Bank of Montreal 2004 Annual Report Download - page 113

BMO Financial Group Annual Report 2004 109
Notes
We participated in a normal course issuer bid during the period
from August 8, 2003 to August 6, 2004, under which we were able
to repurchase up to 15,000,000 common shares, approximately 3%
of our then outstanding common shares.
During the year ended October 31, 2004, we repurchased
6,220,500 shares at an average cost of $53.63 per share, totalling
$333 million. During the year ended October 31, 2003, we repur-
chased 282,800 shares at an average cost of $43.95 per share,
totalling $12 million.
Issuances Exchangeable into Common Shares
One of our subsidiaries, Bank of Montreal Securities Canada
Limited (“BMSCL”), has issued various classes of non-voting
shares that can be exchanged at the option of the holder for our
common shares, based on a formula. If all of these BMSCL shares
had been converted into our common shares, up to 646,383,
771,212 and 1,119,751 of our common shares would have been
needed to complete the exchange as at October 31, 2004, 2003
and 2002, respectively.
Share Redemption and Dividend Restrictions
The Superintendent of Financial Institutions Canada must approve
any plan to redeem any of our preferred share issues for cash.
We are prohibited from declaring dividends on our preferred
or common shares when we would be, as a result of paying such
a dividend, in contravention of the capital adequacy, liquidity
or any other regulatory directives issued under the Bank Act.
In addition, common share dividends cannot be paid unless all
dividends declared and payable on our preferred shares have
been paid or sufficient funds have been set aside to do so.
In addition, we have agreed that if BMO Capital Trust, one of
our subsidiaries, fails to pay any required distribution on its capital
trust securities, we will not declare dividends of any kind on any
of our preferred or common shares.
Shareholder Dividend Reinvestment and Share Purchase Plan
We offer a dividend reinvestment and share purchase plan for our
shareholders. Participation in the plan is optional. Under the terms
of the plan, cash dividends on common shares are reinvested to
purchase additional common shares. Shareholders also have the
opportunity to make optional cash payments to acquire additional
common shares. The common shares may be issued by the
Bank at an average of the closing prices of the Bank’s common
shares on the Toronto Stock Exchange based on the last five
trading days prior to the last business day of the month or purchased
on the open market at market price. During the year, a total of
1,120,931 common shares (1,101,305 in 2003) were issued by the
Bank under the plan.
Potential Share Issuances
As at October 31, 2004, we had reserved 5,905,088 common shares
for potential issuance in respect of our Shareholder Dividend
Reinvestment and Share Purchase Plan and 5,366,230 common
shares in respect of the exchange of certain shares of BMSCL.
We also have reserved 34,906,751 common shares for the potential
exercise of stock options, as further described in Note 19.
Future Change in Accounting Policy
On November 1, 2004, we will adopt new accounting requirements
on the classification of financial instruments as liabilities or equity.
The new rules require that our preferred shares and capital trust
securities that are ultimately convertible into a variable number of
our common shares at the holders’ option be classified as liabilities.
Under the new rules, $1,150 million of our capital trust securities
currently recorded as non-controlling interest in subsidiaries will
be classified as debt on our Consolidated Balance Sheet. The return
paid to capital trust securities holders will be recorded as interest
expense rather than as non-controlling interest in subsidiaries.
Under the new rules, we will also reclassify our Class B Preferred
shares Series 4 and 6, in the amount of $450 million, to debt.
As a result, dividends on these shares will be recorded as
interest expense.
The adoption of these new rules is expected to increase interest
expense by approximately $100 million, decrease non-controlling
interest in subsidiaries by approximately $40 million, decrease
income taxes by approximately $35 million and decrease net income
by approximately $25 million. This change will not have any
impact on earnings per share or net income available to common
shareholders since preferred share dividends are deducted from
net income in determining these measures.
When we adopt the new rules, we will restate our consoli-
dated financial statements to reflect the change in prior years.
The impact of restating prior periods will be an increase in
interest expense of $128 million, $122 million and $122 million,
a decrease in non-controlling interest in subsidiaries of
$41 million, $41 million and $41 million, a decrease in income
taxes of $37 million, $37 million and $37 million, and a decrease
in net income of $50 million, $44 million and $44 million for
the years ended October 31, 2004, 2003 and 2002, respectively.
Stock Option Plan
We maintain a Stock Option Plan for designated officers and
employees. The options granted under the plan from 1995 to 1999
all vest five fiscal years from November 1 of the year in which
the options were granted to the officer or employee, if we have
met certain performance targets. The options granted since 1999
vest 25% per year over a four-year period starting from their grant
date. A portion of the options granted since 1999 can only be
exercised once certain performance targets are met. All options
expire 10 years from the date they are granted.
The following table summarizes information about our Stock Option Plan:
(Canadian $, except as noted) 2004 2003 2002
Number Weighted- Number Weighted- Number Weighted-
of stock average of stock average of stock average
options exercise price options exercise price options exercise price
Outstanding at beginning of year 35,212,440 $ 31.89 38,374,627 $ 30.21 32,997,743 $ 28.31
Granted 1,645,900 53.93 2,244,800 40.90 7,485,500 35.70
Exercised 6,239,301 27.77 5,325,916 23.45 1,923,115 18.87
Forfeited/cancelled 176,979 35.22 81,071 34.00 185,501 31.63
Outstanding at end of year 30,442,060 33.87 35,212,440 31.89 38,374,627 30.21
Exercisable at end of year 21,102,433 30.94 13,337,147 28.29 11,955,097 23.95
Available for grant 4,611,691 6,080,612 3,097,341
Outstanding stock options as a % of outstanding shares 6.08% 7.05% 7.79%
No stock options expired during the years ended October 31, 2004, 2003 and 2002.
Note 19 Employee Compensation – Stock-Based Compensation