-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T9Sh99Bu5O/VgMXUdSSYo4lUL9c+NQEkKaa5O7h9K2cOuob7mKWD7vZa7+Uob3t1 0/D+VgCIP8lXr8gNnGPm/A== 0000950144-01-503090.txt : 20010604 0000950144-01-503090.hdr.sgml : 20010604 ACCESSION NUMBER: 0000950144-01-503090 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20010601 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: R&G FINANCIAL CORP CENTRAL INDEX KEY: 0001016933 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 660532217 STATE OF INCORPORATION: PR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-46753 FILM NUMBER: 1652275 BUSINESS ADDRESS: STREET 1: 280 JESUS T. PINERO AVE CITY: HATO REY, SAN JUAN STATE: PR ZIP: 00918 MAIL ADDRESS: STREET 1: 280 JESUS T PINERO AVE CITY: HATO REY, SAN JUAN STATE: PR ZIP: 00918 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: PRATS RAMON CENTRAL INDEX KEY: 0001140516 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 280 JESNSTPINCRO AVENUE CITY: SAN JUAN STATE: PR ZIP: 00918 BUSINESS PHONE: 7877582424 MAIL ADDRESS: STREET 1: 280 JESNSTPINCRO AVENUE CITY: SAN JUAN STATE: PR ZIP: 00918 SC 13D 1 g69261sc13d.txt R&G CORPORATION / RAMON PRATS 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 - ------------------------------------------------------------------------------- SCHEDULE 13D (Rule 13d-101) INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT TO RULE 13d-1(A) AND AMENDMENTS THERETO FILED PURSUANT TO RULE 13d-2(a) R&G FINANCIAL CORPORATION - ------------------------------------------------------------------------------- (name of Issuer) Class B Common Stock - ------------------------------------------------------------------------------- (Title of Class of Securities) 749136107 - ------------------------------------------------------------------------------- (CUSIP Number) Ramon Prats Vice Chairman of the Board and President R&G Financial Corporation 280 Jesus T. Pinero Avenue San Juan, Puerto Rico 00918 (787) 758-2424 - ------------------------------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) May 8, 2001 - ------------------------------------------------------------------------------- (Date of Event Which Requires Filing of This Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1 (b)(3) or (4), check the following box [ ]. NOTE: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. 2 (*)The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter the disclosures provided in a prior cover page. The information required in the remainder of this cover page shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes). 3 CUSIP No. 749136107 - ------------------------------------------------------------------------------- (1) NAME OF REPORTING PERSON Ramon Prats - ------------------------------------------------------------------------------- (2) CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP(**) (a) [ ] (b) [X] - ------------------------------------------------------------------------------- (3) SEC USE ONLY - ------------------------------------------------------------------------------- (4) SOURCE OF FUNDS(*) SC, AF - ------------------------------------------------------------------------------- (5) CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] - ------------------------------------------------------------------------------- (6) CITIZENSHIP OR PLACE OF ORGANIZATION Puerto Rico - ------------------------------------------------------------------------------- NUMBER OF (7) SOLE VOTING POWER 550,454 SHARES ------------------------------------------------------------- BENEFICIALLY (8) SHARED VOTING POWER 0 OWNED BY ------------------------------------------------------------- EACH (9) SOLE DISPOSITIVE POWER 550,454 REPORTING ------------------------------------------------------------- PERSON WITH (10) SHARED DISPOSITIVE POWER 0 - ------------------------------------------------------------------------------- (11) AGGREGATE AMOUNT BENEFICIALLY OWNED 550,454 BY EACH REPORTING PERSON - ------------------------------------------------------------------------------- (12) CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES(*) [ ] - ------------------------------------------------------------------------------- (13) PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 5.14% - ------------------------------------------------------------------------------- (14) TYPE OF REPORTING PERSONAL(*) IN - ------------------------------------------------------------------------------- (*)SEE INSTRUCTIONS BEFORE FILLING OUT 4 Item 1 Security and Issuer. The equity securities under report and to which this statement relates are the Class B Common Stock, par value $.01 per share (the "Class B Common Stock") of R&G Financial Corporation, Inc. (the "Company"). The principal executive offices of the Company are located at 280 Jesus T. Pinero Avenue, San Juan, Puerto Rico, 00918. Item 2. Identity and Background. (a) Ramon Prats. (b) The business address of Mr. Prats is: c/o R&G Financial Corporation, 280 Jesus T. Pinero Avenue, San Juan, Puerto Rico, 00918. (c) Mr. Prats serves as the Vice Chairman of the Board of Directors and President of the Company. Mr. Prats also serves as President of R& Mortgage Corp., R&G Premier Bank of Puerto Rico, and Mortgage Store of Puerto Rico, Inc., as a director of R&G Mortgage Corp. and Continental Capital Corp, and as Vice Chairman of the Board of Directors of R&G Premier Bank. Each of R&G Premier Bank of Puerto Rico, R&G Mortgage Corp., Mortgage Store of Puerto Rico, Inc. and Continental Capital Corp are subsidiaries of the Company (the "Subsidiaries"), and the address for each of them is: 280 Jesus T. Pinero Avenue, San Juan, Puerto Rico, 00918. (d) Mr. Prats has not during the last five years been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) Mr. Prats has not, during the last five years, been party to a civil proceeding of a judicial or administrative body of competent jurisdiction and, as a result of such proceeding, was or is subject to, a judgment decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, Federal or State securities laws or finding any violation with respect to such laws. (f) Mr. Prats is a citizen of the United States. Item 3. Source and Amount of Funds or Other Consideration. A majority of the shares of Class B Common Stock held directly by Mr. Prats were awarded to him by the Company in lieu of compensation for his role as a director and officer of the Company and its Subsidiaries. The remainder of the shares of Class B Common Stock directly held by Mr. Prats are shares of R-G Premier Bank which were exchanged for shares of Class B Common Stock of the Company. Mr. Prats has also been awarded options to acquire additional shares of Class B Common Stock through from the Company pursuant to the 1996 Stock Option Plan and by Victor J. Galan, the Chairman of the Board and Chief Executive Officer of the Company, as is discussed in further detail below. 5 On September 25, 1997 the Company distributed a 4:5 stock split. On June 25, 1998, the Company effected a 2:1 stock split. All share amounts and per share prices herein are adjusted to take into account these stock splits. (a) Directly Held Shares of Class B Common Stock (i) From Company Mr. Prats acquired 72,000 of his shares of Class B Common Stock from the Company on August 27, 1996 in lieu of further consideration for services rendered as an officer and director of the Company and its Subsidiaries. These shares were not registered under the Securities Act of 1933. (ii) From Exchange Mr. Prats acquired shares in the predessor to R&G Premier Bank in 1987 in consideration for $10,000. In January 1997, those shares were exchanged for shares of Class B Common Stock, which now amount to 10,454 shares of Class B Common Stock. (b) Options for Shares of Class B Common Stock (i) From the Company In compensation for his services rendered as a director and officer of the Company and its Subsidiaries, Mr. Prats has acquired stock options from the Company to purchase an aggregate amount of 288,000 shares of Class B Common Stock, at an exercise price of $4.03 a share, pursuant to the 1996 Stock Option Plan. (ii) From Victor J. Galan Mr. Prats holds an option to acquire an aggregate of 360,000 shares of Class B Common Stock, at a purchase price of $4.03 a share, from Victor J. Galan, the Chairman of the Board of Directors and Chief Executive Officer of the Company, by virtue of a Stock Option Agreement dated May 8, 1998 between Mr. Prats and Mr. Galan, a copy of which is attached hereto as Exhibit 1. Under the terms of Stock Option Agreement, shares vest 1/6th each year. As of May 8, 2001, half of the shares under the Stock Option Agreement, or 180,000 shares have become vested and are exercisable within 60 days of the date of this filing. The vesting on May 8, 2001 gave rise to Mr. Prats' Schedule 13D filing obligation. 6 Item 4. Purpose of Transaction. Except as referenced in response to Item 6 below, Mr. Prats currently has no plans or proposals (excluding action which may be taken or proposed to be taken by the Board of Directors of the Company of which Mr. Prats is a member) which relate to or would result in (a) the acquisition by any person of additional securities of the Company or the disposition of securities of the Company; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its Subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or any of its Subsidiaries; (d) any change in the present Board of Directors or management of the Company, including any plans or proposals to change the number or term of directors or to fill existing vacancies on the Board; (e) any material change in the present capitalization or dividend policy of the Company; (f) any other material change in the Company's business or corporate structure;(g) changes in the Company's charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition or control of the company by any person; (h) causing a class of securities of the Company to be delisted from a national securities exchange or cease to be authorized to be quoted in an inter-dealer quotation systems of a registered national securities association; (i) a class of equity securities of the Company becoming eligible for termination of registration pursuant to 12(g)(4) of the Securities Exchange Act of 1934, as amended; or (j) any action similar to those enumerated above. Item 5. Interest in Securities of the Issuer. (a) Mr. Prats beneficially owns 550,454 shares of Class B Common Stock (including options to acquire 180,000 shares of Class B Common Stock from Mr. Galan and 288,000 options to acquire shares of Class B Common Stock under the Company Stock Option Plan, both types of options are exercisable within 60 days), which represent approximately 5.14% of the 10,237,675 outstanding shares of Class B Common Stock of the Company. (b) Mr. Prats has sole power to vote and dispose of all 550,454 shares of Class B Common Stock over which he is attributed beneficial ownership. (c) Mr. Prats did not effect any transactions involving the Class B Common Stock of the Company; rather, he became vested in an additional 60,000 shares of Class B Common Stock from options given to him by Mr. Galan on May 8, 2001. This additional vesting gave rise to Mr. Prats' Schedule 13D filing obligation. See also the response to Item 3(b)(ii) hereof. (d) No other person is known to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, Mr. Prats securities reported herein. (e) Not applicable. 7 Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer. On May 8, 1998, Mr. Prats executed a stock option agreement (the "Stock Option Agreement"), pursuant to which he was granted by Victor Galan the option (the "Option") to purchase up to 360,000 shares of Class B Common Stock (the "Option Shares"). The following description summarizes certain terms and conditions of the Stock Option Agreement, but does not purport to be a complete description of all of its terms and is qualified in its entirety by reference to the copy of the Stock Option Agreement filed herewith as Exhibit 1 to this Schedule. The Stock Option Agreement was executed by Mr. Galan in consideration of Mr. Prats' agreement to render faithful and efficient service to the Company with such duties and responsibilities as the Company shall from time to time prescribe, and as inducement for Mr. Prats to remain in the service of the Company and for his increased efforts during such service. The Option is exercisable as follows: (a) with respect to all of the Option Shares, upon the occurrence of a "Change of Control" of the Company (defined, for purposes of the Stock Option Agreement, as the acquisition by any person other than Mr. Galan of direct or indirect beneficial ownership of voting securities of the Company representing 50% or more of the Company's outstanding securities), or the death, disability or retirement (on or after reaching age 65) of Mr. Prats; and (b) upon the occurrence of any sale by Mr. Galan of his Class A Common Stock or his Class B Common Sock, in full or in part (a "Stock Disposition"), with respect to the number of Option Shares corresponding to the same proportion of the total number of Option Shares as the amount of common stock sold by Mr. Galan bears to the total number of common stock shares owned by Mr. Galan at the time. In either of the foregoing instances, the Option to acquire the corresponding number of Option Shares shall expire on the first anniversary of the event that makes the Option exercisable. In the event of a Stock Disposition, Mr. Prats shall have the option to cause Mr. Galan to purchase all or part of the Option at a price (the "Put Price") equal to the price at which Mr. Galan shall have made the Stock Disposition less (i) the exercise price of $4.03 per share and less (ii) the proportionate share of the costs incurred by Mr. Galan in effecting the Stock Disposition. If neither a Change of Control or a Stock Disposition has occurred, the Option shall be exercisable during a period of six years beginning on the first anniversary of Stock Option Agreement as follows: (1) beginning on its first anniversary, Mr. Prats may exercise up to one-sixth of the total number of Option Shares; (2) beginning on its second anniversary, Mr. Prats may exercise up to one-third of the total number of Option Shares; (3) beginning on its third anniversary Mr. Prats may exercise up to one-half of the total number of Option Shares; 8 (4) beginning on its fourth anniversary, Mr. Prats may exercise up to two-thirds of the total number of Option Shares; (5) beginning on its fifth anniversary, Mr. Prats may exercise up to five-sixths of the total number of Option Shares; and (6) beginning on its sixth anniversary, Mr. Prats may exercise the total number of Option Shares. The purchase price of the Class B Shares covered by the Option is $4.03 per share. The Stock Option Agreement contains certain anti-dilution adjustment provisions for the number of Class B Shares subject to the Option. The Option shall expire in the event that Mr. Prats employment with the Company terminates for any reason other than death, disability or retirement (on or after reaching age 65), except that Mr. Prats may exercise the Option with respect to any Option Shares for which the Option is then exercisable for a period of 30 days following such termination of employment. The Option is not transferable by Mr. Prats (except to his estate pursuant to the laws of descent and distribution). Item 7. Materials to be Filed as Exhibits. Copy of Stock Option Agreement (Exhibit 1). SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, the undersigned certify that the information set forth in this statement is true, complete and correct. DATED: May 31, 2001. By: /s/ Ramon Prats ------------------------------------- Ramon Prats EX-99.1 2 g69261ex99-1.txt STOCK OPTION AGREEMENT 1 EXHIBIT 1 STOCK OPTION AGREEMENT dated as of May 8, 1998, by and between VICTOR J. GALAN ("Galan") and RAMON PRATS ("Prats"). WHEREAS, Galan is the principal shareholder of R&G FINANCIAL CORPORATION, a Puerto Rico corporation (the "Company") and has determined that it would be to his advantage and best interests as shareholder of the Company to grant the Option provided for herein to Prats as an inducement for him to remain in the service of the Company and as an incentive for his increased efforts during such service; NOW, THEREFORE, in consideration of the mutual covenants herein contained the parties hereto do hereby agree as follows: ARTICLE I Definitions Whenever the following terms are used in this Agreement they shall have the meaning specified below unless the context clearly indicates the contrary. "Applicable Shares" shall have the meaning set forth in Section 3.3(b). "Change of Control" shall be deemed to have occurred on any date following the date of this Agreement on which any Person, other than Galan or any entity the sole beneficial owner of which is Galan, becomes the "beneficial owner" (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities, whether this has occurred by stock purchase, merger, or otherwise. "Class A Common Stock" means the Class A Common Stock, $.01 par value, of the Company. "Class B Common Stock" means the Class B Common Stock, $.01 par value, of the Company. "Common Stock" means the Class A Common Stock and the Class B Common Stock. "Company" means R&G Financial Corporation, a Puerto Rico corporation, and, except to the extent Galan exercises his rights under Section 2.4(b), the surviving entity in any merger on consolidation involving the Company. "Disabled" and "Disability" mean the inability of Prats to perform his duties and responsibilities to the Company by reason of a physical or mental disability or infirmity (i) for a continuous period of twelve (12) months or 2 (ii) at such earlier time as Prats or his legal representative submits satisfactory medical evidence that he has a physical or mental disability or infirmity which will likely prevent him from returning to the performance of his work duties for twelve months or longer. The date of such disability shall be on the last day of such twelve-month period or the day on which Prats submits such satisfactory medical evidence, as the case may be. "Employee" means, with respect to Prats, his employment by the Company or any of its subsidiaries as a director, officer or employee. "Estate" means, with respect to Prats, the respective executors, administrators, testamentary trustees, heirs, legatees or beneficiaries of Prats to whom the rights granted by Prats herein shall inure upon Prats' death, by will or the laws of descent and distribution. "Exercise Price" shall have the meaning set forth in Section 2.2. "Expiration Date" shall have the meaning set forth in Section 3.3(b). "Galan Stock Disposition" shall have the meaning set forth in Section 3.1(a)(ii). "Option" means the option to purchase the Option Shares as provided in this Agreement. "Option Date" means the date of grant of the Option. "Option Shares" means the 180,000 Shares (such number subject to the adjustments provided for in Section 2.4, "Adjustments in Option") to be sold by Galan to Prats pursuant to the exercise of the Option. "Person" means any individual, corporation, partnership, trust, unincorporated organization or government or political department or agency thereof or other entity. "Put Price" shall have the meaning set forth in Section 2.1(b). "Reorganization" shall have the meaning set forth in Section 2.4(b). "Retirement" means, with respect to Prats, Prats's retirement as an Employee of the Company (or any of its subsidiaries) on or after reaching age 65. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, and all rules and regulations promulgated thereunder. 3 "Shares" means shares of Class B Common Stock. "Vested Shares" shall have the meaning set forth in Section 3.1(a)(ii). ARTICLE II Grant of Option Section 2.1 Grant of Option. (a) In consideration of Prats's services to the Company and the benefit that Galan will derive as a shareholder of the Company from those services, on the date hereof, Galan hereby grants to Prats the Option to purchase up to 180,000 Shares (such number subject to adjustment as provided in Section 2.4, and as so modified, the "Option Shares") from Galan upon the terms and conditions set forth in this Agreement and Galan agrees that upon exercise of any part of the Option that may become exercisable as provided herein, Galan shall convert at his sole expense a number of Shares of Class A Common Stock owned by him into Shares as is necessary for Galan to perform his obligations hereunder. The rights granted to Prats hereunder shall inure to the benefit of, and may be exercised by, the Estate in accordance with the provisions of this Agreement. (b) In the event that any part or all of the Option granted under this Agreement shall have become exercisable pursuant and subject to Section 3.1(a)(ii) as a result of a Galan Stock Disposition: (i) Prats or his Estate, as the case may be, shall have the right, in lieu of exercising such portion of the Option as may be then exercisable, to elect by notice to Galan to require Galan to purchase from Prats some or all of the portion of the Option that became exercisable as a result of such sale or transfer by Galan, at a price (the "Put Price(1)") equal to: (A) the product of (x) the number of Option Shares with respect to which the Option is being sold to Galan times (y) the remainder of (i) the price per share at which Galan sold or disposed of his Common Stock, minus (ii) the Exercise Price, less (B) the pro-rata portion of the costs incurred by Galan in connection with such sale or transfer; and (ii) in the case of a sale for value to a non-affiliate of Galan of all of Galan's shares, Galan shall have the right to purchase from Prats the Option, with respect to all Option Shares, at a price equal to the Put Price. 4 Section 2.2 Exercise Price. The purchase price of the Shares covered by the Option shall be $8.06 per Share, without commission or other charge. Such purchase price, as it may be adjusted from time to time as provided in Section 2.4, is referred to herein as the "Exercise Price". Section 2.3 Consideration to Galan. In consideration of the granting of this Option by Galan, Prats agrees to render faithful and efficient service to the Company with such duties and responsibilities as the Company shall from time to time prescribe. Section 2.4 Adjustments in Option. The number of Option Shares and the Exercise Price are subject to the following adjustments in the event of specified changes in the capital structure of the Company before the Expiration Date (as hereinafter defined): (a) In the event of any stock split, extraordinary dividend, combination, exchange, reclassification, distribution of a dividend payable in stock, or the like, the number of Option Shares and the Exercise Price shall be adjusted proportionally by Galan in good faith. (b) In the event of a reorganization, recapitalization, merger, consolidation or liquidation of the Company (each such event, a "Reorganization"), Galan shall have the right to provide that the Option shall (i) be canceled in exchange for payment of securities or property, or any combination thereof, with a value per Option Share determined in good faith by Galan to be equal to the remainder of (1) the value that Galan received in respect of each Option Share as a result of the Reorganization, minus (2) the Exercise Price or (ii) be converted into options to receive securities, property or any combination thereof, with a value determined in good faith by Galan to be equal to the value that Galan received in respect of the Option Shares, at such exercise price as Galan in his discretion may deem appropriate in good faith. ARTICLE III Period of Exercisability Section 3.1 Commencement of Exercisability. (a) The Option granted - --------------- (1) Schedule A sets forth an example of the method described in Section 2.1(b) for calculating the Put Price in a hypothetical situation involving a Galan Stock Disposition, and is incorporated by reference hereto for illustration purposes only. 5 under this Agreement shall become exercisable as follows: (i) in full with respect to all of the Option Shares upon the occurrence of (1) a Change of Control or (2) the death, Disability or Retirement of Prats; (ii) upon the occurrence of any other sale or other disposition of Common Stock of the Company by Galan (a "Galan Stock Disposition"), solely with respect to a number of Option Shares equal to the product of (1) the total number of Option Shares covered by the Option at the time of such sale or other disposition multiplied by (2) the quotient of (x) the number of Common Stock sold or disposed of by Galan divided by (y) the total number of Common Stock owned by Galan prior to such sale or other disposition (excluding the Option Shares covered by the Option at the time)(2); (iii) provided that none of the events contemplated in paragraphs (i) and (ii) above shall have occurred, the Option may be exercised with respect to such number of Option Shares as provided below (such number of Shares to be herein referred to as the "Vested Shares"): (A) beginning on the first anniversary date of the date of execution of this Agreement, the Option may be exercised to a maximum of one-sixth (1/6th) of the total number of Option Shares; (B) beginning on the second anniversary date of the date of execution of this Agreement, the Option may be exercised to a maximum of one-third (1/3rd) of the total number of Option Shares; (C) beginning on the third anniversary date of the date of execution of this Agreement, the Option may be exercised to a maximum of one-half (1/2) of the total number of Option Shares; (D) beginning on the fourth anniversary date of the date of execution of this Agreement, the Option may be exercised to a maximum of two-thirds (2/3) of the total number of Option Shares; - --------------- (2) Schedule A sets forth an example of the method described herein for calculating the number of Option Shares that may be acquired by Prats pursuant to Section 3.1(a)(ii) in the event of a hypothetical Galan Stock Disposition, and is incorporated by reference hereto for illustration purposes only. 6 (E) beginning on the fifth anniversary date of the date of execution of this Agreement, the Option may be exercised to a maximum of five-sixths (5/6ths) of the total number of Option Shares; (F) beginning on the sixth anniversary date of the date of execution of this Agreement, the Option may be exercised to all of the total number of Option Shares; provided, however, that, notwithstanding anything herein to the contrary, in the event of (I) a Change of Control, all of the Option Shares shall become Vested Shares and the Option may be exercised in full with respect to all of the Option Shares, and in the event of (II) a Galan Stock Disposition, then the appropriate number of Option Shares, as determined pursuant to clause (ii) of this paragraph (a) (which shall include, first, any Vested Shares, and if the number of Vested Shares is not sufficient to accommodate the number of Option Shares that may be acquired in the event of a Galan Stock Disposition, such additional number of Option Shares as shall be necessary) shall become Vested Shares and the Option may be exercised solely with respect to such number of the Option Shares; provided, further, that Prats agrees that, at Galan's discretion and as notified by Galan to Prats in writing, the Option shall not be exercisable with respect to any Option Shares not then acquired by Prats and such remaining Option Shares shall become subject to the condition that Prats remain and continue as an Employee for a minimum period of up to two years from the date of such Change of Control or Galan Stock Disposition, and the Option shall then become exercisable in full with respect to the remaining Option Shares upon the lapse of said two-year period if Prats shall have remained as an Employee throughout said period. (b) Notwithstanding anything contained herein to the contrary, the Option shall not be exercisable, no issuance or transfer of Option Shares may be made to Prats, and any attempt to exercise the Option or to transfer any Option Shares to Prats shall be void and of no effect, unless and until (i) a registration statement under the Securities Act has been duly filed and declared effective pertaining to any or all of the Option Shares, and the Option Shares have been duly qualified under applicable state securities or "blue sky" laws or (ii) Galan, in his sole discretion, determines that such registration or qualification is not required as a result or the availability of an exemption from registration or qualification under such laws. (c) Without limiting the foregoing, if at any time Galan shall determine, in his sole discretion, that the listing, registration or qualification of any or all of the Option Shares under any state, Puerto Rico or 7 United States law or on any securities exchange or the consent or approval of any governmental regulatory body is desirable as a condition of, or in connection with, delivery or purchase of Option Shares, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to Galan. (d) Anything to the contrary in this Agreement notwithstanding, no Shares shall be delivered upon the exercise of an Option or otherwise transferred, if Galan, in his sole discretion, shall deem it necessary or advisable to delay such delivery in order to ensure compliance with applicable United States, Puerto Rico and state securities laws. Section 3.2 Duration of Exercisability. The Option, once it becomes exercisable pursuant to Section 3.1(a), shall remain exercisable until it becomes unexercisable under Section 3.3 hereof. In addition, if any portion or all of the Option is canceled according to this Agreement, then such portion or all of the Option shall not be exercisable. Section 3.3 Expiration of Option. (a) Except as otherwise provided in this Section, in the event that Prats's employment with the Company terminates for any reason other than death, Disability or Retirement, (i) if and to the extent that the Option is already exercisable with respect to any or all of the Option Shares at the time of such termination pursuant to Section 3.1(a), then the Option may be exercised within 30 days after such termination and shall expire and cease to be exercisable after such 30-day period; provided, however, that in the event of the death of Prats within such 30-day period, the Option may be exercised by the Estate at any time within 180 days after Prats's death and shall expire and cease to be exercisable after such 180-day period; and (ii) to the extent that the Option is not exercisable at the time of such termination, then the Option shall expire at the time of such termination. (b) In the event that the Option becomes exercisable solely pursuant to clauses (i) and (ii) of Section 3.1(a) with respect to any or all of the Option Shares (the "Applicable Shares"), it may be exercised at any time and from time to time with respect to some or all of such Applicable Shares until 5:00 p.m. San Juan time on the first anniversary (the "Expiration Date") of the event that makes the Option exercisable, at which time the Option shall expire and cease to be exercisable with respect to such Applicable Shares; provided, however, that in the case of the Vested Shares (with respect to which the Option becomes exercisable pursuant to the lapse of time in accordance with Section 3.1(a)(iii)), the Option shall expire with respect to any Vested Shares with respect to which Prats shall not have exercised the Option on the earlier of (i) the first anniversary of the occurrence of an Expiration Date as provided above, or (ii) in accordance with paragraph (a) of this Section 3.3. 8 Section 3.4 Non-transferability of Option. The Option or any portion thereof shall not be transferable (by operation of law or otherwise) by Prats (or his Estate) except pursuant to a transfer upon the death of Prats to his Estate by will or the laws of descent and distribution. ARTICLE IV Exercise of Options Section 4.1 Manner of Exercise. The Option, or any exercisable portion thereof, may be exercised by Prats or, upon his death, his Estate solely by delivery to Galan of the following (prior to the time when the Option or such portion becomes unexercisable under Section 3.3 hereof): (a) notice substantially in the form of Exhibit I signed by Prats or his legal representative or the representative of his Estate, stating that the Option or a portion thereof is thereby exercised; (b) full payment in cash or by certified check for the Option Shares with respect to which such Option or portion thereof is exercised; and (c) in the event the Option or a portion thereof shall be exercised by Prats' legal representative or the representative of the Estate of Prats, upon his death, evidence satisfactory to Galan of the right of the representative of the Estate to exercise the Option. Section 4.2 Conditions to Issuance of Stock Certificates. The Shares deliverable upon the exercise of the Option shall be fully paid and non-assessable. Galan shall not be required to endorse or convey any certificate or certificates for Shares purchased upon the exercise of the Option or a portion thereof until 7 business days following fulfillment of all the following conditions: (a) (i) the completion of any registration or other qualification of such Shares under any United States, Puerto Rico or state securities laws or under rulings or regulations of the SEC or of any other governmental regulatory body or (ii) the completion of any acts (including, without limitation, the placement of legends of the face of any stock certificate representing the Shares) to meet any requirements for an exemption from registration or qualification of the Shares under any United States, Puerto Rico or state law, which Galan shall, in his absolute discretion, deem necessary or advisable; and (b) the obtaining of any approval or other clearance from any United States, Puerto Rico or state governmental agency or stock exchanges which the Board of Directors of the Company shall, in its absolute discretion, determine to be necessary or advisable. 9 ARTICLE V Other Provisions Section 5.1 Applicable Law. The laws of the Commonwealth of Puerto Rico shall govern the interpretation, validity and performance of the terms of this Agreement, without regard to its principles of conflicts of law. Section 5.2 Severability. The invalidity, illegality or unenforceability of one or more of the provisions of this Agreement in any jurisdiction shall not affect the validity, legality or enforceability of the remainder of this Agreement in such jurisdiction or the validity, legality or enforceability of this Agreement, including any such provision, in any other jurisdiction, it being intended that all rights and obligations of the parties hereunder shall be enforceable to the fullest extent permitted by law. Section 5.3 Headings. The headings and captions contained herein are for convenience of reference only and shall not control or affect the meaning or construction of any provision hereof. Section 5.4 Notices. All notices and other communications provided for herein shall be dated and in writing and shall be deemed to have been duly given when delivered, if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid and when received if delivered otherwise, to the party to whom it is directed as follows: If to Galan at: R&G Plaza 280 Jesus T. Pinero Avenue Hato Rey, Puerto Rico 00918 If to Prats at: R&G Plaza 280 Jesus T. Pinero Avenue Hato Rey, Puerto Rico 00918 Prats or Galan may change the address to which notices, statements, instructions or other documents are to be sent to such party by written notice to the other party in accordance herewith. Any notice which is required to be given to Prats's Estate shall be given to the executor, administrator, or other representative of Prats's Estate if such representative has previously informed Galan of his status and address by written notice in accordance herewith. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. /s/ VICTOR J. GALAN ---------------------------------------- VICTOR J. GALAN /s/ RAMON PRATS ---------------------------------------- RAMON PRATS EXHIBIT I FORM OF NOTICE OF EXERCISE Mr. Victor J. Galan R&G Plaza 280 Jesus Pinero Avenue Hato Rey, Puerto Rico 00918 Dear Victor: Reference is hereby made to Section 4.1(a) of that certain Stock Option Agreement (the "Stock Option Agreement") dated as of ___________ __, 1997 between you and Ramon Prats. All capitalized terms not defined herein shall have the meanings set forth next to those terms in the Stock Option Agreement. The option to purchase ________ Option Shares pursuant to and according to the terms of the Stock Option Agreement is hereby exercised. Enclosed please find payment [in cash][by certified check] for the full amount of the aforementioned Option Shares. [In the event the option is exercised by a person other than Prats add: In addition, enclosed is evidence of my right to exercise the Option on behalf of [Prats][the Estate].] Sincerely yours, ---------------------------------------- 11 SCHEDULE A to Stock Option Agreement by and between Victor J. Galan and Ramon Prats dated as of May 8, 1998 1. Calculation of number of Option Shares under Section 3.1(a)(ii): The following example of the calculation of the number of Option Shares which may be acquired by Prats in the event of a Galan Stock Disposition, pursuant to Section 3.1(a)(ii) of the Stock Option Agreement, is intended for illustration purposes only: Relevant assumptions: Let A = number of Option Shares covered by the Option at the time: 180,000 Let B = number of shares sold or disposed of by Galan in the Galan Stock Disposition: 2,350,070 (or 25% of total)) Let C = total number of Common Stock owned by Galan prior to the Galan Stock Disposition: 9,220,278 The formula for determining the number of Option Shares with respect to which the Option shall become exercisable (or OS) is the following: OS = A x B / [C - A] Thus, in the foregoing example, OS = 180,000 x 2,350,070 / [9,220,278 - 180,000] OS = 180,000 x 2,350,070 / 9,040,278 OS = 46,791 12 SCHEDULE A (continued) 2. Determination of Put Price under Section 2.1(b): The following example of the calculation of the Put Price at which Prats may sell the 46,791 Option Shares to Galan in the event of a Galan Stock Disposition, pursuant to Section 2.1(b) of the Stock Option Agreement, is intended for illustration purposes only: Relevant assumptions: Same as above; and further assume the following: Let E = the Exercise Price: $8.06 Let S = the price per share at which Galan sold his Shares: $25 Let X = the total expenses incurred by Galan in connection with the Galan Stock Disposition: $50,000; therefore, the pro rata share attributable to Prats (or "XP") would be equal to $50,000 times 46,791 divided by 2,350,070, equal to $995.52. The formula for determining the Put Price is the following: Put Price = [OS x (S - E)] - XP Thus, in the foregoing example: Put Price = [46,791 x ($25- $8.06)] - $995.52 Put Price = $792,639.54 - $995.52 = $ 791,644.02 - ------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----