<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[ ] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Caterpillar Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
Notes:
<PAGE>
[LOGO OF] CATERPILLAR /R/
100 NE Adams Street
Peoria, Illinois 61629
Notice of Annual Meeting of Stockholders
Wednesday, April 14, 1999
10:30 a.m., Eastern Standard Time
Graylyn International Conference Center
of Wake Forest University
Winston-Salem, North Carolina
February 26, 1999
Fellow stockholder:
On behalf of the Board of Directors, you are cordially invited to attend the
1999 Caterpillar Inc. Annual Meeting of Stockholders to:
. elect directors;
. approve appointment of independent auditors for 1999;
. act on stockholder proposals presented; and
. conduct other business properly brought before the meeting.
You must have an admission ticket to attend, and procedures for requesting that
ticket are detailed on page 26 of this proxy statement. Attendance and voting is
limited to stockholders of record at the close of business on February 16, 1999.
I look forward to seeing you at the meeting.
Sincerely yours,
/s/ Glen A. Barton
Glen A. Barton
Chairman
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Notice of Annual Meeting..........................................Cover
Attendance and Voting Matters........................................ 1
The Caterpillar Board of Directors................................... 2
X Proposal 1 -- Election of Directors............................. 3
Caterpillar Stock Beneficially Owned by Officers and Directors....... 7
Persons Owning More than Five Percent of Caterpillar Stock........... 8
Performance Graph.................................................... 8
Report of the Compensation Committee on Executive Compensation....... 9
Executive Compensation Tables........................................16
X Proposal 2 -- Appointment of Auditors...........................19
X Proposal 3 -- Stockholder Proposal Regarding Country
Selection Guidelines..............................19
Caterpillar Response..............................21
X Proposal 4 -- Stockholder Proposal to Declassify Board..........22
Caterpillar Response..............................23
Other Matters........................................................24
Admission Ticket Request Procedure...................................26
Appendix -- General and Financial Information -- 1998...............A-1
</TABLE>
i
<PAGE>
Attendance and Voting Matters
Admission Ticket Required
Anyone wishing to attend the Annual Meeting must have an admission ticket issued
in their name. Admission is limited to stockholders of record on the record date
and one guest, or a stockholder's authorized proxy holder. The requirements for
obtaining an admission ticket are specified in the "Admission Ticket Request
Procedure" located on page 26. Share ownership through our Employee Investment
Plan is not record ownership, as the Plan Trustee is the owner of record for all
Plan shares.
Voting Matters
Record Date Information
Each share of Caterpillar stock you own as of February 16, 1999 entitles you to
one vote. On February 16, 1999, there were 356,261,190 shares of Caterpillar
common stock outstanding.
Voting by Telephone or Internet
This year, Caterpillar is offering shareholders the opportunity to vote by phone
or via the internet. Instructions for shareholders interested in using either of
these methods to vote are set forth on the enclosed proxy card or voting
instruction form.
If you vote by phone or via the internet, please have your social security
number and proxy or voting instruction card available. The sequence of numbers
appearing on your card and your social security number are necessary to verify
your vote. A phone or internet vote authorizes the named proxies in the same
manner as if you marked, signed and returned the card by mail. Voting by phone
and via the internet are valid proxy voting methods under Delaware law and
Caterpillar bylaws.
Giving your Proxy to Someone Other than Individuals Designated on the Card
If you want to give your written proxy to someone other than individuals named
on the proxy card:
. cross out individuals named and insert the name of the individual you
are authorizing to vote; or
. provide a written authorization to the individual you are authorizing to
vote along with your proxy card.
To obtain an admission ticket for your authorized proxy representative, see the
requirements specified in the "Admission Ticket Request Procedure" on page 26.
1
<PAGE>
Quorum
A quorum of stockholders is necessary to hold a valid meeting. If at least one-
third of Caterpillar stockholders are present in person or by proxy, a quorum
will exist. Abstentions and broker non-votes are counted as present for
establishing a quorum. A broker non-vote occurs when a broker votes on some
matters on the proxy card but not on others, because he does not have the
authority to do so.
Vote Necessary for Action
Directors are elected by a plurality vote of shares present at the meeting,
meaning that the director nominee with the most affirmative votes for a
particular slot is elected for that slot. In an uncontested election for
directors, the plurality requirement is not a factor.
Other action is by an affirmative vote of the majority of shares present at the
meeting. Abstentions and broker non-votes have the effect of a vote "AGAINST"
matters other than director elections.
Votes submitted by mail, telephone or internet, will be voted by the individuals
named on the card in the manner you indicate. If you do not specify how you want
your shares voted, they will be voted in accordance with management's
recommendations. You may change your vote by voting in person at the Annual
Meeting or by submitting another proxy that is dated later.
The Caterpillar Board of Directors
Structure
Our Board of Directors is divided into three classes for purposes of election.
One class is elected at each annual meeting of stockholders to serve for a
three-year term.
Directors elected at the 1999 Annual Meeting of Stockholders will hold office
for a three-year term expiring in 2002. Other directors are not up for election
this year and will continue in office for the remainder of their terms.
If a nominee is unavailable for election, proxy holders will vote for another
nominee proposed by the Board or, as an alternative, the Board may reduce the
number of directors to be elected at the meeting.
2
<PAGE>
X PROPOSAL 1 -- Election of Directors
Directors Up For Election This Year for Terms Expiring in 2002
. W. FRANK BLOUNT, 60, Director and Chief Executive Officer of Telstra
Corporation Limited (telecommunications) since 1992. Other directorships:
Entergy Corporation and First Union National Bank of Georgia. Mr. Blount
has been a director of the Company since 1995.
. JOHN R. BRAZIL, 52, President of Bradley University (Peoria, IL) since
1992. Other directorships: Cilcorp Inc. Dr. Brazil has been a director of
the Company since 1998.
. JAMES P. GORTER, 69, Chairman of the Board of Baker, Fentress & Company
(mutual fund) since 1987 and Limited Partner of Goldman, Sachs & Co.
(investment bankers) since 1988. Other directorships: Consolidated-Tomoka
Land Co. Mr. Gorter has been a director of the Company since 1990.
. PETER A. MAGOWAN, 56, Chairman and Chief Executive Officer of Safeway
Inc. (leading food retailer) from 1980 until 1993 and Chairman until 1998.
Mr. Magowan is also President and Managing General Partner of the San
Francisco Giants (Major League baseball team). Other directorships:
DaimlerChrysler AG and Safeway Inc. Mr. Magowan has been a director of the
Company since 1993.
. CLAYTON K. YEUTTER, 68, Of Counsel to Hogan & Hartson (a Washington,
D.C. law firm) since 1993. Other directorships: Allied Zurich Plc;
ConAgra, Inc.; FMC Corporation; Farmers Group Inc.; Oppenheimer Funds;
Texas Instruments Incorporated; and Zurich Allied AG. Mr. Yeutter has been
a director of the Company since 1991.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES PRESENTED IN
PROPOSAL 1.
Directors Remaining in Office Until 2001
. JOHN T. DILLON, 60, Chairman and Chief Executive Officer of
International Paper (paper and forest products) since 1996. Prior to his
current position, Mr. Dillon was President and Chief Operation Officer
from 1995 to 1996 and Executive Vice President - Packaging from 1987 to
1995. Mr. Dillon has been a director of the Company since 1997.
. JUAN GALLARDO, 51, Chairman and Chief Executive Officer of Grupo
Embotelladoras Unidas S.A. de C.V. (bottling) since 1986; Chairman and
Chief Executive Officer of Grupo Azucarero Mexico, S.A. de C.V. (sugar
mills) since 1990; and Vice Chairman of Home Mart de Mexico, S.A. de C.V.
(retail trade) since 1993. Other Directorships: Nacional de Drogas; Bufete
Industrial, S.A. de C.V.; Grupo Industrial Minera Mexico, S.A. de C.V.;
and Mexico Fund Inc. Mr. Gallardo has been a director of the Company since
1998.
3
<PAGE>
. GORDON R. PARKER, 63, retired in 1994 as Chairman of Newmont Mining
Corporation (production, worldwide exploration for, and acquisition of
gold properties). Other directorships: Gold Fields Limited; Gold Fields of
South Africa Ltd.; Phelps Dodge Corporation; and The Williams Companies,
Inc. Mr. Parker has been a director of the Company since 1995.
. GEORGE A. SCHAEFER, 70, retired in 1990 as Chairman and Chief Executive
Officer of Caterpillar Inc. Other directorships: Aon Corporation and
Helmerich & Payne, Inc. Mr. Schaefer has been a director of the Company
since 1983.
Directors Remaining in Office Until 2000
. LILYAN H. AFFINITO, 67, retired in 1991 as Vice Chairman of Maxxam Group
Inc. (forest products operations). Other directorships: Jostens Inc.;
KeySpan Energy Corporation; and Kmart Corporation. Ms. Affinito has been a
director of the Company since 1980.
. GLEN A. BARTON, 59, Chairman and Chief Executive Officer of Caterpillar
Inc. since February 1, 1999. Prior to his current position, Mr. Barton was
Vice Chairman from November 1, 1998 to February 1, 1999 and Group
President from 1990 to November 1, 1998. Other directorships: Inco Ltd.
Mr. Barton has been a director of the Company since 1998.
. DONALD V. FITES, 65, retired effective February 1, 1999 as Chairman and
Chief Executive Officer of Caterpillar Inc. Other directorships: AT&T
Corporation; Georgia-Pacific Corporation; and Mobil Corporation. Mr. Fites
has been a director of the Company since 1986.
. DAVID R. GOODE, 58, Chairman, President, and Chief Executive Officer of
Norfolk Southern Corporation (holding company engaged principally in
surface transportation) since 1992. Other directorships: Aeroquip-Vickers,
Inc.; Georgia-Pacific Corporation; and Texas Instruments Incorporated. Mr.
Goode has been a director of the Company since 1993.
. JOSHUA I. SMITH, 57, Chairman and Chief Executive Officer of The MAXIMA
Corporation (computer systems and management information products and
services) since 1978. Other directorships: Federal Express Corporation;
Inland Steel Corporation; and The Allstate Corporation. Mr. Smith has been
a director of the Company since 1993.
4
<PAGE>
Board Meetings and Committees
In 1998, our full Board met six times. In addition to those meetings, directors
attended meetings of individual Board committees and non-employee directors met
twice in executive session. For our incumbent Board as a whole, attendance in
1998 at full Board and committee meetings was 94.9%.
Our Board has four standing committees.
The Audit Committee reviews management's independent accountant selection and
makes recommendations to the Board based on that review. The Committee also
questions management, including Caterpillar's internal audit staff and
independent accountants on the application of accounting and reporting standards
to Caterpillar. Present members of the Committee are Frank Blount, John Brazil,
Juan Gallardo, David Goode (chairman), James Gorter, Gordon Parker, and George
Schaefer. The Committee held three meetings during 1998.
The Compensation Committee reviews Caterpillar's compensation practices and
approves its compensation programs and plans. Present members of the Committee
are Lilyan Affinito, John Dillon, David Goode, James Gorter (chairman), Peter
Magowan, and Clayton Yeutter. The Committee held four meetings during 1998.
The Nominating Committee recommends candidates to fill Board vacancies and for
the slate to be proposed by the Board at the Annual Meeting of Stockholders. The
Nominating Committee also advises the Board on nominees for Chairman of the
Board, Chief Executive Officer, and other executive officer positions at
Caterpillar. The Committee considers director nominees from stockholders for
election at the annual stockholders' meeting if a written nomination is received
by Caterpillar's Corporate Secretary not later than 90 days in advance of the
meeting (nomination procedures are discussed in greater detail in our bylaws
which will be provided upon written request). Present members of the Committee
are Frank Blount, John Brazil, Donald Fites, Juan Gallardo, Gordon Parker,
George Schaefer, and Joshua Smith (chairman). The Committee held four meetings
during 1998.
The Public Policy Committee makes recommendations to the Board on public and
social policy issues impacting Caterpillar. The Committee also oversees
Caterpillar's compliance programs and reviews major litigation, legislation and
stockholder matters not within the responsibilities of another Board committee.
Present members of the Committee are Lilyan Affinito, John Dillon, Donald Fites,
Peter Magowan, Joshua Smith, and Clayton Yeutter (chairman). The Committee held
three meetings during 1998.
5
<PAGE>
Director Compensation
Of our current Board members, only Mr. Barton is a salaried employee of
Caterpillar. Board members that are not salaried employees of Caterpillar
receive separate compensation for Board service. That compensation includes:
Annual Retainer: $30,000
Attendance Fees: $1,000 for each Board meeting
$1,000 for each Board Committee meeting
Expenses related to attendance
Committee Chairman Stipend: $5,000 annually
Stock Options: 4,000 shares annually
Restricted Stock: 750 shares annually (400 shares have a
restricted period of three years, while 350
shares are restricted until the director
terminates service)
Under the Directors' Deferred Compensation Plan, directors may defer 50% or more
of their annual compensation in an interest bearing account or an account
representing shares of Caterpillar stock. Under the 1996 Stock Option and Long-
Term Incentive Plan, non-employee directors may also elect to receive all or a
portion of their annual retainer fees, attendance fees, or stipends in shares of
Caterpillar stock.
Our directors also participate in a Charitable Award Program. Beginning in the
year of a director's death, an amount is paid proportionately in 10 annual
installments to charities selected by the director and to the Caterpillar
Charitable Foundation. The maximum amount payable under the program is $1
million on behalf of each eligible director and is based on the director's
length of service. The program is financed through the purchase of life
insurance policies, and directors derive no financial benefit from the program.
Legal Proceedings
Joshua I. Smith is Chairman and Chief Executive Officer of The MAXIMA
Corporation. On June 26, 1998, that corporation filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States
District Court for the Southern District of Maryland.
6
<PAGE>
Caterpillar Stock Beneficially Owned by Officers and Directors
(As of December 31, 1998)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Affinito...........41,092/1/ Magowan...................................................25,204/9/
Barton............203,775/2/ Owens....................................................188,832/10/
Blount..............7,600/3/ Parker....................................................13,302/11/
Brazil................200 Schaefer..................................................76,110/12/
Dillon..............3,083/4/ Shaheen...................................................79,345/13/
Fites.............922,751/5/ Smith..................................................... 7,402/14/
Flaherty..........299,716/6/ Thompson..................................................75,845/15/
Gallardo...........11,453 Yeutter...................................................24,202/16/
Goode..............17,302/7/ All directors and executive officers as a group........4,206,915/17/
Gorter.............41,452/8/
</TABLE>
- -------------------------------------------------------------------------------
/1/Includes 28,000 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to the Directors' Deferred Compensation Plan representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 7,995 shares of Common Stock.
/2/Includes 137,510 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to supplemental employees' investment plans representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 4,136 shares of Common Stock.
/3/Includes 4,000 shares subject to stock options exercisable within 60 days.
/4/Includes 1,333 shares subject to stock options exercisable within 60 days.
/5/Includes 754,645 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to supplemental employees' investment plans representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 11,653 shares of Common Stock.
/6/Includes 201,200 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to supplemental employees' investment plans representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 6,245 shares of Common Stock.
/7/Includes 12,000 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to the Directors' Deferred Compensation Plan representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 5,173 shares of Common Stock.
/8/Includes 28,000 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to the Directors' Deferred Compensation Plan representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 4,679 shares of Common Stock.
/9/Includes 12,000 shares subject to stock options exercisable within 60 days.
/10/Includes 132,400 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to supplemental employees' investment plans representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 2,693 shares of Common Stock.
/11/Includes 8,000 shares subject to stock options exercisable within 60 days.
/12/Includes 24,000 shares subject to stock options exercisable within 60
days.
/13/Includes 52,188 shares subject to stock options exercisable within 60 days
/14/Includes 4,000 shares subject to stock options exercisable within 60 days.
/15/Includes 16,667 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to supplemental employees' investment plans representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 3,473 shares of Common Stock.
/16/Includes 16,000 shares subject to stock options exercisable within 60 days.
In addition to the shares listed above, a portion of compensation has been
deferred pursuant to the Directors' Deferred Compensation Plan representing
an equivalent value as if such compensation had been invested on December
31, 1998 in 3,669 shares of Common Stock.
/17/Includes 2,813,734 shares subject to stock options exercisable within 60
days. Also includes 34,769 shares for which voting and investment power is
shared. All directors and executive officers as a group beneficially own
less than one percent of outstanding Common Stock.
7
<PAGE>
<TABLE>
<CAPTION>
Persons Owning More than Five Percent of Caterpillar Stock
(As of December 31, 1998)
Voting Dispositive
Authority Authority Total Amount Percent
--------------------------------------------------- of Beneficial of
Name and Address Sole Shared Sole Shared Ownership Class
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Oppenheimer Capital -0- 25,656,242 -0- 25,656,242 25,656,242 7.0%
Oppenheimer Tower
World Financial Center
New York, NY 10281
</TABLE>
Performance Graph
CATERPILLAR INC.
Total Cumulative Shareholder Return for
Five-Year Period Ending December 31, 1998
[Performance Graph Appears Here]
Fiscal Year Ended December 31,
December 31, 1993 1994 1995 1996 1997 1998
- -------------------------------------------------------------------
Caterpillar Inc. 100 124.91 135.83 177.66 233.32 226.03
- -------------------------------------------------------------------
S&P 500 100 101.32 139.37 171.35 228.50 293.79
- -------------------------------------------------------------------
S&P Machinery
(Diversified) 100 97.38 120.18 149.77 198.11 164.88
- -------------------------------------------------------------------
8
<PAGE>
Report of the Compensation Committee
on Executive Compensation
Compensation Policies
The Compensation Committee ("Committee") establishes compensation guidelines and
targets based upon the performance of Caterpillar, business units within
Caterpillar, and individual executive officers. The Committee's goal is to
establish a compensation program that:
. links the interests of management and stockholders;
. links executive compensation with long-term Caterpillar performance; and
. attracts and retains executives of high caliber and ability.
For 1998, that program consisted of base salary, short-term incentive
compensation, stock options, and long-term incentive compensation.
The Committee believes this compensation program was a significant factor
contributing to Caterpillar's success this past year, including a sixth
consecutive year of record sales and revenues and the second best year in
company history for profits.
Special Recognition
We believe the following recognition this past year is a testament to the
effectiveness of our compensation programs.
For the second straight year, Fortune named Caterpillar as one of the "World's
Most Admired Companies" in 1998. This rating was based on overall quality of
management, innovativeness, value as a long-term investment, financial strength,
responsibility to the community and the environment, wise use of corporate
assets, and effectiveness in doing business globally. Fortune described these
companies as at "the forefront of creating the truly multinational corporation -
- - not just a firm that does business in multiple countries, but an enterprise
with a work force and corporate culture that reflect the diversity of the
markets in which they operate."
Solar Turbines Incorporated, a Caterpillar wholly-owned subsidiary, received the
Malcolm Baldrige National Quality Award in the manufacturing category from the
United States Department of Commerce and the National Institute of Standards and
Technology. The award recognizes U.S. companies for their achievements in
quality and business excellence. The Committee believes this award reflects the
superior dedication and commitment of Caterpillar employees around the world.
9
<PAGE>
Base Salary
Executive Officers
Each year the Committee reviews base salaries of individual executive officers
and their salary ranges. In determining adjustments to base salary and salary
ranges for a particular year, the Committee relies on consultant surveys
regarding salaries and other short-term compensation ("total short-term
compensation") at comparable companies. In making salary adjustments, the
Committee also makes subjective determinations regarding the performance of
individual officers.
In setting 1998 base salaries and salary ranges for all executive officers,
including Mr. Fites, the Committee referred to the Hewitt Survey of Core Group I
Companies ("Survey"). The Survey included 25 companies, all of which are in the
S&P 500 Composite Index and none of which are in the S&P Machinery (Diversified)
Index. As a cross-check, the Committee also reviewed survey data from Hay and
Towers Perrin. According to the Survey, total short-term compensation of
Caterpillar executive officers was below market average.
Based on Survey results, the Committee increased the salary ranges for 1998 by
5% for the Group President level and by 5% for the Vice President level. The
Committee also approved increases in the base salary of all executive officers
for 1998 based upon a subjective analysis of each officer's individual
performance. After these adjustments, the total short-term compensation of
executive officers as a group remained below average according to the Survey.
Chief Executive Officer
For 1998 Mr. Fites' base salary was increased to $1.35 million. In determining
his base salary, the Committee used the Survey as a benchmark. With the
increase, Mr. Fites' base salary for 1998 was higher than the average of CEOs
included in the Survey, and his total short-term compensation was slightly
higher than average.
In setting Mr. Fites' 1998 salary, the Committee also evaluated his performance
as an executive in the prior year. Determinative factors included his
contributions to Caterpillar, his home community, and a variety of national and
international business organizations. Some of the significant achievements
considered include:
. Caterpillar reported record profits and sales and revenues in 1997;
. reengineered business processes continued to result in significant
reductions in product development time, necessary physical testing, and
product development costs;
. strategic alliances and acquisitions designed to enhance Caterpillar's
competitive position were pursued and completed; and
. Mr. Fites continued his active participation in initiatives and
organizations designed to benefit not only Caterpillar but also industry
as a whole.
10
<PAGE>
Short-Term Incentive Compensation
Executive Officers
In 1998, executive officers, together with most management and salaried
employees, participated in Caterpillar's Corporate Incentive Compensation Plan
("Corporate Plan"). Payouts under the Corporate Plan for 1998 were based on a
team award incorporating Caterpillar's pre-tax return on assets ("ROA") for the
year and an individual award based on a subjective determination of individual
performance. For 1998, a total of approximately $171.3 million was earned by
about 50,364 Caterpillar employees under corporate and business unit incentive
plans.
For 1998, the team award portion of the payout was calculated by multiplying:
. annual base salary;
. a specific percentage of base salary, which increases for higher
positions within Caterpillar, placing a greater percentage of
compensation at risk for those with greater opportunity to affect
Caterpillar's performance; and
. a performance factor based upon Caterpillar's achievement of specific
levels of ROA.
Before any amount could be awarded under the Corporate Plan for 1998, a minimum
Caterpillar ROA level had to be achieved. Increasing amounts are awarded for
Caterpillar achievement up to a maximum ROA. Minimum, target, and maximum ROA
levels to be achieved for 1998 were increased from 1997. For 1998, the minimum
ROA level under the Corporate Plan was exceeded (although the target was not
achieved) and all executive officers received a team award.
In addition to a team award, all executive officers received an individual award
under the Corporate Plan for 1998 based on a subjective determination of
individual performance. The aggregate of individual awards to all officers
cannot exceed the amount available in a discretionary pool established for such
awards. The discretionary pool amount is a specific percentage of team awards
paid to all executive officers.
In 1998, twenty-five executive officers participated in incentive plans
applicable to their business units. Caterpillar has 376 incentive plans
applicable to business units and divisions within those units. Each business
unit within Caterpillar has its own criteria for determining incentive
compensation for its employees. With the exception of nine incentive plans, for
1998, at least 25% of the payout under a business unit plan had to be based on
Caterpillar achievement of ROA levels applicable to the Corporate Plan. Other
factors determining business unit payout in 1998 included return on sales
("ROS") for the particular unit, unit ROA, unit accountable profit, operating
expenses, percentage of industry sales, and customer satisfaction. The two most
widely used factors determining payouts under the business unit plans in 1998
were unit ROA and unit accountable profit.
In 1998, executive officers participating in their respective business unit
incentive plans were eligible to receive 50% of the team award amount that would
have been awarded if he or she had participated solely in the business unit
plans, and 50% of the amount that would have been awarded had the officer
participated solely in the Corporate Plan.
11
<PAGE>
Chief Executive Officer
Because Caterpillar exceeded its minimum ROA level under the Corporate Plan for
1998, Mr. Fites received a team award under the Corporate Plan. Mr. Fites also
received an individual award under the Corporate Plan for 1998.
At the beginning of 1998, Mr. Fites discussed with the Committee his goals and
expectations for the year. As discussed more fully below, Mr. Fites addressed
those goals with the type of leadership that exemplified his tenure at
Caterpillar.
Mr. Fites' Goals and Results
. Caterpillar Results - Mr. Fites set aggressive benchmarks for
Caterpillar profit before tax and return on assets. In a challenging
economic environment, those goals were not met. However, under Mr.
Fites' leadership Caterpillar achieved its second best annual profit
performance ever, and sales and revenues hit a sixth consecutive all-
time high in 1998.
. CEO Succession - Mr. Fites established a goal of successfully assisting
the Board in selection of his successor as CEO. This goal was met in
1998 as Mr. Fites provided valuable assistance to the Board in this
critical task, culminating in the selection of an outstanding candidate
in Mr. Barton.
. Finalization and Integration of Perkins Engines Acquisition - Mr. Fites
set a goal of finalizing Caterpillar's acquisition of Perkins Engines
and implementing a plan to integrate Perkins Engines into the
Caterpillar organization. This goal was met in 1998. The Perkins
Engines acquisition was finalized, and, in a challenging economic
environment, integration proceeded well in that key Perkins' customers
and managers were retained. During the integration process in 1998,
incremental sales opportunities and potential cost savings were also
identified.
. Growth Initiatives - Mr. Fites established a goal of carefully managing
Caterpillar's growth initiatives in terms of timing and cost. These
initiatives include electric power generation, agricultural products,
mining systems, compact machines and further strengthening of
Caterpillar's product support network. This goal was met in 1998, in
that on balance all growth initiatives are on time and are being
implemented at below estimated cost.
. Pursuit of Additional Alliances and Acquisitions - Mr. Fites set a goal
of pursuing additional acquisitions in 1998 designed to improve
Caterpillar's competitive position and enhance shareholder value. This
goal was met in 1998 as Caterpillar completed, in addition to Perkins
Engines, several acquisitions designed to meet these criteria and
actively pursued affiliations with customers and suppliers.
12
<PAGE>
. Contact with Core Constituencies - Mr. Fites expressed his commitment
to maintain regular contact in 1998 with financial analysts,
stockholders, dealers, customers, and employees. Mr. Fites met that
goal. He met with approximately 100 financial analysts in New York
during the year and personally visited several of Caterpillar's largest
shareholders. Mr. Fites also attended several dealer meetings during
the year both inside and outside the U.S., called on over 25 major
customers, and visited 14 major Caterpillar facilities around the
world.
. Industry-Wide Efforts - In 1998, Mr. Fites continued his participation
in initiatives designed to benefit industry as a whole. He was very
active in promoting legislation and governmental action designed to
promote open and free trade around the world. He also provided
leadership to the Business Roundtable, U.S.-Japan Business Council,
Competitiveness Policy Council, Advisory Committee for Trade Policy and
Negotiations, and the Equipment Manufacturers Institute.
. Commitment to Charities and Peoria Community - In 1998, Mr. Fites
received the Lewis J. Burger Outstanding Volunteer Fund Raiser award
from the Central Illinois chapter of the National Society of Fund
Raising Executives. His efforts included chairing Bradley University's
successful $100 million centennial capital campaign, a $3 million
capital campaign for a new Easter Seal Rehabilitation Center in Central
Illinois, several Salvation Army divisional and national fund raising
initiatives, leadership of the World Methodist Council's financial
development efforts and support of numerous other fund raising
activities.
Statement of Gratitude for Mr. Fites' Accomplishments
Effective February 1, 1999, and in accordance with Caterpillar policy, Donald V.
Fites retired as Caterpillar's Chief Executive Officer. During his 42 years of
service to Caterpillar, Mr. Fites has won high respect, admiration and affection
not only within the Company, but also in widespread business, financial, and
governmental circles both at home and abroad.
His broad range of knowledge and interests, coupled with exceptional
intellectual capacity and integrity, have resulted in major contributions to the
welfare and growth of Caterpillar. As architect of Caterpillar's present
organization structure, a major force in expansion of its product offerings, and
a leader who has insisted upon, and achieved, maintenance of high quality
personnel in all areas, it can truly be said that he has contributed greatly to
Caterpillar's present high stature in the world.
On behalf of the Caterpillar Board of Directors, the Compensation Committee
would like to express its appreciation for all that Mr. Fites has done and for
all that he will do in the future in his continuing capacity as a member of the
Caterpillar Board.
13
<PAGE>
Stock Options
Executive Officers
In 1998, all executive officers, as well as other key employees, were granted
incentive and non-qualified stock options under Caterpillar's 1996 Stock Option
and Long-Term Incentive Plan. Incentive stock options were granted up to the
maximum number of shares which may be issued in accordance with U.S. tax law to
an individual. The portion of any option grant not issued as an incentive stock
option was issued as a non-qualified stock option. The number of options granted
to a particular officer in 1998 depended upon that officer's position and a
subjective assessment of that officer's individual performance.
To ensure executive officers retain significant stockholdings in Caterpillar,
the Committee encourages them to own a number of shares at least equal to the
average number of shares for which they received options in their last three
option grants. For 1998, if 100% of the minimum ownership guideline was not met,
significant progress had not been made to achieve the desired ownership level,
or a satisfactory explanation for failure to meet the guideline had not been
presented, the Committee would have reduced the number of shares included in the
officer's grant. For 1998, no officer was penalized for low share ownership.
Chief Executive Officer
In 1998, Mr. Fites received an option grant covering 200,000 shares of
Caterpillar stock, as reflected in the Summary Compensation Table and Option
Grants Table. Like other executive officers, Mr. Fites received this grant based
upon his position at Caterpillar and an assessment of his individual
performance. Individual performance factors considered by the Committee are
those discussed above with respect to Mr. Fites' individual Corporate Plan
award.
Long-Term Incentive Compensation
Executive Officers
Under the long-term incentive portion of the Option Plan ("LTIP"), a three-year
performance period ("cycle") is established each year, with participants
receiving a payout (50% in cash and 50% in restricted stock) if certain minimum,
target or maximum performance thresholds are achieved at the end of the cycle.
The Committee has discretion to apply different performance criteria for
different cycles. The Committee also has discretion during a cycle to adjust
performance measures set for that period to reflect changes in accounting
principles and practices; mergers, acquisitions or divestitures; major technical
innovations; or extraordinary, nonrecurring or unusual items.
14
<PAGE>
A cycle under the LTIP's predecessor (i.e., a long-term incentive supplement to
Caterpillar's 1987 Stock Option Plan) was established at the beginning of 1996
for the years 1996-1998, with a payout to occur in 1999. Amounts that could be
paid at the end of that cycle depended upon an executive's base salary at the
end of the period, a predetermined percentage of that salary that varied based
on an executive's position, and whether certain after-tax ROA thresholds had
been achieved. For an executive to receive any payout under the cycle
established in 1996, Caterpillar had to achieve a threshold ROA level for the
cycle. If a target ROA level was achieved, a larger amount would be received,
while attaining a certain maximum ROA level would yield the maximum amount
payable under the cycle. For the cycle established in 1996, the maximum ROA
level was exceeded and all participants, including those named in the Summary
Compensation Table, received a payout in early 1999 under that cycle. The total
value of cash and restricted stock received by 151 LTIP participants under the
cycle established in 1996 was approximately $13.3 million.
Cycles were also established under the LTIP in 1997 and 1998 for the periods
1997-1999 and 1998-2000, with payouts to occur, if at all, in 2000 and 2001.
Like the 1996 cycle discussed above, a payout under these cycles will depend
upon an executive's base salary at the end of the period, a predetermined
percentage of that salary that varies based on the executive's position, and
whether certain after-tax ROA levels (minimum, target, and maximum levels) have
been achieved.
Chief Executive Officer
Mr. Fites received a payout in 1999 under the 1996 LTIP cycle based on the
criteria discussed above. The amount received by Mr. Fites is disclosed in the
LTIP Payouts column of the Summary Compensation Table.
Mr. Fites also has the potential to receive in 2000, 2001, and 2002 a payout
under the LTIP for the 1997-1999, 1998-2000, 1999-2001 cycles based on the
criteria discussed above. Minimum, target, and maximum amounts that could be
received by Mr. Fites, as well as other named executive officers, are referenced
in the Long-Term Incentive Plans/Awards Table. Due to Mr. Fites' retirement in
1999, potential amounts received in 2000, 2001, and 2002 will be prorated based
on the time period in which he was employed during the applicable LTIP cycles.
By the Compensation Committee consisting of:
James P. Gorter (Chairman) John T. Dillon Peter A. Magowan
Lilyan H. Affinito David R. Goode Clayton K. Yeutter
15
<PAGE>
Executive Compensation Tables
<TABLE>
<CAPTION>
1998 Summary Compensation Table
-------------------------------------------------------------------------------------
Long-Term
Compensation
Annual --------------------------------
Compensation Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
Securities LTIP
Name and Other Annual Underlying Payouts All Other
Principal Position Year Salary Bonus/2/ Compensation Options/3/ ($) Compensation/1/
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
D. V. Fites 1998 $1,350,000 $ 972,000 $2,524/5/ 200,000 $1,215,000/4/ $64,799
Chairman 1997 1,250,000 1,280,000 -0- 150,000 1,125,000 56,700
and CEO 1996 1,150,000 1,151,150 -0- 150,000 1,000,500 55,200
- ------------------------------------------------------------------------------------------------------------------------------------
G. A. Barton 1998 562,503 409,500 1,654/5/ 50,000 492,917/4/ 26,999
Vice Chairman 1997 500,000 384,000 -0- 50,000 375,000 24,000
1996 450,000 321,750 -0- 50,000 326,250 18,299
- ------------------------------------------------------------------------------------------------------------------------------------
G. S. Flaherty 1998 545,004 294,300 -0- 50,000 408,750/4/ 21,363
Group President 1997 500,000 384,000 -0- 50,000 375,000 20,700
1996 450,000 321,750 -0- 50,000 326,250 21,600
- ------------------------------------------------------------------------------------------------------------------------------------
J. W. Owens 1998 485,004 261,900 -0- 50,000 363,750/4/ 17,246
Group President 1997 430,000 330,240 -0- 50,000 322,500 12,041
1996 380,000 271,700 -0- 50,000 257,133 11,400
- ------------------------------------------------------------------------------------------------------------------------------------
R. L. Thompson 1998 485,004 261,900 -0- 50,000 363,750/4/ 14,549
Group President 1997 430,000 330,240 -0- 50,000 322,500 12,900
1996 380,000 271,700 -0- 50,000 257,133 11,400
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/Consists of matching Company contributions, respectively, for the Employees'
Investment Plan and Supplemental Employees' Investment Plans of Messrs. Fites
($8,354/$56,445), Barton ($8,279/$18,720), Flaherty ($7,723/$13,640), Owens
($6,565/$10,681), and Thompson ($4,937/$9,612).
/2/Consists of cash payments made pursuant to the Corporate Incentive
Compensation Plan in 1999 with respect to 1998 performance, in 1998 with
respect to 1997 performance, and in 1997 with respect to 1996 performance.
/3/Numbers for 1996 and 1997 have been adjusted to reflect a two-for-one stock
split effective after the 1997 grant. No options have been granted at an
option price below fair market value on the date of the grant. Although no
outstanding options have been repriced, an exercise price adjustment was made
to such options to reflect the two-for-one stock split.
/4/This payout was made in early 1999. 50% was in cash and 50% in restricted
stock. Caterpillar's average stock price on December 31, 1998 ($46.9375 per
share) was used to determine the restricted stock portion of the payout. As
of December 31, 1998, the number and value of restricted stock held was:
D. V. Fites 40,226 ($1,888,108); G. A. Barton 13,311 ($624,785),
G. S. Flaherty 13,311 ($624,785), J. W. Owens 10,396 ($487,962), and
R. L. Thompson 10,396 ($487,962). Dividends are paid on this restricted
stock.
/5/Tax payment related to use of company aircraft.
16
<PAGE>
<TABLE>
<CAPTION>
Option Grants in 1998
- ---------------------------------------------------------------------------------------------------------------------------
Individual Grants
---------------------------------------------------------------
% of Total Potential Realizable Value
Number of Options at Assumed Annual Rates
Securities Granted to of Stock Price Appreciation
Underlying Employees Exercise for Option Term/1/
Options In Fiscal Price Expiration ---------------------------------
Name Granted/2/ Year 1998/3/ Per Share Date 5% 10%
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. V. Fites 200,000 4.22 $55.6875 6/9/2008 $ 7,004,320 $ 17,750,300
G. A. Barton 50,000 1.05 55.6875 6/9/2008 $ 1,751,080 $ 4,437,575
G. S. Flaherty 50,000 1.05 55.6875 6/9/2008 $ 1,751,080 $ 4,437,575
J. W. Owens 50,000 1.05 55.6875 6/9/2008 $ 1,751,080 $ 4,437,575
R. L. Thompson 50,000 1.05 55.6875 6/9/2008 $ 1,751,080 $ 4,437,575
Executive Group 979,120 20.66 55.6875 6/9/2008 $ 34,290,349 $ 86,898,369
All Stockholders/4/ N/A N/A N/A N/A $12,798,811,719 $32,434,661,416
Executive Group
Gain as % of all
Stockholder Gain N/A N/A N/A N/A .2679% .2679%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/The dollar amounts under these columns reflect the 5% and 10% rates of
appreciation prescribed by the Securities and Exchange Commission. The 5% and
10% rates of appreciation would result in per share prices of $90.7091 and
$144.4390, respectively. Caterpillar expresses no opinion regarding whether
this level of appreciation will be realized and expressly disclaims any
representation to that effect.
/2/Options are exercisable upon completion of one full year of employment
following the grant date (except in the case of death or retirement) and vest
at the rate of one-third per year over the three years following the grant.
Upon exercise, option holders may surrender shares to pay the option exercise
price and satisfy tax withholding requirements. Options granted to employees
at the level of Vice President and above that are vested and not incentive
stock options may be transferred to certain family members and descendants.
/3/In 1998, options for 4,739,495 shares were granted to employees as follows:
Executive Group 979,120; non-employee directors 44,000; and all others
3,716,375.
/4/For "All Stockholders" the potential realizable value is calculated from
$55.6875, the price of Common Stock on June 9, 1998, based on the outstanding
shares of Common Stock on that date.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in 1998,
and 1998 Year-End Option/SAR Values
---------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-the-Money Options/
1998 Year-End SARs at 1998 Year-End2
- ----------------------------------------------------------------------------------------------------------------------------
Shares Acquired Value
Name On Exercise/1/ Realized/2/ Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. V. Fites -0- $ -0- 804,000 350,000 $18,263,966 $701,565
G. A. Barton -0- -0- 137,510 100,000 2,063,418 233,860
G. S. Flaherty -0- -0- 201,200 100,000 3,909,006 233,860
J. W. Owens 6,000 234,750 132,400 100,000 2,056,340 233,860
R. L. Thompson 33,335 765,666 16,667 100,000 -0- 233,860
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/Upon exercise, option holders may surrender shares to pay the option exercise
price and satisfy tax withholding requirements. The amounts provided are
gross amounts absent netting for shares surrendered.
/2/Calculated on the basis of the fair market value of the underlying securities
at the exercise date or year-end, as the case may be, minus the exercise
price.
17
<PAGE>
Long-Term Incentive Plans/Awards in 1998
<TABLE>
<CAPTION>
Estimated future payouts under
Performance or non-stock price-based plans/1/
Other Period Until -----------------------------------------------
Name Maturation or Payout Threshold Target Maximum
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
D. V. Fites/2/ 1998-2000 145,800 291,600 437,400
-----------------------------------------------------------------------
Chairman and CEO 1997-1999 279,450 558,900 838,350
-----------------------------------------------------------------------
G. A. Barton 1998-2000 140,800 281,585 422,400
-----------------------------------------------------------------------
Vice Chairman 1997-1999 140,800 281,585 422,400
-----------------------------------------------------------------------
G. S. Flaherty 1998-2000 136,250 272,500 408,750
-----------------------------------------------------------------------
Group President 1997-1999 136,250 272,500 408,750
-----------------------------------------------------------------------
J. W. Owens 1998-2000 121,250 242,500 363,750
-----------------------------------------------------------------------
Group President 1997-1999 121,250 242,500 363,750
-----------------------------------------------------------------------
R. L. Thompson 1998-2000 121,250 242,500 363,750
-----------------------------------------------------------------------
Group President 1997-1999 121,250 242,500 363,750
- ---------------------------------------------------------------------------------------------------
</TABLE>
/1/Payout is based upon an executive's base salary at the end of the three-year
cycle, a predetermined percentage of that salary, and Caterpillar's
achievement of specified levels of after-tax return on assets ("ROA") over
the three-year period. The target amount will be earned if 100% of targeted
ROA is achieved. The threshold amount will be earned if 50% of targeted ROA
is achieved, and the maximum award amount will be earned at 150% of targeted
ROA. Base salary levels for 1998 were used to calculate the estimated dollar
value of future payments under both cycles.
/2/Estimates for Mr. Fites' Long-Term Incentive Plan awards have been adjusted
to reflect his retirement effective February 1, 1999.
<TABLE>
<CAPTION>
Pension Plan Table
- ---------------------------------------------------------------------------------------------------
Remuneration Years of Service
- ---------------------------------------------------------------------------------------------------
15 20 25 30 35
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 100,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000 $ 52,500
$ 150,000 33,750 45,000 56,250 67,500 78,750
$ 200,000 45,000 60,000 75,000 90,000 105,000
$ 250,000 56,250 75,000 93,750 112,500 131,250
$ 300,000 67,500 90,000 112,500 135,000 157,500
$ 350,000 78,750 105,000 131,250 157,500 183,750
$ 400,000 90,000 120,000 150,000 180,000 210,000
$ 450,000 101,250 135,000 168,750 202,500 236,250
$ 500,000 112,500 150,000 187,500 225,000 262,500
$ 550,000 123,750 165,000 206,250 247,500 288,750
$ 650,000 146,250 195,000 243,750 292,500 341,250
$ 750,000 168,750 225,000 281,250 337,500 393,750
$ 850,000 191,250 255,000 318,750 382,500 446,250
$ 950,000 213,750 285,000 356,250 427,500 498,750
$1,100,000 247,500 330,000 412,500 495,000 577,500
$1,400,000 315,000 420,000 525,000 630,000 735,000
$1,600,000 360,000 480,000 600,000 720,000 840,000
$1,950,000 438,750 585,000 731,250 877,500 1,023,750
$2,500,000 562,500 750,000 937,500 1,125,000 1,312,500
$3,000,000 675,000 900,000 1,125,000 1,350,000 1,575,000
</TABLE>
The compensation covered by the pension program is based on an employee's annual
salary and bonus. Amounts payable pursuant to a defined benefit supplementary
pension plan are included. As of December 31, 1998, the persons named in the
Summary Compensation Table had the following estimated credited years of benefit
service for purposes of the pension program: D. V. Fites 35 years*; G. A.
Barton 35 years*; G. S. Flaherty 35 years*; J. W. Owens 26 years; and R. L.
Thompson 16 years. The amounts payable under the pension program are computed
on the basis of an ordinary life annuity and are not subject to deductions for
Social Security benefits or other amounts.
- ----------------
* Although having served more than 35 years with the Company, amounts payable
under the plan are based on a maximum of 35 years of service.
18
<PAGE>
POST-RETIREMENT SECURITY ARRANGEMENT
Because of continuing concerns regarding the personal safety of Mr. Fites, we
are providing him with certain post-retirement, security-based services. At a
cost of approximately $185,000 annually to Caterpillar, Mr. Fites will be
provided with a home security system and assigned security personnel. Mr. Fites
will also have use of company aircraft at an estimated annual cost not
anticipated to exceed $75,000, such cost to fluctuate based on actual usage. As
we have done in connection with our initial decision to provide these services,
Caterpillar will conduct a comprehensive security analysis annually to evaluate
continued need.
X PROPOSAL 2 -- Appointment of Auditors
The Board of Directors seeks from the stockholders an indication of their
approval or disapproval of the Board's appointment of PricewaterhouseCoopers LLP
("PricewaterhouseCoopers") as independent auditors for 1999.
PricewaterhouseCoopers has been our independent auditor since 1925, and no
relationship exists other than the usual relationship between independent public
accountant and client.
If the appointment of PricewaterhouseCoopers as independent auditors for 1999 is
not approved by the stockholders, the adverse vote will be considered a
direction to the Board of Directors to consider other auditors for next year.
However, because of the difficulty in making any substitution of auditors so
long after the beginning of the current year, the appointment for the year 1999
will stand, unless the Board finds other good reason for making a change.
Representatives of PricewaterhouseCoopers will be available at the annual
meeting of stockholders to respond to questions.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
X PROPOSAL 3 -- Stockholder Proposal Regarding Country Selection Guidelines
Mr. Seamus P. Finn, O.M.I., advises that, on behalf of The Missionary Oblates of
Mary Immaculate, 391 Michigan Ave. NE, Washington, DC 20017 (owners of 4,500
shares of Company stock), he or another representative intends to present for
consideration and action at the annual meeting the following resolution. Co-
sponsors of this proposal are the United Methodist Church, The Sisters of St.
Francis of Philadelphia, and The Congregation of the Sisters of St. Agnes. Each
of the co-sponsors is the holder of at least 100 shares of Company stock.
19
<PAGE>
Resolution Proposed by Stockholder
BE IT RESOLVED: the shareholders request the Board to review and develop
guidelines for country selection and report these guidelines to shareholders and
employees by October 1999. In its review, the Board shall develop guidelines on
maintaining investments in or withdrawing from countries where:
. there is a pattern of ongoing and systematic violation of human rights
. a government is illegitimate
. there is a call by human rights advocates, pro-democracy organizations
or legitimately elected representatives for economic sanctions against
their country
Supporting Statement of Proponent
WHEREAS: Levi Strauss & Co. bases its decision on whether to do business in
certain countries based on criteria that include whether:
"Brand image would be adversely affected by a country's perception or image
among our customers and/or consumers"
"Human rights environment would prevent us from conducting business activities
in a manner that is consistent with the Global Sourcing Guidelines and other
Company policies"
"Political, economic and social environment would threaten the Company's
reputation and/or commercial interests"
Nobel Peace Prize Laureate and Burmese democracy movement leader Aung San Suu
Kyi has called for economic sanctions on Burma, stating that corporations that
do business in Burma "create jobs for some people but what they're mainly going
to do is make an already wealthy elite wealthier, and increase its greed and
strong desire to hang on to power....these companies harm the democratic process
a great deal."
Because of the Burmese military junta's large-scale repression of the democracy
movement, on May 20, 1997, President Clinton signed an executive order banning
new US investment in Burma;
Several cities, including New York and San Francisco, and the Commonwealth of
Massachusetts have enacted laws that effectively prohibit contracts with
companies that do business in Burma;
The Oil, Chemical and Atomic Workers Union (OCAW) and the AFL-CIO support
economic sanctions on Burma; [Company-specific data.]
Human rights organizations have documented not only numerous human rights abuses
committed by Burmese troops deployed to secure the Total/Unocal pipeline area
but also the use of forced labor by the Burmese military on infrastructure
connected to the pipeline project;
20
<PAGE>
On October 3, 1996, a lawsuit was filed in US federal court seeking a halt to
Unocal's role in the Yadana pipeline and seeking compensatory and punitive
damages on behalf of victims of human rights abuses connected to the pipeline;
Our company also does business in other countries with controversial human
rights records such as [company-specific data.];
Caterpillar Response
Statement in Opposition to Proposal
Under this proposal, Caterpillar's Board of Directors would be asked to develop
guidelines for doing business in countries around the world based on our view of
a particular country's human rights record and government legitimacy. On
occasion, the U.S. government has attempted imposing similar criteria in the
form of boycotts and embargoes with significant negative impact on U.S.
companies and people depending upon them, both in the U.S. and in the boycotted
country. We believe the same would result for Caterpillar if we implemented this
proposal.
Unilateral country selection measures are counterproductive and almost always
ineffective. They are a gamble that a foreign country will respond to such
actions. In reality, these measures lead to a nationalistic backlash against the
U.S., strengthening regimes whose policies we oppose. American ideals are not
advanced and citizens of these countries are worse off. And, other countries
quickly fill the gap created and strengthen their commercial ties with the
boycotted country.
Unilateral country selection measures significantly undermine American
competitiveness. The Institute for International Economics estimates that
unilateral economic sanctions cost the United States approximately $15-20
billion in lost exports in 1995. This translates into a loss of more than
200,000 high-wage American jobs. These figures do not take into account
additional losses arising from lost U.S. investment opportunities, or the future
impact of American companies being perceived as unreliable suppliers.
At Caterpillar, we have felt the significant negative impact of unilateral
country selection measures in the past. In 1980, U.S. sanctions prevented us
from meeting commitments on a Soviet gas pipeline project. As a result, we were
tainted as an unreliable supplier in the region and forced to cede it to
Japanese competitors.
Caterpillar's health and growth are inextricably tied to our competitiveness in
global markets. Approximately one-half of our sales are outside the U.S. today
and we anticipate that by 2010 70% of our sales will be abroad. Implementing
country-selection criteria as the proponent suggests would significantly
undermine our status as a world leader in our industry and do substantial harm
to the citizens of excluded countries.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" PROPOSAL 3.
21
<PAGE>
X PROPOSAL 4 -- Stockholder Proposal to Declassify Board
Mr. John Chevedden, 2215 Nelson Avenue, No. 205, Redondo Beach, CA 90278 (owner
of 100 shares of Company stock) advises that he intends to present for
consideration and action at the annual meeting the following resolution.
Resolution Proposed by Stockholder
BE IT RESOLVED that Caterpillar shareholders request the Board of Directors take
the necessary steps to amend the company's governing instruments, including the
corporate by-laws, to ELECT THE ENTIRE BOARD OF DIRECTORS EACH YEAR with an
independent lead director.
This includes the requirement that less frequent than annual election of the
entire board can be re-instituted only with a majority vote of outstanding
shares and as a separate issue.
Supporting Statement of Proponent
This proposal is to enhance the director selection process, to increase director
accountability to better address challenges facing Caterpillar. This will
strengthen the board and improve CAT performance.
Director accountability is closely related to financial performance. It is
intuitive that, when directors are accountable through election, they perform
better. The current piecemeal director election risks insulating directors and
senior management from the consequences of poor financial performance.
Annual election of all directors received more than 49% CAT shareholder
approval in 1996. The 49% approval would have been a majority if the CAT
election used the more balance standards that apply to public election in the
United States of America.
CAT directors currently serve on many boards of successful companies that
benefit from annual election of all directors.
What news reports highlight challenges for CAT director accountability?
. Diesel-engine makers agree to $1 Billion penalty in EPA pollution case.
. CAT and Cummins are assessed the highest penalties.
. This is the largest civil environmental-enforcement action in U.S.
history.
Wall Street Journal Oct. 23, 1998
. CAT profits fell 13 percent in the third quarter.
. CAT forced to give greater discounts.
. Morgan Stanley Dean Witter lowered its Caterpillar rating to neutral.
Reuters Oct. 19, 1998
. We don't recommend CAT stock at this time.
Value Line Aug. 7, 1998
. CAT stock fell 7%.
22
<PAGE>
. CAT said earnings are less than expected due to weaker Asian sales and
higher costs.
New York Times July 16, 1998
. CAT pays $1.3 Billion for Perkins Engines.
. Perkins' owner said the business could not easily be expanded into new
market areas.
Chicago Tribune Dec. 12, 1997
What can CAT directors improve from the past?
. The 1991 UAW strike against CAT took a large human toll.
. Collapsed marriages, suicides, heart attacks and stress flourished
during the strike.
Chicago Tribune Feb. 11, 1996
. CAT Chairman Donald Fites received a 75% pay boost after the long
strike.
Wall Street Journal March 4, 1996
. CAT executives tell hometown congressman, Republican Ray La Hood, they
are unhappy he co-sponsored legislation to protect HMO patients.
Los Angeles Times March 27, 1998
. Chairman Fites has $20 million ($20,272,031) in unexercised stock
options.
Internet -- www.paywatch.org
What evidence is there that directors lack a commitment to the company?
W. Frank Blount Attended less than 75% of meetings
Juan Gallardo T. Owns no stock
John T. Dillon Owns less than 1800 shares
The Business Week November 25, 1996 Cover Story said for the "The Best Board
Place the entire board up for election every year."
Institutional Shareholder Services (www.cda.com/iss), a proxy advisory firm
for institutional shareholders, recommends electing the entire board each year.
ELECT THE ENTIRE BOARD OF DIRECTORS EACH YEAR
YES ON 4
Caterpillar Response
Statement in Opposition to Proposal
Through sound bites without context, the proponent alleges that recent
Caterpillar performance justifies elimination of our classified board structure.
We would like to highlight a few facts regarding Caterpillar performance
conspicuously ignored by the proponent.
. From 1993 through 1997, Caterpillar reported five consecutive years of
record sales and revenues and profits. For 1998, a sixth consecutive
year of record sales and revenues was reported, with a year second only
to 1997 for profits.
23
<PAGE>
. Since 1993, our stock has split twice and dividends increased eight-
fold, including a 20% increase in June of 1998. In this time frame, we
have also initiated two stock repurchase programs.
. For the second year in a row, Fortune named Caterpillar as one of the
"World's Most Admired Companies" in 1998. This rating was based on
overall quality of management, innovativeness, value as a long-term
investment, financial strength, responsibility to the community and
environment, wise use of corporate assets, and effectiveness in doing
business globally.
. In 1997, Industry Week selected Caterpillar as one of the "World's 100
Best Managed Companies" and Worth Financial selected Caterpillar as one
of the "World's 50 Best Stocks to Own."
. In 1996, in the very article the proponent cites as support for his
proposal, Caterpillar's Board was named as one of the 25 "Best Boards"
by Business Week.
At Caterpillar, we make decisions based on their potential to enhance
shareholder value and growth for the long-term. Our performance the past six
years, as well as recognition from independent third parties regarding that
performance, solidly demonstrates that our current corporate governance
structure is working. A primary component of that structure, in addition to the
talent and foresight of our individual Board members, is the continuity and
stability our classified Board structure provides.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" PROPOSAL 4.
Other Matters
Section 16(a) Beneficial Ownership Reporting Compliance
Based upon a review of our records, all reports required to be filed pursuant to
Section 16(a) of the Exchange Act were filed on a timely basis.
Stockholder Proposals for the 2000 Annual Meeting
If you want to submit a proposal for possible inclusion in the Company's 2000
Proxy Statement, we must receive it on or before October 29, 1999.
24
<PAGE>
Matters Raised at the Meeting not Included in this Statement
We do not know of any matters to be acted upon at the meeting other than those
discussed in this statement. If any other matter is presented, proxy holders
will vote on the matter in their discretion.
Under Caterpillar bylaws, a stockholder may bring a matter before the annual
meeting by giving adequate notice to our Corporate Secretary. To be adequate,
that notice must contain information specified in our bylaws and be received by
us not less than 45 days nor more than 90 days prior to the annual meeting. If,
however, less than 60 days notice of the meeting date is given to stockholders,
notice of a matter to be brought before the annual meeting may be provided to us
up to the 15th day following the date notice of the annual meeting was mailed.
Under this criteria, stockholders have until March 15, 1999, to provide us with
notice of a matter to be brought before the annual meeting.
Solicitation
Caterpillar is soliciting this proxy on behalf of its Board of Directors. This
solicitation is being made by mail but also may be made by telephone or in
person. We have hired Innisfree M&A Incorporated for $20,000, plus out-of-pocket
expenses, to assist in the solicitation.
Stockholder List
A stockholder list will be available for your examination during normal business
hours at Wachovia Bank, 100 North Main Street, 5th Floor, Winston-Salem, North
Carolina, at least 10 days prior to the annual meeting.
Revocability of Proxy
You may revoke the enclosed proxy by filing a written notice of revocation with
us or by providing a later executed proxy.
25
<PAGE>
Admission Ticket Request Procedure
Request Deadline
Ticket requests must be submitted in writing and received by Caterpillar on or
before April 2, 1999. No requests will be processed after that date.
Number of Tickets
Admission tickets will be limited to shareholders of record on February 16, 1999
and one guest, or a shareholder's authorized proxy representative.
To Submit Request
Submit requests to R. Rennie Atterbury III, Secretary by mail to 100 NE Adams
Street, Peoria, IL 61629-7310 or by fax to (309) 675-6620. Ticket requests will
not be accepted by telephone.
Verification
In all cases, record date share ownership will be verified.
Authorized Proxy Representative
A shareholder may appoint a representative to attend the meeting and/or vote on
his/her behalf. The admission ticket must be requested by the shareholder but
will be issued in the name of the authorized representative. Individuals holding
admission tickets that are not issued in their name will not be admitted to the
meeting. Shareholder information specified below and a written proxy
authorization must accompany the ticket request.
<TABLE>
<CAPTION>
Registered Stockholders Beneficial (Street) Holders
<S> <C>
For ownership verification provide: For ownership verification provide:
. Name(s) of stockholder . February brokerage account statement
. Address showing Caterpillar stock ownership or
. Phone Number . Letter from broker, bank or other
. Social Security # and/or Share- nominee verifying record date (2/16/99)
holder Account Number stock ownership
Also Include: Also Include:
. Name of guest if other than stockholder . Name of guest if other than stockholder
. Name of authorized proxy representative, . Name of authorized proxy representative,
if one appointed if one appointed
. Address where tickets should be mailed . Address where tickets should be mailed
and phone number and phone number
</TABLE>
26
<PAGE>
APPENDIX
CATERPILLAR INC.
GENERAL AND FINANCIAL INFORMATION
1998
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Management................................................ A-3
Report of Independent Accountants................................... A-3
Consolidated Financial Statements and Notes......................... A-4
Five-year Financial Summary......................................... A-20
Management's Discussion and Analysis (MD&A)
Machinery and Engines Sales Table by Geographic Region......... A-21
1998 Compared with 1997........................................ A-22
Supplemental Information....................................... A-23
Fourth-Quarter 1998 Compared with Fourth-Quarter 1997.......... A-25
1997 Compared with 1996........................................ A-25
Liquidity & Capital Resources.................................. A-26
Employment..................................................... A-27
Other Matters.................................................. A-27
Year 2000 Challenge............................................ A-29
Outlook........................................................ A-30
Supplemental Stockholder Information................................ A-32
Directors and Officers.............................................. A-33
</TABLE>
A-2
<PAGE>
REPORT OF MANAGEMENT Caterpillar Inc.
- --------------------------------------------------------------------------------
The management of Caterpillar Inc. has prepared the accompanying consolidated
financial statements for the years ended December 31, 1998, 1997, and 1996, and
is responsible for their integrity and objectivity. The statements were prepared
in conformity with generally accepted accounting principles, applying certain
estimates and judgments as required.
Management maintains a system of internal accounting controls which has been
designed to provide reasonable assurance that: transactions are executed in
accordance with proper authorization, transactions are properly recorded and
summarized to produce reliable financial records and reports, assets are
safeguarded, and the accountability for assets is maintained.
The system of internal controls includes statements of policies and business
practices, widely communicated to employees, which are designed to require them
to maintain high ethical standards in their conduct of company affairs. The
internal controls are augmented by careful selection and training of supervisory
and other management personnel, by organizational arrangements that provide for
appropriate delegation of authority and division of responsibility, and by an
extensive program of internal audit with management follow-up.
The financial statements have been audited by PricewaterhouseCoopers LLP,
independent accountants, in accordance with generally accepted auditing
standards. They have made similar annual audits since the initial incorporation
of our company. Their role is to render an objective, independent opinion on
management's financial statements. Their report appears below.
Through its Audit Committee, the Board of Directors reviews our financial and
accounting policies, practices, and reports. The Audit Committee consists
exclusively of seven directors who are not salaried employees and who are, in
the opinion of the Board of Directors, free from any relationship that would
interfere with the exercise of independent judgment as a committee member. The
Audit Committee meets several times each year with representatives of
management, including the internal auditing department, and the independent
accountants to review the activities of each and satisfy itself that each is
properly discharging its responsibilities. Both the independent accountants and
the internal auditors have free access to the Audit Committee and meet with it
periodically, with and without management representatives in attendance, to
discuss, among other things, their opinions as to the adequacy of internal
controls and to review the quality of financial reporting.
/s/ Donald V. Fites
Chairman of the Board
/s/ F. L. McPheeters
Chief Financial Officer
January 20, 1999
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS OF CATERPILLAR INC.:
In our opinion, the accompanying consolidated financial statements, in
Statements 1 through 4, present fairly, in all material respects, the financial
position of Caterpillar Inc. and its subsidiaries at December 31, 1998, 1997,
and 1996, and the consolidated results of their operations and their
consolidated cash flow for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Peoria, Illinois
January 20, 1999
A-3
<PAGE>
STATEMENT 1
Consolidated Results of Operations for the Years Ended December 31
(Millions of dollars except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Supplemental consolidating data
------------------------------------------------
Consolidated Machinery and Engines/1/ Financial Products
------------------------- ------------------------- ---------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and revenues:
Sales of Machinery and Engines (Note 1C).......... $19,972 $18,110 $15,814 $19,972 $18,110 $15,814 $ -- $ -- $ --
Revenues of Financial Products (Note 1C).......... 1,005 815 708 -- -- -- 1,117 839 732
------- ------- ------- ------- ------- ------- ------ ------ -----
Total sales and revenues....................... 20,977 18,925 16,522 19,972 18,110 15,814 1,117 839 732
Operating costs:
Cost of goods sold................................ 15,031 13,374 11,832 15,031 13,374 11,832 -- -- --
Selling, general, and administrative expenses..... 2,561 2,232 1,993 2,210 1,932 1,715 377 324 302
Research and development expenses................. 643 528 410 643 528 410 -- -- --
Interest expense of Financial Products............ 489 361 295 -- -- -- 501 373 316
------- ------- ------- ------- ------- ------- ------ ------ -----
Total operating costs.......................... 18,724 16,495 14,530 17,884 15,834 13,957 878 697 618
------- ------- ------- ------- ------- ------- ------ ------ -----
Operating profit.................................... 2,253 2,430 1,992 2,088 2,276 1,857 239 142 114
Interest expense excluding Financial Products..... 264 219 194 264 219 194 -- -- --
Other income (expense) (Note 3)................... 185 202 143 46 153 127 65 61 37
------- ------- ------- ------- ------- ------- ------ ------ -----
Consolidated profit before taxes.................... 2,174 2,413 1,941 1,870 2,210 1,790 304 203 151
Provision for income taxes (Note 6)............... 665 796 613 554 724 558 111 72 55
------- ------- ------- ------- ------- ------- ------ ------ -----
Profit of consolidated companies.................. 1,509 1,617 1,328 1,316 1,486 1,232 193 131 96
Equity in profit of unconsolidated affiliated
companies (Note 10)............................. 4 48 33 4 48 33 -- -- --
Equity in profit of Financial Products'
subsidiaries.................................... -- -- -- 193 131 96 -- -- --
------- ------- ------- ------- ------- ------- ------ ------ -----
Profit.............................................. $ 1,513 $ 1,665 $ 1,361 $ 1,513 $ 1,665 $ 1,361 $ 193 $ 131 $ 96
======= ======= ======= ======= ======= ======= ====== ====== =====
Profit per share of common stock (Note 15).......... $ 4.17 $ 4.44 $ 3.54
======= ======= =======
Profit per share of common stock -- assuming
dilution (Note 15)................................ $ 4.11 $ 4.37 $ 3.50
======= ======= =======
Dividends declared per share of common stock........ $ 1.15 $ .95 $ .78
======= ======= =======
</TABLE>
/1/ Represents Caterpillar Inc. and its subsidiaries except for Financial
Products, which is accounted for on the equity basis.
The supplemental consolidating data is presented for the purpose of additional
analysis. See Note 1B on Page A-7 for a definition of the groupings in these
statements. Transactions between Machinery and Engines and Financial Products
have been eliminated to arrive at the consolidated data.
STATEMENT 2
Changes in Consolidated Stockholders' Equity for the Years Ended December 31
(Dollars in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Common stock (Note 14):
Balance at beginning of year............................................... $ (442) $ 50 $ 333
Common shares issued, including treasury shares reissued:
1998 -- 800,315; 1997 -- 1,426,532; 1996 -- 1,487,992.................... 16 26 20
Treasury shares purchased:
1998 -- 11,612,300; 1997 -- 14,118,412; 1996 -- 8,816,008................ (567) (706) (303)
Issuance of common stock to effect 2-for-1 stock split..................... -- 188 --
------ ------ ------
Balance at year-end........................................................ (993) (442) 50
------ ------ ------
Profit employed in the business:
Balance at beginning of year............................................... 5,026 3,904 2,840
Profit..................................................................... 1,513 1,513 1,665 1,665 1,361 1,361
Dividends declared......................................................... (416) (355) (297)
Issuance of common stock to effect 2-for-1 stock split..................... -- (188) --
------ ------ ------
Balance at year-end........................................................ 6,123 5,026 3,904
------ ------ ------
Accumulated other comprehensive income:
Foreign currency translation adjustment/2/ (Note 1F):
Balance at beginning of year.............................................. 95 162 215
Aggregate adjustment for year............................................. (30) (30) (67) (67) (53) (53)
------ ------ ------ ------ ------ -----
Balance at year-end....................................................... 65 95 162
------ ------ ------ ------ ------ -----
Minimum Pension Liability Adjustment/2/:
Balance at beginning of year.............................................. -- -- --
Aggregate adjustment for year............................................. (64) (64) -- -- -- --
------ ------ ------ ------ ------- -----
Balance at year-end....................................................... (64) -- --
------ ------ ------
Comprehensive income........................................................ 1,419 1,598 1,308
====== ====== =====
Stockholders' equity at year-end............................................. $5,131 $4,679 $4,116
====== ====== ======
</TABLE>
/2/ No reclassification adjustments to report.
See accompanying Notes to Consolidated Financial Statements.
A-4
<PAGE>
STATEMENT 3 Caterpillar Inc.
Financial Position at December 31
(Dollars in millions)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Supplemental consolidating data
-------------------------------------------------------
Consolidated Machinery and Engines/1/ Financial Products
--------------------------- --------------------------- -------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and short-term investments... $ 360 $ 292 $ 487 $ 303 $ 241 $ 445 $ 57 $ 51 $ 42
Receivables -- trade and other.... 3,660 3,331 2,956 2,604 3,346 2,960 1,875 285 175
Receivables -- finance (Note 5)... 3,516 2,660 2,266 -- -- -- 3,516 2,660 2,266
Deferred income taxes and prepaid
expenses (Note 6)................ 1,081 928 852 1,081 935 876 18 9 15
Inventories (Notes 1D and 4)...... 2,842 2,603 2,222 2,842 2,603 2,222 -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------
Total current assets................ 11,459 9,814 8,783 6,830 7,125 6,503 5,466 3,005 2,498
Property, plant, and equipment --
net (Notes 1E and 9)............... 4,866 4,058 3,767 4,125 3,483 3,242 741 575 525
Long-term receivables -- trade and
other.............................. 85 134 128 85 134 128 -- -- --
Long-term receivables -- finance
(Note 5)........................... 5,058 3,881 3,380 -- -- -- 5,058 3,881 3,380
Investments in unconsolidated
affiliated companies (Note 10)..... 773 751 701 773 751 701 -- -- --
Investments in Financial Products'
subsidiaries....................... -- -- -- 1,269 882 759 -- -- --
Deferred income taxes (Note 6)...... 955 1,040 1,093 980 1,075 1,132 8 5 3
Intangible assets (Note 1E)......... 1,241 228 233 1,241 228 233 -- -- --
Other assets (Note 17).............. 691 850 643 316 510 368 375 340 275
------- ------- ------- ------- ------- ------- ------- ------ ------
Total assets.......................... $25,128 $20,756 $18,728 $15,619 $14,188 $13,066 $11,648 $7,806 $6,681
======= ======= ======= ======= ======= ======= ======= ====== ======
Liabilities
Current liabilities:
Short-term borrowings (Note 12)... $ 809 $ 484 $ 1,192 $ 49 $ 53 $ 36 $ 760 $ 431 $1,156
Accounts payable and accrued
expenses......................... 3,558 3,358 2,858 3,440 3,020 2,556 811 654 520
Accrued wages, salaries, and
employee benefits................ 1,217 1,128 1,010 1,208 1,120 1,005 9 8 5
Dividends payable................. 107 92 76 107 92 76 -- -- --
Deferred and current income taxes
payable (Note 6)................. 15 175 142 (19) 46 70 34 129 72
Deferred liability................ -- -- -- -- -- -- 143 -- --
Long-term debt due within one
year (Note 13)................... 2,239 1,142 1,180 60 54 122 2,179 1,088 1,058
------- ------- ------- ------- ------- ------- ------- ------ ------
Total current liabilities........... 7,945 6,379 6,458 4,845 4,385 3,865 3,936 2,310 2,811
Long-term debt due after one year
(Note 13).......................... 9,404 6,942 5,087 2,993 2,367 2,018 6,411 4,575 3,069
Liability for postemployment
benefits (Note 7).................. 2,590 2,698 3,019 2,590 2,698 3,019 -- -- --
Deferred income taxes and other
liabilities (Note 6)............... 58 58 48 60 59 48 32 39 42
------- ------- ------- ------- ------- ------- ------- ------ ------
Total liabilities..................... 19,997 16,077 14,612 10,488 9,509 8,950 10,379 6,924 5,922
------- ------- ------- ------- ------- ------- ------- ------ ------
Contingencies (Notes 17 and 18)
Stockholders' equity (Statement 2)
Common stock of $1.00 par value
(Note 14):
Authorized shares: 900,000,000
Issued shares (1998, 1997, and
1996 -- 407,447,312)
at paid-in amount................. 1,063 1,071 881 1,063 1,071 881 683 403 353
Profit employed in the business..... 6,123 5,026 3,904 6,123 5,026 3,904 615 506 404
Accumulated other comprehensive
income............................ 1 95 162 1 95 162 (29) (27) 2
Treasury stock (1998 -- 50,248,957
shares; 1997 -- 39,436,972 shares;
and 1996 -- 26,745,092 shares) at
cost.............................. (2,056) (1,513) (831) (2,056) (1,513) (831) -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------
Total stockholders' equity............ 5,131 4,679 4,116 5,131 4,679 4,116 1,269 882 759
------- ------- ------- ------- ------- ------- ------- ------ ------
Total liabilities and stockholders'
equity.............................. $25,128 $20,756 $18,728 $15,619 $14,188 $13,066 $11,648 $7,806 $6,681
======= ======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
/1/ Represents Caterpillar Inc. and its subsidiaries except for Financial
Products, which is accounted for on the equity basis.
The supplemental consolidating data is presented for the purpose of additional
analysis. See Note 1B on Page A-7 for a definition of the groupings in these
statements. Transactions between Machinery and Engines and Financial Products
have been eliminated to arrive at the consolidated data.
See accompanying Notes to Consolidated Financial Statements.
A-5
<PAGE>
STATEMENT 4
Statement of Cash Flow for the Years Ended December 31
(Millions of dollars)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Supplemental consolidating data
----------------------------------------------------
Consolidated Machinery and Engines/1/ Financial Products
------------------------- ------------------------- -------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Profit..................................... $ 1,513 $ 1,665 $ 1,361 $ 1,513 $ 1,665 $ 1,361 $ 193 $ 131 $ 96
Adjustments for noncash items:
Depreciation and amortization............. 865 738 696 697 599 575 168 139 121
Profit of Financial Products.............. -- -- -- (193) (131) (96) -- -- --
Other..................................... (72) 23 158 34 (16) 118 (137) 41 43
Changes in assets and liabilities:
Receivables -- trade and other............ (104) (396) (319) 993 (341) (298) (1,258) (82) (14)
Inventories............................... (104) (375) (111) (104) (375) (111) -- -- --
Accounts payable and accrued expenses..... 8 562 134 (114) 529 57 284 37 65
Other -- net.............................. (328) (121) (137) (177) (129) (143) (72) 57 20
------- ------- ------- ------- ------- ------- ------- ------- -------
Net cash provided by (used for) operating
activities................................. 1,778 2,096 1,782 2,649 1,801 1,463 (822) 323 331
------- ------- ------- ------- ------- ------- ------- ------- -------
Cash flow from investing activities:
Capital expenditures -- excluding
equipment leased to others................ (925) (824) (506) (918) (819) (500) (7) (5) (6)
Expenditures for equipment leased to others (344) (282) (265) (9) (5) (8) (335) (277) (257)
Proceeds from disposals of property,
plant, and equipment...................... 141 138 135 17 15 21 124 123 114
Additions to finance receivables........... (8,537) (6,644) (5,802) -- -- -- (8,537) (6,644) (5,802)
Collections of finance receivables......... 4,635 3,605 3,407 -- -- -- 4,635 3,605 3,407
Proceeds from sale of finance receivables.. 1,705 1,833 1,425 -- -- -- 1,705 1,833 1,425
Net intercompany borrowings................ -- -- -- 29 (94) 325 (244) -- --
Investments and acquisitions............... (1,428) (59) (612) (1,428) (59) (612) -- -- --
Other -- net............................... 173 (308) (166) (111) (290) (153) 4 (68) (33)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net cash used for investing activities...... (4,580) (2,541) (2,384) (2,420) (1,252) (927) (2,655) (1,433) (1,152)
------- ------- ------- ------- ------- ------- ------- ------- -------
Cash flow from financing activities:
Dividends paid............................. (400) (338) (289) (400) (338) (289) (49) (28) (12)
Common stock issued, including treasury
shares reissued........................... 6 11 10 6 11 10 280 50 20
Treasury shares purchased.................. (567) (706) (303) (567) (706) (303) -- -- --
Net intercompany borrowings................ -- -- -- 244 -- -- (29) 94 (325)
Proceeds from long-term debt issued........ 4,590 2,284 1,088 627 462 37 3,963 1,822 1,051
Payments on long-term debt................. (1,153) (1,237) (1,335) (65) (177) (166) (1,088) (1,060) (1,169)
Short-term borrowings -- net............... 388 258 1,262 (23) 17 18 411 241 1,244
------- ------- ------- ------- ------- ------- ------- ------- -------
Net cash provided by (used for) financing
activities................................. 2,864 272 433 (178) (731) (693) 3,488 1,119 809
------- ------- ------- ------- ------- ------- ------- ------- -------
Effect of exchange rate changes on cash..... 6 (22) 18 11 (22) 22 (5) -- (4)
------- ------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in cash and short-term
investments................................ 68 (195) (151) 62 (204) (135) 6 9 (16)
Cash and short-term investments at the
beginning of the period.................... 292 487 638 241 445 580 51 42 58
------- ------- ------- ------- ------- ------- ------- ------- -------
Cash and short-term investments at the end
of the period.............................. $ 360 $ 292 $ 487 $ 303 $ 241 $ 445 $ 57 $ 51 $ 42
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
/1/ Represents Caterpillar Inc. and its subsidiaries except for Financial
Products, which is accounted for on the equity basis.
All short-term investments, which consist primarily of highly liquid investments
with original maturities of three months or less, are considered to be cash
equivalents.
The supplemental consolidating data is presented for the purpose of additional
analysis. See Note 1B on Page A-7 for a definition of the groupings in these
statements. Transactions between Machinery and Engines and Financial Products
have been eliminated to arrive at the consolidated data.
See accompanying Notes to Consolidated Financial Statements.
A-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Caterpillar Inc.
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
1. Operations and summary of
significant accounting policies
================================================================================
A. Nature of operations
We operate in three principal lines of business:
(1) Machinery -- design, manufacture, and marketing of construction,
mining, agricultural, and forestry machinery -- track and wheel tractors, track
and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and
wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders,
off-highway trucks, articulated trucks, paving products, telescopic handlers,
skid-steer loaders, and related parts.
(2) Engines -- design, manufacture, and marketing of engines for
Caterpillar Machinery, on-highway trucks and locomotives; marine, petroleum,
construction, industrial, and other applications; electric power generation
systems; and related parts. Reciprocating engines meet power needs ranging from
5 to over 21,000 horsepower (4 to over 15 660 kilowatts). Turbines range from
1,340 to 18,000 horsepower (1000 to 13 500 kilowatts).
(3) Financial Products -- financing to customers and dealers for the
purchase and lease of Caterpillar and noncompetitive related equipment, as well
as some financing for Caterpillar sales to dealers. Also provides various forms
of insurance to customers and dealers to help support the purchase and lease of
our equipment. This line of business consists primarily of Caterpillar Financial
Services Corporation (Cat Financial) and its subsidiaries and Caterpillar
Insurance Services Corporation.
Our products are sold primarily under the marks "Caterpillar," "Cat,"
"Solar," "Barber-Greene," "MaK," and "Perkins."
We conduct operations in our Machinery and Engines' lines of business under
highly competitive conditions, including intense price competition. We place
great emphasis upon the high quality and performance of our products and our
dealers' service support. Although no one competitor is believed to produce all
of the same types of machines and engines, there are numerous companies, large
and small, which compete with us in the sale of each of our products.
Machines are distributed principally through a worldwide organization of
dealers, 64 located in the United States and 131 located outside the United
States. Worldwide, these dealers have more than 1,400 places of business and
serve 166 countries. Reciprocating engines are sold principally through the
worldwide dealer organization and to other manufacturers for use in products
manufactured by them. Some of the reciprocating engines manufactured by Perkins
are also sold through their worldwide distributor network. Our dealers do not
deal exclusively with our products; however, in most cases sales and servicing
of our products are our dealers' principal business. Turbines and large marine
reciprocating engines are sold through sales forces employed by Solar and MaK,
respectively. Occasionally these employees are assisted by independent sales
representatives.
Manufacturing activities of the Machinery and Engines' lines of business
are conducted in 41 plants in the United States; nine in the United Kingdom;
four in China; three each in Australia, France, Germany, and Italy; two each in
India, Japan, Mexico, and Northern Ireland; and one each in Belgium, Brazil,
Canada, Hungary, Indonesia, Netherlands, Poland, Russia, South Africa, and
Sweden. Thirteen parts distribution centers are located in the United States and
ten are located outside the United States.
The Financial Products' line of business also conducts operations under
highly competitive conditions. Financing for users of Caterpillar products is
available through a variety of competitive sources, principally commercial banks
and finance and leasing companies. We emphasize prompt and responsive service to
meet customer requirements and offer various financing plans designed to
increase the opportunity for sales of our products and generate financing income
for our company. Financial Products' activity is primarily conducted in the
United States, with additional offices in Asia, Australia, Canada, Europe, and
Latin America.
B. Basis of consolidation
The financial statements include the accounts of Caterpillar Inc. and its
subsidiaries. Investments in companies that are owned 20% to 50% are accounted
for by the equity method (see Note 10 on Page A-12).
The accompanying financial statements and supplemental consolidating data,
where applicable, have been grouped as follows:
Consolidated -- Caterpillar Inc. and its subsidiaries.
Machinery and Engines -- primarily our manufacturing, marketing, and parts
distribution operations, with the Financial Products' subsidiaries on an equity
basis.
Financial Products -- our finance and insurance subsidiaries, primarily Cat
Financial and Caterpillar Insurance Services Corporation.
Certain amounts for prior years have been reclassified to conform with the
current-year financial statement presentation.
C. Sales and revenue recognition
Sales of machines and engines are generally unconditional sales that are
recorded when product is shipped and invoiced to independently owned and
operated dealers or customers.
Revenues primarily represent finance and lease revenues of Cat Financial, a
wholly-owned subsidiary. Finance revenues are recognized over the term of the
contract at a constant rate of return on the scheduled uncollected principal
balance. Lease revenues are recognized in the period earned. Recognition of
income is suspended when collection of future income is not probable. Income
recognition is resumed if the receivable becomes contractually current and
collection doubts are removed; previously suspended income is recognized at that
time.
D. Inventories
Inventories are valued principally by the LIFO (last-in, first-out) method. The
value of inventories on the LIFO basis represented approximately 85% of total
inventories at current cost value at December 31, 1998, 1997, and 1996.
If the FIFO (first-in, first-out) method had been in use, inventories would
have been $1,978, $2,067, and $2,123 higher than reported at December 31, 1998,
1997, and 1996, respectively.
E. Depreciation and amortization
Depreciation of plant and equipment is computed principally using accelerated
methods. Amortization of purchased intangibles is computed using the straight-
line method, generally over a period of 20 years or less.
The increase in intangible assets in 1998 was primarily related to the
acquisition of Perkins (see Note 22 on Page A-19).
F. Foreign currency translation
The functional currency for most of our Machinery and Engines' consolidated
companies is the U.S. dollar. The functional currency
A-7
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
for most of our Financial Products' and equity basis companies is the respective
local currency. Gains and losses resulting from the translation of foreign
currency amounts to the functional currency are included in the results of
operations. Gains and losses resulting from translating assets and liabilities
from the functional currency to U.S. dollars are included in "Accumulated other
comprehensive income," which is part of stockholders' equity.
G. Derivative financial instruments
We use derivative financial instruments (derivatives) to manage foreign
currency, interest rate, and commodity price exposures that arise in the normal
course of business. Derivatives that we use are primarily foreign currency
contracts (forward and option), interest rate swaps, and commodity contracts
(swap and option). Derivatives are not used for speculative purposes.
Please refer to Note 2 for more information on derivatives, including the
methods used to account for them.
H. Estimates in financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts. Examples of the more significant estimates include:
accruals and reserves for warranty and product liability losses, postemployment
benefits, environmental costs, income taxes, and plant closing and consolidation
costs.
I. Future accounting changes
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP requires the capitalization of
certain costs associated with internally-developed, internal-use software that
our company has historically expensed as incurred. We are required to adopt SOP
98-1 for the year beginning January 1, 1999. It will not have a material impact
on the company's financial position, results of operations, or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that an entity record all
derivatives in the statement of financial position at their fair value. It also
requires changes in fair value to be recorded each period in current earnings or
other comprehensive income depending upon the purpose for using the derivative
and/or its qualification, designation, and effectiveness as a hedging
transaction. We are required to adopt this new accounting standard for the year
beginning January 1, 2000. We are currently analyzing the impact of SFAS 133.
Due to the inherent complexities of this standard, we have not yet determined
the full impact that the adoption of SFAS 133 will have on our financial
position, results of operations, or cash flows. However, at this time, we do not
believe that the impact will be material.
2. Derivative financial instruments
and risk management
================================================================================
A. Foreign exchange derivative instruments -- forward exchange and option
contracts
Our Machinery and Engines' operations are subject to foreign exchange risk.
Currency exchange rates impact the U.S. dollar amount of sales made and costs
incurred in foreign currencies. Our Financial Products' operations are subject
to foreign exchange risk when the currency of debt obligations does not match
the currency of the receivables portfolio.
Forward exchange contracts and certain foreign currency option contracts
are used to hedge our foreign exchange risks. Other than the up-front premiums
that we pay on foreign currency option contracts, all cash flow related to these
contracts occurs when the contracts mature.
Our accounting treatment of foreign currency contracts depends upon the
nature of the contracts:
1. Forward contracts designated as hedges of firm future foreign currency
commitments and purchased foreign currency option contracts designated
as hedges of probable foreign currency transactions:
. No gains or losses are reported until the hedged transaction occurs,
even if the contracts are terminated or mature prior to the time of
the hedged transaction.
. Gains and losses are recognized and reported on the same financial
statement line as the hedged transaction when the hedged transaction
occurs.
. Gains and losses are immediately recognized in current income ("Other
income (expense)" in Statement 1) in those unusual instances when the
hedged transaction is no longer expected to occur, or a foreign
currency contract is no longer effective as a hedge.
2. All other foreign currency contracts (those used to hedge net balance
sheet exposures and anticipated net cash flow exposures for the next 12
months):
. All gains or losses are recognized in current income ("Other income
(expense)") as currency exchange rates change.
. Net gains are reflected as an asset ("Receivables -- trade and other"
in Statement 3) until cash is actually received. Conversely, net
losses are shown as a liability ("Accounts payable and accrued
expenses" in Statement 3) until cash is actually paid.
The notional amounts of outstanding contracts to buy and sell foreign
currency were:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Hedges of firm commitments and/or
probable foreign currency transactions.. $ 222 $ 166 $ 27
Hedges of balance sheet exposure and/or
anticipated cash flow exposure for the
next 12 months.......................... $1,802 $1,294 $ 911
</TABLE>
In addition, we had outstanding cross-currency (primarily cross-European
currency) contracts totaling $6, $6, and $122 at December 31, 1998, 1997, and
1996, respectively, to hedge various European currencies against the Deutsche
mark (1998 cross-European currency contracts involved currencies of Non-
European Monetary Union (EMU) countries). We use the Deutsche mark to manage
our continental European currency cash flows against the dollar, and then use
cross-European currency contracts to manage the risk of exchange rate
movement between the Deutsche mark and the specific European currency of the
cash flow.
The maturity dates for our outstanding contracts, including the cross-
European contracts, are primarily less than six months.
Please refer to Note 16 and Table IV on Page A-15 for fair value
information on foreign currency contracts.
A-8
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
B. Interest rate derivative instruments
We primarily use interest rate swap contracts to manage our exposure to interest
rate changes and to lower the cost of borrowed funds.
Interest rate swap contracts are linked to debt instruments and, in effect,
change the characteristics of the debt (e.g., from fixed rate to floating rate).
Interest rate swap contracts are not reflected in the financial statements at
fair market value. The notional amounts of outstanding interest rate swap
contracts were $3,083, $2,595, and $2,869 at December 31, 1998, 1997, and 1996,
respectively.
The difference between the interest payable and the interest receivable on
each interest rate swap contract is recorded each reporting period as an
adjustment to current income ("Interest expense excluding Financial Products" or
"Interest expense of Financial Products" in Statement 1, as applicable).
Interest rate swap contracts that are in a payable position are shown as
interest payable ("Accounts payable and accrued expenses" in Statement 3); those
in a receivable position are shown as an asset ("Other assets" in Statement 3).
The actual cash settlement on these interest rate swap contracts occurs at times
specified in the agreement. If an interest rate swap contract is terminated
prior to its maturity, no immediate gain or loss is recognized in the financial
statements, except in those cases where the debt instrument to which the
contract is linked is also terminated.
Please refer to Note 16 and Table IV on Page A-15 for fair value information
of interest rate swap contracts.
C. Commodity related derivative instruments
Our Machinery and Engines' operations are also subject to commodity price risk
(i.e., potential price increases of our production material as a result of price
increases in raw material). We make limited use of commodity swap and/or option
contracts to manage the risk of unfavorable price movement. The use of these
types of derivative financial instruments has not been material.
3. Other income (expense)
================================================================================
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Investment and interest income....................... $ 101 $ 115 $ 90
License fees......................................... 18 25 26
Foreign exchange (losses) gains...................... (23) (10) 1
Miscellaneous income................................. 89 72 26
------ ------ ------
$ 185 $ 202 $ 143
====== ====== ======
4. Inventories
================================================================================
December 31,
1998 1997 1996
------ ------ ------
Raw materials and work-in-process.................... $1,041 $1,013 $ 909
Finished goods....................................... 1,605 1,404 1,123
Supplies............................................. 196 186 190
------ ------ ------
$2,842 $2,603 $2,222
====== ====== ======
</TABLE>
5. Finance receivables
================================================================================
Finance receivables are receivables of Cat Financial, which generally can be
repaid or refinanced without penalty prior to contractual maturity. Total
finance receivables reported in Statement 3 are net of an allowance for credit
losses.
Please refer to Table I below for additional finance receivables information
and Note 16 and Table IV on Page A-15 for fair value information.
_______________________________________________________________________________
TABLE I -- Finance Receivables Information
_______________________________________________________________________________
Contractual maturities of outstanding receivables:
<TABLE>
<CAPTION>
December 31, 1998
Installment Financing
Amounts Due In Contracts Leases Notes Total
- -------------- ----------- --------- ------ --------
<S> <C> <C> <C> <C>
1999................................................. $ 917 $1,220 $ 850 $2,987
2000................................................. 645 862 553 2,060
2001................................................. 417 581 436 1,434
2002................................................. 221 288 203 712
2003................................................. 78 115 177 370
Thereafter........................................... 15 95 812 922
------ ------ ------ ------
2,293 3,161 3,031 8,485
Residual value....................................... -- 896 -- 896
Less: Unearned income................................ 197 487 13 697
------ ------ ------ ------
Total................................................ $2,096 $3,570 $3,018 $8,684
====== ====== ====== ======
Impaired loans and leases:
1998 1997 1996
------ ------ ------
Average recorded investment................................... $ 74 $ 47 $ 43
====== ====== ======
At December 31:
Recorded investment.......................................... $ 61 $ 30 $ 33
Less: Fair value of underlying collateral.................... 35 18 21
------ ------ ------
Potential loss................................................ $ 26 $ 12 $ 12
====== ====== ======
Allowance for credit loss activity:
1998 1997 1996
------ ------ ------
Balance at beginning of year.................................. $ 84 $ 74 $ 57
Provision for credit losses................................... 70 39 41
Less: Net credit losses....................................... 38 19 21
Less: Other -- net............................................ 6 10 3
------ ------ ------
Balance at end of year........................................ $ 110 $ 84 $ 74
====== ====== ======
Cat Financial's net investment in financing leases:
December 31,
1998 1997 1996
------ ------ ------
Total minimum lease payments receivable....................... $3,161 $2,784 $2,383
Estimated residual value of leased assets:
Guaranteed................................................... 229 206 162
Unguaranteed................................................. 667 519 402
------ ------ ------
4,057 3,509 2,947
Less: Unearned income......................................... 487 478 430
------ ------ ------
Net investment in financing leases............................ $3,570 $3,031 $2,517
====== ====== ======
</TABLE>
================================================================================
A-9
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
6. Income taxes
================================================================================
The components of profit before taxes were:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
U.S................................................. $1,880 $2,071 $1,565
Non-U.S............................................. 294 342 376
------ ------ ------
$2,174 $2,413 $1,941
====== ====== ======
The components of the provision for income taxes were:
Years ended December 31,
1998 1997 1996
------ ------ ------
Current tax provision:
U.S. Federal....................................... $ 471 $ 571 $ 399
Non-U.S............................................ 102 103 83
State (U.S.)....................................... 45 54 36
------ ------ ------
$ 618 $ 728 $ 518
------ ------ ------
Deferred tax provision (credit):
U.S. Federal....................................... 93 60 86
Non-U.S............................................ (55) 7 7
State (U.S.)....................................... 9 1 2
------ ------ ------
47 68 95
------ ------ ------
Total provision..................................... $ 665 $ 796 $ 613
====== ====== ======
Reconciliation of the U.S. federal statutory rate to effective rate:
Years ended December 31,
1998 1997 1996
------ ------ ------
U.S. statutory rate................................. 35.0 % 35.0 % 35.0 %
(Decreases) increases in taxes resulting from:
Net operating loss carryforwards................... (2.1)% (1.0)% (0.6)%
Benefit of Foreign Sales Corporation............... (3.2)% (2.8)% (2.5)%
Other--net......................................... 0.9 % 1.8 % (0.3)%
------ ------ ------
Provision for income taxes.......................... 30.6 % 33.0 % 31.6 %
------ ------ ------
</TABLE>
We paid income taxes of $714, $709, and $452 in 1998, 1997, and 1996,
respectively.
During 1996, a settlement was reached with the U.S. Internal Revenue
Service (IRS) covering tax years 1988 through 1991. The settlement had a slight
favorable impact on our 1996 effective tax rate.
We have recorded income tax expense at U.S. tax rates on all profits,
except for undistributed profits of non-U.S. companies which are considered
permanently invested. Determination of the amount of unrecognized deferred tax
liability related to permanently invested profits is not feasible.
Deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Postemployment benefits
other than pensions.............................. $ 1,032 $ 1,107 $ 1,212
Warranty reserves................................. 194 159 114
Unrealized profit excluded
from inventories................................. 179 201 176
Net operating loss carryforwards.................. 83 76 105
Inventory valuation method........................ 78 62 63
Other............................................. 198 213 233
------- ------- -------
1,764 1,818 1,903
------- ------- -------
Deferred tax liabilities:
Capital assets.................................... (263) (177) (161)
Pension........................................... (51) (79) (86)
------- ------- -------
(314) (256) (247)
------- ------- -------
Valuation allowance for deferred tax assets......... (61) (129) (153)
------- ------- -------
Deferred taxes--net................................. $ 1,389 $ 1,433 $ 1,503
======= ======= =======
</TABLE>
As of December 31, 1998, amounts and expiration dates of net operating loss
carryforwards in various non-U.S. taxing jurisdictions were:
2000 2001 2002 2003 Unlimited Total
------------------------------------------------------
$ 11 $ 4 $ 17 $ 18 $ 261 $ 311
In 1998, circumstances changed at certain of our European subsidiaries
which allowed us to reduce the valuation allowance and to record additional
deferred tax assets. The remaining valuation allowance primarily relates to one
non-U.S. subsidiary. Circumstances could change in the future which would allow
us to reduce the remaining valuation allowance and to record additional deferred
tax assets.
7. Postemployment benefit plans
================================================================================
A. Pension plans
We have both U.S. and non-U.S. pension plans covering substantially all of our
employees. The defined benefit plans provide a benefit based on years of service
and/or the employee's average earnings near retirement.
Please refer to Table II on Page A-11 for additional financial information.
B. Other postretirement benefit plans
We have defined-benefit retirement health care and life insurance plans for
substantially all of our U.S. employees.
Please refer to Table II on Page A-11 for additional financial information.
C. Other postemployment benefit plans
We offer long-term disability benefits, continued health care for disabled
employees, survivor income benefits insurance, and supplemental unemployment
benefits to substantially all eligible U.S. employees.
D. Summary of long-term liability:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Pensions..................................... $ 66 $ 3 $ 3
Postretirement benefits other than pensions.. 2,457 2,628 2,948
Other postemployment benefits................ 67 67 68
------ ------ ------
$2,590 $2,698 $3,019
====== ====== ======
</TABLE>
8. Operating leases
================================================================================
We lease certain computer and communications equipment, transportation
equipment, and other property through operating leases. Total rental expense for
operating leases was $224, $176, and $151 for 1998, 1997, and 1996,
respectively.
Minimum payments for operating leases having initial or remaining non-
cancelable terms in excess of one year are:
Years ended December 31,
After
1999 2000 2001 2002 2003 2003 Total
------------------------------------------------------------
$136 $ 97 $ 66 $ 45 $ 35 $170 $ 549
A-10
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
================================================================================
TABLE II -- Financial Information Related to Pension and Other Postretirement
Benefit Plans
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Pension Benefits Other Postretirement Benefits
--------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
-------- -------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, January 1.............................. $ 6,713 $ 6,082 $5,843 $ 3,603 $ 3,346 $ 3,031
Service cost............................................... 148 114 110 82 72 81
Interest cost.............................................. 484 434 417 256 249 226
Business combinations...................................... 504 -- -- -- -- --
Plan amendments............................................ 335 -- -- 226 -- --
Actuarial (gains) losses................................... 272 439 88 43 117 196
Foreign currency exchange rates............................ 49 71 4 -- -- --
Benefits paid.............................................. (471) (427) (380) (190) (181) (188)
------- ------- ------ ------- ------- -------
Benefit obligation, December 31............................ $ 8,034 $ 6,713 $6,082 $ 4,020 $ 3,603 $ 3,346
------- ------- ------ ------- ------- -------
Change in plan assets:
Fair value of plan assets, January 1....................... $ 7,718 $ 6,930 $6,199 $ 804 $ 547 $ 297
Actual return on plan assets............................... 983 1,188 1,023 104 76 74
Business combinations...................................... 448 -- -- -- -- --
Foreign currency exchange rate changes..................... 34 (24) 14 -- -- --
Voluntary employer contributions........................... -- -- -- 200 200 200
Benefits paid.............................................. (471) (427) (380) (185) (176) (186)
Employer funding of benefits paid.......................... 44 51 74 175 157 162
------- ------- ------ ------- ------- -------
Fair value of plan assets, December 31..................... $ 8,756 $ 7,718 $6,930 $ 1,098 $ 804 $ 547
------- ------- ------ ------- ------- -------
Over (under) funded, December 31............................ $ 722 $ 1,005 $ 848 $(2,922) $(2,799) $(2,799)
Unrecognized prior service cost............................ 577 332 319 208 (98) (289)
Unrecognized net actuarial (gain) loss..................... (1,074) (1,058) (894) 51 38 (49)
Unrecognized net asset existing at adoption of SFAS 87..... (42) (59) (77) -- -- --
------- ------- ------ ------- ------- -------
Net amount recognized in financial position................ $ 183 $ 220 $ 196 $(2,663) $(2,859) $(3,137)
------- ------- ------ ------- ------- -------
Components of net amount recognized in financial position:
Prepaid benefit costs...................................... $ 501 $ 404 $ 339 $ -- $ -- $ --
Accrued benefit liabilities................................ (318) (184) (143) (2,663) (2,859) (3,137)
Intangible assets.......................................... 2 3 3 -- -- --
Adjustment for minimum pension liability................... (66) (3) (3) -- -- --
Accumulated other comprehensive income..................... 64 -- -- -- -- --
------- ------- ------ ------- ------- -------
Net asset (liability) recognized........................... $ 183 $ 220 $ 196 $(2,663) $(2,859) $(3,137)
------- ------- ------ ------- ------- -------
Components of net periodic benefit cost:
Service cost............................................... $ 148 $ 114 $ 110 $ 82 $ 72 $ 81
Interest cost.............................................. 484 434 417 256 249 226
Expected return on plan assets............................. (689) (580) (532) (74) (47) (26)
Amortization of:
Net asset existing at adoption of SFAS 87................ (23) (23) (22) -- -- --
Prior service cost/1/.................................... 88 62 63 (80) (190) (190)
Net actuarial (gain) loss................................ (4) (1) (1) -- -- (1)
------- ------- ------ ------- ------- -------
Total benefit cost included in results of operations....... $ 4 $ 6 $ 35 $ 184 $ 84 $ 90
======= ======= ====== ======= ======= =======
Rate assumptions as of December 31:
Assumed discount rate/2/................................... 6.6% 7.0% 7.4% 6.8% 7.0% 7.5%
Expected rate of compensation increase/2/................ 4.0% 4.0% 4.2% 4.0% 4.0% 4.0%
Expected long-term rate of return on plan assets/2/...... 9.6% 9.5% 9.4% 10.0% 9.5% 9.5%
</TABLE>
For measurement purposes, a 6.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999. This rate was assumed to
decrease gradually to 4.5% in 2002.
/1/Prior service costs are amortized using a straight-line method. For our
pension plans, the straight-line method is used over the average remaining
service period of employees expected to receive benefits from the plan
amendment. For our other postretirement benefit plans, the straight-line
method is used over the average remaining service period of employees
impacted by the plan amendment.
/2/Weighted-average rates.
A-11
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE II Continued -- Financial Information Related to Pension and Other
Postretirement Benefit Plans
- --------------------------------------------------------------------------------
Effects of a one-percentage-point change in the assumed health care cost trend
rates for 1998:
<TABLE>
<CAPTION>
One-percentage- One-percentage-
point increase point decrease
--------------- ----------------
<S> <C> <C>
Approximate effect on the total of service
and interest cost components of
other postretirement benefit cost......... $39 $ (32)
Approximate effect on accumulated
postretirement benefit obligation......... $337 $(286)
</TABLE>
The following amounts relate to our pension plans with accumulated benefit
obligations in excess of plan assets:
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Accumulated benefit obligation........ $(3,546) $ (69) $(2,459)
Projected benefit obligation.......... $(3,593) $ (92) $(2,479)
Fair value of plan assets............. $ 3,239 $ 41 $ 2,430
</TABLE>
- --------------------------------------------------------------------------------
9. Property, plant, and equipment
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Land -- at original cost................ $ 140 $ 121 $ 122
Buildings and land improvements......... 2,949 2,773 2,704
Machinery, equipment, and other......... 5,871 5,309 5,047
Equipment leased to others.............. 1,063 843 779
Construction-in-process................. 372 357 165
-------- -------- --------
10,395 9,403 8,817
Less: Accumulated depreciation.......... 5,529 5,345 5,050
-------- -------- --------
Property, plant, and equipment -- net... $ 4,866 $ 4,058 $ 3,767
======== ======== ========
</TABLE>
We had commitments for the purchase or construction of capital assets of
approximately $295 at December 31, 1998.
Assets recorded under capital leases/1/:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Gross capital leases/2/............... $ 703 $ 717 $ 405
Less: Accumulated depreciation.......... 547 561 279
-------- -------- --------
Net capital leases...................... $ 156 $ 156 $ 126
======== ======== ========
</TABLE>
/1/ Included in Property, plant, and equipment table above.
/2/ Consists primarily of machinery and equipment.
Equipment leased to others (primarily by Financial Products):
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Equipment leased to others --
at original cost...................... $1,063 $ 843 $ 779
Less: Accumulated depreciation.......... 328 272 251
-------- -------- --------
Equipment leased to others -- net....... $ 735 $ 571 $ 528
======== ======== ========
</TABLE>
Scheduled minimum rental payments to be received for equipment leased to
others:
<TABLE>
<CAPTION>
December 31,
After
1999 2000 2001 2002 2003 2003
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$313 $239 $144 $96 $16 $8
</TABLE>
10. Unconsolidated affiliated companies
- --------------------------------------------------------------------------------
Combined financial information of the unconsolidated affiliated companies,
accounted for by the equity method, was as follows:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Results of Operations
Sales................................... $2,909 $3,613 $3,729
====== ====== ======
Profit.................................. $ 6 $ 104 $ 75
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
September 30,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Financial Position
Assets:
Current assets......................... $1,569 $1,949 $1,995
Property, plant, and equipment -- net.. 788 792 733
Other assets........................... 351 331 395
------- ------- -------
2,708 3,072 3,123
------- ------- -------
Liabilities:
Current liabilities.................... 1,259 1,610 1,683
Long-term debt due after one year...... 274 203 133
Other liabilities...................... 94 129 145
------- ------- -------
1,627 1,942 1,961
------- ------- -------
Ownership............................... $1,081 $1,130 $1,162
======= ======= =======
</TABLE>
At December 31, 1998, consolidated "Profit employed in the business" in
Statement 2 included $164 representing undistributed profit of the
unconsolidated affiliated companies. In 1998, 1997, and 1996, we received $10,
$36, and $10, respectively, in dividends from unconsolidated affiliated
companies.
11. Credit commitments
- --------------------------------------------------------------------------------
<TABLE>
December 31, 1998
Machinery Financial
Consolidated and Engines Products
------------ ----------- ---------
<S> <C> <C> <C>
Credit lines available:
U.S........................... $2,900/1/ $2,900/1/ $2,610/1/
Non-U.S....................... 1,781 152 1,629
------ ------ ------
Total credit lines available.. 4,681 3,052 4,239
Utilized credit:
Backup for bank borrowings.... 238 49 189
------ ------ ------
Unused credit................. $4,443 $3,003 $4,050
====== ====== ======
</TABLE>
/1/The total U.S. line of credit of $2,900 is available to both Machinery and
Engines and Financial Products (Cat Financial). Cat Financial may use up to
90% of the available line subject to a maximum debt to equity ratio.
Machinery and Engines may use up to 100% of the available line subject to a
minimum level of net worth. Based on these restrictions, and the allocating
decisions of available credit made by management, the line of credit
available to Cat Financial at December 31, 1998, was $2,610.
Based on long-term credit agreements, $2,353, $2,301, and $1,522 of commercial
paper outstanding at December 31, 1998, 1997, and 1996, respectively, were
classified as long-term debt due after one year.
A-12
<PAGE>
12. Short-term borrowings
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Machinery and Engines:
Notes payable to banks............................... $ 49 $ 53 $ 36
Financial Products:
Notes payable to banks............................... 189 145 257
Commercial paper..................................... 497 235 859
Other................................................ 74 51 40
------ ------ ------
760 431 1,156
------ ------ ------
Total short-term borrowings........................... $ 809 $ 484 $1,192
====== ====== ======
</TABLE>
The weighted average interest rates on short-term borrowings outstanding were:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Notes payable to banks................................ 4.7% 4.9% 3.7%
Commercial paper...................................... 5.2% 5.2% 5.2%
Other................................................. 5.2% 5.5% 5.5%
</TABLE>
Please refer to Note 16 and Table IV on Page A-15 for fair value
information on short-term borrowings.
13. Long-term debt
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Machinery and Engines:
Notes -- 9 3/8% due 2000............................ $ 150 $ 150 $ 149
Notes -- 9 3/8% due 2001............................ 184 184 183
Notes -- 6% due 2003................................ 253 -- --
Debentures -- 9% due 2006........................... 202 202 202
Debentures -- 6% due 2007........................... 147 141 136
Debentures -- 9 3/8% due 2011....................... 123 123 123
Debentures -- 9 3/4% due 2000-2019.................. 199 199 199
Debentures -- 9 3/8% due 2021....................... 236 236 236
Debentures -- 8% due 2023........................... 199 199 199
Debentures -- 6 5/8% due 2028....................... 299 -- --
Debentures -- 7 3/8% due 2097....................... 297 297 --
Medium-term notes................................... 96 153 185
Capital lease obligations........................... 510 438 281
Other............................................... 98 45 125
------ ------ ------
2,993 2,367 2,018
Financial Products:
Commercial paper supported by revolving
credit agreements (Note 11)...................... 2,353 2,301 1,522
Medium-term notes................................... 4,025 2,241 1,505
Other............................................... 33 33 42
------ ------ ------
Total Financial Products.............................. 6,411 4,575 3,069
------ ------ ------
Total long-term debt due after one year............... $9,404 $6,942 $5,087
====== ====== ======
</TABLE>
Other than the debt of the Financial Products' subsidiaries, all
outstanding notes and debentures itemized above are unsecured direct obligations
of Caterpillar Inc. The capital lease obligations are collateralized by leased
manufacturing equipment and/or security deposits.
The 6% notes may be redeemed in whole at their principal amount if we are
required to pay additional taxes or duties as a result of a change in tax law
and that obligation cannot be reasonably avoided. In addition, if the identity
of beneficial owners of the notes must be disclosed in certain circumstances, we
would be required either to redeem the notes or satisfy the information
disclosure requirement through the payment of certain taxes or charges. We may
also purchase the 6% notes at any time in the open market.
The 6% debentures were sold at significant original issue discounts ($144).
This issue is carried net of the unamortized portion of its discount, which is
amortized as interest expense over the life of the issue. These debentures have
a principal at maturity of $250 and an effective annual cost of 13.3%. We may
redeem them, at our option, at an amount equal to the respective principal at
maturity.
We may redeem annually, at our option, an additional amount for the 9 3/4%
sinking fund debenture issue, without premium, equal to 200% of the amount of
the sinking fund requirement. Also, we may redeem additional portions of the
sinking fund debentures by the payment of premiums which, starting in 1999,
decrease periodically. The premium at the first redemption date of June 1, 1999,
is 4.875%.
We may redeem the 6 5/8% and the 7 3/8% debentures in whole or in part at
our option at any time at a redemption price equal to the greater of 100% of the
principal amount of the debentures to be redeemed or the sum of the present
value of the remaining scheduled payments.
The terms of other notes and debentures do not specify a redemption option
prior to maturity.
The medium-term notes are offered on a continuous basis through agents and
are primarily at fixed rates. Machinery and Engines' medium-term notes have
maturities from nine months to 30 years. At December 31, 1998, these notes had a
weighted average interest rate of 7.7% with one month to six years remaining to
maturity. Financial Products' medium-term notes have a weighted average interest
rate of 5.48% with maturities up to 15 years at December 31, 1998.
The aggregate amounts of maturities and sinking fund requirements of long-
term debt during each of the years 1999 through 2003, including that due within
one year and classified as current are:
<TABLE>
<CAPTION>
December 31,
1999 2000 2001 2002 2003
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Machinery and Engines................... $ 60 $ 174 $ 203 $ 137 $ 221
Financial Products...................... 2,179 2,371 960 289 350
------ ------ ------ ------ ------
$2,239 $2,545 $1,163 $ 426 $ 571
====== ====== ====== ====== ======
</TABLE>
Interest paid on short-term and long-term borrowings for 1998, 1997, and
1996 was $669, $508, and $474, respectively.
Please refer to Note 16 and Table IV on Page A-15 for fair value
information on long-term debt.
14. Capital stock
- --------------------------------------------------------------------------------
A. Stock options
In 1996, stockholders approved a plan providing for the granting of options to
purchase common stock to officers and other key employees, as well as non-
employee directors. This plan reserves 22,000,000 shares of common stock for
issuance. Options vest at the rate of one-third per year over the three year
period following the date of grant, and have a maximum term of ten years. Common
shares issued under stock options, including treasury shares reissued, totaled
676,113; 1,264,539; and 1,313,932 in 1998, 1997, and 1996, respectively.
Our plan grants options which have exercise prices equal to the average
market price on the date of grant. We account for our
A-13
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
stock options in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Therefore, no compensation expense
is recognized in association with these options. As required by Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation," a summary of the pro forma net income and profit per share
amounts are shown in Table III below. Consistent with the requirements of SFAS
123, compensation expense related to grants made prior to 1995 have not been
taken into consideration. Therefore, the pro forma amounts for 1997 and 1996 are
not representative of the impact of future disclosures. The fair value of each
option grant is estimated at the date of grant using the Black-Scholes option-
pricing model.
Please refer to Table III below for additional financial information on our
stock options.
B. Restricted stock
The 1996 Stock Option and Long-Term Incentive Plan permits the award of
restricted stock to officers and other key employees, as well as non-employee
directors. During 1998, 117,052 shares of restricted stock were awarded to
officers and other key employees as Performance Awards, and 7,150 shares of
restricted stock were granted to non-employee directors.
C. Stockholders' rights plan
We are authorized to issue 5,000,000 shares of preferred stock, of which
2,000,000 shares have been designated as Series A
- -------------------------------------------------------------------------------
TABLE III -- Financial Information Related to Capital Stock
SFAS 123 pro forma net income and earnings per share:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net Income:
As reported............................... $1,513 $1,665 $1,361
Pro forma................................. $1,481 $1,640 $1,352
Profit per share of common stock:
As reported:
Basic.................................... $ 4.17 $ 4.44 $ 3.54
Assuming dilution........................ $ 4.11 $ 4.37 $ 3.50
Pro forma:
Basic.................................... $ 4.08 $ 4.37 $ 3.51
Assuming dilution........................ $ 4.04 $ 4.32 $ 3.48
</TABLE>
Weighted-average assumptions used in determining fair value of option grants:
<TABLE>
<CAPTION>
Grant Year
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield............................ 1.91% 1.94% 2.13%
Expected volatility....................... 19.80% 25.51% 24.19%
Risk-free interest rates.................. 5.55% 6.42% 6.59%
Expected lives............................ 5 years 4 years 4 years
</TABLE>
Changes in the status of common shares subject to issuance under options:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Options
Outstanding at beginning
of year................... 15,056,412 $31.89 13,874,114 $25.31 13,267,648 $21.96
Granted to officers and
key employees............. 4,695,495 $55.69 3,491,650 $51.66 3,334,100 $32.91
Granted to outside
directors................. 44,000 $54.38 40,000 $39.19 44,000 $33.47
Exercised.................. (1,237,010) $23.22 (2,274,474) $22.16 (2,627,940) $18.03
Lapsed..................... (119,120) $45.74 (74,878) $32.61 (143,694) $28.23
----------- ---------- ----------
Outstanding at end of year. 18,439,777 $38.50 15,056,412 $31.89 13,874,114 $25.31
=========== ========== ==========
Options exercisable at
year-end.................. 10,443,515 $28.48 8,386,814 $23.58 7,544,270 $20.44
Weighted-average fair value of options granted during the
year...................... $13.01 $16.15 $8.12
</TABLE>
Stock options outstanding and exercisable:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- --------------------------------
Weighted-Average
Remaining
# Outstanding Contractual Life Weighted-Average # Outstanding Weighted-Average
Exercise Prices at 12/31/98 (Years) Exercise Price at 12/31/98 Exercise Price
- --------------- ------------- ------------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$11.78-$18.77 3,020,402 3.2 $16.02 3,020,402 $16.02
$26.77-$39.19 7,275,490 6.6 $30.50 6,221,118 $30.06
$51.66-$55.69 8,143,885 9.0 $53.98 1,201,995 $51.66
------------ ------------
18,439,777 7.1 $38.50 10,443,515 $28.48
============ ============
</TABLE>
- --------------------------------------------------------------------------------
A-14
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
Junior Participating Preferred Stock of $1.00 par value. None of the preferred
shares have been issued.
Stockholders would receive certain preferred stock purchase rights if someone
acquired or announced a tender offer to acquire 15% or more of outstanding
Caterpillar stock. In essence, those rights would permit each holder (other than
the acquiring person) to purchase one share of Caterpillar stock at a 50%
discount for every share owned. The rights, designed to protect the interests of
Caterpillar stockholders during a takeover attempt, expire December 11, 2006.
15. Profit per share
- --------------------
<TABLE>
Years ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Profit (A)................... $ 1,513 $ 1,665 $ 1,361
============ ============ ============
Determination of shares:
Weighted-average common
shares outstanding (B)..... 363,189,005 375,124,745 384,960,440
Assumed conversion
of stock options........... 4,941,357 5,416,215 3,724,630
------------ ------------ ------------
Weighted-average common
shares outstanding --
assuming dilution (C)...... 368,130,362 380,540,960 388,685,070
============ ============ ============
Profit per share of
common stock (A/B).......... $ 4.17 $ 4.44 $ 3.54
Profit per share of common
stock -- assuming
dilution (A/C).............. $ 4.11 $ 4.37 $ 3.50
</TABLE>
Stock options to purchase 8,143,885 and 3,521,250 shares of common stock at a
weighted-average price of $53.98 and $51.66 were outstanding during 1998 and
1997 respectively, but were not included in the computation of diluted profit
per share, because the options' exercise price was greater than the average
market price of the common shares. During 1996, there were no stock options
excluded from the computation of diluted profit per share.
16. Fair values of financial instruments
- -----------------------------------------
We used the following methods and assumptions to estimate the fair value of our
financial instruments:
Cash and short-term investments -- carrying amount approximated fair value.
Long-term investments (other than investments in unconsolidated affiliated
companies) -- fair value was estimated based on quoted market prices.
Foreign currency contracts (forwards and options) -- fair value was estimated
based on quoted market prices of comparable instruments.
Finance receivables -- fair value was estimated by discounting the future cash
flow using current rates, representative of receivables with similar remaining
maturities. Historical bad debt experience was also considered.
Short-term borrowings -- carrying amount approximated fair value.
Long-term debt -- for Machinery and Engines' notes and debentures, fair value
was estimated based on quoted market prices. For Financial Products, fair value
was estimated by discounting the future cash flow using our current borrowing
rates for similar types and maturities of debt, except for floating rate notes
for which the carrying amount was considered a reasonable estimate of fair
value.
- --------------------------------------------------------------------------------
TABLE IV -- Fair Values of Financial Instruments
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Asset (Liability) 1998 1997 1996
-------------------------- ------------------- -------------------
At December 31 Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value Reference #
--------------- --------- -------- --------- -------- --------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and short-term investments.......... $ 360 $ 360 $ 292 $ 292 $ 487 $ 487 Statement 3, Note 17
Long-term investments.................... 450 450 701 701 508 508 Note 17
Foreign currency contracts............... 8 9 41 47 (3) (3) Note 2
Finance receivables -- net
(excluding operating and finance type
leases and currency swaps/1/)........... 7,709 7,770 5,788 5,815 4,954 4,980 Note 5
Short-term borrowings.................... (809) (809) (484) (484) (1,192) (1,192) Note 12
Long-term debt
(including amounts due within one year)
Machinery and Engines................. (3,053) (3,465) (2,421) (2,785) (2,140) (2,377) Note 13
Financial Products.................... (8,590) (8,634) (5,663) (5,721) (4,127) (4,176) Note 13
Interest rate swaps
Machinery and Engines --
in a net receivable position........... 1 22 1 10 1 4 Note 2
in a net payable position.............. (6) -- (3) (1) (1) (3) Note 2
Financial Products --
in a net receivable position........... 14 19 -- 20 1 4 Note 2
in a net payable position.............. (2) (24) (3) (12) (4) (16) Note 2
</TABLE>
/1/ Excluded items have a net carrying value at December 31, 1998, 1997, and
1996, of $865, $753, and $692, respectively.
- --------------------------------------------------------------------------------
A-15
<PAGE>
NOTES continued
(Dollars in millions except per share data)
_______________________________________________________________________________
Interest rate swaps -- fair value was estimated based on the amount that we
would receive or pay to terminate our agreements as of year end.
Please refer to Table IV on Page A-15 for the fair values of our financial
instruments.
17. Concentration of credit risk
- ---------------------------------
Financial instruments with potential credit risk consist primarily of trade and
finance receivables and short-term and long-term investments. Additionally, to a
lesser extent, we have a potential credit risk associated with counterparties to
derivative contracts.
Trade receivables are primarily short-term receivables from independently
owned and operated dealers which arise in the normal course of business. We
perform regular credit evaluations of our dealers. Collateral is generally not
required, and the majority of our trade receivables are unsecured. We do
however, when deemed necessary, make use of various devices such as security
agreements and letters of credit to protect our interests. No single dealer
represents a significant concentration of credit risk.
Finance receivables primarily represent receivables under installment sales
contracts, receivables arising from leasing transactions and notes receivable.
Receivables from customers in construction-related industries made up
approximately one-third of total finance receivables at December 31, 1998, 1997,
and 1996, respectively. We generally maintain a secured interest in the
equipment financed. No single customer or region represents a significant
concentration of credit risk.
Short-term and long-term investments are held with high quality institutions
and, by policy, the amount of credit exposure to any one institution is limited.
Long-term investments are comprised of investments which collateralize capital
lease obligations (see Note 13 on Page A-13) and investments of Caterpillar
Insurance Co. Ltd. supporting insurance reserve requirements. Long-term
investments are a component of "Other assets" in Statement 3.
At December 31, 1998, 1997, and 1996, Cat Financial was contingently liable
under guarantees for certain Caterpillar dealers' obligations totaling $254,
$261, and $253, respectively, of which $119, $109, and $159, respectively, were
outstanding. These guarantees have terms ranging up to two years and are fully
secured by dealer assets. No loss has been experienced nor is any anticipated
under these agreements.
Outstanding derivative instruments, with notional amounts totaling $5,143,
$4,079, and $3,957 and terms generally ranging up to five years, were held at
December 31, 1998, 1997, and 1996, respectively. Collateral is not required of
the counterparties or of our company. We do not anticipate nonperformance by any
of the counterparties. Our exposure to credit loss in the event of
nonperformance by the counterparties is limited to only those gains that we have
recorded, but have not yet received cash payment. At December 31, 1998, 1997,
and 1996, the exposure to credit loss was $22, $49, and $14, respectively.
Please refer to Note 16 and Table IV on Page A-15 for fair value information.
18. Environmental matters
- --------------------------
The company is regulated by federal, state, and international environmental laws
governing our use of substances and control of emissions. Compliance with these
existing laws has not had a material impact on our capital expenditures,
earnings, or competitive position.
We are cleaning up hazardous waste at a number of locations, often with other
companies, pursuant to federal and state laws. When it is likely we will pay
clean-up costs at a site and those costs can be estimated, the costs are charged
against our earnings. In doing that estimate, we do not consider amounts
expected to be recovered from insurance companies and others.
The amount set aside for environmental clean-up is not material and is
included in "Accounts payable and accrued expenses" in Statement 3. If a range
of liability estimates is available on a particular site, we accrue the lower
end of that range.
We cannot estimate costs on sites in the very early stages of clean-up.
Currently, we have five of these sites and there is no more than a remote chance
that a material amount for clean-up will be required.
19. Plant closing and consolidation costs
- ------------------------------------------
The reserve for plant closing and consolidation costs includes the following:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Write-down of property, plant, and equipment.. $ 78 $ 103 $ 102
Employee severance benefits................... 37 95 103
Rearrangement, start-up costs, and other...... 5 47 54
----- ----- -----
Total reserve................................. $ 120 $ 245 $ 259
===== ===== =====
</TABLE>
The write-down of property, plant, and equipment establishes a new cost basis
for assets that have been permanently impaired.
Employee severance benefits (e.g., pension, medical, and supplemental
unemployment benefits) are provided to employees affected by plant closings and
consolidations. The reserve for such benefits is reduced as the benefits are
provided.
At December 31, 1998, the above reserve includes $49 of costs associated with
the closure of the Component Products Division's Precision Barstock Products
(PBP) operation located in York, Pennsylvania. The probable closing of the PBP
manufacturing operation was announced in December 1991. In March 1996, it was
announced that the facility would be closed. We are in the final stages of
closing the unit.
20. Segment information
- ------------------------
A. Basis for segment information
The company is organized based on a decentralized structure that has established
accountabilities to continually improve business focus and increase our ability
to react quickly to changes in both the global business cycle and competitors'
actions. Our current structure uses a product, geographic matrix organization
comprised of multiple profit and service center divisions.
Caterpillar is a highly integrated company. The majority of our profit centers
are product focused. They are primarily responsible for the design, manufacture,
and on-going support of their products; however, some of these product-focused
profit centers also have marketing responsibilities. We also have
geographically-based profit centers that are primarily focused on marketing;
however, most of these profit centers also have some manufacturing
responsibilities. One of our profit centers provides various financial services
to our customers and dealers. The service center divisions perform corporate
functions and provide centralized services.
A-16
<PAGE>
Caterpillar Inc.
We have developed an internal measurement system to evaluate performance and
to drive continuous improvement. This measurement system, which is not based on
generally accepted accounting principles (GAAP), is intended to motivate desired
behavior of employees and drive performance. It is not intended to measure a
division's contribution to enterprise results. The sales and cost information
used for internal purposes varies significantly from our consolidated,
externally-reported information resulting in substantial reconciling items. Each
division has specific performance targets and is evaluated and compensated based
on achieving those targets. Performance targets differ from division to
division; therefore, meaningful comparisons cannot be made among the profit or
service center divisions. It is the comparison of actual results to budgeted
results that makes our internal reporting valuable to management. Consequently,
we feel that the financial information required by Statement of Financial
Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of an
Enterprise and Related Information" has limited value for our external readers.
Due to Caterpillar's high level of integration and our concern that segment
disclosures based on SFAS 131 requirements have limited value to external
readers, we are continuing to disclose GAAP-based financial results for our
three lines of business (Machinery, Engines, and Financial Products) in our
Management's Discussion and Analysis beginning on page A-21.
B. Description of segments
The profit center divisions meet the SFAS 131 definition of "operating
segments"; however, the service center divisions do not. Several of the profit
centers have similar characteristics and have been aggregated. The following is
a brief description of our seven reportable segments and the business activities
included in the "All other" category.
Asia/Pacific Marketing: Primarily responsible for marketing products through
dealers in Australia, Asia (excluding Japan), and the Pacific Rim. Also includes
the regional manufacturing of some products which are also produced by
Construction & Mining Products.
Construction & Mining Products: Primarily responsible for the design,
manufacture, and on-going support of small, medium, and large machinery used in
a variety of construction and mining applications. Also includes the design,
manufacture, procurement, and marketing of components and control systems that
are primarily consumed in the manufacturing of our machinery.
EAME Marketing: Primarily responsible for marketing products through dealers
in Europe, Africa, the Middle East, and the Commonwealth of Independent States.
Also includes the regional manufacturing of some products which are also
produced by Construction & Mining Products and Power Products.
Financing & Insurance Services: Provides financing to customers and dealers
for the purchase and lease of Caterpillar and noncompetitive related equipment,
as well as some financing for Caterpillar sales to dealers. Also provides
various forms of insurance to customers and dealers to help support the purchase
and lease of our equipment.
Latin America Marketing: Primarily responsible for marketing products through
dealers in Latin America. Also includes the regional manufacturing of some
products which are also produced by Construction & Mining Products and Power
Products.
Power Products: Primarily responsible for the design, manufacture, marketing,
and ongoing support of reciprocating and turbine engines along with related
systems. These engines and related systems are used in products manufactured in
other segments, on-highway trucks, and locomotives; and in a variety of
construction, electric power generation, marine, petroleum, and industrial
applications.
North America Marketing: Primarily responsible for marketing products
(excluding Power Products) through dealers in the United States and Canada.
All other: Primarily includes activities such as: service support and parts
distribution to Caterpillar dealers worldwide; the design, manufacture, and
ongoing support of agricultural machinery and paving products; logistics
services for other companies; service tools for Caterpillar dealers; preventive
maintenance products (filters and fluids); and the remanufacturing of
Caterpillar engines and components.
C. Segment measurement and reconciliations
Please refer to Table V on Pages A-18 and A-19 for financial information
regarding our segments. There are several accounting differences between our
segment reporting and our GAAP-based external reporting. Our segments are
measured on an accountable basis; therefore, only those items for which
divisional management is directly responsible are included in the determination
of segment profit/(loss) and assets. The following is a list of the more
significant accounting differences:
. Generally, liabilities are managed at the corporate level and are not
included in segment operations. Segment accountable assets generally include
inventories, receivables, property, plant, and equipment.
. We account for intersegment transfers using a system of market-based prices.
With minor exceptions, each of the profit centers either sells or purchases
virtually all of its products to or from other profit centers within the
company. Our high level of integration results in our internally-reported
sales being approximately double that of our consolidated, externally-
reported sales.
. Segment inventories and cost of sales are valued using a current cost
methodology.
. Timing differences occur between our internal reporting and our external
reporting such as: postretirement benefit expenses and profit that is
recognized on intersegment transfers.
. Interest expense is imputed (i.e., charged) to profit centers based on their
level of accountable assets. This calculation takes into consideration the
corporate debt to debt plus equity ratio and a weighted-average corporate
interest rate.
. In general, foreign currency fluctuations are neutralized for segment
reporting.
. Accountable profit is determined on a pre-tax basis.
Reconciling items are created based on accounting differences between segment
reporting and our consolidated, external reporting. Please refer to Table V on
Pages A-18 and A-19 for financial information regarding significant reconciling
items. Most of our
A-17
<PAGE>
NOTES continued
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
reconciling items are self-explanatory given the above explanations of
accounting differences. However, for the reconciliation of profit, we have
grouped the reconciling items as follows:
. Corporate costs: Certain corporate costs are not charged to our segments.
These costs are related to corporate requirements and strategies that are
considered to be for the benefit of the entire organization.
. Methodology differences: See previous discussion of significant
accounting differences between segment reporting and consolidated,
external reporting.
. Methodology changes in segment reporting: Estimated restatements of prior
periods to reflect changes in our internal-reporting methodology.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TABLE V -- Segment Information (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Business Segments:
Asia/ Construction Financing Latin North
Pacific & Mining EAME & Insurance America Power America All
Marketing Products Marketing Services Marketing Products Marketing Other Total
--------- ---------- --------- --------- --------- -------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
External sales and revenues... $1,093 197 3,289 1,114 1,763 5,300 7,414 866 $21,036
Intersegment sales and
revenues..................... $ 2 8,678 937 -- 145 4,122 209 1,830 $15,923
Total sales and revenues...... $1,095 8,875 4,226 1,114 1,908 9,422 7,623 2,696 $36,959
Depreciation and amortization. $ 6 224 64 165 28 258 -- 54 $ 799/1/
Imputed interest expense...... $ 8 72 25 501 22 118 68 56 $ 870
Accountable profit (loss)..... $ (49) 1,090 211 201 85 410 118 191 $ 2,257
Accountable assets at Dec. 31. $ 289 2,349 862 10,539 741 3,479 1,595 2,030 $21,884
Capital Expenditures.......... $ 26 292 72 -- 19 349 -- 88 $ 846/1/
- ------------------------------------------------------------------------------------------------------------------------------------
1997
External sales and revenues... $1,947 294 3,022 832 1,730 3,693 6,614 855 $18,987
Intersegment sales and
revenues..................... $ 1 8,763 857 -- 147 3,645 207 1,718 $15,338
Total sales and revenues...... $1,948 9,057 3,879 832 1,877 7,338 6,821 2,573 $34,325
Depreciation and amortization. $ 5 228 67 136 27 165 1 48 $ 677/1/
Imputed interest expense...... $ 13 70 24 380 19 68 59 57 $ 690
Accountable profit............ $ 12 1,299 121 162 91 442 199 196 $ 2,522
Accountable assets at Dec. 31. $ 402 2,238 937 7,189 836 2,460 1,396 1,931 $17,389
Capital Expenditures.......... $ 23 243 67 7 18 287 1 105 $ 751/1/
- -----------------------------------------------------------------------------------------------------------------------------------
1996
External sales and revenues... $2,172 314 2,937 715 1,270 2,890 5,632 734 $16,664
Intersegment sales and
revenues..................... $ 2 7,815 633 -- 125 3,110 168 1,554 $13,407
Total sales and revenues...... $2,174 8,129 3,570 715 1,395 6,000 5,800 2,288 $30,071
Depreciation and amortization. $ 3 238 73 119 27 139 -- 45 $ 644/1/
Imputed interest expense...... $ 14 64 34 319 13 50 31 48 $ 573
Accountable profit............ $ 94 1,065 92 137 43 373 195 211 $ 2,210
Accountable assets at Dec. 31. $ 410 2,127 1,000 6,212 729 2,144 1,186 1,796 $15,604
Capital Expenditures.......... $ 20 172 56 -- 12 125 -- 73 $ 458/1/
</TABLE>
/1/Amount differs from our consolidated, external reporting amount primarily
because of service centers, which are not included in business segments.
<TABLE>
<CAPTION>
Reconciliations:
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Sales & Revenues
----------------
Total external sales and revenues
from business segments.................. $21,036 $18,987 $16,664
Other................................... (59) (62) (142)
------- ------- -------
Total consolidated sales and revenues... $20,977 $18,925 $16,522
======= ======= =======
Profit before taxes
-------------------
Total accountable profit from
business segments....................... $ 2,257 $ 2,522 $ 2,210
Corporate costs......................... (316) (317) (290)
Methodology differences................. 168 14 (122)
Methodology changes in
segment reporting...................... -- 119 107
Other................................... 65 75 36
------- ------- -------
Total consolidated profit before taxes.. $ 2,174 $ 2,413 $ 1,941
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Assets
------
Total accountable assets from
business segments....................... $21,884 $17,389 $15,604
Items not included in segment assets:
Deferred income taxes & prepaids........ 2,036 1,968 1,945
Intangible assets & other assets........ 1,663 847 641
Investments in affiliated companies..... 534 539 536
Cash and short-term investments......... 360 292 487
Service center assets.................. 350 294 281
Liabilities included in segment assets.. 596 643 464
Inventory methodology differences....... (1,769) (1,700) (1,634)
Intercompany trade receivables
double counted in segment assets........ (1,217) -- --
Other................................... 691 484 404
------- ------- -------
Total consolidated assets............... $25,128 $20,756 $18,728
======= ======= =======
</TABLE>
Continued on Page A-19
A-18
<PAGE>
Caterpillar Inc.
_______________________________________________________________________________
TABLE V Continued -- Segment Information (unaudited)
_______________________________________________________________________________
Enterprise-Wide Disclosures:
External sales and revenues from products and services:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
------- ------- -------
Machinery.................. $13,448 $13,350 $11,862
Engines.................... 6,524 4,760 3,952
Financial Products......... 1,005 815 708
------- ------- -------
Total consolidated....... $20,977 $18,925 $16,522
======= ======= =======
</TABLE>
Information about Geographic Areas:
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C>
Sales & Revenues/1/ Net property, plant, and equipment
-------------------------------------- -------------------------------------
December 31,
1998 1997 1996 1998 1997 1996
<S> ---------- ---------- ---------- ---------- ----------- ---------
Inside United States........ $10,870 $ 9,492 $ 8,160 $3,038 $2,830 $2,638
Outside United States....... 10,107 9,433 8,362 1,828/2/ 1,228/2/ 1,129/2/
---------- ---------- ---------- ---------- ----------- ---------
Total..................... $20,977 $18,925 $16,522 $4,866 $4,058 $3,767
========== ========== ========== ========== =========== =========
</TABLE>
/1/ Sales of machinery and engines are based on dealer location. Revenues
from services provided are based on location of customer.
/2/ Amount includes $531, $189, and $139 of net property, plant, and
equipment located in the United Kingdom as of December 31, 1998, 1997, and
1996, respectively.
________________________________________________________________________________
21. Selected quarterly financial results (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<C> <C> <C> <C>
1998 Quarter
---------------------------------------------
1st 2nd 3rd 4th
<S> ------- ------- ------- -------
Sales and revenues........... $4,794 $5,604 $5,173 $5,406
Less: Revenues............... 221 247 267 270
------- ------- ------- -------
Sales........................ 4,573 5,357 4,906 5,136
Cost of goods sold........... 3,334 3,978 3,748 3,971
------- ------- ------- -------
Gross margin................. 1,239 1,379 1,158 1,165
Profit....................... 430 446 336 301
Profit per share of common
stock....................... $ 1.17 $ 1.22 $ .93 $ .84
Profit per share of common
stock -- assuming dilution.. $ 1.15 $ 1.20 $ .92 $ .83
1997 Quarter
--------------------------------------------
1st 2nd 3rd 4th
------- ------- ------- -------
Sales and revenues........... $4,262 $4,870 $4,600 $5,193
Less: Revenues............... 190 194 215 216
------- ------- ------- -------
Sales........................ 4,072 4,676 4,385 4,977
Cost of goods sold........... 2,981 3,450 3,278 3,665
------- ------- ------- -------
Gross margin................. 1,091 1,226 1,107 1,312
Profit....................... 394 435 385 451
Profit per share of common
stock....................... $ 1.04 $ 1.15 $ 1.03 $ 1.22
Profit per share of common
stock -- assuming dilution.. $ 1.03 $ 1.13 $ 1.01 $ 1.20
</TABLE>
22. Acquisition of Perkins
- ----------------------------------------------------------------------------
During the first quarter of 1998, we acquired the net assets of Perkins Ltd. and
the stock of several related subsidiaries for $1,328. We paid for this
acquisition using a combination of existing cash and new debt. Perkins is a
leading manufacturer of small to medium-sized diesel engines. The acquisition
was accounted for using the purchase method of accounting. When we acquired
Perkins we preliminarily used a 15-year amortization period for the purchased
intangible assets. Subsequent review, including a more detailed analysis of the
composition and benefit lives of these assets and a study of industry practices,
led us to conclude that a 20-year amortization period was more appropriate.
Therefore, amortization of acquired intangible assets, including goodwill, is
being computed using the straight-line method over a period of 20 years.
A-19
<PAGE>
Five-year Financial Summary Caterpillar Inc.
(Dollars in millions except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<C> <C> <C> <C> <C>
Years ended December 31, 1998 1997 1996 1995 1994
<S> ------- ------ ------ ------ ------
Sales and revenues............................................ $20,977 18,925 16,522 16,072 14,328
Sales........................................................ $19,972 18,110 15,814 15,451 13,863
Percent inside the United States........................... 51% 49% 49% 48% 51%
Percent outside the United States.......................... 49% 51% 51% 52% 49%
Revenues..................................................... $ 1,005 815 708 621 465
Profit........................................................ $ 1,513 1,665 1,361 1,136 955
Profit per share of common stock/1/........................... $ 4.17 4.44 3.54 2.86 2.35
Profit per share of common stock --
assuming dilution/1/......................................... $ 4.11 4.37 3.50 2.84 2.33
Dividends declared per share of common stock.................. $ 1.15 .95 .78 .65 .32
Return on average common stock equity......................... 30.9% 37.9% 36.3% 36.1% 37.4%
Capital expenditures:
Property, plant, and equipment............................... $ 925 824 506 464 501
Equipment leased to others................................... $ 344 282 265 215 193
Depreciation and amortization................................. $ 865 738 696 682 683
Research and engineering expenses............................. $ 838 700 570 532 435
As a percent of sales and revenues........................... 4.0% 3.7% 3.4% 3.3% 3.0%
Wages, salaries, and employee benefits........................ $ 4,146 3,773 3,437 2,919 3,146
Average number of employees................................... 64,441 58,366 54,968 54,263 52,778
December 31,
Total assets:
Consolidated................................................. $25,128 20,756 18,728 16,830 16,250
Machinery and Engines/2/..................................... $15,619 14,188 13,066 12,375 12,142
Financial Products........................................... $11,648 7,806 6,681 5,712 4,737
Long-term debt due after one year:
Consolidated................................................. $ 9,404 6,942 5,087 3,964 4,270
Machinery and Engines/2/..................................... $ 2,993 2,367 2,018 2,049 1,934
Financial Products........................................... $ 6,411 4,575 3,069 1,915 2,336
Total debt:
Consolidated................................................. $12,452 8,568 7,459 6,400 5,903
Machinery and Engines/2/..................................... $ 3,102 2,474 2,176 2,219 2,037
Financial Products........................................... $ 9,350 6,094 5,283 4,181 3,866
Percent of total debt to total debt and stockholders' equity
(Machinery and Engines)...................................... 37.7% 34.6% 34.6% 39.6% 41.2%
</TABLE>
/1/ Computed on weighted-average number of shares outstanding.
/2/ Represents Caterpillar Inc. and its subsidiaries except for Financial
Products, which is accounted for on the equity basis.
Transactions between Machinery and Engines and Financial Products have been
eliminated to arrive at the consolidated data.
A-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
It is our objective to provide the most meaningful disclosures in our
Management's Discussion and Analysis in order to explain significant changes in
our company's results of operations and liquidity and capital resources. As
discussed in Note 20A, "Basis for segment information" on Page A-16, our segment
financial information is not based on generally accepted accounting principles
and it is not intended to measure contributions to enterprise results.
Therefore, it is impractical for us to try to discuss our company's results of
operations and liquidity and capital resources solely based on segment
information. Where practical, we have linked our discussions to segment
information provided in Table V on Pages A-18 and A-19 (see Reconciliation of
Machinery and Engine Sales by Geographic Region to External Sales by Marketing
Segment on Page A-22). Our discussions will focus on consolidated results and
our three principal lines of business as described below:
Consolidated -- represents the consolidated data of Caterpillar Inc. and all
its subsidiaries (affiliated companies that are more than 50% owned).
Machinery -- design, manufacture, and marketing of construction, mining,
agricultural, and forestry machinery -- track and wheel tractors, track and
wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and
wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders,
off-highway trucks, articulated trucks, paving products, telescopic handlers,
skid-steer loaders, and related parts.
Engines -- design, manufacture, and marketing of engines for Caterpillar
Machinery, on-highway trucks, and locomotives; marine, petroleum, construction,
industrial, and other applications; electric power generation systems; and
related parts. Reciprocating engines meet power needs ranging from 5 to over
21,000 horsepower (4 to over 15 660 kilowatts). Turbines range from 1,340 to
18,000 horsepower (1000 to 13 500 kilowatts).
Financial Products -- financing to customers and dealers for the purchase and
lease of Caterpillar and noncompetitive related equipment, as well as some
financing for Caterpillar sales to dealers. Also provides various forms of
insurance to customers and dealers to help support the purchase and lease of our
equipment. This line of business consists primarily of Caterpillar Financial
Services Corporation (Cat Financial) and its subsidiaries and Caterpillar
Insurance Services Corporation.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Machinery and Engines Sales Table by Geographic Region
(Millions of dollars) Total North America EAME** Latin America Asia/Pacific
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Machinery Sales......................................... $13,448 $ 8,352 $ 2,871 $ 1,252 $ 973
Engine Sales/*/......................................... 6,524 3,097 2,134 666 627
------- ------- ------- ------- -------
$19,972 $11,449 $ 5,005 $ 1,918 $ 1,600
======= ======= ======= ======= =======
1997
Machinery Sales......................................... $13,350 $ 7,606 $ 2,714 $ 1,252 $ 1,778
Engine Sales/*/......................................... 4,760 2,526 1,088 450 696
------- ------- ------- ------- -------
$18,110 $10,132 $ 3,802 $ 1,702 $ 2,474
======= ======= ======= ======= =======
1996
Machinery Sales......................................... $11,862 $ 6,465 $ 2,569 $ 854 $ 1,974
Engine Sales/*/......................................... 3,952 2,034 948 384 586
------- ------- ------- ------- -------
$15,814 $ 8,499 $ 3,517 $ 1,238 $ 2,560
======= ======= ======= ======= =======
</TABLE>
/*/Does not include internal engine sales of $1,268 million, $1,162 million,
and $927 million in 1998, 1997, and 1996, respectively. Internal engine
sales are valued at prices comparable to those for unrelated parties.
/**/Europe, Africa & Middle East, and Commonwealth of Independent States.
- --------------------------------------------------------------------------------
A-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
________________________________________________________________________________
Reconciliation of Machinery and Engine Sales by Geographic Region to External
Sales by Marketing Segment
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(Millions of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
North America Geographic Region....................................................................... $11,449 $10,132 $ 8,499
Engine sales included in the Power Products segment................................................... (3,097) (2,526) (2,034)
Company owned dealer sales included in the All Other segment.......................................... (389) (411) (329)
North America Geographic Region sales which are included
in the Latin America Marketing segment............................................................... (135) (132) (87)
Other*................................................................................................ (414) (449) (417)
------- ------- -------
North America Marketing external sales................................................................ $ 7,414 $ 6,614 $ 5,632
======= ======= =======
EAME.................................................................................................. $ 5,005 $ 3,802 $ 3,517
Power Products sales not included in the EAME Marketing segment....................................... (1,448) (587) (457)
Other*................................................................................................ (268) (193) (123)
------- ------- -------
EAME Marketing external sales......................................................................... $ 3,289 $ 3,022 $ 2,937
======= ======= =======
Latin America Geographic Region....................................................................... $ 1,918 $ 1,702 $ 1,238
Sales to the North America Geographic Region which are included in the
Latin America Marketing segment..................................................................... 135 132 87
Power Products sales not included in the Latin America Marketing segment.............................. (385) (237) (193)
Other................................................................................................. 95 133 138
------- ------- -------
Latin America Marketing external sales................................................................ $ 1,763 $ 1,730 $ 1,270
======= ======= =======
Asia/Pacific Geographic Region........................................................................ $ 1,600 $ 2,474 $ 2,560
Power Products sales not included in the Asia/Pacific Marketing segment............................... (370) (343) (206)
Other................................................................................................. (137) (184) (182)
------- ------- -------
Asia/Pacific Marketing external sales................................................................. $ 1,093 $ 1,947 $ 2,172
======= ======= =======
*Mostly represents external sales of the Construction & Mining Products and the All Other segments.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1998 COMPARED WITH 1997
- -----------------------
Sales and revenues of $20.98 billion rose $2.05 billion (approximately $850
million from Perkins), 11% over 1997's record of $18.93 billion. Profit of $1.51
billion was $152 million, 9% less than 1997's record of $1.67 billion. Continued
spending for growth initiatives, including the impact of Perkins, more than
offset the additional profit associated with higher sales and revenues. Profit
per share of $4.11 was down 6% from the 1997 record of $4.37, and continues to
benefit from the company's share repurchase programs.
MACHINERY AND ENGINES
Machinery sales were $13.45 billion, an increase of $98 million from 1997. The
improvement resulted from an increase in physical volume as higher sales to end
users and dealer rental fleets more than offset a slowdown in dealer inventory
accumulation. Price realization was lower as price increases taken over the past
year were more than offset by higher discounting and the effect of the stronger
dollar on sales denominated in currencies other than U.S. dollars.
Sales were higher in all regions of the world except Asia/Pacific where severe
recessions resulted in lower industry demand and a large reduction in dealer
inventories. Sales in North America were particularly strong reflecting good
economic and industry growth as well as an increase in dealer inventory levels.
Sales were up in both the United States and Canada. Sales were higher in Europe
due to improved industry demand. In contrast, low commodity prices and sluggish
economic growth kept sales in Africa & Middle East at 1997 levels. Latin America
began the year with considerable momentum. However, a sharp economic downturn
brought on by higher interest rates and government spending cuts kept sales at
last year's levels.
Engine sales were $6.52 billion, an increase of $1.76 billion or 37%. Excluding
Perkins, sales were up $910 million or 19%. The increase was due primarily to
higher physical volume resulting from improved end-user and Original Equipment
Manufacturer (OEM) demand. Price realization was about the same.
Sales excluding Perkins were up in all regions except Asia/Pacific, although
turbine sales in developing Asia were higher despite the severe downturn. Sales
in North America were up reflecting the strong on-highway truck market as well
as increased demand for other applications. Sales also were higher in Latin
America with increases in petroleum, power generation, and marine applications.
Sales in Europe, Africa & Middle East, and Commonwealth of Independent States
(EAME) were up due primarily to higher demand for petroleum and power generation
applications.
A-22
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating Profit Table
(Millions of dollars) 1998 1997 1996
- -----------------------------------------------------
<S> <C> <C> <C>
Machinery............... $ 1,584 $ 1,808 $ 1,487
Engine.................. 504 468 370
------- ------- -------
$ 2,088 $ 2,276 $ 1,857
======= ======= =======
</TABLE>
Caterpillar operations are highly integrated; therefore, we use a number of
allocations to determine lines of business operating profit.
- --------------------------------------------------------------------------------
Machinery operating profit decreased $224 million, or 12% from 1997. Margin
(sales less cost of goods sold) was about the same, as the benefit from higher
sales was mostly offset by higher fixed manufacturing costs and an unfavorable
change in product sales mix. The unfavorable impact of the stronger dollar on
sales was mostly offset by a favorable impact on costs. Selling, general, and
administrative and research and development expenses were higher in support of
major growth initiatives.
Engine operating profit increased $36 million, or 8% from 1997. Margin (sales
less cost of goods sold) increased due to the higher sales volume but was
unfavorably impacted by higher fixed manufacturing costs (primarily due to
Perkins) and an unfavorable change in product sales mix. Selling, general, and
administrative and research and development expenses were higher in support of
major growth initiatives, including Perkins.
Interest expense was $45 million higher than a year ago due to higher average
debt levels to support the Perkins acquisition and increased working capital
needs.
Other income/expense was income of $46 million compared with income of $153
million last year. The decrease was mostly due to the discounts taken on the
sales of trade receivables to Caterpillar Financial Services Corporation (Cat
Financial). Discounts taken on this revolving sale of receivables to Cat
Financial are reflected in Machinery and Engines as other expense. Revenues
offsetting these discounts as well as the related borrowing costs are reflected
in Financial Products.
<TABLE>
<CAPTION>
Table of Supplemental Information
(Millions of dollars) 1998 1997
- --------------------------------------------
<S> <C> <C>
Identifiable Assets
Machinery.............. $ 9,199 $ 9,463
Engines................ 6,420 4,725
------- -------
Total................ $15,619 $14,188
======= =======
Capital Expenditures
Machinery.............. $ 511 $ 481
Engines................ 416 343
------- -------
Total................ $ 927 $ 824
======= =======
Depreciation
and Amortization
Machinery.............. $ 414 $ 392
Engines................ 283 207
------- -------
Total................ $ 697 $ 599
======= =======
</TABLE>
Caterpillar operations are highly integrated; therefore, we use a number of
allocations to determine lines of business financial data.
- --------------------------------------------------------------------------------
FINANCIAL PRODUCTS
Revenues were a record $1.12 billion, up $278 million or 33% compared with 1997.
The increase was primarily due to Cat Financial's portfolio growth, resulting
from record new retail business and the purchase of trade receivables from
Caterpillar Inc.
Selling, general, and administrative expenses were up $53 million, principally
the result of record new business levels which increased provision for credit
losses and depreciation on leased equipment. Other increases due to growth were
partially offset by favorable reserve adjustments at Caterpillar Insurance Co.
Ltd. (Cat Insurance).
Interest expense was $128 million higher because of increased borrowings to
support the larger portfolio.
INCOME TAXES
1998 tax expense reflects an effective tax rate of 31% and includes a favorable
adjustment to recognize deferred tax assets at certain European subsidiaries.
The 1997 effective tax rate was 33%.
UNCONSOLIDATED AFFILIATED COMPANIES
The company's share of unconsolidated affiliated companies' profit was $4
million, down $44 million from a year ago. The major factor for the decrease was
less favorable results at Shin Caterpillar Mitsubishi Ltd.
SUPPLEMENTAL INFORMATION
- ------------------------
Dealer Machine Sales to End Users and Deliveries to Dealer Rental Operations
Sales and deliveries in North America were up in 1998 due to higher industry
demand. The United States economy registered very good growth with Gross
Domestic Product (GDP) increasing about 3.7%, significantly faster than the
2.0%-2.5% threshold required for industry expansion. Residential construction
was exceptionally strong all year. Canada started the year with strength, but
lower commodity prices and higher interest rates to defend the Canadian dollar
caused a sharp mid-year deceleration in the economy. In total, sales to end
users rose in all key construction sectors as well as nonmetals mining,
petroleum, agriculture, and solid waste. Sales to end users fell in metals and
coal mining and in industrial as well as forestry applications. Deliveries to
dealer rental operations continued to rise.
Sales and deliveries in the EAME region also were up in 1998 due to higher
industry demand and an improvement in share of industry sales. GDP growth in
Europe was near 3% resulting in better industry demand, although the United
Kingdom represented an important exception as high interest rates and a strong
currency depressed the economy. Sales to users were higher in Germany, France,
Spain, and Italy but lower in the United Kingdom. In Africa & Middle East low
commodity prices, sluggish growth, and spending reductions led to lower industry
demand and slightly lower sales to users. Sales to users were higher in United
Arab Emirates, about the same in Turkey, and lower in South Africa and Egypt. In
the Commonwealth of Independent States sales were lower due to severe recession
in Russia and economic difficulties in other countries. For the region as a
whole, sales to users were higher for construction applications as well as
metals and nonmetals mining.
A-23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
________________________________________________________________________________
Sales and deliveries in Latin America were higher for the year despite a
decline in the second half. In the first half, good economic growth led to
strong industry demand and higher sales. In August, however, countries
throughout the region raised interest rates and cut spending to defend their
currencies. These actions along with low commodity prices led to slower growth
for most countries, recession in Brazil and lower industry demand. For the year
as a whole, sales to users rose in Brazil, Mexico, and Argentina, but fell in
Colombia, Chile, and Peru. Sales to users were higher for construction
applications, but lower for commodity applications, particularly metals mining.
Sales and deliveries in Asia/Pacific were down considerably due to severe
recessions in Southeast Asia, Korea, and Japan. Economic contraction, currency
depreciation, high interest rates, government spending reductions, and high
levels of uncertainty led to a very significant decline in sales to end users in
Southeast Asia and Korea. In Japan, industry demand continued to fall as low
interest rates and government spending failed to pull the economy out of
recession. Economic growth in China slowed, but a large government spending
initiative combined with lower interest rates bolstered the economy and led to
higher sales to users. Good growth continued in Australia leading to higher
industry demand and sales to users. For the Asia/Pacific region as a whole,
sales to users were lower in all key construction and commodity sectors.
Dealer Inventories of Machines
Worldwide dealer new machine inventories at year end were about flat compared to
year-end 1997 and moderately above normal relative to current selling rates.
Higher inventories in North America, EAME, and Latin America offset a large
decline in Asia/Pacific. At year end, inventories compared with current selling
rates were about normal in EAME and Asia/Pacific. Inventories in North America
were moderately above normal compared with current selling rates as dealers took
advantage of special financing and inventory programs to improve product
availability for the 1999 selling season. There was also some build up in
anticipation of reloading rental fleets. Inventories in Latin America were
significantly above current selling rates as sales fell more sharply than
anticipated in the fourth quarter.
Engine Sales to End Users and OEMs (excluding Perkins)
Sales in North America were up due to higher industry demand and an increased
share of industry sales. The on-highway truck market was particularly strong.
Sales were also higher in other applications including petroleum, power
generation, marine, and industrial. Sales of both reciprocating and turbine
engines were higher. Sales were up in Canada as well as the United States.
Sales in EAME also were up. In Europe, good economic growth led to higher
sales of reciprocating engines for most applications, especially power
generation. In Africa & Middle East, sales of turbines were higher for oil and
natural gas projects. For the region as a whole, both reciprocating engine and
turbine sales were up with gains in all applications except marine.
Sales in Latin America were higher for the year despite the second-half
economic slowdown. Significantly higher sales of turbines for oil and natural
gas applications accounted for the increase.
Sales in Asia/Pacific were down reflecting severe economic recession in
Southeast Asia, Korea, and Japan. Sales were lower in power generation and
industrial applications, flat in petroleum, and higher in marine and truck
applications.
<TABLE>
<CAPTION>
Machinery and Engines Sales Table
(Millions of dollars) Total North America EAME** Latin America Asia/Pacific
----- ------------- ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Fourth-Quarter 1998
Machinery Sales.................... $3,111 $1,942 $ 674 $267 $228
Engine Sales*...................... 2,025 858 662 262 243
------ ------ ------ ---- ----
$5,136 $2,800 $1,336 $529 $471
======= ====== ====== ==== ====
Fourth-Quarter 1997
Machinery Sales.................... $3,402 $1,926 $ 674 $381 $421
Engine Sales*...................... 1,575 739 382 195 259
------ ------ ------ ---- ----
$4,977 $2,665 $1,056 $576 $680
======= ====== ====== ==== ====
</TABLE>
*Does not include internal engine sales of $304 million and $316 million in
1998 and 1997, respectively. Internal engine sales are valued at prices
comparable to those for unrelated parties.
**Europe, Africa & Middle East, and Commonwealth of Independent States.
A-24
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
FOURTH-QUARTER 1998
COMPARED WITH FOURTH-QUARTER 1997
- ---------------------------------
Fourth-quarter sales and revenues of $5.41 billion were a fourth-quarter record
and were up 4% from fourth-quarter 1997. A 37% increase in Financial Products
revenues and the additional sales provided by Perkins were partially offset by
lower sales in other areas. Profit of $301 million was down 33% from the fourth-
quarter record set in 1997 and profit per share of $.83 was down 31%. The profit
from the higher sales and revenues was more than offset by lower margin rates
and continued spending for growth initiatives.
MACHINERY AND ENGINES
Machinery sales were $3.11 billion, a decrease of $291 million or 9% from
fourth-quarter 1997. The lower sales resulted primarily from a decrease in
physical volume due to lower dealer sales to end users. Price realization was
lower as price increases taken over the past year were more than offset by
higher sales discounts.
Sales were flat in North America as an increase in dealer inventories offset a
slight reduction in sales to users. In EAME both company sales and end-user
demand were flat. In Latin America and Asia/Pacific sales were lower due
primarily to a drop in end-user demand, reflecting economic weakness in those
areas.
Engine sales were $2.03 billion, an increase of $450 million or 29%. Excluding
Perkins, sales were up $210 million or 13%. The increase was due to higher
physical sales volume resulting from improved end-user and OEM demand. Price
realization was about the same.
Sales excluding Perkins were up in all regions except Asia/Pacific. Sales in
North America were higher due to heightened demand for both turbines and
reciprocating engines. Sales in EAME and Latin America were up due primarily to
higher turbine sales.
Operating Profit Table
<TABLE>
<CAPTION>
(Millions of dollars) 1998 1997
- ---------------------------------------
<S> <C> <C>
Machinery............... $235 $418
Engine.................. 165 206
---- ----
$400 $624
==== ====
</TABLE>
Caterpillar operations are highly integrated; therefore, we use a number of
allocations to determine lines of business operating profit.
- --------------------------------------------------------------------------------
Machinery operating profit decreased $183 million, or 44% from 1997. Margin
(sales less cost of goods sold) was lower due to the lower sales volume, higher
fixed manufacturing costs, and an unfavorable change in product sales mix.
Selling, general, and administrative and research and development expenses were
higher in support of major growth initiatives.
Engine operating profit decreased $41 million, or 20% from 1997. Margin (sales
less cost of goods sold) was about the same as the benefit from higher sales
volumes was offset by higher fixed manufacturing costs (primarily due to
Perkins) and an unfavorable change in product sales mix. Selling, general, and
administrative expenses were higher primarily due to Perkins. Research and
development expenses were slightly lower.
Interest expense was $10 million higher than a year ago due to higher average
debt levels supporting the Perkins acquisition and increased working capital
needs.
Other income/expense was expense of $6 million compared with income of $32
million last year. The decrease is mostly due to the discounts taken on the
sales of trade receivables to Cat Financial and the agreement reached with the
Environmental Protection Agency to reduce emissions.
FINANCIAL PRODUCTS
Revenues were a record $305 million, up $83 million or 37% compared with 1997.
The increase was primarily due to Cat Financial's portfolio growth, resulting
from strong new retail business and the purchase of trade receivables from
Caterpillar Inc.
Selling, general, and administrative expenses were up $22 million, principally
the result of record new business levels which increased provision for credit
losses and depreciation on leased equipment. Other increases due to growth were
partially offset by favorable reserve adjustments at Cat Insurance.
Interest expense was $32 million higher due to increased borrowings to support
the larger portfolio.
INCOME TAXES
Fourth-quarter 1998 tax expense reflects an effective tax rate of 24% and
includes a favorable adjustment to recognize deferred tax assets at certain
European subsidiaries. The fourth-quarter 1997 effective tax rate was 33%.
UNCONSOLIDATED AFFILIATED COMPANIES
The company's share of unconsolidated affiliated companies' results was a loss
of $7 million in 1998, compared with profit of $12 million in 1997. The major
factor for the decrease was less favorable results at Shin Caterpillar
Mitsubishi Ltd., including a fourth-quarter 1998 adjustment to write off certain
deferred tax assets.
1997 COMPARED WITH 1996
- -----------------------
(has been changed to conform with 1998 presentation)
Profit for 1997 was up 22% on a 15% increase in sales and revenues. Profit per
share of common stock increased 25%, reflecting the impact of the higher profit
and the ongoing share repurchase program. Profit of $1.67 billion or $4.37 per
share was the best in our history, an improvement of $304 million over the
profit of $1.36 billion or $3.50 per share in 1996. Sales and revenues of $18.93
billion were $2.40 billion higher and also an all-time record. An increase in
physical sales volume of 15% was the most significant factor contributing to the
higher sales and revenues and profit.
MACHINERY AND ENGINES
Machinery sales were $13.35 billion, an increase of $1.49 billion from 1996,
setting another all-time record. Most of the improvement was due to higher sales
volume resulting from higher dealer sales to end users. Sales were higher in
most key applications including construction, sand and quarry operations, and
forestry. Price realization was about the same as price increases taken
over the past year and a favorable change in geographic sales mix were offset by
the effect of the stronger dollar on sales denominated in currencies other than
the U.S. dollar.
A-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
Sales were higher in all regions of the world except Asia/Pacific. Sales in
North America were particularly strong reflecting good economic and industry
growth as well as strong industry demand for construction and mining equipment.
A healthy farm economy also boosted industry demand for agricultural equipment.
Sales were up in both the United States and Canada. Sales were higher in EAME
primarily due to increased sales in Europe as dealers replenished their new
machine inventory. Sales in Latin America were notably higher with sizable gains
in Brazil, Mexico, Peru, Chile, and Argentina, all of which registered good
economic growth. End-user demand was higher in all key construction sectors as
well as metal and nonmetal mining. Lower demand was registered only in coal
mining and agricultural applications. Sales in Asia/Pacific declined reflecting
the impact of the currency crisis on the region's economy. Industry demand for
machines declined sharply in the second half of the year in a number of
Southeast Asia countries including Thailand, Indonesia, Malaysia, and the
Phillipines. As a result, sales to end users for the entire year slipped below
1996 levels.
Engine sales were $4.76 billion, an increase of $808 million from 1996. The
improvement reflected higher end-user demand for reciprocating gas and diesel
engines, as well as turbines. Company sales were higher in all key applications
including on-highway trucks, power generation, oil and gas, industrial, and
marine. Sales were also higher due to the acquisition of MaK Motoren GmbH & Co.
KG on December 31, 1996. Price realization was about the same as price increases
taken over the past year and a favorable change in geographic sales mix were
offset by the effect of the stronger dollar on sales denominated in currencies
other than the U.S. dollar.
Sales were higher in all regions. Sales in North America were up considerably
reflecting the strong on-highway truck market as well as increased demand for
turbines and other reciprocating engines. Sales were higher in Latin America
reflecting good economic growth of Brazil, Mexico, Peru, Chile, and Argentina.
Sales in EAME were up due primarily to higher industry demand. Sales in
Asia/Pacific increased primarily due to turbine sales in Australia and
developing Asia. Sales of reciprocating engines remained near 1996 levels.
Machinery operating profit increased $321 million, or 22% from 1996. Margin
(sales less cost of goods sold) improved as the benefit from higher sales more
than offset higher fixed manufacturing costs. Selling, general, and
administrative and research and development expenses were higher in support of
major growth initiatives and product line expansions.
Engine operating profit increased $98 million, or 26% from 1996. Margin (sales
less cost of goods sold) improved as the benefit from higher sales more than
offset higher fixed manufacturing costs and an unfavorable change in product
sales mix. Selling, general, and administrative and research and development
expenses were higher in support of major growth initiatives and product line
expansions.
Interest expense of $219 million was $25 million higher than a year ago, mostly
due to higher average debt levels.
Other income/expense was income of $153 million compared with income of $127
million last year. The increase of $26 million is primarily due to several small
favorable items, partially offset by an unfavorable change in foreign exchange
gains and losses.
FINANCIAL PRODUCTS
Revenues of $839 million were a record, up $107 million or 15% compared with
1996, primarily the result of Cat Financial's larger portfolio.
Selling, general, and administrative expenses were up $22 million, primarily due
to Cat Financial's higher depreciation on leased equipment and other increases
due to growth, partially offset by a favorable reserve adjustment at Cat
Insurance.
Interest expense was up $57 million due to increased borrowings to support the
larger portfolio. Other income/expense was income of $61 million, an increase of
$24 million from a year ago.
The increase in other income was primarily the result of higher gains on sales
of used equipment, exchange gains, increased use of securitization by Cat
Financial, and higher investment income at Cat Insurance.
INCOME TAXES
The provision for income taxes was $796 million compared with $613 million for
1996. The $183 million increase reflects the higher before-tax profit and a
higher effective tax rate of 33% compared with 31.6% for 1996. The higher tax
rate accounted for $34 million of the increase.
LIQUIDITY & CAPITAL RESOURCES
Consolidated operating cash flow totaled $1.78 billion for 1998, compared with
$2.10 billion during 1997. This decrease is largely due to an unfavorable change
in accounts payable and accrued expenses.
Total debt at year-end 1998 was $12.45 billion, an increase of $3.88 billion
from year-end 1997. Over this period, debt related to Machinery and Engines
increased $628 million to $3.10 billion, while debt related to Financial
Products increased $3.26 billion to $9.35 billion.
During 1995, we announced a plan to repurchase up to 10% of our outstanding
common stock over a three to five year period. This share repurchase program was
completed in the third quarter of 1998. In October 1998, the Board of Directors
authorized another share repurchase program to reduce the number of outstanding
shares to 320 million within the next three to five years. In total, 11.6
million shares were repurchased during the year. The number of shares
outstanding at December 31, 1998, was 357.2 million.
Machinery and Engines
Operating cash flow totaled $2.65 billion for 1998, compared with $1.80 billion
for 1997. The increase is primarily the result of a $1.33 billion favorable
change in accounts receivable, largely due to the $1.22 billion sale of
receivables to Cat Financial. Partially offsetting this favorable item was a
$372 million net unfavorable change in accounts payable and accrued expenses and
inventories.
Capital expenditures, excluding equipment leased to others, totaled
$918 million for 1998 compared with $819 million for 1997. Total debt increased
by $628 million. As part of the company's long-term funding strategy, $250
million of Eurobond notes and $300 million of debentures were issued during the
first and third quarter of 1998, respectively. The $250 million of five-year
Eurobonds were issued at a premium. These bonds are due
A-26
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
February 13, 2003, and were priced to yield 5.914% semi-annually with a
coupon of 6%. The $300 million of 30-year debentures were issued at a discount.
These bonds are due July 15, 2028, and were priced to yield 6.649% semi-annually
with a coupon of 6.625%. These funds were utilized for general corporate
purposes, including the acquisition of Perkins. Our additional debt has
increased the percent of debt to debt plus stockholders' equity from 35% at
December 31, 1997, to 38% at December 31, 1998.
Financial Products
Operating cash flow totaled $(822) million for 1998, compared with $323 million
for 1997. This decrease resulted from the purchase of $1.22 billion of Machinery
and Engines trade receivables. Cash used to purchase equipment leased to others
totaled $335 million in 1998. In addition, net cash used for finance receivables
was $2.20 billion for 1998, compared with $1.21 billion for 1997.
Financial Products' debt was $9.35 billion at December 31, 1998, an increase
of $3.26 billion from December 31, 1997, and is primarily comprised of $6.20
billion of medium-term notes, $189 million of notes payable to banks, and $2.85
billion of commercial paper. At December 31, 1998, finance receivables past due
over 30 days were 1.5%, compared with 1.7% at December 31, 1997. The ratio of
debt to equity of Cat Financial was 8.0:1 at December 31, 1998, compared with
7.8:1 at December 31, 1997.
Financial Products had outstanding credit lines totaling $4.24 billion at
December 31, 1998, which included $2.61 billion of shared revolving credit
agreements with Machinery and Engines. These credit lines are with a number of
banks and are considered support for our outstanding commercial paper,
commercial paper guarantees, the discounting of bank and trade bills, and bank
borrowings.
<TABLE>
<CAPTION>
Dividends paid per share of common stock
Quarter 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
First..................................... $ .25 $ .20 $ .18
Second.................................... .25 .20 .17
Third..................................... .30 .25 .20
Fourth.................................... .30 .25 .20
----- ----- -----
$1.10 $ .90 $ .75
===== ===== =====
- ---------------------------------------------------------------
</TABLE>
EMPLOYMENT
At the end of 1998, Caterpillar's worldwide employment was 65,824 compared with
59,863 one year ago. Hourly employment increased 2,459 to 36,707; salaried and
management employment increased 3,502 to 29,117. The increases were almost
entirely the result of acquisitions.
<TABLE>
<CAPTION>
Full-Time Employees at Year End
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Inside U.S....................... 40,261 39,722 38,571
Outside U.S...................... 25,563 20,141 18,455
Total........................... 65,824 59,863 57,026
By Region:
North America................... 40,485 39,941 38,698
EAME............................ 18,117 12,739 12,042
Latin America................... 5,302 5,340 4,540
Asia/Pacific.................... 1,920 1,843 1,746
Total......................... 65,824 59,863 57,026
- ---------------------------------------------------------
</TABLE>
OTHER MATTERS
ENVIRONMENTAL MATTERS
The company is regulated by federal, state, and international environmental laws
governing our use of substances and control of emissions. Compliance with these
existing laws has not had a material impact on our capital expenditures,
earnings, or competitive position.
We are cleaning up hazardous waste at a number of locations, often with other
companies, pursuant to federal and state laws. When it is likely we will pay
clean-up costs at a site and those costs can be estimated, the costs are charged
against our earnings. In doing that estimate, we do not consider amounts
expected to be recovered from insurance companies and others.
The amount set aside for environmental clean-up is not material and is
included in "Accounts payable and accrued expenses" in Statement 3. If a range
of liability estimates is available on a particular site, we accrue the lower
end of that range.
We cannot estimate costs on sites in the very early stages of clean-up.
Currently, we have five of these sites and there is no more than a remote chance
that a material amount for clean-up will be required.
DERIVATIVE FINANCIAL INSTRUMENTS
I. Market Risk and Risk Management Policies
Our earnings and cash flow are subject to fluctuations due to changes in foreign
currency exchange rates, interest rates, and commodity prices. Our risk
management policy includes the use of derivative financial instruments to manage
foreign currency exchange rate, interest rate, and commodity price exposures.
Foreign Currency Exchange Rate
Foreign currency exchange rate movements create a degree of risk to our
operations by affecting:
. The U.S. dollar value of sales made in foreign currencies, and
. The U.S. dollar value of costs incurred in foreign currencies.
Foreign currency exchange rate movements also affect our competitive position,
as exchange rate changes may affect business practices and/or pricing strategies
of non-U.S. based competitors.
Our general policy is to use foreign currency derivative instruments as needed
to operate our business and protect our interests. We enter into foreign
currency derivative instruments only to manage risk -- not as speculative
instruments. We buy and sell currencies only to cover business needs and to
protect our financial and competitive position. Our general approach is to
manage future foreign currency cash flow for Machinery and Engines' operations
and net foreign currency balance sheet exposures for Financial Products'
operations.
Our Machinery and Engines' operations manufacture products in, and purchase
raw materials from, many locations around the world. Consequently, our cost base
is well diversified over a number of European, Asia/Pacific, and Latin American
currencies, as well as the U.S. dollar. This diversified cost base serves to
counterbalance the cash flow and earnings impact of non-U.S. dollar revenues
and, therefore, minimizes the effect of exchange rate movements on consolidated
earnings. We use derivative
A-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
financial instruments to manage the currency exchange risk that results when the
cash inflows and outflows by currency are not completely matched.
In managing foreign currency for Machinery and Engines' operations, our
objective is to maximize consolidated after-tax U.S. dollar cash flow. To this
end, our policy allows for actively managing:
. Cash flow related to firmly committed foreign currency transactions;
. Anticipated foreign currency cash flow for the future rolling twelve-
month period; and
. Any hedges (derivative instruments) that are outstanding.
We limit the types of derivative instruments we use to forward exchange
contracts and foreign currency option contracts (net purchased option
contracts). When using forward exchange contracts, we are protected from
unfavorable exchange rate movements, but have given up any potential benefit
from favorable changes in exchange rates. Purchased option contracts, on the
other hand, protect us from unfavorable rate movements while permitting us to
benefit from the effect of favorable exchange rate fluctuations. We do not use
historic rate rollovers or leveraged options, nor do we sell or write foreign
currency options, except in the case of combination option contracts that limit
the unfavorable effect of exchange rate movements, while allowing a limited
potential benefit from favorable exchange rate movements. The forward exchange
or foreign currency option contracts that we use are not exchange traded.
Each month, our financial officers approve the company's outlook for expected
currency exchange rate movements, as well as the policy on desired future
foreign currency cash flow positions (long, short, balanced) for those
currencies in which we have significant activity. Financial officers receive a
daily report on currency exchange rates, cash flow exposure, and open foreign
currency hedges. Expected future cash flow positions and strategies are
continuously monitored. Foreign exchange management practices, including the use
of derivative financial instruments, are presented to the Audit Committee of our
Board of Directors at least annually.
In managing foreign currency risk for our Financial Products' operations, our
objective is to minimize earnings volatility resulting from the translation of
net foreign currency balance sheet positions. We use forward exchange contracts
to offset the risk when the currency of our receivable portfolio does not match
the currency of our debt portfolio.
Interest Rate
We use various interest rate derivative instruments, including interest rate
swap agreements, interest rate cap (option) agreements, and forward rate
agreements to manage exposure to interest rate changes and lower the cost of
borrowed funds. All interest rate derivative instruments are linked to debt
instruments upon entry. We enter into such agreements only with those financial
institutions with strong bond ratings which, in the opinion of management,
virtually negates exposure to credit loss.
Our Financial Products' operations have a "match funding" objective whereby
the interest rate profile (fixed rate or floating rate) of their debt portfolio
must match the interest rate profile of their receivable, or asset portfolio
within specified boundaries. In connection with that objective, we use interest
rate derivative instruments to modify the debt structure to match the receivable
portfolio. This "match funding" reduces the risk of deteriorating margins
between interest-bearing assets and interest-bearing liabilities, regardless of
which direction interest rates move. We also use these instruments to gain an
economic and/or competitive advantage through lower cost of borrowed funds. This
is accomplished by changing the characteristics of existing debt instruments or
entering into new agreements in combination with the issuance of new debt.
Commodity Prices
Our Machinery and Engines' operations are subject to commodity price risk, as
the price we must pay for raw materials changes with movements in underlying
commodity prices. We use commodity swap and option agreements to reduce this
risk. However, our use of these types of derivative financial instruments is not
material.
II. Sensitivity
Exchange Rate Sensitivity
Based on the anticipated and firmly committed cash inflows and outflows for our
Machinery and Engines' operations for the next 12 months and the foreign
currency derivative instruments in place at year end, a hypothetical 10%
weakening of the U.S. dollar relative to all other currencies would adversely
affect our expected 1999 cash flows for our Machinery and Engines' operations by
$116 million. This is not materially different than the potential $92 million
adverse impact on expected 1998 cash flows for our Machinery and Engines'
operations that we reported last year based on similar assumptions and
calculations.
Since our policy for Financial Products' operations is to hedge the foreign
exchange risk when the currency of our debt portfolio does not match the
currency of our receivable portfolio, a 10% change in the value of the U.S.
dollar relative to all other currencies would not have a material effect on our
consolidated financial position, results of operations, or cash flow. Neither
our policy nor the effect of a 10% change in the value of the U.S. dollar has
changed from that reported at the end of last year.
The effect of the hypothetical change in exchange rates ignores the affect
this movement may have on other variables including competitive risk. If it were
possible to quantify this competitive impact, the results could well be
different than the sensitivity effects shown above. In addition, it is unlikely
that all currencies would uniformly strengthen or weaken relative to the U.S.
dollar. In reality, some currencies may weaken while others may strengthen.
Interest Rate Sensitivity
For our Machinery and Engines' operations, we currently use interest rate swaps
to lower the cost of borrowed funds by attaching fixed-to-floating interest rate
swaps to fixed rate debt. A hypothetical 100 basis point adverse move (increase)
in interest rates along the entire interest rate yield curve would adversely
affect 1999 pretax earnings of Machinery and Engines by $8 million. Last year,
similar assumptions and calculations yielded a potential $9 million adverse
impact on 1998 pretax earnings.
A-28
<PAGE>
Caterpillar Inc.
- --------------------------------------------------------------------------------
For our Financial Products' operations, we use interest rate derivative
instruments primarily to meet our "match funding" objectives and strategies. A
hypothetical 100 basis point adverse move (increase) in interest rates along the
entire interest rate yield curve would adversely affect the 1999 pretax earnings
of Financial Products by $14 million. This impact is not materially different
from the potential $10 million adverse 1998 pretax earnings impact of a similar
interest rate movement as reported last year.
The effect of the hypothetical change in interest rates ignores the affect
this movement may have on other variables including changes in actual sales
volumes that could be indirectly attributed to changes in interest rates. The
actions that management would take in response to such a change are also
ignored. If it were possible to quantify this impact, the results could well be
different than the sensitivity effects shown above.
YEAR 2000 CHALLENGE
- -------------------
Our Approach
Caterpillar has a comprehensive plan to address the Year 2000 challenge. A Year
2000 Steering Committee, chaired by a member of our Executive Office, is charged
with monitoring remediation efforts of our business units and reporting
remediation status to our Executive Office and Board of Directors. Although this
team has monitoring responsibility, vice presidents in charge of each business
unit are responsible for identifying, evaluating, and implementing changes
necessary to achieve readiness within their units.
Remediation History and Status
Caterpillar began addressing the Year 2000 challenge as part of plant
modernization and corporate restructuring initiatives in the late 1980s and
early 1990s. New systems incorporated Year 2000 compliance by design. In 1994,
Caterpillar's corporate information systems division initiated projects to
address the Year 2000 issue. Today, all Caterpillar business units are engaged
in a comprehensive effort to meet the Year 2000 challenge as it impacts their
internal and external customers.
We have established five Year 2000 phases under which units measure their
progress:
.Inventory -- identifying key business areas and related products and
services (both internal and external) potentially impacted by the Year
2000 issue;
.Analysis -- determining how a product or service is impacted and
preparing a plan to address the issue;
.Remediation -- making the necessary changes to bring the product or
service into compliance;
.Validation -- testing the product or service to ensure it is Year 2000
compliant; and
.Implementation -- installing necessary changes in production.
Internal Systems
As of December 31, 1998, substantially all Caterpillar business units have
completed an inventory of internal systems having potential Year 2000 issues. By
internal systems, we mean both information technology and non-information
technology systems. Analysis to address Year 2000 issues has been completed on
about 95% of critical systems within the control of our units. Of those critical
systems, about 85% have been remediated and 80% validated. For about 75% of all
critical systems within our control, Year 2000 fixes have been implemented.
About 85% of our business units report that mission-critical systems within
their control will be fixed, tested, and in production by June 1, 1999.
Substantially all units (over 95%) report that mission-critical and significant
priority systems will attain that status by October 1, 1999, with the remaining
few units completed prior to year-end 1999.
Caterpillar Products
For some time, we have been assessing the potential impact of the Year 2000
challenge on the operation of machines and engines sold by Caterpillar. Our
Electrical and Electronics business unit has substantially completed its review,
evaluation, and testing of electronic components and service tools used on
Caterpillar machines and engines for Year 2000 related problems. This review
included all electronic control modules, display and monitoring systems,
generator set control systems, and electronic service tools under the design
control of that business unit.
As a result of this assessment and others completed by Caterpillar, it is our
position at this time that the Year 2000 challenge should not have any
significant impact on the performance of previous, present, or future
Caterpillar machines and engines. We note that our assessment of the Year 2000
impact across our product line is an ongoing process and subject to further
review. We are committed to delivering the highest quality products and services
to our customers currently and beyond the Year 2000.
Suppliers and Caterpillar Dealers
We are actively assessing the Year 2000 readiness of our significant third-party
suppliers. Those efforts include survey mailings, presentations, review of
supplier Year 2000 statements, and follow-up activities with suppliers that have
not responded to requests for information. For suppliers that have not
responded, we are following up to achieve ultimately an acceptable comfort level
with our supply chain. For suppliers posing a significant risk, contingency
plans are being developed.
Analysis to address Year 2000 issues has been completed on about 92% of
critical dependencies (including suppliers, utilities, and transportation
services) outside the control of our business units. For 64% of these critical
dependencies, we have implemented Year 2000-ready solutions or confirmed that
the business partner or dependency was already Year 2000 compliant. Dependencies
reported as outside the control of our units may include those supplied by other
units within Caterpillar as well as those supplied by outside companies.
We are also assessing the readiness of our dealers. Efforts in the U.S. and
outside the U.S., include mailings requesting information on remediation plans
and status, periodic regional meetings with dealers and their information
systems managers, and on-site assessments by Caterpillar managers responsible
for specific dealer regions. Based on these communications, we expect that by
the end of 1999 our dealers will be in a position to service customers without
any significant business disruption related to the Year 2000 issue. We will
continually monitor dealer progress against this time frame.
A-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
- --------------------------------------------------------------------------------
Costs
The following cost estimates, which are as of December 31, 1998, would not have
a material impact on Caterpillar's results, financial position, or cash flow. As
of December 31, 1998, we have incurred about two-thirds of these estimated total
costs. As necessary, we will refine these estimates.
We anticipate incurring $130-150 million in Year 2000-related costs. Of these
costs, capital costs for the replacement of systems, hardware, or equipment are
currently estimated to be $20-30 million.
These budgeted costs may not include all of the cost of implementing
contingency plans, which are in the process of being developed. These estimates
also do not include litigation or warranty costs related to the Year 2000 issue,
which at this time cannot be reasonably estimated.
Risks
Our estimates on cost, remediation time frame, and potential financial impact
are based on information we have currently. There can be no assurance these
estimates will prove accurate and actual results could differ materially from
those currently anticipated.
Factors that could cause actual results to differ include unanticipated
supplier or dealer failures; utilities, transportation, or telecommunications
breakdowns; U.S. or non-U.S. government failures; and unanticipated failures on
our part to address Year 2000-related issues.
The most reasonably likely worst case scenario in light of these risks would
involve a potential loss in sales resulting from production and shipping delays
caused by Year 2000-related disruptions. Under this scenario, manual procedures
would be required for order processing, invoicing, supplier management
processing, warranty claim processing, and for certain factory machine tool
operations. The degree of sales loss impact would depend on the severity of the
disruption, the time required to correct it, whether the sales loss was
temporary or permanent, and the degree to which our primary competitors were
also impacted by the disruption.
To minimize the potential impact of the most reasonably likely worst case
scenario, each Caterpillar business unit is developing contingency plans.
Finalized contingency plans may involve manual procedures for machine operation,
manual procedures for collecting and reporting data, inventory adjustments for
major components, and considering alternative sources of supply. Contingency
plans, where deemed necessary, will be finalized by the end of 1999.
OUTLOOK
- -------
Summary
World economic growth in 1999 is forecast to be similar to 1998 as improvement
in Asia offsets slower growth in the Western Hemisphere and continued recession
in Japan. Combined with low prices for metals and oil, this outlook is expected
to result in slightly lower industry demand for construction and mining
machinery.
While machine demand is forecast to remain close to 1998 levels in the United
States, lower demand in Japan, Latin America, Canada, and Australia should more
than offset higher demand in Europe. Low prices for agricultural commodities are
expected to depress worldwide industry demand for agricultural equipment.
Worldwide industry demand for engines is forecast to be down slightly due to
low oil prices and a softening in the OEM markets, including on-highway trucks.
While declines are expected in the Western Hemisphere, demand elsewhere should
remain near 1998 levels.
In this environment, company sales and revenues for 1999 are expected to be
slightly below 1998's record levels. Profit is expected to be moderately lower
primarily because of the sales volume decrease and the continuing competitive
pricing environment. As indicated at the end of the third quarter, our growth
initiatives unfavorably impacted 1998 profit by about 10%. We expect that the
dilutive effect in 1999 will be less than 1998 as some programs near completion.
We anticipate the impact of our growth initiatives to be accretive in 2000.
North America
In the United States, Gross Domestic Product (GDP) growth is forecast to slow
from 3.7% in 1998 to about 2.5% in 1999. Housing starts should remain strong,
and the new six-year highway spending bill will significantly increase highway
construction spending as well as aggregates production. Metal mining and
agriculture, however, are expected to remain weak due to low worldwide prices.
Overall, industry demand for machines is expected to remain at about last year's
level. Industry demand for engines is forecast to decline due to lower on-
highway truck and turbine engine demand. In Canada, slower economic growth is
expected to result in slightly lower industry demand for both machines and
engines. Company sales for the region are forecast to decline as dealers are not
expected to increase new machine inventory as they did in 1998 and as industry
demand for engines declines.
EAME
In Western Europe, GDP growth is expected to be about 2.7%, resulting in
slightly higher industry demand for construction and mining machines. Demand in
the United Kingdom, however, is anticipated to decline due to weak growth
resulting from high interest rates and a strong currency. European demand for
reciprocating engines is likely to be flat to down, but turbine demand is
forecast to improve. In Africa & Middle East weak growth and low commodity
prices are likely to keep industry demand for both machines and engines from
exceeding 1998 levels. In Russia, continued recession and instability are
forecast to result in lower industry demand. For the region as a whole, higher
European industry demand for construction and mining machinery should lead to
higher company sales.
Latin America
As a result of the January 13th Brazilian currency devaluation, recession is now
forecast for the region. Brazil is likely to experience severe recession in the
first half of 1999 which will likely adversely impact neighboring countries,
particularly Argentina. The whole region is expected to suffer from higher
interest rates and reductions in government spending as countries defend their
currencies. Mexico is expected to avoid recession although growth will likely
slow. For the region as a whole, industry demand for
A-30
<PAGE>
Caterpillar Inc.
- -------------------------------------------------------------------------------
machines and engines is forecast to decline significantly, leading to a drop in
company sales.
Asia/Pacific
In the Asia/Pacific region, the developing countries which experienced severe
recession in 1998 should begin to stabilize and China should continue to grow at
about 7%. As a result, GDP for developing Asia is expected to increase from .6%
in 1998 to 3.3% in 1999. Industry demand for machines is forecast to be flat
with an increase in China offsetting continued decline in Southeast Asia and
Korea. Industry demand for engines should also be about flat. Japan is expected
to remain in recession with GDP forecast to fall 1% and industry demand expected
to further decline. In Australia, slower economic growth and low commodity
prices will likely result in lower industry demand for both machines and
engines. For the region as a whole, company sales are forecast to be up slightly
as higher sales in developing Asia offset lower sales in Australia.
The information included in the Outlook section is forward looking and
involves risks and uncertainties that could significantly affect expected
results. A discussion of these risks and uncertainties is contained in Form 8-K
filed with the Securities & Exchange Commission on January 20, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS
A-31
<PAGE>
SUPPLEMENTAL STOCKHOLDER INFORMATION
Shareholder Services:
Stock Transfer Agent
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
phone: (800) 446-2617 (U.S. or Canada)
(201) 324-0498 (Outside U.S. or Canada)
(201) 222-4955 (Hearing impaired)
Internet home page: www.fctc.com
e-mail: [email protected]
Caterpillar Assistant Secretary:
Laurie J. Huxtable
Assistant Secretary
Caterpillar Inc.
100 N.E. Adams Street
Peoria, IL 61629-7310
phone: (309) 675-4619
fax: (309) 675-6620
e-mail: [email protected]
Stock Purchase Plan:
Current shareholders and other interested investors may purchase Caterpillar
Inc. common stock directly through the DirectSERVICE(TM) Investment Program
sponsored and administered by our Transfer Agent.
Current shareholders can get more information on the program from our Transfer
Agent using the contact information provided above. Non-shareholders can request
program materials by calling: 800-955-4749 (U.S. and Canada) or 201-324-0498
(outside the U.S. and Canada). The DirectSERVICE Investment Program may also be
accessed from our Investor Relations web site or First Chicago's home page.
Investor Relations:
Institutional analysts, portfolio managers, and representatives of financial
institutions seeking additional information about the Company should contact:
Director of Investor Relations
James F. Masterson
Caterpillar Inc.
100 N.E. Adams Street, Peoria, IL 61629-5310
phone: (309) 675-4549
fax: (309) 675-4457
e-mail: [email protected]
Internet web site: www.CAT.com/investor
Common Stock (NYSE: CAT)
Listing Information: Caterpillar common stock is listed on the New York, Pacific
and Chicago stock exchanges in the United States, and on stock exchanges in
Belgium, France, Germany, Great Britain, and Switzerland.
Price Ranges: Quarterly price ranges of Caterpillar common stock on the New York
Stock Exchange, the principal market in which the stock is traded, were:
<TABLE>
<CAPTION>
1998 1997
--------------------- ----------------------
Quarter High Low High Low
- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C>
First.... 59 1/4 44 1/2 41 7/8 36 1/4
Second... 60 3/4 51 1/16 54 11/16 38 3/16
Third.... 56 5/16 39 1/16 61 1/2 52 1/4
Fourth... 52 3/16 41 1/8 60 15/16 44
</TABLE>
Number of Stockholders: Stockholders of record at year end totaled 34,527,
compared with 32,409 at the end of 1997. Approximately 68% of our issued shares
are held by institutions and banks, 25% by individuals, and 7% by Caterpillar
benefit plans.
Employees' investment and profit-sharing plans acquired 2,685,138 shares of
Caterpillar stock in 1998. Investment plans, for which membership is voluntary,
held 26,663,273 shares for employee accounts at 1998 year end. Profit-sharing
plans, in which membership is automatic for most U.S. and Canadian employees in
eligible categories, held 480,790 shares at 1998 year end.
Company Publications:
To request any of the following materials, call our Financial Hotline -- (800)
CAT-7717 (U.S. & Canada) or (201) 332-8602 (outside U.S. or Canada); or visit
our Investor Relations web site to download or request materials on-line:
. Annual Report/Proxy Statement (early March)
. Form 10-K (late April)
. Form 10-Q (late May, Aug., and Nov.)
. Financial Results Press Release (late Jan., April, July, and Oct.)
. General Investor Packet
To hear a summary of Caterpillar's latest financial results and current
outlook or to request a copy of results by fax or mail, call our Financial
Hotline.
Annual Meeting:
On Wednesday, April 14, 1999, at 10:30 a.m., Eastern Standard Time, the annual
meeting of stockholders will be held at Graylyn International Conference Center
of Wake Forest University, Winston-Salem, North Carolina. Requests for proxies
are being sent to stockholders with this report mailed on or about February 26,
1999.
Internet:
Visit us on the Internet at www.CAT.com.
A-32
<PAGE>
DIRECTORS AND OFFICERS
DIRECTORS
Lilyan H. Affinito/2,4/ Former Vice Chairman, Maxxam Group Inc.
Glen A. Barton/5/ Chairman and Chief Executive Officer, Caterpillar
Inc.
W. Frank Blount/1,3/ Director and Chief Executive Officer, Telstra
Corporation Limited
John R. Brazil/1,3/ President, Bradley University
John T. Dillon/2,4/ Chairman and Chief Executive Officer,
International Paper
Donald V. Fites/3,4,5/ Former Chairman and Chief Executive Officer,
Caterpillar Inc.
Juan Gallardo/1,3/ Chairman and Chief Executive Officer,
Grupo Embotelladoras Unidas S.A. de C.V.
David R. Goode/1,2/ Chairman, President, and Chief Executive Officer,
Norfolk Southern Corporation
James P. Gorter/1,2/ Chairman, Baker, Fentress & Company
Peter A. Magowan/2,4/ Former Chairman and CEO, Safeway Inc.; President
and Managing General Partner, San Francisco Giants
Gordon R. Parker/1,3/ Former Chairman, Newmont Mining Corporation
George A. Schaefer/1,3/ Former Chairman and Chief Executive Officer,
Caterpillar Inc.
Joshua I. Smith/3,4/ Chairman and Chief Executive Officer, The MAXIMA
Corporation
Clayton K. Yeutter/2,4/ Of Counsel to Hogan & Hartson, Washington, D.C.
/1/ Member of Audit Committee (David R. Goode, chairman)
/2/ Member of Compensation Committee (James P. Gorter, chairman)
/3/ Member of Nominating Committee (Joshua I. Smith, chairman)
/4/ Member of Public Policy Committee (Clayton K. Yeutter, chairman)
OFFICERS
Glen A. Barton/5/ Chairman and Chief Executive Officer
Gerald S. Flaherty Group President
James W. Owens Group President
Gerald L. Shaheen Group President
Richard L. Thompson Group President
R. Rennie Atterbury III Vice President, General Counsel and Secretary
James W. Baldwin Vice President
Sidney C. Banwart Vice President
Vito H. Baumgartner Vice President
Michael J. Baunton Vice President
James S. Beard Vice President
Richard A. Benson Vice President
Ronald P. Bonati Vice President
James E. Despain Vice President
Roger E. Fischbach/6/ Vice President
Michael A. Flexsenhar Vice President
Donald M. Ings Vice President
Duane H. Livingston Vice President
Robert R. Macier Vice President
David A. McKie Vice President
F. Lynn McPheeters Vice President
Daniel M. Murphy Vice President
Douglas R. Oberhelman Vice President
Gerald Palmer Vice President
Robert C. Petterson Vice President
John E. Pfeffer Vice President
Siegfried R. Ramseyer Vice President
Alan J. Rassi Vice President
Gary A. Stroup Vice President
Sherril K. West Vice President
Donald G. Western Vice President
Steven H. Wunning Vice President
Robert R. Gallagher Controller
Kenneth J. Zika Treasurer
Robin D. Beran Assistant Treasurer
Mary J. Callahan Assistant Secretary
Laurie J. Huxtable Assistant Secretary
__________
Note: All director/officer information is as of December 31, 1998, except as
noted.
/5/ Effective February 1, 1999
/6/ Will retire effective April 1, 1999
A-33
<PAGE>
NOTES
- --------------------------------------------------------------------------------
A-34
<PAGE>
NOTES
- --------------------------------------------------------------------------------
A-35
<PAGE>
[LOGO OF CATERPILLAR]
<PAGE>
VOTING INSTRUCTION
[LOGO OF CATERPILLAR(R)]
ANNUAL MEETING OF STOCKHOLDERS - APRIL 14, 1999
THIS VOTING INSTRUCTION IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
At the Annual Meeting of Stockholders of the Company on April 14, 1999, or
at any adjournments thereof, the undersigned hereby authorizes THE NORTHERN
TRUST COMPANY, as Trustee, to appoint L.H. AFFINITO and J.I. SMITH, and each
or either of them, with power of substitution, proxies to vote all shares of
the Company's stock credited to the accounts of the undersigned under the
Employees' Investment Plan Trust at the close of business on February
16, 1999, as directed hereon on the following matters, and, in their
discretion, on any other matters that may come before the meeting.
Election of Directors. Nominees: W.F. Blount, J.R. Brazil, J.P. Gorter, P.A.
Magowan, C.K. Yeutter
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
ELECTRONIC DELIVERY OF PROXY MATERIALS
Sign up to receive next year's annual report and proxy materials via the
Internet. Next year when the materials are available, we will send you an e-mall
with instructions which will enable you to review these materials on-line. To
sign up for this optional service, visit http://www.vote-by-net.com.
<PAGE>
[X] Please mark your
votes as in this
example.
This Proxy, when properly executed, will be voted in the manner you have
directed. If no direction is given, this Proxy will be voted FOR the election of
directors, FOR proposal 2 and AGAINST proposals 3 and 4.
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of Nominees: 2. Appointment of Independent Auditors [_] [_] [_]
Directors [_] [_] 1. W. Frank Blount
2. John R. Brazil
For, except vote withheld from the 3. James P. Gorter
following nominee(s): 4. Peter A. Magowan 3. Shareholder Proposal--Country
5. Clayton K. Yeutter Selection Guidelines [_] [_] [_]
- -----------------------------------------------------------------
4. Shareholder Proposal--Declassify
Board [_] [_] [_]
--------------------------------------------------------------------
NOTE: Please sign exactly as name appears hereon. If more than one
owner, each must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title
as such.
____________________________________________________________
____________________________________________________________
SIGNATURE (S) DATE
____________________________________________________________________________________________________________________________________
. FOLD AND DETACH HERE .
</TABLE>
NEW VOTING OPTIONS AVAILABLE!
- --------------------------------------------------------------------------------
VOTE BY MAIL
- --------------------------------------------------------------------------------
Complete, date, sign and mail your proxy card (above) in the enclosed envelope
to:
Caterpillar Inc.
c/o First Chicago Trust
Company of New York
P.O. Box 8940
Edison, NJ 08818
USA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOTE BY PHONE
- --------------------------------------------------------------------------------
Call 1-800-OK2-VOTE
(1-800-652-8683)
toll free from U.S. & Canada
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOTE BY INTERNET
- --------------------------------------------------------------------------------
Access http://www.vote-by-net.com for on-line voting.
- --------------------------------------------------------------------------------
. Available 24 hours a day, 7 days a week.
. To vote by phone or internet, have your social security number and your proxy
card available. The sequence of numbers appearing on your card and social
security number are necessary to verify your vote.
. A phone or internet vote authorizes the named proxies in the same manner as if
you marked, signed and returned your card by mail.
<PAGE>
PROXY AND VOTING INSTRUCTION
[LOGO OF CATERPILLAR(R)]
ANNUAL MEETING OF STOCKHOLDERS - APRIL 14, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
At the Annual Meeting of Stockholders of the Company on April 14, 1999, or
at any adjournments thereof, the undersigned hereby appoints (i) L.H.
AFFINITO and J.I. SMITH, and each of them, proxies with power of
substitution to vote the common stock of the undersigned and (ii) THE
NORTHERN TRUST COMPANY, as Trustee, to appoint L.H. AFFINITO and J.I. SMITH,
and each or either of them, with power of substitution, proxies to vote all
shares of the Company's stock credited to the accounts of the undersigned
under the Employees' Investment Plan Trust and/or the Caterpillar Inc.
Investment Trust at the close of business on February 16, 1999, as directed
hereon on the following matters, and, in their discretion, on any other
matters that may come before the meeting.
Election of Directors. Nominees: W.F. Blount, J.R. Brazil, J.P. Gorter, P.A.
Magowan, C.K. Yeutter
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTOR'S RECOMMENDATIONS. THIS CARD ALSO
CONSTITUTES VOTING INSTRUCTIONS FOR ANY SHARES HELD BY THE UNDERSIGNED IN
ANY COMPANY EMPLOYEE INVESTMENT PLANS.
------------
SEE REVERSE
SIDE
------------
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
INTERNET ACCOUNT ACCESS
Registered shareholders can now access account information on the Internet at
http://gateway.fctc.com.
Through this site, you can view your current share balance, access your account
history sell or request a certificate for shares, and obtain current and
historical stock prices.
You must have the following to use this service:
. issue and account number (located on your account statement or check
stub)
. password (located on your account statement or check stub) or call
877-THE-WEB7 to have your password reissued by mail
. U.S. social security number
ELECTRONIC DELIVERY OF PROXY MATERIALS
Sign up to receive next year's annual report and proxy materials via the
Internet. Next year when the materials are available, we will send you an e-mail
with instructions which will enable you to review these materials on-line. To
sign up for this optional service, visit http://www.vote-by-net.com.
<PAGE>
[X] Please mark your
votes as in this
example.
This Proxy, when properly executed, will be voted in the manner you have
directed. If no direction is given, this Proxy will be voted FOR the election of
directors, FOR proposal 2 and AGAINST proposals 3 and 4.
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of Nominees: 2. Appointment of Independent Auditors [_] [_] [_]
Directors [_] [_] 1. W. Frank Blount
2. John R. Brazil
For, except vote withheld from the 3. James P. Gorter
following nominee(s): 4. Peter A. Magowan 3. Shareholder Proposal--Country
5. Clayton K. Yeutter Selection Guidelines [_] [_] [_]
- -----------------------------------------------------------------
4. Shareholder Proposal--Declassify
Board [_] [_] [_]
--------------------------------------------------------------------
NOTE: Please sign exactly as name appears hereon. If more than one
owner, each must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title
as such.
____________________________________________________________
____________________________________________________________
SIGNATURE (S) DATE
____________________________________________________________________________________________________________________________________
. FOLD AND DETACH HERE .
</TABLE>
NEW VOTING OPTIONS AVAILABLE!
- --------------------------------------------------------------------------------
VOTE BY MAIL
- --------------------------------------------------------------------------------
Complete, date, sign and mail your proxy card (above) in the enclosed envelope
to:
Caterpillar Inc.
c/o First Chicago Trust
Company of New York
P.O. Box 8940
Edison, NJ 08818
USA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOTE BY PHONE
- --------------------------------------------------------------------------------
Call 1-800-OK2-VOTE
(1-800-652-8683)
toll free from U.S. & Canada
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOTE BY INTERNET
- --------------------------------------------------------------------------------
Access http://www.vote-by-net.com for on-line voting.
- --------------------------------------------------------------------------------
. Available 24 hours a day, 7 days a week.
. To vote by phone or internet, have your social security number and your proxy
card available. The sequence of numbers appearing on your card and social
security number are necessary to verify your vote.
. A phone or internet vote authorizes the named proxies in the same manner as if
you marked, signed and returned your card by mail.
<PAGE>
PROXY
[LOGO OF CATERPILLAR(R)]
ANNUAL MEETING OF STOCKHOLDERS - APRIL 14, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
At the Annual Meeting of Stockholders of the Company on April 14, 1999, or
at any adjournments thereof, the undersigned hereby appoints L.H. AFFINITO and
J.I. SMITH, and each of them, proxies with power of substitution to vote the
stock of the undersigned on the following matters, and, in their discretion,
on any other matters that may come before the meeting.
Election of Directors, Nominees: W.F. Blount, J.R. Brazil, J.P. Gorter, P.A.
Magowan, C.K. Yeutter
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTOR'S RECOMMENDATIONS. PLEASE MARK, SIGN,
DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
-----------
SEE REVERSE
SIDE
-----------
- --------------------------------------------------------------------------------
. FOLD AND DETACH HERE .
INTERNET ACCOUNT ACCESS
Registered shareholders can now access account information on the Internet at
http://gateway.fctc.com.
Through this site, you can view your current share balance, access your account
history, sell or request a certificate for shares, and obtain current and
historical stock prices.
You must have the following to use this service:
. issue and account number (located on your account statement or check stub)
. password (located on your account statement or check stub) or call 877-THE-
WEB7 to have your password reissued by mail
. U.S. social security number
ELECTRONIC DELIVERY OF PROXY MATERIALS
Sign up to receive next year's annual report and proxy materials via the
Internet. Next year when the materials are available, we will send you an e-mail
with instructions which will enable you to review these materials on-line. To
sign up for this optional service, visit http://www.vote-by-net.com.
<PAGE>
[X] Please mark your
votes as in this
example.
This Proxy, when properly executed, will be voted in the manner you have
directed. If no direction is given, this Proxy will be voted FOR the election of
directors, FOR proposal 2 and AGAINST proposals 3 and 4.
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of Nominees: 2. Appointment of Independent Auditors [_] [_] [_]
Directors [_] [_] 1. W. Frank Blount
2. John R. Brazil
For, except vote withheld from the 3. James P. Gorter
following nominee(s): 4. Peter A. Magowan 3. Shareholder Proposal--Country
5. Clayton K. Yeutter Selection Guidelines [_] [_] [_]
- -----------------------------------------------------------------
4. Shareholder Proposal--Declassify
Board [_] [_] [_]
--------------------------------------------------------------------
NOTE: Please sign exactly as name appears hereon. If more than one
owner, each must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title
as such.
____________________________________________________________
____________________________________________________________
SIGNATURE (S) DATE
____________________________________________________________________________________________________________________________________
. FOLD AND DETACH HERE .
</TABLE>
NEW VOTING OPTIONS AVAILABLE!
- --------------------------------------------------------------------------------
VOTE BY MAIL
- --------------------------------------------------------------------------------
Complete, date, sign and mail your proxy card (above) in the enclosed envelope
to:
Caterpillar Inc.
c/o First Chicago Trust
Company of New York
P.O. Box 8940
Edison, NJ 08818
USA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOTE BY PHONE
- --------------------------------------------------------------------------------
Call 1-800-OK2-VOTE
(1-800-652-8683)
toll free from U.S. & Canada
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOTE BY INTERNET
- --------------------------------------------------------------------------------
Access http://www.vote-by-net.com for on-line voting.
- --------------------------------------------------------------------------------
. Available 24 hours a day, 7 days a week.
. To vote by phone or internet, have your social security number and your proxy
card available. The sequence of numbers appearing on your card and social
security number are necessary to verify your vote.
. A phone or internet vote authorizes the named proxies in the same manner as if
you marked, signed and returned your card by mail.
<PAGE>
VOTING INSTRUCTION
[LOGO OF CATERPILLAR(R)]
ANNUAL MEETING OF STOCKHOLDERS - APRIL 14, 1999
THIS VOTING INSTRUCTION IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
At the Annual Meeting of Stockholders of the Company on April 14, 1999,
or at any adjournments thereof, the undersigned hereby authorizes THE
CANADA TRUST COMPANY, as Trustee, to appoint L.H. AFFINITO and J.I. SMITH,
and each or either of them, with power of substitution, proxies to vote all
shares of the Company's stock credited to the accounts of the undersigned
under the Employees' Investment Plan Trust at the close of business on
February 16, 1999, as directed hereon on the following matters, and, in
their discretion, on any other matters that may come before the meeting.
Election of Directors. Nominees: W.F. Blount, J.R. Brazil, J.P. Gorter, P.A.
Magowan, C.K. Yeutter
________________________________________________________________________________
. FOLD AND DETACH HERE .
ELECTRONIC DELIVERY OF PROXY MATERIALS
Sign up to receive next year's annual report and proxy materials via the
Internet. Next year when the materials are available, we will send you an e-mail
with instructions which will enable you to review these materials on-line. To
sign up for this optional service, visit http://www.vote-by-net.com.
<PAGE>
[X] Please mark your
votes as in this
example.
This Proxy, when properly executed, will be voted in the manner you have
directed. If no direction is given, this Proxy will be voted FOR the election of
directors, FOR proposal 2 and AGAINST proposals 3 and 4.
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of Nominees: 2. Appointment of Independent Auditors [_] [_] [_]
Directors [_] [_] 1. W. Frank Blount
2. John R. Brazil
For, except vote withheld from the 3. James P. Gorter
following nominee(s): 4. Peter A. Magowan 3. Shareholder Proposal--Country
5. Clayton K. Yeutter Selection Guidelines [_] [_] [_]
- -----------------------------------------------------------------
4. Shareholder Proposal--Declassify
Board [_] [_] [_]
--------------------------------------------------------------------
NOTE: Please sign exactly as name appears hereon. If more than one
owner, each must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title
as such.
____________________________________________________________
____________________________________________________________
SIGNATURE (S) DATE
____________________________________________________________________________________________________________________________________
. FOLD AND DETACH HERE .
</TABLE>
NEW VOTING OPTIONS AVAILABLE!
- --------------------------------------------------------------------------------
VOTE BY MAIL
- --------------------------------------------------------------------------------
Complete, date, sign and mail your proxy card (above) in the enclosed envelope
to:
Caterpillar Inc.
c/o First Chicago Trust
Company of New York
P.O. Box 8940
Edison, NJ 08818
USA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOTE BY PHONE
- --------------------------------------------------------------------------------
Call 1-800-OK2-VOTE
(1-800-652-8683)
toll free from U.S. & Canada
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VOTE BY INTERNET
- --------------------------------------------------------------------------------
Access http://www.vote-by-net.com for on-line voting.
- --------------------------------------------------------------------------------
. Available 24 hours a day, 7 days a week.
. To vote by phone or internet, have your social security number and your proxy
card available. The sequence of numbers appearing on your card and social
security number are necessary to verify your vote.
. A phone or internet vote authorizes the named proxies in the same manner as if
you marked, signed and returned your card by mail.
