporation. Any director of the Corporation individually,
or any firm or association of which any director may be a member, may be a
party to, or may be pecuniarily or otherwise interested in, any contract
or transaction of the Corporation, provided that the fact that he
individually or such firm or association is so interested shall be
disclosed or shall have been known to the Board of Directors or a majority
of such members thereof as shall be present at any meeting of the Board of
Directors at which action upon any such contract or transaction shall be
taken. Any director of the Corporation who is also a director or officer
of such other corporation or who is so interested may be counted in
determining the existence of a quorum at any meeting of the Board of
Directors which shall authorize any such contract or transaction, with
like force and effect as if he were not such director or officer of such
other corporation or not so interested.
5. Any person made or threatened to be made a party to any action
or proceeding, whether civil or criminal, by reason of the fact that he,
his testator or intestate is or was a Director, officer or employee of the
Corporation or serve or served any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprises in any capacity
at the request of the Corporation shall be indemnified by the Corporation,
and the Corporation may advance his related expenses, to the fullest
extent permitted by law. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a Director, officer,
employee or agent of the Corporation, or is or was serving at the request
of the Corporation as a Director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such.
SEVENTH: A director of this Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except to the extent such
exemption from liability or limitation thereof is not permitted under the
Puerto Rico General Corporation Law of 1995 as the same exists or may
hereafter be amended. Any repeal or modification
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of the foregoing provisions of this Article SEVENTH shall not adversely
affect any right or protection of a director of the Corporation existing
hereunder with respect to any act or omission occurring prior to or at the
time of such repeal or modification.
EIGHTH: The Corporation reserves the right to amend, alter or repeal
any of the provisions of this Certificate of Incorporation and to add
other provisions authorized by the laws of the Commonwealth of Puerto Rico
at the time in force in the manner and at the time prescribed by said
laws, and all rights, powers and privileges at any time conferred upon the
Board of Directors and the stockholders are granted subject to the
provisions of this Article."
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation in accordance with the
provisions of its Restated Certificate of Incorporation, a series of
Serial Preferred Stock of the Corporation be and it hereby is created.
FURTHER RESOLVED, that the directors have determined that the
preferences and relative, participating, optional or other special rights
of the shares of such series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, as stated and expressed herein, are
under the circumstances prevailing on the date hereof fair and equitable
to all the existing shareholders of the Corporation.
FURTHER RESOLVED, that the designation and amount of such series and
the voting powers, preferences and relative, participating, optional or
other special rights of the shares of such series of Preferred Stock, and
the qualifications, limitations or restrictions thereof are as follows:
A. DESIGNATION AND AMOUNT
The shares of such series of Preferred Stock shall be
designated as the "8% Convertible Cumulative Preferred Stock (Liquidation
Preference $1,000 per share)" (herein after called the "8% Preferred
Stock"), and the number of authorized shares constituting such series
shall be 20,000.
B. DIVIDENDS
(i) Holders of record of the 8% Preferred Stock ("Holders")
will be entitled to receive, when, as and if declared by the Board
of Directors of the
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Corporation, out of funds of the Corporation legally available
therefor, cumulative cash dividends at the annual rate per share of
8% of their liquidation pref erences, or $6.662/3 per share per
month.
(ii) Dividends on the 8% Preferred Stock will accrue from
their date of original issuance and will be payable (when, as and if
declared by the Board of Directors of the Corporation out of funds
of the Corporation legally available therefor) monthly in arrears in
United States dollars commencing on the last day of the month in
which the 8% Preferred Stock is issued, and on the last day of each
calendar month of each year thereafter to the holders of record of
the 8% Preferred Stock as they appear on the books of the
Corporation on the Business Day (as defined below) immediately
preceding the relevant date of pay ment. In the case of the dividend
payable in the month in which the 8% Preferred Stock is issued, such
dividend shall cover the period from the date of issuance of the 8%
Preferred Stock to the end of such month. In the event that any date
on which dividends are payable is not a Business Day, then payment
of the dividend payable on such date will be made on the next
succeeding Business Day without any interest or other payment in
respect of any such delay, except that, if such Business Day is in
the next succeeding calendar year, such payment will be made on the
Business Day immediately preceding the relevant date of payment, in
each case with the same force and effect as if made on such date. A
"Business Day" is a day other than a Saturday, Sunday or bank
holiday in San Juan, Puerto Rico.
(iii) Dividends on the 8% Preferred Stock will be cumulative
from their date of issuance, and will accrue, to the extent not
paid, on the last day of each month.
(iv) The amount of dividends payable for any monthly dividend
period will be computed on the basis of twelve 30-day months and a
360-day year. The amount of dividends payable for any period shorter
than a full monthly dividend period will be computed on the basis of
the actual number of days elapsed in such period.
(v) Subject to any applicable fiscal or other laws and
regulations, each dividend payment will be made by dollar check
drawn on a bank in New York, New York or San Juan, Puerto Rico and
mailed to the record
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holder thereof at such holder's address as it appears on the
register for such 8% Preferred Stock or, in the case of holders of
$1,000,000 or more in aggregate liquidation preference of the 8%
Preferred Stock, by wire transfer of immediately available funds to
the account of such holders as notified by such holders to the
Corporation.
(vi) So long as any shares of the 8% Preferred Stock remain
outstanding, the Corporation shall not declare, set apart or pay any
dividend or make any other distribution of assets (other than
dividends paid or other distributions made in stock of the
Corporation ranking junior to the 8% Preferred Stock as to the
payment of dividends and the distribution of assets upon
liquidation, dissolution or winding up of the Corporation) on, or
redeem, purchase, set apart or otherwise acquire (except upon
conversion or exchange for stock of the Corporation ranking junior
to the 8% Preferred Stock as to the payment of dividends and the
distribution of assets upon liquidation, dissolution or winding up
of the Corporation), shares of common stock or of any other class of
stock of the Corporation ranking junior to the 8% Preferred Stock as
to the payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up of the Corporation, unless
all accrued and unpaid dividends on the 8% Preferred Stock shall
have been paid or are paid contemporaneously and the full monthly
dividend on the 8% Preferred Stock for the then current month has
been or is contemporaneously declared and paid or declared and set
apart for payment and unless the Corporation has not defaulted in
the payment of the redemption price of any shares of 8% Preferred
Stock called for redemption.
(vii) When dividends are not paid in full on the 8% Preferred
Stock and any other shares of stock of the Corporation ranking on a
parity as to the payment of dividends with the 8% Preferred Stock,
all dividends declared upon the 8% Preferred Stock and any such
other shares of stock of the Corporation will be declared pro rata
so that the amount of dividends declared per share on the 8%
Preferred Stock and any such other shares of stock will in all cases
bear to each other the same ratio that the liquidation preference
per share of the 8% Preferred Stock and any such other shares of
stock bear to each other.
(viii) Holders of record of the 8% Preferred Stock will not be
entitled to any dividend, whether
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payable in cash, property or stock, in excess of the dividends
provided for herein on the shares of 8% Preferred Stock. The
Corporation may, however, at its discretion, declare a special
dividend in an amount sufficient to allow the Corporation to pay
dividends on any stock of the Corporation ranking junior to the 8%
Preferred Stock in compliance with the provisions of Section B.6
above.
C. CONVERSION
(i) A holder of a share of 8% Preferred Stock may convert it
into common stock of the Corporation at any time before the close of
business on December 1, 2005 (the "Expiration Date"). If a share of
8% Preferred Stock is called for redemption, the holder may convert
it at any time before the close of business on the day preceding the
redemption date. The initial conversion price is $8.75 per share of
common stock of the Corporation, subject to adjustment in certain
events as provided in subsection 4 below (as so adjusted from time
to time, the "Conversion Price"). To determine the number of shares
of common stock of the Corporation issuable upon conversion of a
share of 8% Preferred Stock, divide (a) the aggregate liquidation
preference of the shares of 8% Preferred Stock to be converted by
(b) the Conversion Price in effect on the conversion date. The
Corporation will deliver a check for an amount equal to the value of
any fractional share plus the total amount of accrued but unpaid
dividends on such shares to the date of conversion.
(ii) To convert a share of 8% Preferred Stock a Holder must
(1) complete and sign the conversion election on the back of the
certificate, (2) surrender the certificate to the Corporation, (3)
furnish appropriate endorsements and transfer documents if required
by the Corporation, and (4) pay any transfer or similar tax if
required.
(iii) Reservation, Listing and Issuance of Shares. The
Corporation will at all times have authorized, and reserve and keep
available, free from preemptive rights, for the purpose of enabling
it to satisfy any obligation to issue shares of common stock of the
Corporation upon the conversion of shares of 8% Preferred Stock, the
number of shares of common stock of the Corporation deliverable upon
conversion of the outstanding shares of 8% Preferred Stock. The
Corporation will, at its expense, cause the shares
<PAGE> 15
15
of common stock of the Corporation deliverable upon conversion of
the 8% Preferred Stock to be listed (subject to issuance or notice
of issuance of such shares) on all stock exchanges on which the
common stock is listed not later than the date such common stock is
so listed. The Corporation agrees to list such shares (subject to
issuance or notice of issuance) on NASDAQ-NMS, to the extent not
already listed, promptly after the date of this Certificate of
Designation.
Before taking any action which could cause an adjustment
pursuant to subsection 4 below reducing the Conversion Price below
the then par value (if any) of the shares of common stock of the
Corporation, the Corporation will take any corporate action which
may be necessary in order that the Corporation may validly and
legally issue at the Conversion Price as so adjusted shares of
common stock of the Corporation that are fully paid and
non-assessable.
The Corporation covenants that all shares of common stock of
the Corporation deliverable upon conversion of the 8% Preferred
Stock will, upon issuance in accordance with the terms hereof, be
(i) duly authorized, fully paid and non-assessable, and (ii) free
from all taxes with respect to the issuance thereof and from all
liens, charges and security interests created by the Corporation.
(iv) Adjustments of Conversion Price and Number of Shares of
Common Stock Issuable upon Conversion of the 8% Preferred Stock.
Adjustment of Conversion Price upon Issuance of Common Stock. If and
whenever, after September 25, 1995, the Corporation shall issue or
sell any shares of common stock (except upon conversion of one or
more of the 8.25% convertible subordinated debentures due January 1,
2006 or of one or more shares of the 8% Preferred Stock or upon
exercise by Popular, Inc. of certain rights to purchase shares of
common stock of the Corporation set forth in Article 5 of the
Exchange Agreement dated July 9, 1997, between the Corporation and
Popular, Inc.) for a consideration per share less than the Market
Price (as hereinafter defined) at the time of such issue or sale,
then, forthwith upon such issue or sale, the Conversion Price shall
be reduced to the price (calculated to the nearest cent) determined
by multiplying the Conversion Price in effect immediately prior to
the time of such issue or sale by a fraction, the numerator of which
shall be the sum of (a) the
<PAGE> 16
16
number of shares of common stock of the Corporation outstanding
immediately prior to such issue or sale multiplied by the Market
Price immediately prior to such issue or sale plus (b) the
consideration received by the Corporation upon such issue or sale,
and the denominator of which shall be the product of (c) the total
number of shares of common stock outstanding immediately after such
issue or sale, multiplied by (d) the Market Price immediately prior
to such issue or sale. No adjustment of any Conversion Price,
however, shall be made in an amount less than $0.01 per share, but
any such lesser adjustment shall be carried forward and shall be
made at the time of, and together with, the next subsequent
adjustment which together with any adjustments so carried forward
shall amount to $0.01 per share or more.
(i) For the purposes of this subsection 4, the
following provisions shall also be applicable:
1) Issuance of Rights or Options. In case at
any time the Corporation shall grant (whether directly or by
assumption in a merger or otherwise) any rights to subscribe
for or to purchase, or any options for the purchase of, common
stock or any stock or securities convertible into or
exchangeable for common stock (such convertible or
exchangeable stock or securities being herein called
"Convertible Securities") whether or not such rights or
options or the right to convert or exchange any such
Convertible Securities are immediately exercisable, and the
price per share for which common stock is issuable upon the
conversion of such rights or options or upon conversion or
exchange of such Convertible Securities (determined as
provided below) shall be less than the Market Price determined
as of the date of granting such rights or options, then the
total maximum number of shares of common stock issuable upon
the conversion of such rights or options or upon conversion or
exchange of the total maximum amount of such Convertible
Securities issuable upon the conversion of such rights or
options shall (as of the date of granting of such rights or
options) be deemed to be outstanding and to have been issued
for such price per share. Except as provided in clause (iii)
of this subsection, no further adjustments of any Conversion
Price shall be made upon the actual
<PAGE> 17
17
issue of such common stock or of such Convertible Securities
upon conversion of such rights or options or upon the actual
issue of such common stock upon conversion or exchange of such
Convertible Securities. For the purposes of this clause (i),
the price per share for which common stock is issuable upon
the conversion of any such rights or options or upon
conversion or exchange of any such Convertible Securities
shall be determined by dividing (A) the total amount, if any,
received or receivable by the Corporation as consideration for
the granting of such rights or options, plus the minimum
aggregate amount of additional consideration payable to the
Corporation upon the conversion of all such rights or options,
plus, in the case of such rights or options which relate to
Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or
exchange thereof, by (B) the total maximum number of shares of
common stock issuable upon the conversion of such rights or
options or upon the conversion or exchange of all such
Convertible Securities issuable upon the conversion of such
rights or options.
2) Issuance of Convertible Securi ties. In case
the Corporation shall issue (whether directly or by assumption
in a merger or otherwise) or sell any Convertible Securities,
whether or not the rights to exchange or convert thereunder
are immediately exercisable, and the price per share for which
common stock is issuable upon conversion or exchange of such
Convertible Securities (determined as provided below) shall be
less than the Market Price, determined as of the date of such
issue or sale of such Convertible Securities, then the total
maximum number of shares of common stock issuable upon
conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible
Securities) be deemed to be outstanding and to have been
issued for such price per share, provided that (1) except as
provided in clause (iii) of this subsection, no further
adjustments of any Conversion Price shall be made upon the
actual issue of such common stock upon conversion or exchange
of such Convertible Securities, and (2) if any such issue or
sale of such Convertible
<PAGE> 18
18
Securities is made upon conversion of any rights to subscribe
for or to purchase or any option to purchase any such
Convertible Securities for which adjustments of any Conversion
Price have been or are to be made pursuant to other provisions
of this subsection (b), no further adjustment of any
Conversion Price shall be made by reason of such issue or
sale. For the purposes of this clause (ii), the price per
share for which common stock is issuable upon conversion or
exchange of Convertible Securities shall be determined by
dividing (A) the total amount received or receivable by the
Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Corporation
upon the conversion or exchange thereof, by (B) the total
maximum number of shares of common stock issuable upon the
conversion or exchange of all such Convertible Securities.
3) Change in Option Price or Conversion Rate.
If the purchase price provided for in any rights or options
referred to in clause (i) above, or the additional
consideration, if any, payable upon the conversion or exchange
of Convertible Securities referred to in clause (i) or (ii)
above, or the rate at which any Convertible Securities
referred to in clause (i) or (ii) above are convertible into
or exchangeable for common stock, shall change (other than
under or by reason of provisions designed to protect against
dilution), then the Conversion Price in effect at the time of
such event shall forthwith be readjusted to the Conversion
Price which would have been in effect at such time had such
rights, options or Convertible Securities still outstanding
provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold.
4) Expiration of Options, Rights and Other
Similar Conversion Privileges. On the expiration of any such
option or right or the termination of any such right to
convert or exchange such Convertible Securities, the
Conversion Price then in effect hereunder shall forthwith be
increased to the Conversion Price
<PAGE> 19
19
which would have been in effect at the time of such expiration
or termination had such right, option or Convertible Security,
to the extent outstanding immediately prior to such expiration
or termination, never been issued, and the common stock
issuable thereunder shall no longer be deemed to be
outstanding. If the purchase price provided for in any such
right or option referred to in clause (i) above or the rate at
which any Convertible Securities referred to in clause (i) or
(ii) above are convertible into or exchangeable for common
stock, shall decrease at any time under or by reason of
provisions with respect thereto designed to protect against
dilution, then in case of the delivery of common stock upon
the conversion of any such right or option or upon conversion
or exchange of any such Convertible Security, the Conversion
Price then in effect hereunder shall forthwith be adjusted to
such respective amount as would have obtained had such right,
option or Convertible Security never been issued as to such
common stock and had adjustments been made upon the issuance
of the shares of common stock delivered as aforesaid, but only
if as a result of such adjustment the Conversion Price then in
effect hereunder is thereby decreased.
5) Stock Dividends. In case the Corporation shall
declare a dividend or make any other distribution upon any
stock of the Corporation payable in common stock or
Convertible Securities, any common stock or Convertible
Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued
or sold without consideration.
6) Consideration for Stock. In case any shares of
common stock or Convertible Securities or any rights or
options to purchase any such common stock or Convertible
Securities shall be issued or sold for cash, the consideration
received therefor shall be deemed to be the amount received by
the Corporation therefor, without deduction therefrom of any
expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith. In case any shares of common stock or Convertible
Securities or any rights or options to purchase any such
common
<PAGE> 20
20
stock or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration
other than cash received by the Corporation shall be deemed to
be the fair value of such consideration as determined, in good
faith and in the exercise of reasonable business judgment, by
the board of directors of the Corporation, without deduction
of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection
therewith. In case any shares of common stock or Convertible
Securities or any rights or options to purchase such shares of
common stock or Convertible Securities shall be issued in
connection with any merger or consolidation in which the
Corporation is the surviving corporation (other than any
consolidation or merger in which the previously outstanding
shares of common stock of the Corporation shall be changed
into or exchanged for the stock or other securities of another
corporation), the amount of consideration therefor shall be
deemed to be the fair value as determined reasonably and in
good faith by the board of directors of the Corporation of
such portion of the assets and business of the non-surviving
corporation as such board may determine to be attributable to
such shares of common stock, Convertible Securities, rights or
options, as the case may be. In the event of any consolidation
or merger of the Corporation in which the Corporation is not
the surviving corporation or in which the previously
outstanding shares of common stock of the Corporation shall be
changed into or exchanged for the stock or other securities of
another corporation or in the event of any sale of all or
substantially all of the assets of the Corporation for stock
or other securities of any corporation, the Corporation shall
be deemed to have issued a number of shares of its common
stock for stock or securities or other property of the other
corporation computed on the basis of the actual exchange ratio
on which the transaction was predicated and for a
consideration equal to the fair market value on the date of
such transaction of all such stock or securities or other
property of the other corporation, and if any such calculation
results in adjustment of the Conversion Price, the
determination of the number of shares of common
<PAGE> 21
21
stock issuable upon conversion of the Securities immediately
prior to such merger, consolidation or sale, for purposes of
subsection (e) below, shall be made after giving effect to
such adjustment of the Conversion Price.
7) Record Date. In case the Corpora tion shall take a
record of the holders of its common stock for the purpose of
entitling them (A) to receive a dividend or other distribution
payable in common stock or in Convertible Securities, or (B)
to subscribe for or purchase common stock or Convertible
Securities, then such record date shall be deemed to be the
date of the issue or sale of the shares of common stock deemed
to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date
of the granting of such right of subscription or purchase, as
the case may be.
8) Treasury Shares. The number of shares of common
stock outstanding at any given time shall not include shares
owned or held by or for the account of the Corporation, and
the disposition of any such shares shall be considered an
issue or sale of common stock for the purposes of this
subsection (b).
9) Definition of Market Price. "Market Price" shall
mean the average of the daily closing prices per share of the
common stock for the ten consecutive trading days immediately
preceding the day as of which "Market Price" is being
determined, except that, in the case of an underwritten bona
fide public offering, "Market Price" shall mean the initial
public offering price. The closing price for each day shall be
the last sale price regular way or, in case no such sale takes
place on such day, the average of the closing bid and asked
prices regular way, in either case on the New York Stock
Exchange, or, if shares of the common stock are not listed or
admitted to trading on the New York Stock Exchange, on the
principal national securities exchange (including for this
purpose the NASDAQ-NMS) on which the shares are listed or
admitted to trading, or if the shares are not so listed or
admitted to trading, the average of the highest reported bid
and lowest reported asked prices as furnished by the
<PAGE> 22
22
National Association of Securities Dealers, Inc. through
NASDAQ or through a similar organization if NASDAQ is no
longer reporting such information. If shares of the common
stock are not listed or admitted to trading on any exchange or
quoted through NASDAQ or any similar organization, the "Market
Price" shall be deemed to be the higher of (A) the book value
of a share of the common stock as determined by any firm of
independent public accountants of recognized standing,
selected by the board of directors of the Corporation, as at
the last day of any month ending within sixty days preceding
the date as of which the determination is to be made or (B)
the fair value thereof determined in good faith by an
independent brokerage firm or Standard & Poor's Corporation as
of a date which is within fifteen days of the date as of which
the determination is to be made (the fees and expenses of any
such independent public accountants, independent brokerage
firm or other firm engaged pursuant to subclauses (A) and (B)
of this clause (ix) to be paid by the Corporation).
10) Determination of Market Price under Certain
Circumstances. Anything herein to the contrary
notwithstanding, in case the Corporation shall issue any
shares of common stock or Convertible Securities in connection
with the acquisition by the Corporation of the stock or assets
of any other corporation or the merger of any other
corporation into the Corporation, the Market Price shall be
determined as of the date the number of shares of common stock
or Convertible Securities (or in the case of Convertible
Securities other than stock, the aggregate principal amount of
Convertible Securities) was determined (as set forth in a
written agreement between the Corporation and the other party
to the transaction) rather than on the date of issuance of
such shares of common stock or Convertible Securities.
11) Certain Issues Excepted. Anything herein to the
contrary notwithstanding, the Corporation shall not be
required to make any adjustment of any Conversion Price in
case of the issuance of shares of common stock (1) upon the
conversion of options or rights relating to up to 500,000
shares (subject to adjustment for
<PAGE> 23
23
stock splits, stock combinations, stock dividends and similar
events) of the Corporation's common stock granted or provided
or to be granted or provided under the Corporation's stock
option plan, as in effect on July 9, 1997, or (2) under the
Corporation's restricted stock plan, as in effect on July 9,
1997, up to a maximum of 250,000 shares (subject to adjustment
for stock splits, stock combinations, stock dividends and
similar events), and shall not be required to make any such
adjustment upon the granting of any options or rights referred
to above if and to the extent that issuance of the shares
covered thereby is excepted by this clause.
(ii) Adjustment for Certain Special Dividends. In case
the Corporation shall declare a dividend upon the common stock
payable otherwise than out of earnings or earned surplus,
determined in accordance with Generally Accepted Accounting
Principles, and otherwise than in common stock or Convertible
Securities, the Conversion Price in effect immediately prior
to the declaration of such dividend shall be reduced by an
amount equal, in the case of a dividend in cash, to the amount
per share of the common stock so declared as payable otherwise
than out of earnings or earned surplus or, in the case of any
other dividend, to the fair value per share of the common
stock of the property so declared as payable otherwise than
out of earnings or earned surplus, as determined, reasonably
and in good faith, by the board of directors of the
Corporation. For the purposes of the foregoing a dividend
other than in cash shall be considered payable out of earnings
or earned surplus (other than revaluation or paid-in-surplus)
only to the extent that such earnings or earned surplus are
charged an amount equal to the fair value of such dividend, as
determined, reasonably and in good faith, by the board of
directors of the Corporation. Such reductions shall take
effect as of the date on which a record is taken for the
purpose of such dividend, or, if a record is not taken, the
date as of which the holders of common stock of record
entitled to such dividend are determined.
(iii) Subdivision or Combination of Stock. In case the
Corporation shall at any time subdivide the outstanding shares
of common stock
<PAGE> 24
24
into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision shall be
proportionately reduced, and conversely, in case the
outstanding shares of common stock shall be combined into a
smaller number of shares, the Conversion Price in effect
immediately prior to such combination shall be proportionately
increased.
(iv) Adjustments for Consolidation, Merger, Sale of
Assets, Reorganization, etc. In case the Corporation (a)
consolidates with or merges into any other corporation and is
not the continuing or surviving corporation of such
consolidation or merger, or (b) permits any other corporation
to consolidate with or merge into the Corporation and the
Corporation is the continuing or surviving corporation but, in
connection with such consolidation or merger, the common stock
is changed into or exchanged for stock or other securities of
any other corporation or cash or any other assets, or (c)
transfers all or substantially all of its properties and
assets to any other corporation, or (d) effects a capital
reorganization or reclassification of the capital stock of the
Corporation in such a way that holders of common stock shall
be entitled to receive stock, securities, cash or assets with
respect to or in exchange for common stock, then, and in each
such case, proper provision shall be made so that, upon the
basis and upon the terms and in the manner provided in this
subsection (e), the Holders, upon the conversion of each
Security at any time after the consummation of such
consolidation, merger, transfer, reorganization or
reclassification, shall be entitled to receive (at the
aggregate Conversion Price in effect for all shares of common
stock issuable upon such conversion immediately prior to such
consummation as adjusted to the time of such transaction), in
lieu of shares of common stock issuable upon such conversion
prior to such consummation, the stock and other securities,
cash and assets to which such Holder would have been entitled
upon such consummation if such Holder had so converted such
Security immediately prior thereto (subject to adjustments
subsequent to such corporate action as nearly equivalent as
possible to the adjustments provided for in this subsection
4).
<PAGE> 25
25
(v) Notice of Adjustment. Upon any adjust ment of the
Conversion Price, then and in each such case the Corporation
shall promptly deliver a notice to the registered holder of
the Secur ities, which notice shall state the Conversion Price
resulting from such adjustment, setting forth in reasonable
detail the method of calculation and the facts upon which such
calculation is based.
(vi) Other Notices. In case at any time:
(1) the Corporation shall declare or pay any
dividend on or make any distribution with respect to its common
stock, other than quarterly cash dividends consistent with past
practice;
(2) the Corporation shall offer for
subscription pro rata to the holders of its common stock any
additional shares of stock of any class or other rights;
(3) there shall be any capital reorganization,
or reclassification of the capital stock of the Corporation, or
consolidation or merger of the Corporation with another corporation
(other than a Subsidiary of the Corporation in which the Corporation
is the surviving or continuing corporation and no change occurs in
the Corporation's common stock), or sale of all or substantially all
of its assets to, another corporation;
(4) there shall be a voluntary or involuntary
dissolution, liquidation, bankruptcy, assignment for the benefit of
creditors, or winding up of the Corporation; or
(5) the Corporation proposes to take any other
action or an event occurs which would require an adjustment of the
Conversion Price pursuant to subsection (h) below;
then, in any one or more of said cases, the Corporation shall give
written notice, addressed to each Holder at the address of such
Holder as shown on the books of the Corporation, of (1) the date on
which the books of the Corporation shall close or a record shall be
taken for such dividend, distribution or subscription rights, or (2)
the date (or, if not then known, a reasonable approximation thereof
by the Corporation) on which such reorganization, reclassification,
<PAGE> 26
26
consolidation, merger, sale, dissolution, liquidation, bankruptcy,
assignment for the benefit of creditors, winding up or other action,
as the case may be, shall take place. Such notice shall also specify
(or, if not then known, reasonably approximate) the date as of which
the holders of common stock of record shall participate in such
dividend, distribution or subscription rights, or shall be entitled
to exchange their common stock for securities or other property
deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, bankruptcy,
assignment for the benefit of creditors, winding up, or other
action, as the case may be. Such written notice shall be given at
least twenty days prior to the action in question and not less than
twenty days prior to the record date or the date on which the
Corporation's transfer books are closed in respect thereto.
(vii) Certain Events. If any event occurs as to which
in the reasonable opinion of the Corporation, in good faith,
the other provisions of this subsection 4 are not strictly
applicable but the lack of any adjustment would not in the
opinion of the Corporation fairly protect the conversion
rights of the Holders in accordance with the basic intent and
principles hereof, or if strictly applicable would not fairly
protect the conversion rights of the Holders in accordance
with the basic intent and principles hereof, then the
Corporation shall appoint a firm of independent certified
public accountants (which may be the regular auditors of the
Corporation) of recognized national standing, which shall give
their opinion upon the adjustment, if any, on a basis
consistent with the basic intent and principles established in
the other provisions of this subsection 4, necessary to
preserve, without dilution, the conversion rights of the
Holders. Upon receipt of such opinion, the Corporation shall
forthwith make the adjustments described therein.
(vii) All calculations under this sub section 4 shall
be made to the nearest cent or to the nearest one hundredth
(1/100) of a share, as the case may be.
(viii) In any case in which the provisions hereof
require that an adjustment shall become effective immediately
after a record date for an event, the Corporation may defer
until the
<PAGE> 27
27
occurrence of such event (i) issuing to the Holder of any
Security converted after such record date and before the
occurrence of such event the additional shares of common stock
issuable upon such conversion by reason of the adjustments
required by such event over and above the shares of common
stock issuable upon such conversion before giving effect to
such adjustment and (ii) paying to such Holder any amount in
cash in lieu of a fractional share of common stock; provided,
however, that the Corporation shall deliver to such Holder a
due bill or other appropriate instrument evidencing such
Holder's right to receive such additional shares and such cash
upon the occurrence of the event requiring such adjustment.
D. REDEMPTION AT THE OPTION OF THE CORPORATION
(i) The shares of the 8% Preferred Stock are not redeemable
prior to January 1, 2001. On and after that date, the shares of the
8% Preferred Stock will be redeemable in whole or in part from time
to time at the option of the Corporation, with the consent of the
Board of Governors of the Federal Reserve System, upon not less than
thirty nor more than sixty days' notice by mail, at the redemption
prices set forth below, during the twelve-month periods beginning on
January 1 of the years set forth below, plus accrued and unpaid
dividends to the date fixed for redemption.
<TABLE>
<CAPTION>
YEAR REDEMPTION
---- ----------
PRICE
-----
<S> <C>
2001..................
2002.................. $1,020.00
2003.................. $1,015.00
2004.................. $1,010.00
2005 and thereafter .. $1,005.00
$1,000.00
</TABLE>
(ii) In the event that less than all of the out standing
shares of the 8% Preferred Stock are to be redeemed in any
redemption at the option of the Corporation, the total number of
shares to be redeemed in such redemption shall be determined by the
Board of Directors and the shares to be redeemed shall be allocated
pro rata or by lot as may be determined by the Board of Directors or
by such other method as the Board of Directors may approve and deem
equitable, including any method to conform to any rule or regula-
<PAGE> 28
28
tion of any national or regional stock exchange or automated
quotation system upon which the shares of the 8% Preferred Stock may
at the time be listed or eligible for quotation.
(iii) Notice of any proposed redemption shall be given by the
Corporation by mailing a copy of such notice to the holders of
record of the shares of 8% Preferred Stock to be redeemed, at their
address of record, not more than sixty nor less than thirty days
prior to the redemption date. The notice of redemption to each
holder of shares of 8% Preferred Stock shall specify the number of
shares of 8% Preferred Stock to be redeemed, the redemption date and
the redemption price payable to such holder upon redemption, and
shall state that from and after said date dividends thereon will
cease to accrue. If less than all the shares owned by a holder are
then to be redeemed at the option of the Corporation, the notice
shall also specify the number of shares of 8% Preferred Stock which
are to be redeemed and the numbers of the certificates representing
such shares. Any notice which is mailed as herein provided shall be
conclusively presumed to have been duly given, whether or not the
stockholder receives such notice; and failure duly to give such
notice by mail, or any defect in such notice, to the holders of any
stock designated for redemption shall not affect the validity of the
proceedings for the redemption of any other shares of 8% Preferred
Stock.
(iv) Notice having been mailed as aforesaid, from and after
the redemption date (unless default be made in the payment of the
redemption price for any shares to be redeemed), all dividends on
the shares of 8% Preferred Stock called for redemption shall cease
to accrue and all rights of the holders of such shares as
stockholders of the Corporation by reason of the ownership of such
shares (except the right to receive the redemption price, on
presentation and surrender of the respective certificates
representing the redeemed shares), shall cease on the redemption
date, and such shares shall not after the redemption date be deemed
to be outstanding. In case less than all the shares represented by
any such certificate are redeemed, a new certificate shall be issued
without cost to the holder thereof representing the unredeemed
shares.
(v) At its option, the Corporation may, on or prior to the
redemption date, irrevocably deposit the aggregate amount payable
upon redemption of the shares of the 8% Preferred Stock to be
redeemed with a bank or trust company designated by the Board of
Directors
<PAGE> 29
29
having its principal office in New York, New York, San Juan, Puerto
Rico, or any other city in which the Corporation shall at that time
maintain a transfer agency with respect to its capital stock, and
having a combined capital and surplus (as shown by its latest
published statement) of at least $50,000,000 (herein after referred
to as the "Depositary"), to be held in trust by the Depositary for
payment to the holders of the shares of the 8% Preferred Stock then
to be redeemed. If such deposit is made and the funds so deposited
are made immediately available to the holders of the shares of the
8% Preferred Stock to be redeemed, the Corporation shall thereupon
be released and dis charged (subject to the provisions of Section
D.6) from any obligation to make payment of the amount payable upon
redemption of the shares of the 8% Preferred Stock to be redeemed,
and the holders of such shares shall look only to the Depositary for
such payment.
(vi) Any funds remaining unclaimed at the end of two years
from and after the redemption date in respect of which such funds
were deposited shall be returned to the Corporation forthwith and
thereafter the holders of shares of the 8% Preferred Stock called
for redemption with respect to which such funds were deposited shall
look only to the Corporation for the payment of the redemption price
thereof. Any interest accrued on any funds deposited with the
Depositary shall belong to the Corporation and shall be paid to it
from time to time on demand.
(vii) Any shares of the 8% Preferred Stock which shall at any
time have been redeemed shall, after such redemption, have the
status of authorized but unissued shares of Preferred Stock, without
designation as to series, until such shares are once more designated
as part of a particular series by the Board of Directors.
E. LIQUIDATION PREFERENCE
(i) Upon any voluntary or involuntary liquida tion,
dissolution, or winding up of the Corporation, the then record
holders of shares of 8% Preferred Stock will be entitled to receive
out of the assets of the Corporation available for distribution to
shareholders, before any distribution is made to holders of common
stock or any other equity securities of the Corporation ranking
junior upon liquidation to the 8% Preferred Stock, distributions
upon liquidation in the amount of $1,000 per share plus an amount
equal to any accrued and unpaid dividends to the date of payment.
Such
<PAGE> 30
30
amount shall be paid to the holders of the 8% Preferred Stock prior
to any payment or distribution to the holders of the common stock of
the Corporation or of any other class of stock or series thereof of
the Corporation ranking junior to the 8% Preferred Stock in respect
of dividends or as to the distribution of assets upon liquidation.
(ii) If upon any voluntary or involuntary liquida tion,
dissolution or winding up of the Corporation, the amounts payable
with respect to the 8% Preferred Stock and any other shares of stock
of the Corporation ranking as to any such distribution on a parity
with the 8% Preferred Stock are not paid in full, the holders of the
8% Preferred Stock and of such other shares will share ratably in
any such distribution of assets of the Corporation in proportion to
the full liquidation preferences to which each is entitled. After
payment of the full amount of the liquidation preference to which
they are entitled, the holders of shares of 8% Preferred Stock will
not be entitled to any further participation in any distribution of
assets of the Corporation.
(iii) Neither the consolidation or merger of the Corporation
with any other corporation, nor any sale, lease or conveyance of all
or any part of the property or business of the Corporation, shall be
deemed to be a liquidation, dissolution, or winding up of the
Corporation.
(iv) If the assets distributable upon any dissolu tion,
liquidation, or winding up of the Corporation shall be insufficient
to permit the payment to the holders of the 8% Preferred Stock of
the full preferential amounts aforesaid, then such assets or the
proceeds thereof shall be distributed among the holders of the 8%
Preferred Stock ratably in proportion to the respective amounts the
holders of such shares of stock would be entitled to receive if they
were paid the full preferential amounts aforesaid.
F. VOTING RIGHTS
(i) Except as described in this Section F, or except as
required by applicable law, holders of the 8% Preferred Stock will
not be entitled to receive notice of or attend or vote at any
meeting of stockholders of the Corporation.
(ii) Any variation or abrogation of the rights, preferences
and privileges of the 8% Preferred Stock by way of amendment of the
Corporation's Restated
<PAGE> 31
31
Certificate of Incorporation or otherwise (including, without
limitation, the authorization or issuance of any shares of the
Corporation ranking, as to dividend rights or rights on liquidation,
winding up and dissolution, senior to the 8% Preferred Stock) shall
not be effective (unless otherwise required by applicable law)
except with the consent in writing of the holders of at least a
majority of the outstanding shares of the 8% Preferred Stock or with
the sanction of a special resolution passed at a separate general
meeting by the holders of at least a majority of the outstanding
shares of the 8% Pre ferred Stock. Notwithstanding the foregoing,
the Corporation may, without the consent or sanction of the holders
of the 8% Preferred Stock, authorize and issue shares of the
Corporation ranking, as to dividend rights and rights on
liquidation, winding up and disso lution, on a parity with or junior
to the 8% Preferred Stock.
(iii) No vote of the holders of the 8% Preferred Stock will be
required for the Corporation to redeem or purchase and cancel the 8%
Preferred Stock in accordance with the Restated Certificate of
Incorporation of the Corporation.
(iv) The Corporation will cause a notice of any meeting at
which holders of any series of Preferred Stock are entitled to vote
to be mailed to each record holder of such series of Preferred
Stock. Each such notice will include a statement setting forth (i)
the date of such meeting, (ii) a description of any resolution to be
proposed for adoption at such meeting on which such holders are
entitled to vote and (iii) instructions for deliveries of proxies.
(v) Except as set forth in this Section F, holders of 8%
Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are
entitled to vote as set forth herein) for taking any corporate
action.
G. RANK
The 8% Preferred Stock will, with respect to dividend rights
and rights on liquidation, winding up and dissolution, rank (i)
senior to all classes of common stock of the Corporation and to all
other equity securities issued by the Corporation the terms of which
specifically provide that such equity securities will rank junior to
the 8% Preferred Stock (or to a number of series of Preferred Stock
which includes the 8% Preferred Stock); (ii) on a parity
<PAGE> 32
32
with all equity securities issued by the Corporation the terms of
which specifically provide that such equity securities will rank on
a parity with the 8% Preferred Stock (or with a number of series of
Preferred Stock which includes the 8% Preferred Stock); and (iii)
junior to all equity securities issued by the Corporation the terms
of which specifically provide that such equity securities will rank
senior to the 8% Preferred Stock (or to a number of series of
Preferred Stock which includes the 8% Preferred Stock). For this
purpose, the term "equity securities" does not include debt
securities convertible into or exchangeable for equity securities.
H. FORM OF CERTIFICATE FOR 8% PREFERRED STOCK; TRANSFER AND
REGISTRATION
(i) The 8% Preferred Stock shall be issued in registered
form only. The Corporation may treat the record holder of a share of
8% Preferred Stock, including the Depository Trust Company and its
nominee and any other holder that holds such share on behalf of any
other person, as such record holder appears on the books of the
registrar for the 8% Preferred Stock, as the sole owner of such
share for all purposes.
(ii) The transfer of a share of 8% Preferred Stock may be
registered upon the surrender of the certificate evidencing the
share of 8% Preferred Stock to be transferred, together with the
form of transfer endorsed on it duly completed and executed, at the
office of the transfer agent and registrar.
(iii) Registration of transfers of shares of 8% Preferred
Stock will be effected without charge by or on behalf of the
Corporation, but upon payment (or the giving of such indemnity as
the transfer agent and registrar may require) in respect of any tax
or other governmental charges which may be imposed in relation to
it.
(iv) The Corporation will not be required to register the
transfer of a share of 8% Preferred Stock after such share has been
called for redemption.
I. REPLACEMENT OF LOST CERTIFICATES
If any certificate for a share of 8% Preferred Stock is
mutilated or alleged to have been lost, stolen or destroyed, a new
certificate representing the same share shall be issued to the
holder upon request
<PAGE> 33
33
subject to delivery of the old certificate or, if alleged to have
been lost, stolen or destroyed, compliance with such conditions as
to evidence, indemnity and the payment of out-of-pocket expenses of
the Corporation in connection with the request as the Board of
Directors of the Corporation may determine.
J. NO PREEMPTIVE RIGHTS
Holders of the 8% Preferred Stock will have no preemptive
rights to purchase any securities of the Corporation.
<PAGE> 34
34
IN WITNESS WHEREOF, the said Doral Financial Corporation, has caused its
corporate seal to be hereunto affixed and this Certificate to be signed by
Zoila Levis, its President, and Luis Alvarado, its Assistant Secretary, this
7th day of November, 1997.
/s/ Zoila Levis
----------------------------------
President
/s/ Luis Alvarado
----------------------------------
Assistant Secretary
<PAGE> 1
EXHIBIT 4.1
DORAL FINANCIAL CORPORATION
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF PUERTO RICO
NUMBER
D
- ---------------
CUSIP 25811P 100
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS TO CERTIFY that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
OF THE PAR VALUE OF $1 EACH, OF
DORAL FINANCIAL CORPORATION, transferable on the books of the Corporation in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Richard F. Bonini [CORPORATE SEAL] /s/ Zoila Levis
Secretary President
COUNTERSIGNED AND REGISTERED
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
DORAL FINANCIAL CORPORATION
The Corporation will furnish without charge to each shareholder who so
requests the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series which the
Corporation is authorized to issue and the qualifications, limitations or
restrictions of such preferences and/or rights. Any request should be made to
the Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as
tenants in common
UNIF GIFTS MIN ACT -- _________________ Custodian __________________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ______________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________________________ hereby
sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
Please print or typewrite name and address,
including postal zip code of assignee.
__________________________________________________________________________Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
______________________________________________________________________ Attorney,
to transfer said stock on the books of the within-named Corporation with full
power of substitution in the premises.
Dated,_____________________________
____________________________________________
<PAGE> 1
EXHIBIT 10.74
FIRST FINANCIAL CARIBBEAN CORPORATION
1159 F.D. Roosevelt Avenue
Puerto Nuevo, Puerto Rico 00920
As of September 1, 1997
Mr. Richard F. Bonini
570 Lexington Avenue
40th Floor
New York, NY 10022-6824
Dear Mr. Bonini:
We are pleased to detail herein below the provisions of your employment
agreement with First Financial Caribbean Corporation ("FFCC").
1. TERMS OF EMPLOYMENT
The term of this Agreement shall be for a period commencing
retroactively to January 1, 1997 and ending on December 31, 1999, unless sooner
terminated as herein provided. This Agreement supersedes and cancels all prior
employment, personal service or similar agreements between you and FFCC and its
subsidiaries, divisions and ventures.
2. POSITION AND RESPONSIBILITIES
You will serve as Senior Executive Vice President, Secretary and
Chief Financial Officer of FFCC. By your acceptance of this Agreement, you
undertake to accept such employment and to devote your full time and attention
to FFCC, and to use your best efforts, ability and fidelity in the performance
of the duties attaching to such employment. During the term of your employment
hereunder, you shall not perform any services for any other company, which
services conflict in any way with your obligations under the two preceding
sentences of this Section 2, whether or not such company is competitive with the
businesses of FFCC, provided, however, that nothing in this Agreement shall
preclude you from devoting reasonable periods required for
(i) serving as a director or member of a committee of any
organization involving no conflict or potential conflict of interest with the
interests of FFCC;
(ii) delivering lectures, fulfilling speaking engagements, teaching
at educational institutions;
(iii) engaging in charitable and community activities; and
(iv) managing your personal and family investments, provided that
such activities do not interfere with the regular performance of your duties and
responsibilities under this Agreement.
<PAGE> 2
Mr. Richard F. Bonini
As of September 1, 1997
Page 2
You shall, at all times during the term hereof, be subject to the
supervision and direction of the Chairman of the Board and Chief Executive
Officer and the President of FFCC with respect to your duties, responsibilities
and the exercise of your powers.
3. COMPENSATION
(a) During the term of this Agreement you shall receive an annual
salary of $390,000 annually, payable no less often than monthly in accordance
with corporate policy.
(b) (i) During the term of this Agreement, you shall also be
entitled to receive an annual incentive bonus equal to 5% of
the amount of Adjusted Net Income (as hereinafter defined) in
excess of a 15% Return on Equity Capital (as hereinafter
defined); provided, however, that total salary and incentive
compensation payable to you pursuant to this Agreement shall
not exceed $1.2 million per annum;
(ii) The incentive bonus shall be payable annually by FFCC
within 30 days following the date on which its Annual Report
on Form 10-K for the fiscal year ended the prior December 31
shall have been filed with the United States Securities and
Exchange Commission; provided that such amount shall only be
payable if you shall have served as President to FFCC pursuant
to this Agreement for the entire fiscal year to which such
payments relate. As used in this Section 3, "Adjusted Net
Income" means the annual consolidated net income by FFCC and
its subsidiaries after all taxes (including net income from
equity interests held by FFCC in any other venture and net
income of any successor of FFCC which may be formed by merger,
consolidation or sale of substantially all of the assets of
FFCC) during the calendar year preceding the payment as
determined in accordance with generally accepted accounting
principles applied on a consistent basis throughout the
periods involved and as shown by FFCC's published consolidated
financial statements audited by its independent accountants
(hereinafter referred to as "GAAP"), such net income to be
adjusted (A) by adding back to such net income any payments
made pursuant to Section 3(b)(i) hereof and payments of
similar incentive compensation to other executive officers of
FFCC, and (B) by adjusting such net income for any
extraordinary items of income and expense such as merger
related expenses. As used in this Section 3, (1) "Equity
Capital" means FFCC's consolidated Stockholders Equity
including preferred stock at the December 31 immediately
preceding the beginning of the fiscal year for which the
calculation is being made, determined in accordance with GAAP
and (2) "Return on Equity Capital" for any fiscal year means
the percentage determined by dividing FFCC's consolidated net
income after all taxes determined in accordance with GAAP for
such fiscal year by Equity Capital for such preceding December
31; provided that such calculation shall be adjusted as set
forth in the immediately succeeding sentence. If FFCC sells
its equity securities during the fiscal year, Equity Capital
shall be increased by the net proceeds to FFCC (after
expenses) of such sale multiplied by a fraction the numerator
of which shall be the number of days in such fiscal year which
had elapsed from the date of the closing of such sale to the
end of such fiscal year and the denominator of which shall be
365.
<PAGE> 3
Mr. Richard F. Bonini
As of September 1, 1997
Page 3
(iii) At the option of FFCC, and subject to any
applicable requirements of the National Association of
Securities Dealers or any stock exchange on which the Common
Stock of FFCC may be listed, up to 50% of the amount payable
under Section 3(b)(i) may be in the form of shares of FFCC
Common Stock. For purposes of computing the number of shares
to be issued, the shares of Common Stock will be assigned a
value equal to the average of last sales prices of the Common
Stock as reported on the NASDAQ National Market System for the
five trading dates immediately preceding the date of issuance;
(c) You shall be entitled to participate in the other benefit
plans of FFCC upon the terms and conditions on which such benefits are made
available to other officers of FFCC, except that FFCC agrees to establish an
annuity contract for your benefit in the amount of $30,000 per year in lieu of
your participation in FFCC's pension plan and will acquire separate medical
insurance for you in lieu of your participation in FFCC's medical plan. Nothing
herein shall obligate FFCC to continue any existing benefit plan or to establish
any replacement benefit plan.
(d) You shall be entitled to reimbursement for reasonable travel
and entertainment expenses incurred in connection with the rendering of your
services hereunder. Nothing contained herein shall authorize you to make any
political contributions, including but not limited to payments for dinners and
advertising in any political party program or any other payment to any person
which might be deemed a bribe, kickback or otherwise and improper payment under
corporate policy or practice and no portion of the compensation payable
hereunder is for any such purpose.
(e) Payments under this Agreement shall be subject to reduction by
the amount of any applicable federal, Commonwealth, state or municipal income,
withholding, social security, state disability insurance, or similar or other
taxes or other items which may be required or authorized to be deducted by law
or custom.
(f) No additional compensation shall be due to you for services
performed or offices held in any subsidiary, division, affiliate, or venture of
FFCC.
4. MISCELLANEOUS PROVISIONS RELATING TO THE BONUS AND OTHER MATTERS
(a) Your acceptance of this Agreement will confirm that you
understand and agree that the granting of the incentive compensation referred to
in Section 3(b) (the "incentive compensation"), and any action thereunder, does
not involve any statement or representation of any kind by FFCC as to its
business, affairs, earnings or assets, or as to the tax status of the incentive
compensation or the tax consequences of any payment thereof, or otherwise. You
further agree that any action at any time taken by or on behalf of FFCC or by
its directors or any committee thereof, which might or shall at any time
adversely affect you or the incentive compensation, may be freely taken
notwithstanding any such adverse effect without your being thereby or otherwise
entitled to any right or claim against FFCC, Doral or any other person or party
by reason thereof.
(b) The incentive compensation is personal to you and, except as
provided as contemplated in Section 3(b) above, in the event of your death or
incapacity, is not transferable or assignable either by
<PAGE> 4
Mr. Richard F. Bonini
As of September 1, 1997
Page 4
your act or by operation of law, and no assignee, trustee in bankruptcy,
receiver or other party whosoever shall have any right to demand any incentive
compensation or any other right with respect to it. If, in the event of your
death or incapacity, your legal representative shall be entitled to demand the
incentive compensation under any of the provisions hereof then, unless otherwise
indicated by the context or otherwise required by any term hereof, references to
"you" shall apply to said representative.
(c) If and when questions arise from time to time as to the
intent, meaning or application of any one or more of the provisions hereof such
questions will be decided by the Board of Directors of FFCC or any Committee
appointed to consider such matters, or, in the event FFCC is merged into or
consolidated with any other corporation, by the Board of Directors (or a
Committee appointed by it) of the surviving or resulting corporation, and the
decision of such Board of Directors or Committee, as the case may be, as to what
is a fair and equitable settlement of each such question or as to what is a fair
and proper interpretation of any provision hereof or thereof, whatever the
effect of such a decision may be, beneficial or adverse, upon the incentive
compensation, shall be conclusive and binding and you hereby agree that the
incentive compensation is granted to and accepted by you subject to such
condition and understanding. You understand that the incentive compensation is
not held or set aside in trust and (1) FFCC may seek to retain, offset, attach
or similarly place a lien on such funds in circumstances where you have been
discharged for cause and shall be entitled to do so for (x) malfeasance damaging
to FFCC, (y) conversion to you of an FFCC opportunity, or (z) a violation of
FFCC's conflict of interest policy, in each case as determined in the sole
discretion of the Board of Directors, and (2) in the event FFCC is unable to
make any payment under this Agreement because of insolvency, bankruptcy or
similar status or proceedings, you will be treated as a general unsecured
creditor of FFCC and may be entitled to no priority under applicable law with
respect to such payments.
5. RESTRICTIONS ON COMPETITION
During the term of this Agreement and for a period of one year after
you cease to be an employee of FFCC or an affiliate of FFCC, you will not,
without the prior written consent of FFCC, (a) accept employment or render
service to any person, firm or corporation, directly or indirectly, in
competition with FFCC, or any affiliate thereof for any purpose which would be
competitive with the mortgage banking business within the Commonwealth of Puerto
Rico or any other geographic area in which FFCC or any affiliate of FFCC by
which you were employed, conducted operations (the "Restricted Area") or any
business as to which studies or preparations relating to the entry into which
were made by FFCC or any affiliate of FFCC by which you were employed within two
years prior thereto (collectively, the "Restricted Businesses") or (b) directly
or indirectly, enter into or in any manner take part in or lend your name,
counsel or assistance to any venture, enterprise, business or endeavor, whether
as proprietor, principal, investor, partner, director, officer, employee,
consultant, adviser, agent, independent contractor or in any other capacity
whatsoever for any purpose which would be competitive with the Restricted
Businesses in the Restricted Area. An investment not exceeding 5% of the
outstanding stock in any corporation regularly traded on any national securities
exchange or in the over-the-counter market shall not be deemed to violate this
provision, provided that you shall not render any services for such corporation.
<PAGE> 5
Mr. Richard F. Bonini
As of September 1, 1997
Page 5
6. TERMINATION OF EMPLOYMENT
(a) Your employment hereunder may be terminated for dishonesty,
death, incapacity, or inability to perform the duties of your employment on a
daily basis, resulting from physical or mental disability caused by illness,
accident or otherwise or refusal to perform the duties and responsibilities of
you employment hereunder, or breach of fidelity to FFCC.
(b) At any time following a "Change in Control" of FFCC, this
Agreement may be terminated by FFCC or you on 30 days' written notice to you or
FFCC, as the case may be, such termination to be effective as of the end of the
calendar year during which such notice is given. As used herein, a "Change in
Control" shall be deemed to have occurred at such time as (i) any person or
group becomes the beneficial owner of more than 50% of the voting power of
FFCC's voting stock, or (ii) FFCC consolidates with or merges into any other
corporation or conveys or otherwise disposes of all or substantially all of its
assets to any person.
(c) If at any time you shall voluntarily terminate your
employment, then this Agreement, except for Section 5 hereof, shall terminate
and all further obligations of FFCC hereunder shall cease, provided that in any
termination pursuant to subsection (b) of this Section 6 you shall be entitled
to receive all compensation due to pursuant to Section 3 hereof for the calendar
year in which such date of termination occurs.
You agree that this Section 6 shall create no additional rights in
you to direct the operations of FFCC.
7. REGISTRATION RIGHTS
(a) Upon your written request or requests that FFCC effect a
registration on Form S-3 and any related qualification or compliance with
respect to all or a part of the securities granted to you pursuant to Section
3(b)(iii) hereof (the "Registrable Securities") and other senior executives of
FFCC holding similar registration rights (individually a "Holder" and
collectively, the "Holders"), FFCC will:
(i) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
(ii) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from FFCC; provided,
however, that FFCC shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 7: (1) if Form S-3 is not
available for such offering by the Holders; (2) if the Holders, together with
the holders of any other securities of FFCC entitled to inclusion in such
registration, propose to sell Registrable Securities and such other securities
(if any) at an aggregate price to the public (net of any underwriters' discounts
or commissions) of less than $250,000; (3) if FFCC shall furnish to the Holders
a certificate signed by an officer of FFCC stating that in the good faith
judgment of
<PAGE> 6
Mr. Richard F. Bonini
As of September 1, 1997
Page 6
the Board of Directors of FFCC, it would be seriously detrimental to FFCC and
its shareholders for such Form S-3 registration statement to be filed, in which
event FFCC shall have the right to defer the filing of the Form S-3 Registration
Statement for a period of not more than 120 days after receipt of the request of
the Holder or Holders under this Section 7; (4) if FFCC has, within the 12-month
period preceding the date of such request, already effected two registrations on
Form S-3 for the Holders pursuant to this Section 7; (5) if FFCC shall have
effected any registration (other than on S-3 or any successor Form) within the
six month period preceding the date of such request; or (6) in any particular
jurisdiction in which FFCC would be required to qualify to do business or to
execute a general consent to service of process in effecting such registration,
qualification or compliance; and
(iii) Subject to the foregoing, FFCC shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Holders. All expenses incurred in connection with a registration
requested pursuant to this Section 7, including, without limitation, all
registration, filing, qualification, printer's and accounting fees and the
reasonable fees and disbursements of counsel for the selling Holder or Holders
and counsel for FFCC, but excluding any underwriters' discounts or commissions
associated with Registrable Securities, shall be borne pro rata by the Holder or
Holders selling securities pursuant to Form S-3 Registration.
(b) The rights to cause FFCC to register Registrable Securities
pursuant to this Section 7 may not be assigned or transferred in any fashion.
8. MEMBERSHIP ON BOARD OF DIRECTORS. FFCC agrees to nominate or cause
you to be nominated for election to FFCC's Board of Directors.
9. WAIVERS AND MODIFICATIONS
No waiver by either party of any breach by the other of any
provisions hereof shall be deemed to be a waiver of any later or other breach
thereof, or as a waiver of any such or other provision of this Agreement. This
Agreement sets forth all of the terms of the understandings between the parties
with reference to the subject matter set forth herein and may not be waived,
changed, discharged or terminated orally or by any course of dealing between the
parties, but only by an instrument in writing signed by the party against whom
any waiver, change, discharge or termination is sought.
10. SEVERABILITY
Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective under applicable law. In the event
that any provision, or any portion of any provision, of this Agreement shall be
held to be void and unenforceable, the remaining provisions of this Agreement,
and the remaining portion of any provision found void or unenforceable in part
only, shall continue in full force and effect.
<PAGE> 7
Mr. Richard F. Bonini
As of September 1, 1997
Page 7
11. ARBITRATION
Any dispute arising under this Agreement shall be submitted to
arbitration in New York, New York under the rules of the American Arbitration
Association.
12. NOTICES
Any notice or communication required or permitted to be given
hereunder shall be deemed duly given if delivered personally or sent by
registered or certified mail, return receipt requested, to the address of the
intended recipient as herein set forth or to such other address as a party may
theretofore have specified in writing to the other by delivering or mailing in a
similar manner. Any notice or communication intended for FFCC shall be addressed
to the attention of its Board of Directors.
13. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Puerto Rico.
14. MISCELLANEOUS
This Agreement shall be binding upon the successors and assigns of
FFCC. This Agreement is personal to you, and you therefore may not assign your
duties under this Agreement. The headings of the sections of this Agreement are
inserted for convenience only and shall not be deemed to constitute a part
thereof or to affect the meaning hereof.
If the foregoing terms and conditions correctly embody your mutual
understanding with FFCC, kindly endorse your acceptance and agreement therewith
in the space below provided, whereupon this shall become a binding agreement.
Very truly yours,
FIRST FINANCIAL CARIBBEAN CORPORATION
By: /s/ Salomon Levis
---------------------------------
Name: Salomon Levis
Title: Chairman of the Board and
Chief Executive Officer
Accepted and Agreed to as of the
date first above set forth:
/s/ Richard F. Bonini
- ----------------------------------
Richard F. Bonini
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DORAL FINANCIAL CORPORATION FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 82,586
<SECURITIES> 873,869
<RECEIVABLES> 32,617
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 18,419
<DEPRECIATION> 7,558
<TOTAL-ASSETS> 1,546,105
<CURRENT-LIABILITIES> 0
<BONDS> 8,460
0
0
<COMMON> 18,425
<OTHER-SE> 152,254
<TOTAL-LIABILITY-AND-EQUITY> 1,546,105
<SALES> 0
<TOTAL-REVENUES> 94,313
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,214
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</TABLE>
