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OMB
APPROVAL
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OMB
Number:
3235-0059
Expires:
January 31, 2008
Estimated
average
burden
hours
per response............14
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of the Securities
Exchange
Act
of 1934 (Amendment No. )
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Filed
by the
Registrant:
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X
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Filed
by a
Party other than the Registrant:
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Check
the
appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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X
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Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Material Pursuant to §240.14a-12
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Caterpillar
Inc.
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(Name
of
Registrant as Specified In Its Charter)
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(Name
of
Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment
of
Filing Fee (Check the appropriate box):
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X
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No
fee
required.
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Fee
computed
on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each
class of securities to which transaction applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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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):
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(4)
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Proposed
maximum aggregate value of transaction:
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(5)
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Total
fee
paid:
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Fee
paid
previously with preliminary materials.
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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.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule
or Registration Statement No.:
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(3)
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Filing
Party:
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(4)
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Date
Filed:
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SEC
1913
(04-05)
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Persons
who are to respond to the collection of information contained in
this form
are not required to respond unless the form displays a currently
valid OMB
control number.
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100
NE Adams
Street
Peoria,
Illinois
61629
Wednesday,
June 14, 2006
1:30
p.m. -
Central Daylight Time
Northern
Trust Building
50
South
LaSalle Street
Chicago,
Illinois 60675
April
28,
2006
Fellow
stockholder:
On
behalf of the
board of directors, you are cordially invited to attend the 2006 Caterpillar
Inc. annual meeting of stockholders to:
| • |
elect
directors;
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| • |
amend
articles of incorporation;
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| • |
ratify
Independent Registered Public Accounting
Firm;
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| • |
act
on
management proposals;
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| • |
act
on
stockholder proposals, if properly presented;
and
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| • |
conduct
any
other business properly brought before the
meeting.
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You
must have an
admission ticket to attend. Procedures for requesting the admission ticket
are
detailed on page 45 of this proxy statement. Attendance and voting is limited
to
stockholders of record at the close of business on April 17, 2006.
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Sincerely yours,
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James W. Owens
Chairman
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Table
of
Contents
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Management
Proposals
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Stockholder
Proposals
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Admission
Ticket Required
Anyone
wishing to
attend the annual meeting must have an admission ticket issued in his or
her
name. Admission is limited to stockholders of record on April 17, 2006, 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"
on
page 45.
Record
Date Information
Each
share of
Caterpillar stock you owned as of April 17, 2006, entitles you to one vote.
As
of April 17, 2006, there were approximately 666 million shares of Caterpillar
common stock outstanding.
Voting
by Telephone or Internet
Caterpillar
is
again offering stockholders the opportunity to vote by phone or electronically
via the Internet. Instructions for stockholders interested in using either
of
these methods to vote are set forth on the enclosed proxy and/or voting
instruction card.
If
you vote by
phone or via the Internet, please have your proxy and/or voting instruction
card
available. The control number appearing on your card is necessary to process
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. In the opinion
of
counsel, voting by phone or via the Internet are valid proxy voting methods
under Delaware law and Caterpillar's bylaws.
Giving
your Proxy to Someone Other than Individuals Designated on the
Card
If
you want to
authorize someone other than the individual(s) named on the proxy card to
vote
this written proxy:
| • |
cross
out the
individual(s) named and insert the name of the individual you are
authorizing to vote; or
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| • |
provide
a
written authorization to the individual you are authorizing to vote
along
with your proxy card.
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To
obtain an
admission ticket for your authorized proxy representative, see the requirements
specified in the "Admission Ticket Request Procedure" on page 45.
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 nominee holding shares for a beneficial
owner does not vote on a particular proposal because the nominee does not
have
discretionary voting power with respect to that item and has not received
instructions from the beneficial owner.
Vote
Necessary for Action
Directors
are
elected by a plurality vote of the shares present at the meeting, meaning
that
the director nominee with the most affirmative votes for a particular slot
is
elected for that slot.
Other
actions
require 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.
Page
1
Votes
submitted by
mail, telephone or Internet will be voted by the individuals named on the
card
(or the individual properly authorized) in the manner indicated. If you do
not
specify how you want your shares voted, they will be voted in accordance
with
management's recommendations. If you hold shares in more than one account,
you
must vote each proxy and/or voting instruction card you receive to ensure
that
all shares you own are voted. You may change your vote by voting in person
at
the annual meeting or by submitting another proxy that is dated later. For
all
methods of voting, the last vote cast will supercede all previous votes.
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.
With the exception of the Chairman, all directors are independent as defined
in
the New York Stock Exchange listing standards.
Directors
elected
at the 2006 annual meeting of stockholders will hold office for a three-year
term expiring in 2009. 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.
Mr.
Gordon Parker,
a valued member of the board of directors of Caterpillar Inc. since 1995,
notified the board of directors at a meeting held on December 14, 2005, of
his
intention to retire from the Caterpillar board effective June 14, 2006.
Directors Up for Election This Year for Terms Expiring in 2009
| § |
DAVID
R. GOODE, 65, former Chairman, President and CEO of Norfolk
Southern Corporation (holding company engaged principally in surface
transportation). Other directorships: Delta Air Lines, Inc.; Norfolk
Southern Corporation; and Texas Instruments Incorporated. Mr. Goode
has
been a director of the company since
1993.
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| § |
JAMES
W. OWENS, 60, Chairman and CEO of Caterpillar Inc.
(machinery, engines, and financial products). Prior to his current
position, Mr. Owens served as Vice Chairman and as Group President
of
Caterpillar. Other directorships: Alcoa Inc. and International Business
Machines Inc. Mr. Owens has been a director of the company since
2004.
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| § |
CHARLES
D. POWELL, 64, Chairman of Safinvest Limited (asset and
investment management) and LVMH Services Limited (luxury goods).
Prior to
his current positions, Lord Powell was Chairman of Phillips Fine
Art
Auctioneers (art, jewelry and furniture auction) and Chairman of
Sagitta
Asset Management Limited (asset management). Other directorships:
LVMH
Moet-Hennessy Louis Vuitton; Mandarin Oriental International Ltd.;
Textron
Corporation; Schindler Holding Ltd.; and Yell Group plc. Lord Powell
has
been a director of the company since
2001.
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| § |
JOSHUA
I. SMITH, 65, Chairman and Managing Partner of the Coaching
Group, LLC (management consulting). As part of the Coaching Group,
Mr.
Smith served as former Vice Chairman and Chief Development Officer
of
iGate, Inc. (broadband networking). Other directorships: CardioComm
Solutions Inc.; Federal Express Corporation; and The Allstate Corporation.
Mr. Smith has been a director of the company since
1993.
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Page
2
Directors
Remaining in Office Until 2008
| § |
W.
FRANK BLOUNT, 67, Chairman and CEO of JI Ventures, Inc.
(venture capital) and TTS Management Corporation (private equity
management). Prior to his current positions, Mr. Blount served as
Chairman
and CEO of Cypress Communications Inc. (telecommunications). Other
directorships: ADTRAN, Inc.; Alcatel S.A.; Entergy Corporation; and
Hanson
PLC. Mr. Blount has been a director of the company since
1995.
|
| § |
JOHN
R. BRAZIL, 60, President of Trinity University (San Antonio,
Texas). Dr. Brazil has been a director of the company since
1998.
|
| § |
EUGENE
V. FIFE, 65, Managing Principal of Vawter Capital LLC
(private investment). Mr. Fife served as the interim CEO and President
of
Eclipsys Corporation from April to November of 2005. He currently
serves
as the non-executive Chairman of Eclipsys Corporation. Mr. Fife has
been a
director of the company since 2002.
|
| § |
GAIL
D. FOSLER, 58, Executive Vice President and Chief Economist
of The Conference Board (research and business membership). Prior
to her
current position, Ms. Fosler was Senior Vice President of The Conference
Board. Other directorship: Baxter International Inc. Ms. Fosler has
been a
director of the company since 2003.
|
| § |
PETER
A. MAGOWAN, 64, President and Managing General Partner of
the San Francisco Giants (major league baseball team). Other directorship:
DaimlerChrysler AG. Mr. Magowan has been a director of the company
since
1993.
|
Directors
Remaining in Office Until 2007
| § |
JOHN
T. DILLON, 67, former Chairman and CEO of International
Paper (paper and forest products). Mr. Dillion serves as Vice Chairman
of
Evercore Capital Partners (advisory and investment firm) and Senior
Managing Director of the firm's investment activities and private
equity
business. Other directorships: E. I. du Pont de Nemours and Company;
Kellogg Co.; and Vertis Inc. Mr. Dillon has been a director of the
company
since 1997.
|
| § |
JUAN
GALLARDO, 58, Chairman of Grupo Embotelladoras Unidas S.A.
de C.V. (bottling). Former Vice Chairman of Home Mart de Mexico,
S.A. de
C.V. (retail trade), former Chairman and CEO of Grupo Azucarero Mexico,
S.A. de C.V. (sugar mills) and former Chairman of Mexico Fund Inc.
(mutual
fund). Other directorships: Lafarge SA and Grupo Mexico, S.A. de
C.V. Mr.
Gallardo has been a director of the company since
1998.
|
| § |
WILLIAM
A. OSBORN, 58, Chairman and CEO of Northern Trust
Corporation (multibank holding company) and The Northern Trust Company
(bank). Other directorships: Nicor Inc. and Tribune Company. Mr.
Osborn
has been a director of the company since
2000.
|
| § |
EDWARD
B. RUST, JR.,55, Chairman and CEO of State Farm Mutual
Automobile Insurance Company (insurance). He is also President and
CEO of
State Farm Fire and Casualty Company, State Farm Life Insurance Company
and other principal State Farm affiliates, as well as Trustee and
President of State Farm Mutual Fund Trust and State Farm Variable
Product
Trust. Other directorships: Helmerich & Payne, Inc. and The
McGraw-Hill Companies, Inc. Mr. Rust has been a director of the company
since 2003.
|
Board
Meetings, Communications and Committees
In
2005, our board
met six times and held regularly scheduled executive sessions without management
presided by the chair of the Governance Committee. In addition to those
meetings, directors attended meetings of individual board committees. For
our
incumbent board as a whole, attendance in 2005 at board and committee meetings
was 96.19 percent. Company policy, posted on our website, states that in
the
absence of unavoidable conflict, all directors are expected to attend the
annual
meeting of stockholders. All of our fourteen directors attended the annual
meeting in April 2005.
Our
board has four
standing committees, an Audit Committee,
Compensation Committee, Governance
Committee and Public Policy Committee.
Copies of written charters for each of these committees, as well as our board's
Guidelines on Corporate Governance Issues, Worldwide Code of Conduct and
other
corporate governance information are available on our Internet site
(www.CAT.com/governance), or upon written request to the Corporate
Secretary at 100 NE Adams Street, Peoria, Illinois 61629.
Page 3
You
may communicate
with any of our directors, our board as a group or any board committee as
a
group by sending an email to a particular director, the board or a committee
at
Directors@CAT.com or by mail c/o the Corporate Secretary at 100 NE Adams
Street, Peoria, Illinois 61629. The board has delegated to the Corporate
Secretary, or his designee, responsibility for determining in his discretion
whether the communication is appropriate for individual director, committee
or
board consideration. According to the policy adopted by the board, the Corporate
Secretary is required to direct all communications regarding personal
grievances, administrative matters, the conduct of the company's ordinary
business operations, billing issues, product or service related inquires,
order
requests and similar issues to the appropriate individual within the company.
All other communications are to be submitted to the board as a group, to
the
particular director to whom it is directed or, if appropriate, to the director
or committee the Corporate Secretary believes to be the most appropriate
recipient, as the case may be. If you send an email or letter to a director,
the
board or a board committee, you will receive a written acknowledgement from
the
Corporate Secretary's office confirming receipt of your
communication.
Below
is a
description of each committee of the board. Committee memberships as of December
31, 2005, are listed in the Committee Membership table on page 5.
The
Audit Committee assists the board in fulfilling its
oversight responsibilities for financial matters. The committee performs
this
function by monitoring Caterpillar's financial reporting process and internal
controls and by assessing the audit efforts of Caterpillar's Independent
Registered Public Accounting Firm (auditors) and internal auditing department.
The committee has ultimate authority and responsibility to appoint, retain,
compensate, evaluate, and, where appropriate, replace the auditors. The
committee also reviews updates on emerging accounting and auditing issues
provided by the auditors and by management to assess their potential impact
on
Caterpillar. During 2005, the committee met nine times. All members of the
committee meet the standards for independence set forth in the New York Stock
Exchange listing standards and meet financial literacy guidelines adopted
by the
board. Additionally, the board has determined that each member of the committee
qualifies as an "audit committee financial expert" as defined under the
Sarbanes-Oxley Act of 2002 and Item 401(h) of Regulation S-K.
The
Compensation Committee assists the board of directors
in fulfilling its responsibilities in connection with the compensation of
company directors, officers and employees. It performs this function by
approving and recommending standards for the company's compensation programs
and
plans, including various incentive compensation, retirement and other benefit
plans. The committee reviews the board's annual review of the performance
of the
company's Chief Executive Officer and fixes his compensation. The committee
also
reviews the company's salaried and management compensation practices, including
the methodologies for setting employee and officer salaries, and fixes the
salary and other compensation of all officers of the company. All members
of the
committee meet the standards for independence set forth in the New York Stock
Exchange listing standards. During 2005, the committee met four times.
The
Governance Committee makes recommendations to the
board regarding the appropriate size and composition of the board, and monitors
and makes recommendations regarding the board's performance. The committee,
formerly known as the Nominating and Governance Committee, continues to perform
the functions of a nominating committee. As such, the committee makes
recommendations regarding the criteria for the selection of candidates to
serve
on the board and evaluates and makes recommendations on proposed candidates
for
service on the board, including recommending the slate of nominees for election
at annual meetings of stockholders. The committee also recommends candidates
for
election as officers of the company (including Chairman and Chief Executive
Officer), monitors compliance with the board's Guidelines on Corporate
Governance Issues, and administers the board's self-evaluation and the
self-evaluation of each board committee and shares the results thereof with
the
board for discussion and deliberation. The committee considers director nominees
from stockholders for election at the annual stockholders' meeting. Stockholders
who are interested in nominating a director candidate can do so in accordance
with the policy discussed in the Governance Committee Report on page 9. All
members of the committee meet the standards for independence set forth in
the
New York Stock Exchange listing standards. During 2005, the committee met
four
times.
Page 4
The
Public Policy Committee assists the board in general
oversight with respect to matters of public and social policy affecting the
company domestically and internationally, including investor, consumer and
community relations issues and employee safety programs, policies and
procedures, and labor relations issues. The committee oversees the company's
Worldwide Code of Conduct, Policy Letters, compliance programs and reviews
major
legislative proposals and proposed regulations involving matters not falling
within the substantive coverage of any other committee of the board. All
members
of the committee meet the standards for independence set forth in the New
York
Stock Exchange listing standards. During 2005, the committee met four times.
|
Committee
Membership
(as
of
December 31, 2005)
|
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|
Audit
|
Compensation
|
Governance
|
Public
Policy
|
|
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|
|
|
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W.
Frank
Blount
|
Ö
|
|
Ö
|
|
|
John
R.
Brazil
|
Ö
|
Ö*
|
||
|
John
T.
Dillon
|
Ö
|
Ö*
|
||
|
Eugene
V.
Fife
|
Ö*
|
|||
|
Gail
D.
Fosler
|
Ö
|
Ö
|
||
|
Juan
Gallardo
|
Ö
|
Ö
|
||
|
David
R.
Goode
|
Ö
|
Ö
|
||
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Peter
A.
Magowan
|
Ö
|
Ö
|
||
|
William
A.
Osborn
|
Ö*
|
|||
|
James
W.
Owens
|
||||
|
Gordon
R.
Parker
|
Ö
|
Ö
|
||
|
Charles
D.
Powell
|
Ö
|
Ö
|
||
|
Edward
B.
Rust, Jr.
|
Ö
|
Ö
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||
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Joshua
I.
Smith
|
Ö
|
Ö
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||||
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*
Chairman of
Committee
|
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Director
Compensation
Of
our current
board members, only Mr. Owens is a salaried employee of Caterpillar. Mr.
Owens
receives no compensation for board service. Non-employee directors do receive
compensation for board service. For 2005, compensation for non-employee
directors was comprised of the following components:
|
Annual
Retainer:
|
$65,000
|
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|
Attendance
Fees:
|
$1,000
for
each board meeting
$1,000
for
each board committee meeting
Expenses
related to attendance
|
||
|
Committee
Chairman Stipend:
|
Audit
|
$15,000
annually
|
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|
Compensation
|
$10,000
annually
|
||
|
Governance
|
$ 6,500
annually
|
||
|
Public
Policy
|
$ 5,000
annually
|
||
|
Audit
Committee Members Stipend:
|
$5,000
annually
|
||
|
Stock
Options:
|
4,0001
shares annually
|
||
|
|
|||
|
1
The 4,000 shares granted in April 2005 was adjusted to 8,000 shares
in connection with a 2-for-1 stock split in July 2005.
|
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Page 5
Based
on the
foregoing components, the individual compensation paid to each outside director
in 2005 is set forth below.
|
Director
Compensation for 2005
|
||||||||||||||||
|
|
|
|
|
Non-Qualified
Options
|
||||||||||||
| Director
|
Director
Since
|
Annual
Retainer
|
Chairman
Stipend
|
Attendance
Fees
|
Audit
Committee Member
|
Grant
Date
|
Shares
Granted1
|
|||||||||
|
W.
Frank
Blount
|
1995
|
$
|
65,000
|
|
$
|
--
|
|
$
|
19,000
|
|
$
|
5,000
|
|
04/13/2005
|
4,000
|
|
|
John
R.
Brazil
|
1998
|
$
|
65,000
|
|
$
|
5,000
|
|
$
|
20,000
|
|
$
|
--
|
|
04/13/2005
|
4,000
|
|
|
John
T.
Dillon
|
1997
|
$
|
65,000
|
|
$
|
6,500
|
|
$
|
18,000
|
|
$
|
5,000
|
|
04/13/2005
|
4,000
|
|
|
Eugene
V.
Fife
|
2002
|
$
|
65,000
|
|
$
|
15,000
|
|
$
|
15,000
|
|
$
|
--
|
|
04/13/2005
|
4,000
|
|
|
Gail
D.
Fosler
|
2003
|
$
|
65,000
|
|
$
|
--
|
|
$
|
14,000
|
|
$
|
--
|
|
04/13/2005
|
4,000
|
|
|
Juan
Gallardo
|
1998
|
$
|
65,000
|
|
$
|
--
|
|
$
|
13,000
|
|
$
|
--
|
|
04/13/2005
|
4,000
|
|
|
David
R.
Goode
|
1993
|
$
|
65,000
|
|
$
|
--
|
|
$
|
18,000
|
|
$
|
5,000
|
|
04/13/2005
|
4,000
|
|
|
Peter
A.
Magowan
|
1993
|
$
|
65,000
|
|
$
|
--
|
|
$
|
13,000
|
|
$
|
--
|
|
04/13/2005
|
4,000
|
|
|
William
A.
Osborn
|
2000
|
$
|
65,000
|
|
$
|
10,000
|
|
$
|
10,000
|
|
$
|
--
|
|
04/13/2005
|
4,000
|
|
|
Gordon
R.
Parker
|
1995
|
$
|
65,000
|
|
$
|
--
|
|
$
|
17,000
|
|
$
|
5,000
|
|
04/13/2005
|
4,000
|
|
|
Charles
D.
Powell
|
2001
|
$
|
65,000
|
|
$
|
--
|
|
$
|
14,000
|
|
$
|
--
|
|
04/13/2005
|
4,000
|
|
|
Edward
B.
Rust, Jr.
|
2003
|
$
|
65,000
|
|
$
|
--
|
|
$
|
17,000
|
|
$
|
5,000
|
|
04/13/2005
|
4,000
|
|
|
Joshua
I.
Smith
|
1993
|
$
|
65,000
|
|
$
|
--
|
|
$
|
14,000
|
|
$
|
--
|
|
04/13/2005
|
4,000
|
|
|
1
2005 grant of 4,000 shares was adjusted in connection with a 2-for-1
stock
split in July, 2005.
|
||||||||||||||||
Under Caterpillar's Directors' Deferred Compensation Plan, directors may defer 50 percent or more of their annual compensation in an interest-bearing account or an account representing equivalent shares of Caterpillar stock. Under the 1996 Stock Option and Long-Term Incentive Plan, directors could also elect to receive all or a portion of their annual retainer fees, attendance fees and/or stipends in shares of Caterpillar stock.
Eligible
directors
may also participate in a Charitable Award Program. Under the program, a
donation of up to $1,000,000 will be made by the company, in the director's
name, in ten equal annual installments, with the first installment to be
made as
soon as is practicable after the director's death. Of the total donation
amount,
50 percent will be donated to the eligible tax-exempt organization(s) selected
by the director, and the remaining portion of the donation will be made to
the
Caterpillar 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
On
May 11, 2000,
the First Circuit Court in Mexico City granted Grupo Azucarero Mexico, S.A.
de
C.V., a public company of which Juan Gallardo is the controlling stockholder,
suspension of payments protection, which is legal protection similar to Chapter
11 of the U.S. Bankruptcy Code. This protection enables the company to continue
its operations while meeting its financial obligations in an orderly
fashion.
During 2005, Caterpillar paid $404,225 to Out of the Ordinary Inc. for consulting services. Out of the Ordinary Inc. is owned 100 percent by Danielle Pflederer, wife of Mark Pflederer, Vice President of Caterpillar's Technology & Solutions Division. No service contracts with Out of the Ordinary were approved by Mark Pflederer. The company plans to continue purchasing consulting services from Out of the Ordinary Inc. in 2006.
Page
6
The
Audit Committee
(committee) is comprised entirely of independent directors (as defined for
members of an audit committee in the New York Stock Exchange listing standards)
and operates under a written charter adopted by the board. The members of
the
committee, as of December 31, 2005, are listed at the end of this report.
Management is responsible for the company's internal controls and the financial
reporting process. The Independent Registered Public Accounting Firm (auditors)
are responsible for performing an independent audit of the company's
consolidated financial statements and internal controls over financial reporting
in accordance with standards established by the Public Company Accounting
Oversight Board (United States) and issuing a report thereon. The committee's
responsibility is to monitor these processes. In this regard, the committee
meets separately at each committee meeting with management, the Vice President
for Corporate Auditing and Compliance and the auditors. The committee has
the
authority to conduct or authorize investigations into any matters within
the
scope of its responsibilities and the authority to retain such outside counsel,
experts and other advisors as it determines appropriate to assist it in
conducting any such investigations. The committee is responsible for selecting
and, if appropriate, replacing the auditors (PricewaterhouseCoopers LLP).
Pre-Approval
Process
The
committee
pre-approves all audit and non-audit services to be performed by the auditors.
It has policies and procedures in place to ensure that the company and its
subsidiaries are in full compliance with the requirements for pre-approval
set
forth in the Sarbanes-Oxley Act of 2002 and the Securities and Exchange
Commission (SEC) rules regarding auditor independence. These policies and
procedures provide a mechanism by which management can request and secure
pre-approval of audit and non-audit services in an orderly manner with minimal
disruption to normal business operations. The policies and procedures are
detailed as to the particular service and do not delegate the
committee's responsibility to management. They address any service provided
by
the auditors, and any audit or audit-related services to be provided by any
other audit service provider. The pre-approval process includes an annual
and
interim component.
Annual
Pre-Approval Process
At
each February
committee meeting, management and the auditors jointly submit a Service Matrix
of the types of audit and non-audit services that management may wish to
have
the auditors perform for the year. The Service Matrix categorizes the types
of
services by Audit, Audit-Related, Tax and All Other. Approval of a service
is
merely an authorization that this type of service is permitted by the committee,
subject to pre-approval of specific services. Management and the auditors
jointly submit an Annual Pre-Approval Limits Request. The request lists
individual project and aggregate pre-approval limits by service category.
The
request also lists known or anticipated services and associated fees. The
committee approves or rejects the pre-approval limits and each of the listed
services. For 2005, the pre-approval limits were as follows:
|
Type
of Service
|
Pre-approval
Limits
(in
thousands)
|
|||||
|
|
|
|||||
|
Per
Project
|
Aggregate
Limit
|
|||||
|
|
|
|||||
|
Audit
Services
|
$
|
200
|
$
|
15,000
|
||
|
Audit
Related Services
|
$
|
200
|
$
|
3,000
|
||
|
Tax
Services
|
$
|
200
|
$
|
15,000
|
||
|
All
Other Services
|
$
|
200
|
$
|
1,000
|
||
Page 7
Interim
Pre-Approval Process
During
the course
of the year, the committee chairman has the authority to pre-approve requests
for services that were not approved in the Annual Pre-Approval Process.
Committee approval is not required for individual projects below the
pre-approval project limits. However, all services, regardless of fee amounts,
are subject to the services allowable under the Sarbanes-Oxley Act of 2002
and
SEC rules regarding auditor independence. In addition, all fees are subject
to
on-going monitoring by the committee.
On-Going
Monitoring
At
each committee
meeting subsequent to the board of directors' meeting in February, the chairman
reports any interim pre-approvals since the last meeting. Also, at each of
these
meetings, management and the auditor provide the committee with an update
of
fees expected to be incurred for the year compared to amounts pre-approved
in
February.
The
committee has
discussed with the company's auditors the overall scope and plans for the
independent audit. Management represented to the committee that the company's
consolidated financial statements were prepared in accordance with generally
accepted accounting principles. Discussions about the company's audited
financial statements included the auditors' judgments about the quality,
not
just the acceptability of the accounting principles, the reasonableness of
significant judgments and the clarity of disclosures in the financial
statements. The committee also discussed with the auditors other matters
required by Statement on Auditing Standards No. 61 Communication with Audit
Committees, as amended by SAS No. 90 Audit Committee
Communications. Management made presentations to the committee
throughout the year on specific topics of interest, including: (i) management's
philosophy, asset allocation levels, risk management and oversight of the
company's pension funds; (ii) accounting for the company's pension funding
obligations; (iii) the company's derivatives policy and usage review; (iv)
the
internal audit plan for 2005; (v) updates on the implementation of the internal
audit plan for 2005; (vi) the company's information technology systems and
the
controls in place within those systems for compliance with the Sarbanes-Oxley
Act of 2002; (vi) the applicability of new accounting releases; (vii) the
company's critical accounting policies; (viii) risk management initiatives
and
controls for various business units within the company, including the Global
Mining Division and Financial Products Division; and (ix) the company's progress
in meeting the internal controls requirements under Section 404 of the
Sarbanes-Oxley Act of 2002.
The
auditors
provided to the committee the written disclosures required by Independence
Standards Board Standard No. 1 Independence Discussions with Audit
Committees, and the committee discussed the auditors' independence with
management and the auditors. In addition, the committee noted that no
information technology consulting services had been provided by the auditors'
firm. The committee concluded that the auditors' independence had not been
impaired.
Based
on: (i) the
committee's discussion with management and the auditors; (ii) the committee's
review of the representations of management; and (iii) the report of the
auditors to the committee, the committee recommended to the board that the
audited consolidated financial statements be included in the company's Annual
Report on Form 10-K for the year ended December 31, 2005, filed with the
SEC on
February 22, 2006.
|
By
the Audit Committee consisting of:
|
|||||
|
Eugene
V. Fife (Chairman)
|
David
R. Goode
|
||||
|
W.
Frank Blount
|
Gordon
R. Parker
|
||||
|
John
T. Dillon
|
Edward
B. Rust, Jr.
|
||||
Page
8
Audit
Fees
Fees
paid to our
auditors' firm were comprised of the following (in millions):
|
|
2004
Actual4
|
|
2005
Actual
|
|||||
|
|
|
|
|
|||||
|
Audit
Services
|
$
|
18.7
|
|
|
$
|
15.7
|
|
|
|
Audit
Related Services1
|
|
2.8
|
|
|
|
3.0
|
|
|
|
Tax
Compliance Services2
|
|
3.4
|
|
|
|
2.3
|
|
|
|
Tax
Planning and Consulting
Services3
|
|
7.8
|
|
|
|
6.4
|
|
|
|
All
Other
|
|
0.1
|
|
|
|
0.1
|
|
|
|
TOTAL
|
|
$
|
32.8
|
|
|
$
|
27.5
|
|
|
|
|
|
|
|
||||
|
|
||||||||
|
1
Total
fees paid directly by the benefit plans and not the company were
$.2 and
$.3 in 2004 and 2005, respectively.
|
||||||||
|
2
"Tax
Compliance Services" includes, among other things, tax return preparation
and review, executive tax compliance and advising on the impact
of changes
in local tax laws.
|
||||||||
|
3
"Tax
Planning and Consulting Services" includes, among other things,
tax
planning and advice and assistance with respect to transfer pricing
issues.
|
||||||||
|
4
$0.2
of Agreed Upon Procedures costs were reclassified from Audit Services
to
Audit Related Services and $0.2 of additional out-of pocket expenses
were
added to the Audit Services
category.
|
||||||||
The
Governance
Committee (committee) is composed of six directors, identified at the end
of
this report, all of whom meet the independence requirements for nominating
committee members as defined in the New York Stock Exchange listing standards
and determined by the board in its business judgment. The committee operates
under a written charter adopted by the board. As part of its mandate, the
committee evaluates and makes recommendations regarding proposed candidates
to
serve on the board, including recommending the slate of nominees for election
at
annual meetings of stockholders.
Presiding
Director
At
the recommendation of the committee, the board met on April 12, 2006, and
designated the chairman of the committee as the presiding director of the
board
with the following clearly delineated responsibilities:
| • |
chair
executive sessions of independent directors and preside at all meetings
of
the board at which the chairman and CEO is not present;
|
| • |
review
board
meeting agendas;
|
| • |
review
meeting schedules;
|
| • |
provide
feedback from the board to the chairman and CEO following each executive
session of independent directors, and in conjunction with the Compensation
Committee chair, provide the chairman and CEO with an annual performance
review; and
|
| • |
call
executive sessions of independent directors when
necessary.
|
Page
9
Process
for Nominating Directors
The
committee
solicits and receives recommendations for potential director candidates from
other directors and Caterpillar management and may also utilize the services
of
a third party consultant to identify and evaluate potential nominees. The
committee also considers unsolicited inquiries or nominees proposed by
stockholders in accordance with procedures outlined below and in compliance
with
the company’s bylaws.
When
considering a
candidate, the committee believes that certain characteristics are essential.
For example, candidates must be individuals of high integrity, honesty and
accountability, with a willingness to express independent thought. Candidates
must also have successful leadership experience and stature in their primary
fields, with a background that demonstrates an understanding of business
affairs
as well as the complexities of a large, publicly held company. Particular
consideration will be given to candidates with experience as chief executive
officers of successful, capital-intensive businesses with international
operations. In addition, candidates must have a demonstrated ability to think
strategically and make decisions with a forward-looking focus, with the ability
to assimilate relevant information on a broad range of complex
topics.
The
committee also
believes that certain characteristics are desirable. This includes being
a team
player with a demonstrated willingness to ask tough questions in a constructive
manner that adds to the decision-making process of the board. At the same
time,
candidates should be independent, with an absence of conflicts of interests,
and
have the ability to devote the time necessary to meet director responsibilities;
in particular, serve on no more than five public company boards in addition
to
the Caterpillar board. Candidates must also have the ability to commit to
company stock ownership according to the company’s Guidelines on Corporate
Governance Issues.
Stockholder
Nominations
Stockholders
wishing to recommend a director candidate to serve on the board may do so
by
providing advance written notice to the company. Such written notice of an
intent to nominate a director candidate at an annual meeting of stockholders
must be given either by personal delivery or by United States mail, postage
prepaid, to the Corporate Secretary no later than ninety (90) days in advance
of
such meeting. The notice must set forth: (i) the name and address of the
stockholder who intends to make the nomination and of the person or persons
to
be nominated; (ii) a representation that the nominating stockholder is a
stockholder of record of the company's stock entitled to vote at such meeting
and intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (iii) a description of all
arrangements or understandings between the stockholder and each nominee and
any
other person or persons (naming such person or persons) pursuant to which
the
nomination or nominations are to be made by the stockholder; (iv) such other
information regarding each nominee proposed by such stockholder as would
be
required to be included in a proxy statement filed pursuant to the proxy
rules
of the SEC, had the nominee been nominated, or intended to be nominated,
by the
board; and (v) the consent of each nominee to serve as a director of the
company
if so elected. The presiding officer of the annual meeting of stockholders
may
refuse to acknowledge the nomination of any person not made in compliance
with
the foregoing procedure. If you are interested in recommending a director
candidate, you may request a copy of the company's bylaws by writing the
Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.
|
By
the Governance Committee consisting of:
|
|||||
|
John
T. Dillon (Chairman)
|
David
R. Goode
|
||||
|
W.
Frank Blount
|
Peter
A. Magowan
|
||||
|
Juan
Gallardo
|
Edward
B. Rust, Jr.
|
||||
Page
10
|
(as
of December 31,
2005)
|
|
Blount
|
68,243
|
1
|
|
Osborn
|
40,602
|
11
|
|
Brazil
|
43,302
|
2
|
|
Owens
|
1,883,305
|
12
|
|
Dillon
|
76,258
|
3
|
|
Parker
|
93,665
|
13
|
|
Fife
|
38,002
|
4
|
|
Powell
|
36,411
|
14
|
|
Fosler
|
18,002
|
5
|
|
Rust
|
20,935
|
15
|
|
Gallardo
|
150,103
|
6
|
|
Shaheen
|
930,849
|
16
|
|
Goode
|
98,402
|
7
|
|
Smith
|
54,855
|
17
|
|
Levenick
|
453,973
|
8
|
|
Vittecoq
|
506,118
|
18
|
|
Magowan
|
281,609
|
9
|
|
Wunning
|
556,052
|
19
|
|
Oberhelman
|
784,010
|
10
|
|
All
directors
and executive officers as a group
|
13,605,459
|
20
|
|
|
||||||
|
1 Blount
- Includes 56,002 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, 2005, in 1,001 shares of common stock.
|
||||||
|
2
Brazil - Includes 40,002 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, 2005, in 340 shares of common
stock.
|
||||||
|
3
Dillon - Includes 64,002 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, 2005, in 493 shares of common
stock.
|
||||||
|
4
Fife - Includes 16,002 shares subject to stock options exercisable
within
60 days.
|
||||||
|
5
Fosler - Includes 16,002 shares subject to stock options exercisable
within 60 days.
|
||||||
|
6
Gallardo - Includes 56,002 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, 2005, in 340 shares of common
stock.
|
||||||
|
7
Goode - Includes 72,002 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, 2005, in 32,168 shares of common stock.
|
||||||
|
8
Levenick - Includes 421,042 shares subject to stock options exercisable
within 60 days.
|
||||||
|
9
Magowan - Includes 72,002 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, 2005, in 10,878 shares of common
stock.
|
||||||
|
10
Oberhelman - Includes 729,308 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, 2005, in 22,874 shares of common
stock.
|
||||||
|
11
Osborn - Includes 32,002 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, 2005, in 88 shares of common
stock.
|
||||||
|
12
Owens
- Includes 1,651,334 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, 2005, in 6,310 shares of common stock.
|
||||||
|
13
Parker - Includes 72,002 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, 2005, in 1,146 shares of common
stock.
|
||||||
|
14
Powell - Includes 32,002 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, 2005, in 88 shares of common
stock.
|
||||||
|
15
Rust
- Includes 16,002 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, 2005, in 4,058 shares of common stock.
|
||||||
|
16
Shaheen - Includes 785,078 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, 2005, in 40,311 shares of common
stock.
|
||||||
|
17
Smith
- Includes 44,002 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, 2005, in 1,098 shares of common stock.
|
||||||
|
18
Vittecoq - Includes 437,328 shares subject to stock options exercisable
within 60 days.
|
||||||
|
19
Wunning - Includes 506,920 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, 2005, in 19,126 shares of common
stock.
|
||||||
|
20
Group
includes directors, named executives and 33 additional executive
officers.
Amount includes 11,627,152 shares subject to stock options exercisable
within 60 days and 133,646 shares for which voting and investment
power is
shared. Each individual director and executive officer beneficially
owns
less than one percent of the company's outstanding common stock.
All
directors and executive officers as a group beneficially own 2.03
percent
of the company's outstanding common
stock.
|
||||||
|
|
Voting
Authority
|
Dispositive
Authority
|
Total
Amount of Beneficial
|
Percent
of
|
||
|
Name
and Address
|
Sole
|
Shared
|
Sole
|
Shared
|
Ownership
|
Class
|
|
|
|
|
|
|
|
|
|
Capital
Research and Management Company
333
South
Hope Street
Los
Angeles,
CA 90071
|
1,442,000
|
0
|
40,058,000
|
0
|
40,058,000
|
5.9%
|
CATERPILLAR
INC.
Total
Cumulative Stockholder Return for
Five-Year
Period Ending December 31, 2005
The
graph below
shows the cumulative stockholder return assuming an investment of $100 on
December 31, 2000, and reinvestment of dividends issued
thereafter.
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
|||||||||||||
|
|
|
|
|
|
|
|||||||||||||
|
Caterpillar
Inc.
|
$
|
100.00
|
$
|
113.63
|
$
|
102.42
|
$
|
190.65
|
$
|
228.48
|
$
|
275.81
|
||||||
|
S&P
500
|
$
|
100.00
|
$
|
88.12
|
$
|
68.66
|
$
|
88.34
|
$
|
97.94
|
$
|
102.74
|
||||||
|
S&P
500
Machinery
|
$
|
100.00
|
$
|
108.07
|
$
|
105.41
|
$
|
159.10
|
$
|
191.50
|
$
|
193.36
|
||||||
Page
12
|
Executive
Officer and Chief Executive Officer
Compensation
|
As
Caterpillar's
Compensation Committee (committee), our primary goal is to establish a
compensation program that serves the long-term interests of Caterpillar and
its
stockholders. We believe a focused, competitive compensation program, tailored
to meet our long-term financial, operational and strategic goals, helps us
engage the entire Caterpillar team as we strive to achieve Vision 2020. Although
this report primarily focuses on executive officer compensation (CEO and
group
presidents), the committee emphasizes that it is only through the efforts
of
highly motivated, dedicated Caterpillar employees at all levels around the
globe
that the company delivered its successes in 2005 and will it be able to continue
to drive profitable growth and build on its success in the future. Ultimately,
it is the people at Caterpillar who make everything we do possible.
We
believe that
Caterpillar has developed and implemented a compensation program that
effectively:
• links
the interests of management and stockholders;
• links
employee compensation with both individual performance and long-term Caterpillar
performance; and
• attracts
and retains people of high caliber and ability.
To
assist us in
evaluating the compensation practices at Caterpillar, we engage an independent
outside consultant, Hewitt Associates (Hewitt), to advise us directly. The
role
of the consultant is to provide advice and ongoing recommendations regarding
executive compensation that are consistent with Caterpillar's business goals
and
pay philosophy. The consultant provides market information and analyses as
background to decisions regarding total compensation, including base salary,
short-term incentives, long-term incentives, executive benefits and perquisites
for the CEO, other executive officers and select key employees.
To
ensure that
Caterpillar executive officer compensation is competitive in the marketplace,
we
benchmark ourselves against an appropriate comparator group, the Hewitt Core
Group 1 (HCG1). The HCG1 is comprised of 23 companies, 21 of which are from
the
Fortune 300 (excluding BP p.l.c., a British company, and Rockwell International
Company) representing a cross section of industries. All components of the
Caterpillar executive compensation package as well as the long-term incentive
compensation components for all employees are targeted at the median level
of
the HCG1. The compensation data we receive from Hewitt, which also serves
as our
primary source for compensation data, is regressed so that market compensation
levels reflect differences in company size and scope. We believe the list
of
companies below is representative of the market in which we compete for talent.
However, the committee regularly reviews the comparator group to assure that
it
remains an appropriate benchmark for Caterpillar.
|
•
3M
Company
|
•
H.J.
Heinz
Company
|
•
The
Procter
& Gamble Company
|
|
•
Alcoa
Inc.
|
•
Hewlett-Packard Company
|
•
Rockwell
International Company
|
|
•
Altria
Group, Inc.
|
•
Honeywell
International Inc.
|
•
Sara
Lee
Corporation
|
|
•
BP
p.l.c.
|
•
Eli
Lilly
and Company
|
•
United
Technologies Corporation
|
|
•
The
Coca-Cola Company
|
•
Johnson
Controls, Inc.
|
•
Weyerhaeuser
Company
|
|
•
General
Electric Company
|
•
Lockheed
Martin Corporation
|
•
Whirlpool
Corporation
|
|
•
The
Gillette
Company
|
•
Motorola,
Inc.
|
•
Xerox
Corporation
|
|
•
The
Goodyear
Tire & Rubber Company
|
•
Pfizer
Inc.
|
Page
13
Guidelines
and Philosophy
Our
executive
officer compensation package includes a combination of total annual cash
and
long-term incentive compensation. Total annual cash compensation for executive
officers is comprised of base salary plus annual short-term incentive pay.
Long-term incentives currently consist of equity awards, including stock
option
grants, targeted grants of restricted stock and a three-year long-term cash
performance plan.
Compensation
at
Caterpillar is driven by two main philosophies: pay for performance and higher
pay at risk for increased job responsibility. We also ensure that the interests
of our executives and key employees are aligned with our stockholders' interests
by maintaining strict stock ownership requirements. Failure to meet these
guidelines results in automatic grant reductions, absent compelling personal
circumstances which prevent attainment of ownership objectives. In addition,
no
executive officer has a "golden parachute" agreement or set severance package
(outside of the employment contract required by Swiss law for G.R. Vittecoq)
that would reward him or her upon departure from the company, as such agreements
are inconsistent with our pay for performance philosophy. In addition, benefits
such as health
insurance, life insurance, 401(k) and defined benefit pension that are available
to the executive officers (excluding G.R. Vittecoq) are also available to
U.S.
Caterpillar salaried and management employees.
The
committee
established the following principles to guide the use of the compensation
components listed above to drive Caterpillar's pay for performance and pay
at
risk philosophy:
• Base
salary, as a percentage of total direct pay, should decrease as salary grade
levels increase. As employees move to higher levels of
responsibility, with greater ability to influence enterprise results, the
percentage of their pay at risk should increase
correspondingly.
• The
ratio of long-term variable pay to short-term variable pay should increase
as
salary grade levels increase. The long-term success of our
company should be the top priority of our executives. Our compensation program
must emphasize this and motivate our executives to take actions that are
best
for the long-term vitality of the company.
• Equity
compensation increases as salary grade levels increase. Equity
ownership encourages our key employees to behave like owners and provides
a
clear link between the interests of the stockholder and the interests of
the
recipient. As employees have more impact on corporate performance, their
main
incentive should be profitably growing the company, which aligns their interest
with that of our stockholders.
These
principles
were used to guide the compensation committee's decisions during 2005 and
are
reflected in the graph below. The graph depicts the progression of pay
components as salary grades increase for a representative management plan
in the
United States. Structures differ globally depending on local practices, but
preserve the compensation philosophy and guidelines described in this
report.
Page
14
Total
Annual Cash Compensation
Total
annual cash
compensation consists of market-competitive, performance-driven base salary
and
our annual short-term incentive pay. At Caterpillar, total annual cash
compensation is targeted at the median level of the HCG1.
When
reviewing
total annual cash compensation, we use the HCG1 group as our benchmark. Our
review of market data for 2005 showed that the aggregate market position
for the
cash element for all officer groups (CEO, group presidents and vice presidents)
was within +/- 5 percent of the market median, which reflects our goal at
Caterpillar. Based on this data, no adjustments were made to total annual
cash
compensation structures for the executive officers or the vice presidents.
Base
Salary
Base
salary
increases are performance-driven. At Caterpillar, we believe in paying for
performance, as evidenced by our base salary administration practice—the
Performance Award Process. The Performance Award Process results in salary
increases based upon the performance of the individual and provides for greater
increases to the highest-performing employees. Consistently high-performing
employees, other than executive officers and vice presidents, will have the
opportunity to significantly exceed target base salary levels.
To
strengthen the
performance component of base salary, we modified the administration of
executive officer and vice president base salary in 2004. As part of this
change, base salary for executive officers and vice presidents will reach
a
market-competitive level within five years (following promotion into the
role)
if performance objectives are met, with faster progression based on performance.
The base salary for this group is capped once an individual's salary reaches
the
midpoint for his or her salary level. Base salary above midpoint must be
re-earned annually given certain performance parameters, thereby stressing
the
performance component of the program to an even greater degree for all officer
groups.
Mr.
James W. Owens
completed his second year as the Chairman and CEO of Caterpillar in 2005.
In
2005, Caterpillar revenues increased to $36.3 billion and profit per share
increased to $4.04 post split, both record highs. Based on his outstanding
leadership and the record setting performance Caterpillar experienced in
2005,
Mr. Owens was awarded a base salary adjustment and a performance increase
totaling $170,000. This increase resulted in an annual base salary of $1.2
million, which is still below the median for the CEO position of the HCG1
companies.
Short-Term
Incentive Plan
Vice
presidents,
along with most other employees, participate in Caterpillar's Short Term
Incentive Plan (STIP). This plan constitutes team-based pay at risk that
delivers a target percentage of base salary to each participant based on
performance against team goals at both the enterprise and business unit levels.
The following guiding principles apply to this plan:
• percentage
of pay at risk is to remain at market competitive levels;
• employees
are rewarded for the delivery of results against measurable goals;
• awards
drive behavior aligned with both enterprise and business unit results;
and
• the
company's payout objective under the plans is to be at target on average
over a
period of years.
In
line with
Caterpillar's pay for performance philosophy, the company's vice presidents
(as
well as top performing management and salaried employees) are eligible for
discretionary awards based on STIP. At the end of each plan year, a
discretionary pool is formed from the STIP payout to award the company's
top
performing employees. The CEO, in consultation with the committee, decides
whether any individual awards to the vice presidents are warranted. Each
business unit vice president decides whether any individual awards to employees
at all other salary grade levels are warranted. Top performing employees
can
receive an additional award up to their original STIP award. Unused portions
of
the funds allocated to the CEO and unit vice presidents for individual
discretionary awards are not carried forward into the next year.
Page
15
Executive
Short-Term Incentive Plan
The
CEO and the
group presidents participate in the Caterpillar Executive Short-Term Incentive
Plan (ESTIP). Because of this group's enterprise focus, the ESTIP for 2005
was
comprised of two measures, profit per share (PPS) and enterprise 6 Sigma
benefits. These measures link the CEO and group presidents directly to the
overall performance of the company. The ESTIP is a stockholder approved plan
that allows for tax deductibility in accord with section 162(m) of the Internal
Revenue Code of 1986 for qualified performance-based compensation.
The
market data
reviewed by the committee showed that our STIP and ESTIP target percentages
remain competitive for all officer groups, and preserve the desired proportion
of pay at risk. Therefore, we are maintaining the STIP and ESTIP target
percentages for all officer groups.
Payouts
Under The Corporate Incentive Compensation Plans
For
2005,
approximately 49,500 Caterpillar employees earned
approximately $445 million in short-term incentive compensation. This
team award is calculated on prorated annual salary, a specific percentage
based
on position and performance factors for corporate and business unit
achievements.
Before
any amount
could be awarded under these plans for 2005, Caterpillar had to achieve a
threshold PPS level, with increasingly larger amounts awarded for achievement
of
business plan, target and maximum PPS level. This requirement reflects our
focus
on alignment with stockholder value. For 2005, the target PPS level was exceeded
and all eligible employees received a team award.
As
part of the
STIP, each business unit (or divisions within those units) at Caterpillar
has
its own short-term incentive compensation plan tied to goals specific to
that
unit. Several factors may impact the payout including return on assets,
accountable profit, cash flow, revenue growth, price realization, percentage
of
industry sales and quality. Vice presidents participating in their respective
divisional incentive plans were eligible to receive up to 50 percent of the
team
award amount that would have been awarded if he or she had participated solely
in their divisional plan. The remaining portion of the executive officer
plans
were tied to corporate performance factors such as PPS and enterprise 6 Sigma
benefits.
Mr.
Owens was a
participant in the 2005 ESTIP. The plan had two performance measures, PPS
and
enterprise 6 Sigma benefits, weighted at 80 percent and 20 percent,
respectively. The company outperformed its targets set for 2005 for the two
measures, which resulted in a payout factor of 1.0869 relative to target.
The
CEO position is eligible for an ESTIP target opportunity of 110 percent of
base
salary which, when multiplied by the payout factor and the prorated salary
for
the year, resulted in a cash payment of $1,384,605 for the 2005 plan.
Long-Term
Incentive Compensation
The
Long-Term
Incentive Plan (LTIP) is composed of two main elements, an equity incentive
plan
and a Long-Term Cash Performance Plan (LTCPP). As with other components of
executive pay, we target long-term compensation to be competitive against
the
HCG1. Caterpillar's LTIP is designed to reward the company's key employees
for
achieving and exceeding our long-term goals, to drive stockholder return
and to
foster stock ownership. Ultimately, LTIP aligns the interests of officers
and
key employees with those of the stockholders.
Equity
The
main equity
vehicle used in 2005 to motivate and reward executive officers and certain
other
key employees was stock options. These stock options permit the holder to
buy
Caterpillar stock for a price equal to the stock's value when the option
was
granted. Option holders have ten years to exercise stock options from the
date
they were granted, absent events such as death or termination of employment.
Caterpillar views stock options as critical to linking the interest of our
stockholders and employees.
Page
16
The
number of
options an officer receives depends upon his or her position in the company
and
his or her performance. A baseline number of options are granted for the
positions of vice president, group president and CEO. Positive or negative
adjustments may be made based on a subjective assessment of individual
performance, as long as these adjustments do not increase the total number
of
options issued.
Consistent
with our
approach to total cash compensation, we target the equity compensation for
all
executive officers to be competitive against the HCG1. Our review of market
data for 2005 showed that the market position for the equity element for
all
officer groups was competitive against our comparator group. Based on this
data,
no adjustments were made to the standard equity grants for the officer groups.
Since
we are
committed to cultivating an ownership mentality among our executive officers
and
all key employees eligible to receive stock options, Caterpillar established
and
adheres to strict ownership guidelines in connection with stock option grants.
Employees are encouraged to own a number of shares at least equal to the
average
number of options awarded in the last five years. Generally, this target
corresponds to a requirement that vice presidents hold more than two to three
times their base salary in Caterpillar stock with the CEO and group presidents
holding much higher multiples of their base salaries. Since options represent
an
equity position in the company, 25 percent of vested unexercised options
apply
toward the ownership target.
Even
though
Caterpillar targets total compensation for all officers at the comparator
group
median, the holding requirements are well into the upper quartile of our
comparator group companies. With few exceptions, if the ownership requirement
is
not met, the employee's grant is reduced proportionally to the shortfall.
For
2005, all officers complied with or exceeded the target ownership guidelines.
In
2005, 2.5 percent of the stock option eligible employees did not meet their
ownership requirements, which resulted in 61,980 options not being
granted.
Since
many of the
officers hold significantly more than the minimum requirements, there will
be
times when sales during the open window period or programmed sales approved
and
filed in an open window period may occur. As long as the aggressive minimum
ownership requirements are met, legitimate sales occur for reasons of tax
payments, portfolio diversification and special needs. The CEO and the General
Counsel approve each sale or programmed sale by an officer in advance and
in
writing.
Under
the
leadership of Mr. Owens, Caterpillar achieved a 20 percent increase in sales
and
revenues from 2004 and profit per share was up 40 percent, both company records.
In July of 2005, Caterpillar stock split 2 for 1 and for the year ended December
31, 2005, Caterpillar's stock price climbed 20.7 percent. In recognition
of
Caterpillar's record setting performance for 2005, Mr. Owens was awarded
the
standard CEO grant of 420,000 stock options (post split) and an additional
40,000 stock options with a ten-year option life. The total stock option
grant
for Mr. Owens is consistent with our pay for performance philosophy.
Restricted
Stock Grants
In
addition to
stock options, the committee approved the implementation of a restricted
stock
award program in December 2000 in recognition of the need to attract and
retain
outstanding performers. Key elements of the program are:
• establishment
of an annual pool of 500,000 restricted shares of company stock, from which
selected performance-based and retention-based grants would be made to officers
and other key employees, as well as prospective employees;
• restrictions
on awarded shares with vesting schedules varying from three-five years;
and
• forfeiture
of restricted shares upon the grantee's election to leave Caterpillar prior
to
vesting.
Pursuant
to the
plan, the committee reviews nominations for the restricted stock award program.
The nominees that are prospective employees must have the potential to be
a
significant contributor, have the capabilities that present a potential
competitive advantage or have special talents or characteristics that meet
a
specific corporate need, in order to receive an award. Current employees
must
have shown exceptional performance, have high potential for promotion or
be
highly marketable for positions outside of the company.
Page
17
In
2005, 109
participants received a total of 114,825 restricted shares with a total value
of
$5,519,138 under this restricted stock award program. In addition, to preserve
a
beneficial tax status, 19 participants received a total of 15,075 equivalent
shares of restricted stock with a total value of $733,272 under this program
in
2005.
Mr.
Owens was a
recipient of 20,000 restricted stock shares for his outstanding contributions
to
Caterpillar's success. The restricted stock shares have a five-year vesting
period with one third of the award vesting in years three, four and five.
Cash
Performance Plan
Our
long-term
incentive compensation plan also includes a Long-Term Cash Performance Plan
(LTCPP) offered to officers and other high-level management employees. Under
this plan, a three-year performance cycle is established each year. If the
company meets certain threshold, target or maximum performance goals at the
end
of the cycle, participants receive a cash payout. As with past cycles, we
decided to combine relative PPS growth and return on equity (ROE) for the
2005-2007 cycle. In February 2005, we set the threshold, target and maximum
levels for the 2005-2007 cycle for PPS growth at the 25th, 50th and 75th
percentiles of our S&P peer group, respectively, and for ROE at 20, 30 and
40 percent, respectively. Each measure is weighted equally and will trigger
independently for the 2005-2007 cycle.
The
2005 LTCPP
payout was based on the three-year cycle, which began in 2003 and ended in
2005.
The metrics utilized for the 2003 through 2005 plan were relative PPS growth
and
ROE. The threshold target and maximum levels for PPS growth were the 25th,
50th
and 75th percentiles of our S&P peer group, respectively, and for ROE at 15,
20 and 25 percent, respectively. We achieved 29.1 percent ROE for a factor
of
1.50 and achieved the 78th percentile for relative PPS growth for a
factor of 1.50. The two factors combined for a maximum payout factor of 1.50.
The S&P peer group differs from the HCG1 comparator group utilized for
benchmarking all levels of compensation. We utilize the S&P peer group to
compare Caterpillar’s performance against the performance of our specific
industry. The companies in our S&P peer group are listed below.
|
•
3M
Company
|
•
General
Electric Company
|
•
Navistar
International Corporation
|
|
•
Cummins
Inc.
|
•
Honeywell
International Inc.
|
•
PACCAR
Inc
|
|
•
Danaher
Corporation
|
•
Illinois
Tool Works Inc.
|
•
Pall
Corporation
|
|
•
Deere
&
Company
|
•
Ingersoll-Rand Company Limited
|
•
Parker-Hannifin Corporation
|
|
•
Dover
Corporation
|
•
ITT
Industries, Inc.
|
•
Textron
Inc.
|
|
•
Eaton
Corporation
|
•
Johnson
Controls, Inc.
|
•
United
Technologies Corporation
|
Additionally,
our
market data review showed that the current target percentages for the LTCPP
were
competitive in the marketplace. The market data further showed that in
conjunction with the LTCPP, our LTIP provides for adequate, market competitive
incentives that effectively balance our growth and profitability objectives
over
an intermediate and long-term horizon.
Mr.
Owens was a
participant in the 2003-2005 cycle of the LTCPP. For the LTCPP, the CEO position
is awarded a 160 percent of base salary payment which, when multiplied by
the
1.50 payout factor achieved by Caterpillar, resulted in a payout of $2.5
million
to Mr. Owens. The LTCPP payment is capped at $2.5 million under the rules
of the
stockholder approved LTIP of 1996.
Page
18
Compensation
Summary for the Chairman and Chief Executive Officer
The
compensation
design for the Chairman and CEO of Caterpillar is consistent with that of
all
executive officers. The total compensation for Mr. Owens is designed to be
competitive in the marketplace as compared to the HCG1. The pay for performance
philosophy is strictly adhered to for the CEO, with 87 percent of target
total
compensation at risk for Mr. Owens.
In
his second full
year as Chairman and CEO, Mr. Owens led Caterpillar to record setting revenue
growth and profits. Although revenues and profits were at record levels,
the
total compensation for Mr. Owens remained below the median level of the HCG1.
Total stockholder return for Caterpillar in 2005 was 20.7 percent, which
placed
Caterpillar in the upper quartile of the HCG1. Based on his excellent leadership
in driving Team Caterpillar and in accord with our pay for performance
philosophy, Mr. Owens was awarded a $170,000 base salary increase, an additional
40,000 stock options over the standard option grant and 20,000 restricted
stock
shares.
Summary
We
believe the
design of Caterpillar's compensation plans and their relative mix successfully
motivates the company's executive officers. All aspects of compensation are
performance driven and align both the short-term and long-term interests
of
employees and stockholders. The ownership requirements for executives and
officers are instrumental in the company's drive to increase stockholder
return.
A
2004 equity
research report completed by Bear Stearns & Co. analyzed the compensation
practices of the U.S. Machinery sector found that, "Cat has shown the most
consistent executive compensation program within our sector." The report
concluded that, "[w]e believe that Cat's executive compensation is indeed
appropriately linked to company performance and is therefore shareholder
'friendly.'" In addition to being consistent and linked to company performance,
Caterpillar compensation plans are competitive in the marketplace and allow
us
to attract and retain the best and brightest employees. Therefore, we, the
committee, conclude that Caterpillar's plans are effective, create significant
value and reflect an appropriate mix that drives company success.
Mr.
Owens's Individual Goals for 2005
Individual
Goals for Jim Owens in 2005
The
committee
reviewed the board's assessment of the individual goals of Mr. Owens established
at the beginning of 2005 and his subsequent performance against those goals.
His
2005 performance was also considered in determining adjustments to his salary.
We believe that the company's 2005 performance is a testament to the new
strategic direction and individual goals set by Mr. Owens. He has very clearly
positioned the company for long-term growth and success.
Under
the
leadership of Mr. Owens, the company developed a new corporate vision, mission,
critical success factors and top tier target metrics. In October, the company
launched the new Vision 2020 and updated Worldwide Code of Conduct to the
public, and the feedback has been extremely positive.
The
individual
goals of Mr. Owens stem from "3-Ps" that he established as the focal points
for
the company going forward - Profitable growth, Performance through 6 Sigma,
and
People. We believe that 2005 was a year of extraordinary achievement in each
of
these areas.
Page
19
Profitable
Growth
The
company had a
record year, with year-end results of over $36 billion in sales and revenues.
Profit exceeded $2.8 billion, or $4.04 a share, up 40
percent. The results surpassed the revised outlook announced at the beginning
of
the fourth quarter.
Under
the direction
of Mr. Owens, Team Caterpillar - employees, dealers and suppliers - effectively
responded to unprecedented customer demand in 2005. Since 2004, the company
has
more than doubled production at several manufacturing facilities. In 2005,
the
focus was on meeting customer delivery expectations while creating stockholder
value and improving the company's period cost structure. Also, there has
been
significant progress in the corporate order fulfillment initiative, with
sales
increasing 20 percent, setting new production level records and improving
product availability. Moreover, several new initiatives were implemented
to
improve the company's order-to-delivery performance. Mr. Owens established
"Velocity" as one of the company's seven Critical Success Factors under Vision
2020. He also created the Caterpillar Production System Division to lead
an
enterprise transformation of manufacturing systems over the next few years.
To
enhance
profitability, the company continued to leverage its groundbreaking ACERT®
Technology. Market acceptance of ACERT remains positive and it
appears that machines with ACERT engines are experiencing margin improvements.
The company also improved profitability by focusing on underachieving products
and services. Throughout the enterprise, definitive time lines and milestones
were established to meet financial expectations or take other corrective
actions.
Mr.
Owens continued
to aggressively develop business opportunities in China, India and CIS (Russia).
In China, the company acquired a key stake of Shandong SEM Machinery Co Ltd.,
and Caterpillar Xuzhou Ltd. began exporting excavators to North America.
With
more than 20 business units responsible for deploying the enterprise growth
strategy in China, the company has established an effective corporate governance
process to ensure coordination and focus on the enterprise perspective. Business
units remain accountable for their individual results, but enterprise financial
exposure, capital investments, supply chain exposure, personnel development
strategies, and financial results are monitored and coordinated against the
company's long-range performance goals through a defined governance process
owned by the China Council.
Under
the direction
of Mr. Owens, in India the company increased its ownership in Hindustan
Powerplus Limited, and Caterpillar India Private Limited achieved a strategic
breakthrough with the export of trucks to Indonesia. Also, Caterpillar Logistics
Services India Private Limited is now providing services to Caterpillar and
external clients worldwide. In Russia, sales growth continues to be very
strong
and the company's dealer network and product support capabilities are steadily
improving.
Performance
through 6 Sigma
Under
the
leadership of Mr. Owens, the company continued to embed 6 Sigma in the way
it
works, engages its people, develops its leaders and creates sustainable value
for customers and stockholders. 6 Sigma played a central role in the development
of the new Vision 2020 and will be the methodology that drives the execution
of
the strategy. In 2005, the company exceeded its aggressive 6 Sigma value
proposition target. At year-end, there were over 3,500 active
Black Belts leading over 26,000 employees in 6 Sigma projects. Also in
2005, 6 Sigma helped the company develop future leaders with more than 800
Black
Belts moving back into the organization, many in managerial roles. The company
also strengthened its supply chain by completing the deployment of 6 Sigma
to
156 dealers and 385 suppliers worldwide.
Page
20
People
In
response to a
challenge issued by Mr. Owens, participation in the 2005 Employee Opinion
Survey
resulted in the third consecutive year for improved employee engagement at
Caterpillar. Overall, employee engagement increased four points from 2004
to a
record high of 64 percent favorable. Eight out of ten business units below
60
percent last year increased their employee engagement by at least five points
this year. In addition, the global management payroll engagement index improved
to a record level of 75 percent and engagement among hourly employees increased
favorably.
Mr.
Owens also
continued to set the "tone at the top" with respect to workplace safety and
employee diversity. For workplace safety, the company had another year of
notable improvement in its lost time case frequency rate, recordable injury
frequency, and lost workdays. For diversity, Mr. Owens set clear directions
about the importance of training and building a more diverse workforce to
reflect the global nature of our employees, suppliers, and customers worldwide.
During the year, 52 future leaders were selected to attend a new leadership
development program taught by the company's officers. Also, the assessment
and
development of leadership competencies continues to gain momentum with the
global rollout of the company's "Making Great Leaders" program.
In
addition to
delivering on his "3-Ps," Mr. Owens set and achieved impressive personal
goals
for 2005. In particular, he:
| • |
Continued
to
develop and/or maintain close relationships with key customers, dealers
and strategic suppliers by attending several meetings with dealer
groups
worldwide, and establishing personal relationships with the CEOs
of
several key customers and suppliers;
|
| • |
Assured
personal and executive office engagement with selected outside
organizations and state and community groups to focus on global trade
liberalization and to enhance the competitiveness from existing
operations;
|
| • |
Provided
corporate leadership for the company's investor relations efforts,
and
kept the market well informed about the company's performance and
direction through a series of meetings held with stockholders, analysts
and the media, including a meeting to roll-out the new Vision 2020
to 125
analysts in New York, followed by one-on-one visits with key investors
on
the East Coast, West Coast, and Mid-West;
|
| • |
Maintained
a
solid working rapport with the board of directors by meeting individually
with various board members and streamlining the board meetings for
more
strategic discussions; and
|
| • |
Effectively
managed succession with a number of planned officer
changes.
|
|
By
the Compensation Committee consisting of:
|
||||||||
|
William
A. Osborn (Chairman)
|
Peter
A. Magowan
|
|||||||
|
John
R. Brazil
|
Charles
D. Powell
|
|||||||
|
Gail
D. Fosler
|
Joshua
I. Smith
|
|||||||
Page
21
|
2005
Summary Compensation Table
|
||||||||||||||||||||||||
|
Annual
Compensation
|
Long
Term Compensation
|
All
Other
Compensation7
|
||||||||||||||||||||||
|
Bonus1
|
Other
Annual Compensation
|
Awards
|
Payouts
|
Matching
Contributions
|
||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
|
Short-Term
Incentive
Pay
|
Variable
Base
Pay & Lump-Sum Discretionary Bonus
|
Financial
Counseling2 |
Personal
Use
of
Corporate
Aircraft2
|
Expatriate
Program/
Relocation
Payments2
|
Restricted
Stock
Awards4
|
Securities
Underlying
Options5
|
LTIP
Payouts6
|
401(k)
|
SEIP
&
DEIP
|
||||||||||||
|
J.W. Owens
|
2005
|
$
|
1,157,490
|
$
|
1,384,605
|
$
|
--
|
$
|
14,000
|
$
|
3,906
|
$
|
--
|
$
|
960,200
|
460,000
|
$
|
2,500,000
|
$
|
12,600
|
$
|
153,558
|
||
|
Chairman
&
CEO
|
2004
|
$
|
1,029,960
|
$
|
1,611,811
|
$
|
--
|
$
|
26,077
|
$
|
3,796
|
$
|
--
|
$
|
--
|
460,000
|
$
|
1,371,886
|
$
|
12,300
|
$
|
89,003
|
||
|
2003
|
$
|
695,000
|
$
|
658,419
|
$
|
23,000
|
$
|
12,325
|
$
|
1,929
|
$
|
--
|
$
|
--
|
140,000
|
$
|
--
|
$
|
12,000
|
$
|
52,536
|
|||
|
S.L.
Levenick
|
2005
|
$
|
579,999
|
$
|
504,425
|
$
|
--
|
$
|
8,000
|
$
|
2,902
|
$
|
290,257
|
3
|
$
|
--
|
130,000
|
$
|
842,889
|
$
|
12,600
|
$
|
52,363
|
|
|
Group
President
|
2004
|
$
|
497,250
|
$
|
547,197
|
$
|
--
|
$
|
8,000
|
$
|
841
|
$
|
984,229
|
3
|
$
|
--
|
126,000
|
$
|
533,814
|
$
|
12,300
|
$
|
17,535
|
|
|
2003
|
$
|
389,004
|
$
|
345,495
|
$
|
--
|
$
|
3,968
|
$
|
400
|
$
|
720,680
|
3
|
$
|
--
|
54,000
|
$
|
--
|
$
|
11,670
|
$
|
29,456
|
||
|
D.R. Oberhelman
|
2005
|
$
|
677,502
|
$
|
589,321
|
$
|
5,000
|
$
|
2,480
|
$
|
1,923
|
$
|
--
|
$
|
96,020
|
140,000
|
$
|
1,094,631
|
$
|
12,600
|
$
|
74,211
|
||
|
Group
President
|
2004
|
$
|
604,749
|
$
|
688,340
|
$
|
38,000
|
$
|
1,935
|
$
|
866
|
$
|
--
|
$
|
237,810
|
140,000
|
$
|
708,745
|
$
|
12,300
|
$
|
54,534
|
||
|
2003
|
$
|
537,340
|
$
|
509,159
|
$
|
--
|
$
|
3,975
|
$
|
--
|
$
|
--
|
$
|
--
|
140,000
|
$
|
--
|
$
|
12,000
|
$
|
37,215
|
|||
|
G.L.
Shaheen
|
2005
|
$
|
695,004
|
$
|
604,331
|
$
|
83,000
|
$
|
5,578
|
$
|
3,134
|
$
|
--
|
$
|
--
|
140,000
|
$
|
1,094,631
|
$
|
12,600
|
$
|
85,485
|
||
|
Group
President
|
2004
|
$
|
686,004
|
$
|
780,739
|
$
|
63,000
|
$
|
540
|
$
|
2,945
|
$
|
--
|
$
|
--
|
140,000
|
$
|
788,135
|
$
|
12,300
|
$
|
68,162
|
||
|
2003
|
$
|
649,004
|
$
|
615,022
|
$
|
40,000
|
$
|
370
|
$
|
16,094
|
$
|
--
|
$
|
--
|
140,000
|
$
|
--
|
$
|
12,000
|
$
|
49,469
|
|||
|
G.R.
Vittecoq
2
|
2005
|
$
|
670,500
|
$
|
583,024
|
$
|
66,894
|
$
|
10,000
|
$
|
--
|
$
|
--
|
$
|
--
|
130,000
|
$
|
989,049
|
$
|
23,358
|
$
|
--
|
||
|
Group
President
|
2004
|
$
|
779,609
|
$
|
887,295
|
$
|
--
|
$
|
10,000
|
$
|
136
|
$
|
--
|
$
|
--
|
126,000
|
$
|
771,808
|
$
|
31,094
|
$
|
--
|
||
|
2003
|
$
|
571,660
|
$
|
449,847
|
$
|
--
|
$
|
7,500
|
$
|
--
|
$
|
--
|
$
|
44,750
|
54,000
|
$
|
--
|
$
|
27,168
|
$
|
--
|
|||
|
S.H.
Wunning
|
2005
|
$
|
597,999
|
$
|
520,148
|
$
|
--
|
$
|
8,000
|
$
|
310
|
$
|
--
|
$
|
--
|
130,000
|
$
|
902,756
|
$
|
12,600
|
$
|
60,803
|
||
|
Group
President
|
2004
|
$
|
549,507
|
$
|
625,387
|
$
|
--
|
$
|
2,375
|
$
|
--
|
$
|
--
|
$
|
--
|
126,000
|
$
|
550,432
|
$
|
12,300
|
$
|
42,206
|
||
|
2003
|
$
|
399,004
|
$
|
358,928
|
$
|
--
|
$
|
400
|
$
|
--
|
$
|
--
|
$
|
--
|
54,000
|
$
|
--
|
$
|
12,000
|
$
|
24,582
|
|||
|
|
||||||||||||||||||||||||
|
1
Consists of cash payments made pursuant to the corporate incentive
compensation plan in 2006 with respect to 2005 performance, in
2005 with
respect to 2004 performance, and in 2004 with respect to 2003 performance.
Also includes variable base pay lump sum amounts that must be re-earned
annually, and discretionary bonus payments authorized by the compensation
committee of the board of directors.
|
||||||||||||||||||||||||
|
2
Amounts include any related taxes paid on behalf of employee. Besides
these very limited benefits, no other perquisites are
provided.
|
||||||||||||||||||||||||
|
3
Mr.
Levenick was an International Service Employee (ISE) based in Japan
until
his return to the U.S. in July 2004. The 2005 amount contains a
foreign
income tax payment, a final tax equalization computation, and a
U.S. tax
gross-up on foreign service allowances. Amounts in 2003 include
various
foreign service allowances typically paid by the company on behalf
of
ISEs, including allowances for cost of living, housing, foreign
service
premiums, and for that portion of his foreign and U.S. taxes attributable
to employment as an ISE for the company. Amount for 2004 includes
the
expenses noted for 2003 plus relocation expenses associated with
his move
back to the United States, including a housing appreciation allowance,
an
international service premium, moving expenses, and costs associated
with
a search for a new house. These allowances are intended to ensure
that our
ISEs are in the same approximate financial position as they would
have
been if they lived in their home country during the time of their
service
as ISEs.
|
||||||||||||||||||||||||
|
4
Consists of restricted shares issued pursuant to the restricted
stock
award program established in December 2000. The fair market value
of
Caterpillar stock at the time of the 2005 award was $48.01 per
share.
Caterpillar's average stock price on December 31, 2005 ($57.835 per
share) was used to determine the fair market value (FMV) of restricted
stock. Dividends are paid on this restricted stock. As of December
31,
2005, the number and value of all restricted stock held by named
executives was: J.W. Owens: 20,000 shares/$1,156,700; D.R. Oberhelman:
10,332 shares/$597,551; G.R. Vittecoq: 1,900 share equivalents/$109,887;
and S.H. Wunning: 2,332 shares/$134,871.
|
||||||||||||||||||||||||
|
5
Share
amounts reflect the 2005 2-for-1 stock split.
|
||||||||||||||||||||||||
|
6
Consists of cash payments pursuant to the long-term cash performance
plan
in 2006, with respect to performance over a three year plan cycle
from
2003-2005 ending on December 31, 2005. The 2001-2003 plan cycle
did not
meet the threshold for payment.
|
||||||||||||||||||||||||
|
7
Consists of matching company contributions for participants in
either the
Caterpillar 401(k) Plan or a similar non-U.S. investment plan,
and
matching company contributions in either the supplemental and/or
deferred
employees' investment plans (SEIP and DEIP).
|
||||||||||||||||||||||||
|
8
Dollar
amounts for Mr. Vittecoq are based on compensation in Swiss Francs
converted to U.S. dollars using the exchange rate in effect on
December
31st of each year. The 2005 numbers reflect a 14 percent depreciation
in
the Swiss Franc against the U.S. Dollar from the rate in effect
on
December 31, 2004. The 2004 numbers reflect a ten percent appreciation
in
the Swiss Franc against the U.S. Dollar from the rate in effect
on
December 31, 2003.
|
||||||||||||||||||||||||
Page
22
|
Option
Grants in 2005
|
||||||||||||
|
Individual
Grants
|
Potential
Realizable Value at Assumed Annual Rates of Stock Price
Appreciation for
Option Term3
|
|||||||||||
|
Name
|
Number
of Securities Underlying Options Granted1
|
%
of
Total Options Granted to Employees in Fiscal Year
20052
|
Exercise
Price Per Share
|
Expiration
Date
|
5%
|
10%
|
||||||
|
J.W.
Owens
|
460,000
|
3.66
|
$
|
45.6425
|
02/18/15
|
$
|
13,205,450
|
$
|
33,459,250
|
|||
|
S.L.
Levenick
|
130,000
|
1.03
|
$
|
45.6425
|
02/18/15
|
$
|
3,731,975
|
$
|
9,455,875
|
|||
|
D.R.
Oberhelman
|
140,000
|
1.11
|
$
|
45.6425
|
02/18/15
|
$
|
4,019,050
|
$
|
10,183,250
|
|||
|
G.L.
Shaheen
|
140,000
|
1.11
|
$
|
45.6425
|
02/18/15
|
$
|
4,019,050
|
$
|
10,183,250
|
|||
|
G.R.
Vittecoq
|
130,000
|
1.03
|
$
|
45.6425
|
02/18/15
|
$
|
3,731,975
|
$
|
9,455,875
|
|||
|
S.H.
Wunning
|
130,000
|
1.03
|
$
|
45.6425
|
02/18/15
|
$
|
3,731,975
|
$
|
9,455,875
|
|||
|
Executive
Group2
|
2,867,800
|
22.82
|
$
|
45.6425
|
02/18/15
|
$
|
81,414,470
|
$
|
206,283,550
|
|||
|
All
Stockholders4
|
N/A
|
N/A
|
N/A
|
N/A
|
$
|
19,665,068,170
|
$
|
49,826,278,708
|
||||
|
Executive
Group Gain as
% of all Stockholder Gain |
N/A
|
N/A
|
N/A
|
N/A
|
.41
|
.41
|
||||||
|
|
||||||||||||
|
1
The
2005 grant fully vested on the granting date, February
18, 2005. Upon
exercise, option holders may surrender shares to pay the
option exercise
price and satisfy tax-withholding requirements. Options
granted to certain
employees that are vested and not incentive stock options
may be
transferred to certain permitted transferees. All share
data reflects the
2 for 1 stock split that occurred on July 13, 2005.
|
||||||||||||
|
2
In
2005, options for 12,669,872 shares were granted to employees
and
directors as follows: Executive Group - 2,867,800; non-employee
directors
- 104,000; and all others 9,698,072. The Executive Group
represents 39
officers.
|
||||||||||||
|
3
The
dollar amounts under these columns reflect the five percent
and ten
percent rates of appreciation prescribed by the SEC. The
five percent and
ten percent rates of appreciation would result in per share
prices of
$74.35 and $118.38, respectively.
|
||||||||||||
|
4
For
"All Stockholders" the potential realizable value is calculated
by
multiplying the average price of common stock on February
18, 2005
($45.6425) by the outstanding shares of common stock on
that
date.
|
||||||||||||
|
Aggregated
Option/SAR Exercises in 2005, and 2005 Year-End Option/SAR
Values
|
||||||||||||||
|
|
|
|
Number
of Securities Underlying Unexercised Options / SARs
at
2005
Year-End3
|
Value
of Unexercised In-the-Money Options / SARs at
2005
Year-End2
|
||||||||||
|
Name
|
Shares
Acquired on Exercise1
|
Value
Realized2
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||||||
|
|
|
|
|
|
|
|
||||||||
|
J.W.
Owens
|
100,000
|
|
$
|
3,215,228
|
|
1,651,334
|
|
46,666
|
|
$
|
37,664,823
|
$
|
1,432,296
|
|
|
S.L.
Levenick
|
51,330
|
|
$
|
1,343,522
|
|
421,042
|
|
18,000
|
|
$
|
9,120,632
|
$
|
552,465
|
|
|
D.R.
Oberhelman
|
N/A
|
|
$
|
N/A
|
|
729,308
|
|
46,666
|
|
$
|
18,787,872
|
$
|
1,432,296
|
|
|
G.L.
Shaheen
|
7,458
|
|
$
|
159,707
|
|
785,078
|
|
46,666
|
|
$
|
19,818,191
|
$
|
1,432,296
|
|
|
G.R.
Vittecoq
|
36,280
|
|
$
|
1,021,863
|
|
437,328
|
|
18,000
|
|
$
|
9,797,370
|
$
|
552,465
|
|
|
S.H.
Wunning
|
25,200
|
|
$
|
594,446
|
|
506,920
|
|
18,000
|
|
$
|
12,031,738
|
$
|
552,465
|
|
|
|
||||||||||||||
|
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.
All share amounts
reflect the July 13, 2005 - 2 for 1 stock split.
|
||||||||||||||
|
2
Calculated on the basis of the fair market value of the
underlying
securities at either the exercise date or year-end ($57.835
per share), as
the case may be, minus the exercise price.
|
||||||||||||||
|
3
Numbers presented have not been reduced to reflect any
transfers of
options by the named
executives.
|
||||||||||||||
Page
23
|
Long
- Term Incentive Plans/Awards in 2005
|
|||||||
|
Estimated
Future Payouts under
Non-Stock
Price-Based Plans 1
|
|||||||
|
Name
|
Performance
or Other Period Until Maturation or Payout
|
Threshold
|
Target
|
Maximum
|
|||
|
J.W.
Owens
|
2005
-
2007
|
$
|
948,664
|
$
|
1,897,328
|
$
|
2,500,000
|
|
Chairman
& CEO
|
2004
-
2006
|
$
|
960,000
|
$
|
1,920,000
|
$
|
2,500,000
|
|
S.L.
Levenick
|
2005
-
2007
|
$
|
307,300
|
$
|
614,600
|
$
|
921,899
|
|
Group
President
|
2004
-
2006
|
$
|
308,700
|
$
|
617,400
|
$
|
926,100
|
|
D.R.
Oberhelman
|
2005
-
2007
|
$
|
361,814
|
$
|
723,629
|
$
|
1,085,443
|
|
Group
President
|
2004
-
2006
|
$
|
364,877
|
$
|
729,754
|
$
|
1,094,631
|
|
G.L.
Shaheen
|
2005
-
2007
|
$
|
364,877
|
$
|
729,754
|
$
|
1,094,631
|
|
Group
President
|
2004
-
2006
|
$
|
364,877
|
$
|
729,754
|
$
|
1,094,631
|
|
G.R.
Vittecoq
|
2005
-
2007
|
$
|
352,012
|
$
|
704,024
|
$
|
1,056,036
|
|
Group
President
|
2004
-
2006
|
$
|
352,012
|
$
|
704,024
|
$
|
1,056,036
|
|
S.H.
Wunning
|
2005
-
2007
|
$
|
318,850
|
$
|
637,700
|
$
|
956,549
|
|
Group
President
|
2004
-
2006
|
$
|
321,300
|
$
|
642,600
|
$
|
963,900
|
|
|
|||||||
|
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 performance levels (profit per share
and return
on equity) over the three-year period. The threshold amount
will be earned
if 50 percent of the targeted performance level is achieved.
The target
amount will be earned if 100 percent of the targeted performance
level is
achieved. The maximum award amount will be earned at 150 percent
of
targeted performance level. Base salary levels for 2005 were
used to
calculate the estimated dollar value of future payments under
both
cycles.
|
|||||||
|
Pension
Plan Table
|
||||||||||||||||
|
Years
of Service
|
||||||||||||||||
|
Remuneration
|
15
|
20
|
25
|
30
|
35
|
|||||||||||
|
$
|
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
|
$
|
937,000
|
$
|
1,125,000
|
$
|
1,312,500
|
|||||
|
$
|
2,750,000
|
$
|
618,750
|
$
|
825,000
|
$
|
1,031,250
|
$
|
1,237,500
|
$
|
1,443750
|
|||||
|
$
|
3,000,000
|
$
|
675,000
|
$
|
900,000
|
$
|
1,125,000
|
$
|
1,350,000
|
$
|
1,575,000
|
|||||
Page
24
PROPOSAL
1 - Management
Proposal: Election of DirectorsThe
board of
directors has nominated four directors to stand for re-election for a
three-year
term expiring in 2009. The nominees were evaluated and recommended by
the
Governance Committee in accordance with the process for nominating directors
as
found of page 9 of this proxy statement.
Directors
Up for Election This Year for Terms Expiring in 2009
| § |
DAVID
R. GOODE, 65, former Chairman, President and CEO of Norfolk
Southern Corporation (holding company engaged principally in surface
transportation). Other directorships: Delta Air Lines, Inc.; Norfolk
Southern Corporation; and Texas Instruments Incorporated. Mr. Goode
has
been a director of the company since
1993.
|
| § |
JAMES
W. OWENS, 60, Chairman and CEO of Caterpillar Inc.
(machinery, engines, and financial products). Prior to his current
position, Mr. Owens served as Vice Chairman and as Group President
of
Caterpillar. Other directorships: Alcoa Inc. and International Business
Machines Inc. Mr. Owens has been a director of the company since
2004.
|
Page
25
| § |
CHARLES
D. POWELL, 64, Chairman of Safinvest Limited (asset and
investment management) and LVMH Services Limited (luxury goods).
Prior to
his current positions, Lord Powell was Chairman of Phillips Fine
Art
Auctioneers (art, jewelry and furniture auction) and Chairman of
Sagitta
Asset Management Limited (asset management). Other directorships:
LVMH
Moet-Hennessy Louis Vuitton; Mandarin Oriental International Ltd.;
Textron
Corporation; Schindler Holding Ltd.; and Yell Group plc. Lord Powell
has
been a director of the company since
2001.
|
| § |
JOSHUA
I. SMITH, 65, Chairman and Managing Partner of the Coaching
Group, LLC (management consulting). As part of the Coaching Group,
Mr.
Smith served as former Vice Chairman and Chief Development Officer
of
iGate, Inc. (broadband networking). Other directorships: CardioComm
Solutions Inc.; Federal Express Corporation; and The Allstate Corporation.
Mr. Smith has been a director of the company since
1993.
|
YOUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE NOMINEES PRESENTED
IN
PROPOSAL 1.
PROPOSAL
2
- Management Proposal: Approve Amendment to Articles
of
Incorporation Article
FOURTH of
Caterpillar's Restated Certificate of Incorporation currently fixes our
authorized capital stock at 900,000,000 shares of common stock, $1.00
par value,
and 5,000,000 shares of preferred stock, $1.00 par value. The Board recommends
an amendment to increase the number of authorized shares of common stock
to
2,000,000,000. No change is being proposed to the par value of the common
stock
or the number of authorized shares of preferred stock.
If
the amendment is
approved by stockholders, the first paragraph of Article FOURTH of the Restated
Certificate of Incorporation would be restated to read as follows:
"FOURTH:
(a) The
corporation is authorized to issue two classes of shares to be designated,
respectively, "common stock" and "preferred stock." The total number of such
shares shall be two billion five million (2,005,000,000), all of which shares
shall have a par value of $1.00 per share. The total number of shares of
common
stock authorized to be issued shall be two billion (2,000,000,000) and the
total
number of shares of preferred stock authorized to be issued shall be five
million (5,000,000)."
The
rights of
additional authorized shares would be identical to shares now authorized.
Although the authorization would not, in itself, have any effect on your
rights
as a stockholder, issuance of additional shares of common stock for other
than a
stock split or dividend could have a dilutive effect on earnings per share.
If
approved, the amendment would allow the board to authorize the issuance of
additional shares up to the new maximum without further stockholder approval,
unless that approval was required under applicable law or stock exchange
regulations. This proposal is not in response to any known effort to accumulate
Caterpillar common stock or obtain control of Caterpillar.
As
of December 31,
2005, we had 900,000,000 shares of authorized common stock, of which 670,867,219
shares were issued and outstanding. While we do not have any current plans
to
issue additional shares of common stock, other than under authorized benefit
and
compensation plans, the amendment would enhance the Board's flexibility in
possible future actions, such as stock splits, stock dividends, acquisitions
and
other corporate activities involving the common stock.
YOUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL
2.
The
board of
Caterpillar Inc. (company) has established, subject to stockholder approval,
the
Caterpillar Inc. 2006 Long-Term Incentive Plan (plan). The purpose of the
plan
is to further the board's compensation philosophy, as outlined by the
Compensation Committee in their report. Specifically, the plan would allow
the
board to provide key present and future employees and members of the board
with
cash-based incentives, stock-based incentives and other equity interests
in the
company, thereby giving them a stake in the growth and prosperity of the
company, aligning their interests with those of stockholders and encouraging
the
continuance of their services with the company and its
subsidiaries.
The
company's
former long-term incentive plan, the Caterpillar Inc. 1996 Stock Option and
Long-Term Incentive Plan (1996 plan) expired on April 9,
2006. The board wishes to ensure the company's continued
ability to offer cash and equity based compensation to its key employees.
The
board believes this type of compensation is critical to its ability to attract
and retain highly qualified individuals and otherwise attain the goals described
above. Recognizing the importance of the company's broad-based equity
compensation program and its effectiveness in meeting the board's goals,
the
board adopted the plan on April 12, 2006 and hereby
submits it to the company's stockholder's for their approval.
Stockholder
approval of the plan is required (1) for purposes of compliance with certain
exclusions from the limitations of section 162(m) of the Internal Revenue
Code
of 1986, as amended (code), (2) in order for certain awards that may be granted
under the plan to qualify as incentive stock options under section 422 of
the
code, and (3) by the rules of the New York Stock Exchange. The affirmative
vote
of holders of a majority of the company's common stock present at the meeting
and entitled to vote is required to approve the plan.
The
plan will
become effective upon stockholder approval (effective date). The plan will
be
unlimited in duration and, in the event of plan termination, will remain
in
effect as long as any awards under it are outstanding; provided, however,
that
no awards may be granted under the plan after the tenth anniversary of the
effective date. The following is a summary of the principal features of the
plan. This summary is qualified in its entirety by reference to the complete
text of the plan (attached as Exhibit A). Stockholders are urged to read
the
actual text of the plan in its entirety.
Administration
The
plan will be
administered by the compensation committee of the board, or by another committee
appointed by the board (committee). The committee shall consist of at least
two
persons and committee members shall be non-employee directors, as defined
under
Rule 16b-3 of the Securities Exchange Act of 1934, as amended, and "outside
directors" within the meaning of code section 162(m). The full board will
perform the functions of the committee for purposes of granting awards to
non-employee directors but will not have exclusive authority with respect
to
other aspects of non-employee director awards.
Subject
to certain
limitations, the committee may delegate its authority under the plan to one
or
more members of the committee or one or more officers or other designees
of
Caterpillar. The committee has the authority to select the employees,
prospective employees and directors who may participate in the plan and to
determine the size and types of awards, the number of shares subject to awards
and the terms and conditions of these awards in accordance with the terms
of the
plan. The committee also has full authority to interpret the plan and to
establish rules for its administration. Further, the committee will make
all
other determinations, which may be necessary or advisable for the administration
of the plan.
Page
27
Shares
Subject to the Plan and Maximum Awards
The
plan provides
that the total number of shares of Caterpillar stock that may be issued will
not
exceed 20 million shares, subject to certain adjustments. In addition, 17.6
million shares of Caterpillar stock that have been authorized for the 1996
plan
but that haven't been issued and are not subject to outstanding grants pursuant
to the 1996 plan will be reserved and available for grant under the plan.
The
per share closing price of Caterpillar stock on the New York Stock Exchange
on
April 10, 2006 was $75.45. Caterpillar currently intends to register the
shares
issuable under the plan under the Securities Act of 1933, as amended, after
it
receives stockholder approval. No awards have yet been granted under the
plan.
The
maximum
aggregate number of shares to which incentive stock options may be granted
will
not exceed 37.6 million shares. In addition, up to an aggregate of twenty
percent of the authorized shares under the plan may be issued with respect
to
awards of restricted stock and up to an aggregate of twenty percent of the
authorized shares under the plan may be issued with respect to awards of
performance shares.
Of
the shares
authorized for issuance under the plan, the maximum aggregate number of shares
(including stock options, stock appreciation rights, restricted stock and
performance shares to be paid out in shares) that may be granted in any one
fiscal year to a single participant will be 800,000 shares. The maximum
aggregate cash payout (including performance units and performance shares
paid
out in cash but excluding cash-settled SARs) with respect to awards granted
in
any one fiscal year that may be made to a single participant will be $5
million.
To
the extent that
shares of company stock subject to an outstanding award under the plan are
not
issued by reason of expiration, forfeiture or cancellation of such award,
by
reason of the tendering or withholding of shares to pay all or a portion
of the
exercise price or to satisfy all or a portion of the tax withholding obligations
relating to the award, by reason of being settled in cash in lieu of shares
or
settled in a manner that some or all of the shares covered by the award are
not
issued to the participant, or being exchanged for a grant under the plan
that
does not involve shares of company stock, then such shares will immediately
again be available for issuance under the plan. Shares underlying awards
granted
in substitution for awards previously granted by an entity acquired by
Caterpillar will not be counted against the plan limit.
Shares
of company
stock issued with respect to awards may be authorized but unissued shares
or
treasury shares. In the event there is a change in the capital structure
of the
company as a result of any stock dividend or split, recapitalization, merger,
consolidation or spin-off or other corporate change affecting the shares,
the
number of shares of company stock authorized for issuance, available for
issuance or covered by any outstanding award and the price per share of any
such
award, and the various limitations described above, will be proportionately
adjusted. Fractional shares will not be issued under the plan.
The
plan limit is
reduced on a one-for-one basis based upon the number of shares of company
stock
for which an award is granted or denominated. An award of stock appreciation
rights reduces the plan limit on a one-for-one basis based upon the number
of
shares of company stock for which the stock appreciation right is denominated,
not the number of shares of company stock actually delivered pursuant to
the
stock appreciation right. Shares subject to awards under the plan will again
be
available for future awards upon the occurrence of specified events that
result
in fewer than the total number of shares subject to the award being delivered
to
the participants.
Eligibility
and Participation
Any
director, or
current or future employee (including officer) of Caterpillar or any of its
subsidiaries is eligible to receive an award under the plan, except that
incentive stock options may only be granted to persons who are employed by
the
company or its subsidiaries and only if the recipient does not own more than
10
percent of Caterpillar stock. Caterpillar currently has over 85,000 employees
and has 14 directors. The selection of participants and the nature and size
of
the awards granted to participants is subject to the discretion of the
committee. Accordingly, the company cannot specifically identify those employees
and directors to whom awards may be granted under the plan because no such
determination has been made.
Page
28
Awards
A
participant in
the plan is permitted to receive multiple grants of awards. The terms and
provisions of a type of award with respect to any recipient need not be the
same
with respect to any other recipient of such award.
The
plan provides
for awards of stock options to purchase shares of company stock, stock
appreciation rights, restricted stock, performance
shares and performance units, the terms and conditions of
which are described in more detail below.
Stock
Options. Stock options may be nonqualified stock options
or incentive stock options that comply with section 422 of the code. Each
stock
option grant will be evidenced by a resolution of the committee approving
the
stock option grant and an award document. The committee will determine the
exercise period for any stock option at the time of grant. If the award document
does not specify the time the stock option will first become exercisable,
the
stock option will become fully vested and exercisable by the participant
on the
third anniversary of the grant date. Each stock option may be exercised in
whole
or in part, from time to time, after the grant becomes exercisable. The plan
limits the term of any stock option to ten years and prohibits repricing
of
stock options without stockholder approval.
The
exercise price
per share for all shares of Caterpillar stock issued pursuant to stock options
under the plan may not be less than 100 percent of the fair market value
of a
share of Caterpillar stock on the grant date. The exercise price of a stock
option will be paid in cash, by tendering previously acquired shares, or
through
a cashless exercise procedure.
An
incentive stock
option may not be sold or transferred, other than by will or by the laws
of
descent and distribution. Further, all incentive stock options granted to
a
participant under the plan will be exercisable during his or her lifetime
only
by the participant. A nonqualified stock option may only be assigned or
transferred, except as otherwise provided below or in the award document,
by a
participant by will, by the laws of descent and distribution or pursuant
to a
domestic relations order. In addition, nonqualified stock options (whether
vested or unvested) that are held by (1) participants who are Section 16
officers; (2) participants who are directors, or (3) any participant who
previously held the positions of Section 16 officer or director may be
transferred to one or more permitted transferees (as defined in the plan).
Nonqualified stock options (whether vested or unvested) held by all other
participants and by permitted transferees may be transferred only to permitted
transferees, upon the prior written approval of Caterpillar's Director of
Compensation and Benefits.
Stock
Appreciation Rights (SARs). SARs entitle a
participant to receive an amount equal to the excess of the fair market value
of
a share of Caterpillar stock on the date the SAR is exercised over the fair
market value of a share of company stock on the date the SAR is granted,
multiplied by the number of shares to which the SAR is exercised. The payment
may be made in shares of Caterpillar stock having a fair market value on
the
date of exercise equal to the amount due upon the exercise of the SAR, may
be
paid in cash, or a combination thereof.
The
committee may
grant SARs under the plan alone or in tandem with stock options. SARs that
are
granted alone must be granted with a per share exercise price not less than
100
percent of the fair market value of a share of Company stock on the date
of
grant. The grant price of tandem SARs will equal the option price of the
related
stock option. The plan limits the term of SARs to 10 years from the grant
date.
SARs
granted alone
may be exercised upon the terms and conditions the committee, in its sole
discretion, imposes upon them in the award document. SARs granted in tandem
with
stock options may be exercised for all or part of the shares subject to the
related stock option upon the surrender of the right to exercise the equivalent
portion of the related stock option. A tandem SAR may be exercised only with
respect to the shares for which its related stock option is then exercisable.
With respect to a tandem SAR granted in connection with an incentive stock
option: (1) the tandem SAR will expire no later than the expiration of the
underlying incentive stock option; (2) the value of the payout with respect
to
the tandem SAR may be for no more than 100 percent of the difference between
the
option price of the underlying incentive stock option and the fair market
value
of the shares subject to the underlying incentive stock option at the time
the
tandem SAR is exercised; and (3) the tandem SAR may be exercised only when
the
fair market value of the shares subject to the incentive stock option exceeds
the option price of the incentive stock option.
Page
29
SARs
may only be
assigned or transferred, except as otherwise provided below or in the award
document, by a participant by will, by the laws of descent and distribution
or
pursuant to a domestic relations order. In addition, SARs that are held by
(1)
participants who are Section 16 officers; (2) participants who are directors,
or
(3) any participant who previously held the position of Section 16 officer
or
director may be transferred to one or more permitted transferees (as defined
in
the plan). SARs held by all other participants and by permitted transferees
may
be transferred only to permitted transferees, upon the prior written approval
of
Caterpillar's Director of Compensation and Benefits. Notwithstanding the
foregoing, a tandem SAR granted in connection with an incentive stock option
may
not be sold, transferred, pledged, assigned or otherwise alienated or
hypothecated other than by will or by the laws of descent and
distribution.
Restricted
Stock. An award of restricted stock is a share of
company stock granted to the participant that may not be sold or otherwise
disposed of during a restricted period as determined by the committee in
the
award document. If the restricted period is not set forth in the award document,
the transfer and any other restrictions will lapse (1) to the extent of
one-third of the shares (rounded to the nearest whole) covered by the restricted
stock award on the third anniversary of the grant date, (2) to the extent
of
two-thirds of the shares (rounded to the nearest whole) covered by the
restricted stock award on the fourth anniversary of the grant date, and (3)
to
the extent of 100 percent of the shares covered by the restricted stock award
on
the fifth anniversary of the grant date.
In
addition, the
committee may impose such other conditions and/or restrictions on any shares
of
restricted stock granted pursuant to the plan as it may deem advisable including
without limitation, a requirement that participants pay a stipulated purchase
price for each share of restricted stock, restrictions based upon the
achievement of specific performance goals (company-wide, subsidiary-wide,
divisional, and/or individual), time-based restrictions on vesting, which
may or
may not be following the attainment of the performance goals, sales restrictions
under applicable stockholder agreements or similar agreements, and/or
restrictions under applicable federal or state securities laws.
For
awards of
restricted stock, the participant will have all rights as a holder of shares
of
Caterpillar stock except that the restricted shares cannot be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of until the end of
the
restriction period established by the committee and specified in the award
document, or upon earlier satisfaction of any other conditions, as specified
by
the committee in its sole discretion and set forth in the award
document.
Performance
Shares and Performance Units. Performance shares and
performance units are awards of a fixed or variable number of shares or of
dollar-denominated units that are earned by achievement of performance goals
established by the committee. Amounts earned under performance share and
performance units may be paid in shares of Caterpillar stock, cash or a
combination thereof.
The
terms and
conditions of the performance awards will be determined by the committee,
and
the granting, vesting and/or exercisability of performance awards will be
conditioned on the achievement in whole or in part of performance goals (as
described below) during a performance period as selected by the committee.
At
the sole discretion of the committee, participants may be entitled to receive
any dividends declared with respect to shares that have been earned in
connection with grants of performance units and/or performance shares that
have
been earned, but not yet distributed to participants.
Performance
units
and/or performance shares may not be sold or transferred, other than by will
or
by the laws of descent and distribution. Further, except as otherwise provided
in the award document, a participant's rights under the plan will be exercisable
during the participant's lifetime only by the participant or the participant's
legal representative.
Performance
Goals
Section
162(m) of
the code limits publicly-held companies such as the company to an annual
deduction for federal income tax purposes of $1 million for compensation
paid to
their "covered employees." A "covered employee" is an individual whose
compensation is reported in the summary compensation table and who also was
employed as an executive officer of the company on the last day of the taxable
year. However, performance-based compensation is excluded from this limitation.
The plan is designed to permit the committee to grant awards that qualify
as
performance-based for purposes of satisfying the conditions of section
162(m).
Page
30
Under
the plan, the
committee may condition the grant, vesting and/or exercisability of any award,
including, but not limited to, performance shares and performance units,
upon
the attainment of performance targets related to one or more performance
goals
over a performance period selected by the committee. The committee may reduce
any award below the maximum amount that could be paid based upon the degree
to
which the performance targets related to such award were attained. However,
the
committee may not increase any award that is intended to satisfy the exception
for "qualified performance-based compensation" set forth in section 162(m)
of
the code above the maximum amount that could be paid based on the attainment
of
performance targets.
For
any awards that
are intended to satisfy the section 162(m) exception for "qualified
performance-based compensation," the awards will be subject to one or more,
or
any combination, of the following performance goals which will be established
by
the committee in writing and stated in terms of the attainment of specified
levels of or percentage changes in any one or more of the following
measurements: (1) revenue; (2) primary or fully-diluted earnings per share;
(3)
earnings before interest, taxes, depreciation, and/or amortization; (4) pretax
income; (5) cash flow from operations; (6) total cash flow; (7) return on
equity; (8) return on invested capital; (9) return on assets; (10) net operating
profits after taxes; (11) economic value added; (12) total stockholder return;
(13) return on sales; or (14) any individual performance objective which
is
measured solely in terms of quantifiable targets related to the company or
the
businesses of the company; or any combination thereof. In addition, such
performance goals may be based in whole or in part upon the performance of
the
company, a subsidiary, division and/or other operational unit under one or
more
of such measures. Further, for any awards that are not intended to satisfy
the
section 162(m) exception, the committee may establish performance targets
based
on other performance goals, as it deems appropriate.
Award
Forfeitures
Unless
otherwise
determined by the committee, in the case of a forfeiture event, the following
forfeitures will result:
| • |
the
unexercised portion of any stock option, whether or not vested, and
any
other award not then settled (except for an award that has not been
settled solely due to an elective deferral by the participant and
otherwise is not forfeitable in the event of any termination of service
of
the participant) will be immediately forfeited and canceled upon
the
occurrence of the forfeiture event; and
|
| • |
the
participant will be obligated to repay to Caterpillar, in cash, within
five business days after demand is made by Caterpillar, the total
amount
of award gain (as defined in the plan) realized by the participant
upon
each exercise of a stock option or settlement of an award (regardless
of
any elective deferral) that occurred on or after (1) the date that is
six months before the occurrence of the forfeiture event, if the
forfeiture event occurred while the participant was employed by
Caterpillar or a subsidiary, or (2) the date that is six months before
the
date the participant's employment by, or service as a director with
Caterpillar or a subsidiary terminated, if the forfeiture event occurred
after the participant ceased to be
employed.
|
Triggering
Events. The forfeiture of an award will be triggered upon either
(1) the violation by a participant of certain non-solicitation provisions
or (2)
the participant's disclosure to any person or entity, or the participant's
unauthorized use of any "confidential or proprietary information" (as defined
in
the plan) at any time during the participant's employment or service as a
director with Caterpillar or a subsidiary or during the one-year period
following termination of such employment or service.
Waivers. The
committee may, in its sole discretion, waive in whole or in part the Company's
right to forfeiture, but no such waiver will be effective unless evidenced
by a
writing signed by a duly authorized officer of the company. In addition,
the
committee may impose additional conditions on awards, by inclusion of
appropriate provisions in the award document.
Termination
of Employment or Services
The
committee, in
its sole discretion, will set forth in the applicable award document the
extent
to which a participant will have the right to exercise or retain an award
following termination of employment with Caterpillar or any subsidiary or
following termination of his or her service as a director. Such provisions
need
not be uniform among all awards issued pursuant to the plan, and may reflect
distinctions based on the reasons for such termination or reasons relating
to
the breach or threatened breach of restrictive covenants. The following rules
will apply if no contrary provisions are contained in the award
document.
Page
31
Stock
Options and Stock Appreciation Rights
Subject
to the
change of control provisions, in the event that a participant's award document
does not set forth such provisions, the following provisions will
apply:
| • |
if
a
participant's employment with the company and/or any subsidiary or
service
as a director terminates by reason of long service separation
(i.e., after age 55 with 10 years of service), death or
disability, to the extent that the stock option or SARs are not
exercisable, all shares covered by his or her stock options or SARs
will
immediately become fully vested and will remain exercisable until
the
earlier of (1) the remainder of the term of the stock option or SAR,
or
(2) 60 months from the date of such termination;
or
|
| • |
if
a
participant's employment with the company and/or any subsidiary or
service
as a director terminates for cause, all stock options or SARs granted
to
such participant will expire immediately and all rights to purchase
shares
(vested or nonvested) under the stock options or the rights under
the SARs
will cease upon such termination; or
|
| • |
if
a
participant's employment with the company and/or any subsidiary or
service
as a director terminates for any reason other than long service
separation, death, disability, or for cause, all stock options or
SARs
will remain exercisable until the earlier of (1) the remainder of
the term
of the stock option or SAR, or (2) 60 days from the date of such
termination. In such circumstance, the stock option or SAR will only
be
exercisable to the extent that it was exercisable as of such termination
date and will not be exercisable with respect to any additional shares
or
SARs.
|
Restricted
Stock
Subject
to the
change of control provisions, in the event that a participant's award document
does not set forth such provisions, the following provisions will
apply:
| • |
unless
the
award qualifies for the performance-based exception (as defined in
the
plan), if a participant's employment with the company and/or any
subsidiary or service as a director terminates by reason of long
service
separation, death or disability, all shares of restricted stock will
immediately become fully vested on the date of such termination and
any
restrictions will lapse; or
|
| • |
if
a
participant's employment with the company and/or any subsidiary or
service
as a director terminates for any reason other than long service
separation, death, disability, all shares of restricted stock that
are
unvested at the date of termination will be
forfeited.
|
In
addition, except
in the cases of terminations connected with a change of control and terminations
by reason of death or disability, the vesting of shares of restricted stock
that
qualify for the performance-based exception and that are held by named executive
officers will not occur before the time they otherwise would have, but for
the
employment termination.
Performance
Shares and Performance Units
Subject
to the
change of control provisions, in the event that a participant's award document
does not set forth such provisions, the following provisions will
apply:
| • |
if
a
participant's employment with the company and/or any subsidiary or
service
as a director terminates by reason of long service separation, death
or
disability, the participant will receive a prorated payout of the
performance units and/or performance shares, unless the committee
determines otherwise. The prorated payout will be determined by the
committee, will be based upon the length of time that the participant
held
the performance units and/or performance shares during the performance
period, and will further be adjusted based on the achievement of
the
preestablished performance goals; or
|
| • |
if
a
participant's employment with the company and/or any subsidiary or
service
as a director terminates during a performance period for any reason
other
than long service separation, death or disability, all performance
units
and/or performance shares will be
forfeited.
|
Page 32
Change
of Control
If
any
participant's (i.e., an officer employee's, a non-officer employee's or a
director's) employment or service with the company and/or any subsidiary
terminates either without cause or for good reason within the 12 month period
following a change of control, unless otherwise specifically prohibited under
applicable laws, or by the rules and regulations of any governing governmental
agencies or national securities exchanges:
| • |
all
stock
options and SARs granted will become immediately exercisable, and
shall
remain exercisable throughout their entire
term;
|
| • |
any
period of
restriction and other restrictions imposed on restricted stock will
lapse;
and
|
| • |
unless
otherwise specified in an award document, the maximum payout opportunities
attainable under all outstanding awards of performance units and
performance shares will be deemed to have been fully earned for the
entire
performance period(s) as of the effective date of the change of control.
The vesting of all such awards will be accelerated as of the effective
date of the change of control, and in full settlement of such awards,
there shall be paid out in cash to participants within 30 days following
the effective date of the change of control the maximum of payout
opportunities associated with such outstanding
awards.
|
Effective
Date; Amendment and Termination
If
approved by
stockholders, the plan will become effective as of the date of such approval
and
will remain in effect until all shares subject to the plan have been purchased
and/or acquired according to the provisions of the plan; provided, however,
that
no awards may be granted on or after the tenth anniversary of the plan's
effective date.
The
board may at
any time alter, amend, suspend or terminate the plan, in whole or in part,
except that no alteration or amendment will be effective without stockholder
approval if such approval is required by law or under the rules of the principal
stock exchange on which company stock is listed, and no termination, suspension,
alteration or amendment may materially adversely alter or affect the terms
of
any then outstanding awards without the consent of the affected
participant.
Other
Provisions
The
committee may
provide that the receipt of payment of cash or the delivery of shares that
would
otherwise be due to a participant under an award may be deferred at the election
of the participant pursuant to an applicable deferral plan established by
the
company or a subsidiary.
The
committee may
make awards on terms and conditions other than those described above or in
the
plan to comply with the laws and regulations of any foreign jurisdiction
or to
make the award more effective under such laws or regulations.
No
award will be
construed as giving any participant a right to receive future awards or to
continued employment or service with the company.
U.S.
Federal Income Tax Consequences
Incentive
Stock Options. The grant of an incentive stock
option will not be a taxable event for the participant or for the company.
A
participant will not recognize taxable income upon exercise of an incentive
stock option (except that the alternative minimum tax may apply), and any
gain
realized upon a disposition of Caterpillar stock received pursuant to the
exercise of an incentive stock option will be taxed as long-term capital
gain if
the participant holds the shares of company stock for at least two years
after
the date of grant and for one year after the date of exercise (holding period
requirement). The company will not be entitled to any income tax deduction
with
respect to the exercise of an incentive stock option, except as discussed
below.
Page
33
For
the exercise of
an incentive stock option to qualify for the foregoing tax treatment, the
participant generally must be an employee of the company or an employee of
a
company subsidiary from the date the option is granted through a date within
three months before the date of exercise of the option. If all of the foregoing
requirements are met except the holding period requirement mentioned above,
the
participant will recognize ordinary income upon the disposition of the company
stock in an amount generally equal to the excess of the fair market value
of the
company stock at the time the option was exercised over the option exercise
price (but not in excess of the gain realized on the sale). The balance of
the
realized gain, if any, will be capital gain. The company will be allowed
an
income tax deduction to the extent the participant recognizes ordinary income,
subject to the company's compliance with section 162(m) of the code and to
certain reporting requirements.
Nonqualified
Stock Options. The grant of a nonqualified stock
option will not be a taxable event for the participant or the company. Upon
exercising a nonqualified stock option, a participant will recognize ordinary
income in an amount equal to the difference between the exercise price and
the
fair market value of the company stock on the date of exercise. Upon a
subsequent sale or exchange of shares acquired pursuant to the exercise of
a
nonqualified stock option, the participant will have taxable capital gain
or
loss, measured by the difference between the amount realized on the disposition
and the tax basis of the shares of company stock (generally, the amount paid
for
the shares plus the amount treated as ordinary income at the time the option
was
exercised). If the company complies with applicable reporting requirements
and
with the restrictions of section 162(m) of the code, the company generally
will
be entitled to an income tax deduction in the same amount and generally at
the
same time as the participant recognizes ordinary income.
Restricted
Stock. A participant who is awarded restricted stock
will not recognize any taxable income for federal income tax purposes in
the
year of the award, provided that the shares of company stock are subject
to
restrictions (that is, the restricted stock is nontransferable and subject
to a
substantial risk of forfeiture). However, the participant may elect under
section 83(b) of the code to recognize compensation income in the year of
the
award in an amount equal to the fair market value of the company stock on
the
date of the award (less the purchase price, if any), determined without regard
to the restrictions. If the participant does not make such a section 83(b)
election, the fair market value of the company stock on the date the
restrictions lapse (less the purchase price, if any) will be treated as
compensation income to the participant and will be taxable in the year the
restrictions lapse and dividends paid while the Caterpillar stock is subject
to
restrictions may be subject to withholding taxes. If the company complies
with
applicable reporting requirements and with the restrictions of section 162(m)
of
the code, the company generally will be entitled to an income tax deduction
in
the same amount and generally at the same time as the participant recognizes
ordinary income.
Stock-Settled
Stock Appreciation Rights. There are no immediate
tax consequences of receiving an award of stock-settled SARs under the plan.
Upon exercising a stock appreciation right, a participant will recognize
ordinary income in an amount equal to the difference between the exercise
price
and the fair market value of the company stock on the date of exercise. If
the
company complies with applicable reporting requirements and, if applicable,
with
the restrictions of section 162(m) of the code, the company generally will
be
entitled to an income tax deduction in the same amount and generally at the
same
time as the participant recognizes ordinary income.
Performance
Awards. The award of a performance award will have
no federal income tax consequences for the company or for the participant.
The
payment of the award is taxable to a participant as ordinary income. If the
company complies with applicable reporting requirements and, if applicable,
with
the restrictions of section 162(m) of the code, the company generally will
be
entitled to an income tax deduction in the same amount and generally at the
same
time as the participant recognizes ordinary income.
New
Plan
Benefits
As
described above,
the committee in its discretion will select the participants who receive
awards
and the size and types of those awards, if the plan is approved by stockholders.
It is, therefore, not possible to predict the awards that will be made to
particular individuals or groups in the future under the plan.
Page
34
Stock
options and
performance shares awarded to the named executive officers in 2005 under
the
1996 plan are set forth in the Executive Compensation Tables under "Option
Grants in 2005" on page 23 and "Long-Term Incentive Plans/Awards in 2005"
on
page 24. The stock options awarded to non-employee directors in 2005 under
the
1996 plan are set forth under "Director Compensation for 2005" on page 6.
In
addition, during fiscal year 2005, 2,867,800 nonqualified stock options were
awarded to the company's current executive officers as a group (39 persons)
and
9,698,072 nonqualified stock options were awarded to all employees other
than
current executive officers as a group under the 1996 plan. If the plan had
been
in effect in 2005, these persons and groups would have received the same
number
of awards as were actually granted to them under the 1996 plan in 2005. No
other
stock-based awards would have been granted under the 1996 plan in 2005 had
the
plan been in effect.
YOUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL
3.
PROPOSAL
4 -Management Proposal: Approve
Caterpillar Inc. Executive Short-Term Incentive
PlanThe
board of
Caterpillar Inc. (company) has established, subject to stockholder approval,
the
Executive Short-Term Incentive Plan (plan). The purpose of the plan is to
provide certain executive officers with annual cash incentive opportunities,
based on the achievement of objective quantitative performance
goals.
The
company's
former short-term executive incentive plan, the Caterpillar Inc. Executive
Incentive Compensation Plan (former plan) will expire on December 31, 2006.
The
plan is designed to continue the existing performance-based incentive concepts
used by the company under the former plan to ensure the deductibility of
awards
to the Chief Executive Officer (CEO), Group Presidents, and any other officer
of
the company designated by the compensation committee (committee) of the
board.
Pursuant
to
section 162(m) of the Internal Revenue Code of 1986 as amended (code), the
company may not deduct more than $1 million per year for compensation paid
to the CEO and the four other most highly compensated officers of the company.
An exclusion from the $1 million per officer limitation is available for
compensation that satisfies the stockholder approval and other requirements
provided in section 162(m) for qualified performance-based compensation.
The purpose of submitting the plan to stockholders for approval is to qualify
the annual incentive bonus to be paid to each participating executive officer
as
performance-based compensation that will be excluded from the $1 million
limit on tax deductible compensation under section 162(m). Therefore, on
April 12, 2006, the board adopted the plan and hereby submits it to the
company's stockholders for approval.
The
plan is
substantially similar in operation to the Caterpillar Inc. Corporate Incentive
Compensation Plan, which has been used to make bonus awards to individuals
for a
number of years. The board intends that the awards paid pursuant to the plan
to
the CEO, Group Presidents and other designated participants will be similar
to
the bonuses historically paid by the company to
individuals pursuant to the Corporate Incentive Compensation Plan, which
will
continue in effect for all other salaried and management employees. However,
under the plan, any amounts paid will qualify for deductibility by the company
for federal income tax purposes.
The
effective date
of the plan is January 1, 2007 (effective date), subject to stockholder
approval. The plan has a term of four years and in the event of plan
termination, will remain in effect as long as any awards under it are
outstanding. The following is a summary of the principal features of the
plan.
This summary is qualified in its entirety by reference to the complete text
of
the plan (attached as Exhibit B). Stockholders are urged to read the actual
text
of the plan in its entirety.
Administration
and Participation
The
plan is
administered by the committee, which is made up of only independent directors.
The committee has the authority to designate performance goals and objectives
and determine the amount and timing of awards. All executive officers of
the
company are eligible for participation in the plan, although it is anticipated
that participation will be limited to the CEO and the company's Group
Presidents. The approximate number of persons eligible under the plan is
six.
Page
35
Performance
Goals and Objectives
Within
the first
90 days of the company's fiscal year (which is the calendar year), the
committee will establish the performance goals and objectives governing the
plan
for that year. The performance goals and objectives may be based on any of
the
following factors, alone or in combination, as the committee deems appropriate:
(i) revenue; (ii) primary or fully-diluted earnings per share; (iii) earnings
before interest, taxes, depreciation, and/or amortization; (iv) pretax income;
(v) cash flow from operations; (vi) total cash flow; (vii) return on equity;
(viii) return on invested capital; (ix) return on assets; (x) net operating
profits after taxes; (xi) economic value added; (xii) total stockholder return;
(xiii) return on sales; (xiv) realized 6 Sigma benefits; or (xv) any individual
performance objective which is measured solely in terms of quantifiable targets
related to the company or the company's business.
Performance
goals
may be measured on an absolute basis or relative to a group of peer companies
selected by the committee, relative to internal goals or relative to levels
attained in prior years. For each year that the plan is in effect, the committee
may use one or more of the permitted performance goals and may change the
performance goals and targets from year to year.
Important
Facts About Awards
Under
the plan,
each participant will be eligible to receive an incentive bonus based on
the
achievement of the pre-established goals set by the committee. If a participant
terminates employment before the last day of the fiscal year by reason of
death,
disability or retirement, a payout based on performance and the period of
employment during the year shall be distributed. Participants employed on
the
last day of the year, but not for the entire year, shall receive a payout
based
on performance and prorated for that part of the year for which they were
participants. If the participant is deceased at the time of an award payment,
the payment shall be made to the recipient's designated
representative.
The
maximum dollar
amount that any participant may be paid in any single year under the plan
may
not exceed $4 million.
Additional
Awards
Nothing
in the plan
precludes the company from making additional payments or special awards to
plan
participants outside of the plan that may or may not qualify as
"performance-based" compensation under section 162(m), provided that such
payment or award does not affect the qualification of any incentive compensation
payable under the plan as "performance-based" compensation.
Amendment
& Termination of Plan
The
committee may
amend, suspend or terminate the plan at any time in its sole and absolute
discretion. Any amendment or termination of the plan, however, shall not
affect
the right of a participant to receive any earned but unpaid incentive bonus.
The
committee may amend the plan without stockholder approval, unless such approval
is necessary to comply with applicable laws, including provisions of the
Securities Exchange Act of 1934 or the code.
New
Plan
Benefits
Amounts
awarded to
the named executive officers in March, 2006 for 2005 performance under the
former plan are included in the Summary Compensation Table on page 22. The
amount that would have been paid if the plan had been in effect for fiscal
year
2005 would have been substantially similar to the amounts paid under the
former
plan.
YOUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL
4.
Page
36
PROPOSAL
5 -Management Proposal: Ratification
of Independent Registered Public Accounting
FirmThe
board seeks an
indication from stockholders of their approval or disapproval of the Audit
Committee's appointment of PricewaterhouseCoopers LLP (PricewaterhouseCoopers)
as Independent Registered Public Accounting Firm (auditors) for
2006.
PricewaterhouseCoopers
has been our auditors since 1925, and no relationship exists other than the
usual relationship between auditor and client.
If
the appointment
of PricewaterhouseCoopers as auditors for 2006 is not approved by the
stockholders, the adverse vote will be considered a direction to the Audit
Committee 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 2006 will stand, unless the
Audit
Committee finds other good reason for making a change.
Representatives
of
PricewaterhouseCoopers will be available to respond to questions at the annual
meeting of stockholders.
YOUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL
5.
PROPOSAL
6 -Stockholder Proposal: Annual Election of Directors
and Caterpillar ResponsePursuant
to Rule
14a-8(l)(1) of the Securities Exchange Act of 1934, the company will provide
the
name, address and number of company securities held by the proponent of this
stockholder proposal promptly upon receipt of a written or oral
request.
Resolution
Proposed by Stockholder
RESOLVED:
Shareholders request that our Directors take the necessary steps, in the
most
expeditious manner possible, to adopt annual election of each director. This
includes complete transition from the current staggered system to 100% annual
election of each director in one election cycle if practicable. Also to
transition solely through direct action of our board if
practicable.
Supporting
Statement of Proponent
The
Safeway Inc.
2004 definitive proxy is one example of converting from a 100% staggered
system
to a 100% annual election of each director system in one election cycle.
Southwest Airlines began transition to annual election of each director solely
through direct board action in 2005.
70%
Yes -
Vote
Thirty-five
(35)
shareholder proposals on this topic won an impressive 70% average yes vote
in
2004. The Council of Institutional Investors, www.cii.org, whose members
have $3 trillion invested recommends adoption of this proposal
topic.
Page
37
Progress
Begins with One Step
It
is important to
take one step forward in our corporate governance and adopt the above RESOLVED
statement since our 2005 governance standards were not impeccable. For instance
in 2005 it was reported (and certain concerns are noted):
| • |
Our
directors
were accountable to shareholder election only once in
3-years.
|
| • |
Our
directors
do not need to win a majority vote.
|
| • |
Seven
directors were allowed to hold from 4 to 10 director seats each -
Over-extension concern.
|
| • |
A
75%
shareholder vote was required to make certain key improvements -
Entrenchment concern.
|
| • |
Our
company
had no Independent Chairman or even a Lead Director - Oversight
concern.
|
| • |
Our
directors
had a $1 million Charitable Award Program - Conflict of interest
concern.
|
The
above number of
less-than-best practices reinforce the reason to take one step forward now
and
adopt annual election of each director.
To
our board's
credit Caterpillar improved its corporate governance by terminating its
poison
pill on June 30, 2005. This was after our board considered our 5 annual
majority
votes supporting shareholder proposals to terminate the poison pill. These
proposals were submitted by John Chevedden, Redondo Beach,
Calif.
A
Single
Yes-Vote from 600 Million Shares Now Elects a Director for
3-Years
I
believe our
directors can be complacent under our present system. Our typically unopposed
directors often need but one vote per director from our 600-plus million
voting
shares.
Annual
Vote
on Each Audit Committee Member
Annual
election of
each director would automatically enable us to vote annually on each member
of
our key Audit Committee. This is particularly important because poor auditing
played a key role in the $200 billion-plus combined market-value loss at
WorldCom, Enron, Tyco, Qwest and Global Crossing. And The Corporate Library
gave
Caterpillar a "C" in Accounting.
Best
for
the Investor
Arthur
Levitt,
Chairman of the Securities and Exchange Commission, 1993-2001 said:
In
my view it's
best for the investor if the entire board is elected once a year. Without
annual
election of each director shareholders have far less control over who represents
them.
Elect
Each
Director Annually
Yes
on
6
We
believe that we have an excellent and qualified board of directors. The
impeccable integrity of the company's management, the consistency of superior
stockholder returns and the quality and technology leadership displayed in
its
products and processes are the result of a dedicated and proactive board.
Our
board is
committed to utilizing best corporate governance practices and has adopted
corporate governance guidelines (guidelines) that emphasize this commitment.
In
adopting the guidelines, our board considered the most effective structure
for
the board and determined that the current classified board structure is in
the
best interest of the company and our stockholders for the reasons outlined
below.
Page
38
Stability
and
Continuity. In accordance with our articles of incorporation, our board is
divided into three classes that serve staggered three-year terms. This
classified board structure is designed to provide stability, prevent sudden
disruptive changes to the board's composition, enhance long-term planning
and
ensure that, at any given time, there are directors serving on the board
who are
familiar with our company, our business and our strategic goals. This classified
board structure benefits the company and our stockholders because it aids
the
company in attracting and retaining director candidates who are willing to
make
long-term commitments of their time and energy. We believe that the in-depth
knowledge and experience of board members are particularly important now,
given
the opportunities and challenges that we face as we continue our growth into
a
much larger and complex business enterprise dedicated to enhancing stockholder
value. This is illustrated by the board's decision to authorize the development
of our Vision 2020 strategic plan, a commitment that stretches over several
years and one that will best be fulfilled by a stable and continuous
board.
Independence.
Electing directors to three-year terms enhances the independence of
non-management directors by providing them with a longer assured term of
office,
thereby insulating them against pressure from management or from special
interest groups who might have an agenda contrary to the long-term interests
of
all stockholders. As a result, independent directors voice their views without
having to continually consider an upcoming nomination for re-election the
following year.
Accountability
to Stockholders. Every director is required to uphold his or her fiduciary
duties to the company and our stockholders, regardless of how often he or
she
stands for election. Our directors continue to be accountable to the company
and
our stockholders under our classified board structure.
Protection
Against Takeovers. Our classified board structure strongly encourages
potential acquirers to deal directly with the board if they are interested
in
acquiring the company and better positions the board to negotiate effectively
on
behalf of stockholders to realize the greatest possible stockholder value.
Our
classified board structure is designed to safeguard against a potential acquirer
unilaterally gaining control of our business and assets without paying fair
value for them by removing our directors at a single annual meeting. Because
only one-third of the directors are elected at any annual meeting of
stockholders, it is impossible to elect an entirely new board or even a majority
of the board at a single meeting, which provides the incumbent directors
at
least two annual stockholder meetings to negotiate the best results for our
stockholders without a change in control of the board in any one year. It
is
important to note that a classified board does not preclude a takeover, but
it
does provide a company with time and leverage to evaluate the adequacy and
fairness of any takeover proposal, negotiate on behalf of all stockholders
and
weigh alternative methods of maximizing stockholder value for all stockholders.
It is for these reasons that a significant number of Fortune 500 companies
continue to have classified boards.
It
is also
important to note that stockholder approval of this proposal would not in
itself
declassify our board. Approval of this proposal would advise our board that
a
majority of our stockholders voting at the meeting favor a change and would
prefer that the board take the necessary steps to end the staggered system
of
electing directors. However, under Delaware law, to change the class structure
of our board, the board must first authorize amendments to our articles of
incorporation and bylaws. Stockholders would then have to approve each of
those
amendments with an affirmative vote of not less than 75 percent of the total
voting power of all outstanding shares of company stock entitled to vote
generally in the election of directors.
After
careful
consideration of this proposal, the Governance Committee and the entire board
have determined that retention of a classified board structure remains in
the
best interests of the company and our stockholders. We believe that the benefits
of our classified board structure do not come at the cost of directors'
accountability to stockholders. In addition to the many corporate governance
measures that the board has implemented, the steps taken to terminate our
stockholder rights plan 17 months earlier than was specified in the plan,
as
well as the strong financial performance of the company, validates the board's
commitment to the company and our stockholders and demonstrates the
responsibility each director feels personally to guide the company in a manner
that benefits all stockholders. Caterpillar has paid a dividend to its
stockholders every year since 1925 and has increased dividends annually for
over
ten consecutive years.
FOR
THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "AGAINST"
PROPOSAL 6.
Page
39
PROPOSAL
7 -Stockholder Proposal: Separate CEO
& Chair and Caterpillar
ResponsePursuant
to Rule
14a-8(l)(1) of the Securities Exchange Act of 1934, the company will provide
the
name, address and number of company securities held by the proponent of this
stockholder proposal promptly upon receipt of a written or oral
request.
Resolution
Proposed by Stockholder
Resolved:
The
shareholders of Caterpillar request that the Board of Directors establish
a
policy of, whenever possible, separating the roles of Chairperson and Chief
Executive Officer, so that an independent director who has not served as
an
executive officer of the Company serves as Chair of the Board of
Directors.
This
proposal shall
not apply to the extent that complying would necessarily breach any contractual
obligations in effect at the time of the 2006 shareholder meeting.
Supporting
Statement of Proponent
The
principle of
the separation of the roles of Chairperson and Chief Executive Officer is
a
basic element of sound corporate governance practice. The primary purpose
of the
Board of Directors is to protect shareholders' interests by providing
independent oversight of management and the CEO. The Board gives strategic
direction and guidance to our Company.
Given
these
different roles and responsibilities, we believe:
| • | An independent Board Chair - separated from the CEO - is the preferable form of corporate governance. |
| • |
It
is the
role of the Chief Executive Officer and management to run the business
of
the company.
|
| • |
An
independent Chair and vigorous Board will bring greater focus to
ethical
imperatives, and be better able to forge solutions for shareholders
and
consumers.
|
| • |
Separating
the roles of Chair and CEO at Caterpillar would result in greater
independence and accountability which would allow the company to
have
greater focus and thereby better address issues of environmental,
social
and health impacts of the company's
products.
|
The
Board will
likely achieve its goals more effectively by separating the roles of Chair
and
CEO. An independent Chair will enhance investor confidence in our Company
and
strengthen the integrity of the Board of Directors.
A
number of
respected institutions recommend such separation. CaIPER's Corporate Core
Principles and Guidelines state: "the independence of a majority of the Board
is
not enough" and that "the leadership of the board must embrace independence,
and
it must ultimately change the way in which directors interact with
management."
An
independent
board structure will also help the board address policy issues and other
complex
issues facing our company, among them:
| • |
Reputational
risk associated with an exponential growth in negative media coverage
and
international protests targeting the company.
|
| • |
A
highly
publicized debate among religious institutional shareholders regarding
divestment from Caterpillar.
|
Page
40
| • |
Lawsuits
by
the Federal government (EEOC) alleging sexual and racial
discrimination.
|
| • |
Membership
in
a trade association that funded a political candidate criticized
for
running "racist" ads in a state election campaign.
|
| • |
Failure
by
most of its manufacturing plants to obtain ISO 14001 certification
for
meeting environmental management
standards.
|
In
order to ensure
that our Board can provide the proper strategic direction for our Company
with
independence and accountability, we urge a vote FOR this
resolution.
We
believe that our current governance structure is consistent with good governance
practices and does not compromise board independence.
Our
corporate
governance guidelines (guidelines), available on our website, provide for
the
position of chief executive officer (CEO) and chairman of the board to be
combined in order to promote unified leadership and direction for the company
and the board. We feel that the combined leadership role enhances the chairman's
ability to provide insight and direction on important strategic initiatives
impacting the company and its stockholders to both management and the
independent directors and, at the same time, ensures that the appropriate
level
of oversight and independence is applied to all board decisions.
The
separation of
the roles of chairman and CEO is not yet widely accepted in the United States
and we feel a single, clear focus for the chain of command is important and
can
be damaged by separating the two roles. We believe separating the CEO/chair
position could potentially: (1) dilute the power of the CEO to provide effective
leadership; (2) create rivalry between the chairman and the CEO, leading
to
compromise rather than decisive action; (3) insulate the CEO from being held
accountable by the board if the chairman is overprotective; or (4) cause
confusion by having two public spokesmen, and could allow a third party to
"play
the two ends against the middle."
Except
for the
chairman, the board is composed entirely of independent directors that all
meet
the independence requirements of the New York Stock Exchange. In addition,
all
members of the Audit, Compensation, Governance and Public Policy Committees
are
composed of independent directors. Our guidelines specify that the board
must
meet in executive session involving only non-management directors at least
twice
each year, or more frequently as circumstances warrant, and designate the
chair
of the Governance Committee to preside over these meetings. All directors
communicate regularly with the chairman and CEO regarding appropriate agenda
topics and other board related matters. We also have a published procedure
enabling stockholders and other third parties to communicate directly with
board
members.
The
board reviews
and considers trends and developments in corporate governance on an on-going
basis, and is currently considering the appointment of a "lead director."
Given
the strong independence of our board, we see no reason to separate the chairman
and CEO roles at this time. We believe it is in the best interests of the
company and our stockholders to retain flexibility to exercise its collective
judgment to determine who should serve as chairman, given the circumstances
at
any particular point in time.
FOR
THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "AGAINST"
PROPOSAL 7.
Page
41
PROPOSAL
8 -Stockholder Proposal: Director
Election Majority Vote Standard and Caterpillar
ResponsePursuant
to Rule
14a-8(l)(1) of the Securities Exchange Act of 1934, the company will provide
the
name, address and number of company securities held by the proponent of this
stockholder proposal promptly upon receipt of a written or oral
request.
Resolution
Proposed by Stockholder
Resolved:
That the shareholders of Caterpillar, Inc. ("Company") hereby request
that the Board of Directors initiate the appropriate process to amend the
Company's governance documents (certificate of incorporation or bylaws) to
provide that director nominees shall be elected by the affirmative vote of
the
majority of votes cast at an annual meeting of shareholders.
Supporting
Statement of Proponent
Our
Company is
incorporated in Delaware. Delaware law provides that a company's certificate
of
incorporation or bylaws may specify the number of votes that shall be necessary
for the transaction of any business, including the election of directors.
(DGCL,
Title 8, Chapter 1, Subchapter VII, Section 216). The law provides that if
the
level of voting support necessary for a specific action is not specified
in the
certificate of incorporation or bylaws of the corporation, directors "shall
be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election
of
directors."
Our
Company
presently uses the plurality vote standard for the election of directors.
This
proposal requests that the Board initiate a change in the Company's director
election vote standard to provide that nominees for the board of directors
must
receive a majority of the vote cast in order to be elected or re-elected
to the
Board.
We
believe that a
majority vote standard in director elections would give shareholders a
meaningful role in the director election process. Under the Company's current
standard, a nominee in a director election can be elected with as little
as a
single affirmative vote, even if a substantial majority of the votes cast
are
"withheld" from that nominee. The majority vote standard would require that
a
director receive a majority of the vote cast in order to be elected to the
Board.
The
majority vote
proposal received high levels of support last year, winning majority support
at
Advanced Micro Devices, Freeport McMoRan, Marathon Oil, Marsh and McClennan,
Office Depot, Raytheon, and others. Leading proxy advisory firms recommended
voting in favor of the proposal.
Some
companies have
adopted board governance policies requiring director nominees that fail to
receive majority support from shareholders to tender their resignations to
the
board. We believe that these policies are inadequate for they are based on
the
continued use of the plurality standard and would allow director nominees
to be
elected despite only minimal shareholder support. We contend that changing
the
legal standard to a majority vote is a superior solution that merits shareholder
support.
Our
proposal is not
intended to limit the judgment of the Board in crafting the requested governance
change. For instance, the Board should address the status of incumbent directors
who fail to receive a majority vote under a majority vote standard or whether
a
plurality vote standard may be appropriate in director elections when the
number
of director nominees exceeds the available board seats.
We
urge your
support of this important director election reform.
Page
42
We
are incorporated
in the State of Delaware and use the default plurality vote standard. Plurality
voting has long been the accepted standard among most large public companies,
and the rules governing plurality voting are well established and understood.
We
believe that implementation of a majority vote standard would be inappropriate
at this time in light of the fact that a number of associations, scholars,
corporations and investors are analyzing and evaluating alternative voting
standards. We continue to monitor the progress of these discussions and,
once
the issues are resolved, will take appropriate action to maintain Caterpillar's
commitment to the highest standards of corporate governance.
At
this time, we do
not believe that our current plurality vote standard should be changed, and
there is no reason to rush to adopt a majority vote standard. We have a history
of electing, by a plurality of the vote, strong and independent directors.
In
the past ten years, the average affirmative vote for directors has been greater
than 96 percent of the shares voted through the plurality process. In addition,
the board maintains sound and effective corporate governance practices that
reflect the highest standards of responsibility, ethics and integrity. With
the
exception of the chairman, all directors are independent as defined in the
New
York Stock Exchange listing standards. Director nominees are evaluated and
recommended for election by the Governance committee, which is comprised
solely
of independent, non-employee directors. The Governance committee recommends
nominees that will enhance the board's ability to manage and direct, in an
effective manner, the affairs and business of the company. The company's
commitment to effective and independent board leadership is shown by, among
other things, our governance guidelines, available on our website.
The
board of
directors and management are committed to strong corporate governance and
are
following the discussions regarding alternative voting standards with interest,
but we believe it would be premature to change the director election standard
until there has been further study and consensus. We will continue to monitor
trends that develop in this area. Until such time, we believe it generally
is in
the best interest of the company and its stockholders to continue to follow
its
current process, which is the most widely used and tested industry practice
for
electing directors.
FOR
THESE REASONS, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "AGAINST"
PROPOSAL 8.
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 Securities Exchange Act of 1934 were filed on a timely basis
except:
| • |
One
late Form
4 filing reporting six option exercise transactions for J.
Beard;
|
| • |
One
late Form
4 filing reporting a single transaction for K. Colgan;
|
| • |
One
late Form
4 filing reporting a single transaction for W.
Rohner;
|
| • |
One
late Form
4 filing reporting twenty-three transactions for E. Rust (these
transactions were executed by a third-party money manager with
discretionary authority over Mr. Rust's financial portfolio without
Mr.
Rust's knowledge); and
|
| • |
One
late Form
4 filing reporting a single transaction for D.
Western.
|
Page
43
Stockholder
Proposals for the 2007 Annual Meeting
If
you would like
to submit a proposal for possible inclusion in the company's 2007 Proxy
Statement, our Corporate Secretary must receive it on or before December
29,
2006.
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 to vote upon at 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
provided.
Questions
in Advance of the Annual Meeting
Stockholders
wishing to submit a question in advance of the annual meeting to be considered
for a response during the annual meeting may do so by sending an email to
the
Corporate Secretary at Directors@CAT.com or by mail c/o the Corporate
Secretary at 100 NE Adams Street, Peoria, Illinois 61629.
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 $15,000, 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 100
NE
Adams Street, Peoria, Illinois 61629, at least ten days prior to the annual
meeting and will also be available for examination at the annual
meeting.
Revocability
of Proxy
You
may revoke the
enclosed proxy by filing a written notice of revocation with Caterpillar
or by
submitting another executed proxy that is dated later.
Page
44
Request
Deadline
Ticket
requests
must include all information specified in the applicable table below and
be
submitted in writing and received by Caterpillar on or before May 31, 2006.
No
requests will be processed after that date.
Number
of Tickets
Admission
tickets
will be limited to stockholders of record on April 17, 2006, and one guest,
or a
stockholder's authorized proxy representative.
To
Submit Request
Submit
requests by
mail to James B. Buda, Corporate Secretary, 100 NE Adams Street, Peoria,
IL
61629-7310 or by facsimile to (309) 675-6620. Ticket requests by telephone
will
not be accepted.
Verification
In
all cases,
record date share ownership must be verified at the meeting. Please bring
valid
photo identification to the meeting.
Authorized
Proxy Representative
A
stockholder may
appoint a representative to attend the meeting and/or vote on his/her behalf.
The admission ticket must be requested by the stockholder 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.
Stockholder information specified below and a written proxy authorization
must
accompany the ticket request.
|
Registered
Stockholders
|
Beneficial
Holders
|
|
|
For
ownership verification provide:
|
For
ownership verification provide:
|
|
|
Ø name(s)
of stockholder
Ø address
Ø phone
number
Ø social
security number and/or stockholder account number; or
Ø a
copy
of your proxy card showing stockholder name and address
|
Ø a
copy
of your April brokerage account statement showing Caterpillar stock
ownership as of the record date (4/17/06);
Ø a
letter from your broker, bank or other nominee verifying your record
date
(4/17/06) ownership; or
Ø a
copy
of your brokerage account voting instruction card showing stockholder
name
and address
|
|
|
Also
include:
|
Also
include:
|
|
|
Ø name
of guest if other than stockholder
Ø name
of authorized proxy representative, if one appointed
Ø address
where tickets should be mailed and phone number
|
Ø name
of guest if other than stockholder
Ø name
of authorized proxy representative, if one appointed
Ø address
where tickets should be mailed and phone number
|
|
Page
45
CATERPILLAR
INC.
2006
LONG-TERM INCENTIVE PLAN
Section
1.
Establishment,
Objectives and Duration
1.1. Establishment.
Subject to the approval of the stockholders of Caterpillar Inc., a Delaware
corporation (the "Company"), the Company has established the Caterpillar
Inc.
2006 Long-Term Incentive Plan (the "Plan"), as set forth herein. The Plan
supersedes and replaces all prior equity and non-equity long-term incentive
compensation plans or programs maintained by the Company; provided that,
any
prior plans of the Company shall remain in effect until all awards granted
under
such prior plans have been exercised, forfeited, canceled, expired or otherwise
terminated in accordance with the terms of such grants.
1.2. Purpose.
The Plan is intended to provide certain present and future employees and
Directors cash-based incentives, stock-based incentives and other equity
interests in the Company thereby giving them a stake in the growth and
prosperity of the Company and encouraging the continuance of their services
with
the Company or its Subsidiaries.
1.3. Effective
Date. The Plan is effective as of the later of (a) the date the
Plan is adopted by the Board or (b) the date the Company's stockholders approve
the Plan (the "Effective Date"). The Plan will be deemed to be approved by
the
stockholders if it receives the affirmative vote of the holders of a majority
of
the shares of stock of the Company present or represented and entitled to
vote
at a meeting duly held in accordance with the applicable provisions of the
Certificate of Incorporation or Bylaws of the Company.
1.4. Duration.
The Plan shall remain in effect, subject to the right of the Company's Board
of
Directors to amend or terminate the Plan at any time pursuant to Section
16,
until all Shares subject to the Plan shall have been purchased or granted
according to the Plan's provisions. However, in no event may an Award be
granted under the Plan on or after the tenth anniversary of the Effective
Date.
Upon termination of the Plan, no Awards may be granted but Awards previously
granted shall remain outstanding in accordance with the terms of the Plan
and
the applicable Award Document.
Section
2.
Definitions
and Construction
When
a word or phrase appears in the Plan with
the initial letter capitalized, and the word or phrase does not commence
a
sentence, the word or phrase shall generally be given the meaning ascribed
to it
in this Section unless a clearly different meaning is required by the context.
The following words and phrases shall have the following meanings:
2.1. "Award"
means, individually or collectively, a grant under the Plan of Nonqualified
Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted
Stock, Performance Shares or Performance Units.
2.2. "Award
Document" means any agreement, contract, or other
written instrument that evidences an Award granted to the Participant under
the
Plan and sets forth the terms and provisions applicable to such
Award.
2.3. "Award
Gain" means (a) with respect
to a given Option exercise, the product of (X) the excess of the Fair Market
Value of a Share on the date of exercise over the Option Price times (Y)
the
number of shares as to which the Option was exercised at that date, and (b)
with
respect to any other settlement of an Award granted to the Participant, the
Fair
Market Value of the cash or Shares paid or payable to the Participant
(regardless of any elective deferral pursuant to Section 13) less any cash
or
the Fair Market Value of any Shares or property (other than an Award that
would
have itself then been forfeitable hereunder and excluding any payment of
tax
withholding) paid by the Participant to the Company as a condition of or
in
connection such settlement.
Page
46
2.4. "Board".
means the Board of Directors of the Company.
2.5. "Cause". means,
except as otherwise provided in an Award Document, a willful engaging in
gross
misconduct materially and demonstrably injurious to the Company. For this
purpose, "willful" means an act or omission in bad faith and without reasonable
belief that such act or omission was in or not opposed to the best interests
of
the Company.
2.6. "Change
of Control". means the occurrence of any of the
following events: (a) any person becomes the "beneficial owner" (as defined
in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
of the
Company representing 15 percent or more of the combined voting power of the
Company's then outstanding common stock, unless the Board by resolution negates
the effect of this provision in a particular circumstance, deeming that
resolution to be in the best interests of Company stockholders; (b) during
any
period of two consecutive years, there shall cease to be a majority of the
Board
comprised of individuals who at the beginning of such period constituted
the
Board; (c) the stockholders of the Company approve a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto representing (either by remaining outstanding or
by
being converted into voting securities of the surviving entity) less than
fifty
percent of the combined voting power of the voting securities of the Company
or
such surviving entity outstanding immediately after such merger or
consolidation; or (d) Company stockholders approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the
Company of all or substantially all of its assets.
2.7. "Code".
means the Internal Revenue Code of 1986, as amended from time to time, or
any
successor legislation thereto.
2.8. "Committee".
means the Compensation Committee of the Board, appointed to administer the
Plan,
as provided in Section 3.
2.9. "Company".
means Caterpillar Inc., a Delaware corporation, and any successor to such
entity
as provided in Section 18.
2.10. "Director".
means any individual who is a member of the Board.
2.11. "Disability".
means, unless otherwise provided for in an employment, change of control
or
similar agreement in effect between the Participant and the Company or a
Subsidiary or in an Award Document, (a) in the case of an Employee, the Employee
qualifying for long-term disability benefits under any long-term disability
program sponsored by the Company or Subsidiary in which the Employee
participates, and (b) in the case of a Director, the inability of the Director
to engage in any substantial gainful business activity by reason of any
medically determinable physical or mental impairment that can be expected
to
result in death, or which has lasted or can be expected to last for a continuous
period of not less than 12 months, as determined by the Committee, based
upon
medical evidence.
2.12.
"Effective
Date". means the date specified
in Section 1.3.
2.13. "Employee".
means any employee of the Company or any Subsidiary.
2.14. "Exchange
Act". means the Securities Exchange Act of 1934,
as amended from time to time, or any successor act thereto.
2.15. "Fair
Market Value". means, as of any given date, the
fair market value of a Share on a particular date determined by such methods
or
procedures as may be established from time to time by the Committee. Unless
otherwise determined by the Committee, the Fair Market Value of a Share as
of
any date shall be the mean between the high and low prices at which the Share
is
traded on the New York Stock Exchange for that date or, if no prices are
reported for that date, the prices on the next preceding date for which prices
were reported. Notwithstanding the foregoing, unless otherwise determined
by the
Committee, for purposes of Section 6.5(d) of the Plan, Fair Market Value
means
the actual price at which the Share used to acquire Shares are
sold.
Page
47
2.16. "Family
Member" means any (a) child; (b) stepchild; (c)
grandchild; (d) parent; (e) stepparent; (f) grandparent; (g) spouse; (h)
former
spouse; (i) sibling; (j) niece; (k) nephew; (l) mother-in-law; (m)
father-in-law; (n) son-in-law; (o) daughter-in-law; (p) brother-in-law; or
(q)
sister-in-law of the Participant (including adoptive relationships). Family
Member also shall mean any person sharing in the Participant's household
(other
than a tenant or an employee).
2.17. "Good
Reason". means, except as otherwise provided
in an Award Document, the occurrence of any of the following circumstances
(unless such circumstances are fully corrected by the Company before a
Participant's termination of employment):
(a) the
Company's assignment of any duties
materially inconsistent with the Participant's position within the Company,
or
which have a significant adverse alteration in the nature or status of the
responsibilities of the Participant's employment; or
(b) a
material reduction by the Company in
the Participant's annual base salary, unless such reduction is part of a
compensation reduction program affecting all similarly situated management
employees.
2.18. "Incentive
Stock Option". or
"ISO"
means the right
to purchase Shares pursuant terms and conditions that provide that such right
will be treated as an incentive stock option within the meaning of Code Section
422, as described in Section 6.
2.19. "Long
Service Separation" means, except as otherwise
provided in an Award Document, a termination of employment with the Company
or a
Subsidiary after the attainment of age 55 and the completion of ten or more
years of service with the Company and/or its Subsidiaries.
2.20. "Named
Executive Officer". means a
Participant who is one of the group of covered employees as defined in the
regulations promulgated under Code Section 162(m), or any successor provision
or
statute.
2.21. "Nonqualified
Stock Option". or
"NQSO".
means the
right to purchase Shares pursuant to terms and conditions that provide that
such
right will not be treated as an Incentive Stock Option, as described in Section
6.
2.22 "Option".
means an Incentive Stock Option or a Nonqualified Stock Option, as described
in
Section 6.
2.23 "Option
Price". means the per share price
of a Share available for purchase pursuant to an Option.
2.24. "Participant".
means an Employee, prospective Employee, Director, beneficiary or any other
person who has outstanding an Award granted under the Plan, and includes
those
former Employees and Directors who have certain post-termination rights under
the terms of an Award granted under the Plan.
2.25. "Performance-Based
Exception". means the exception
for performance-based compensation from the tax deductibility limitations
of
Code Section 162(m).
2.26.
"Performance
Period". means the time period
during which performance goals must be achieved with respect to an Award,
as
determined by the Committee.
2.27. "Performance
Share". means an Award granted to a Participant,
as described in Section 9.
2.28. "Performance
Unit". means an Award granted
to
a Participant, as described in Section 9.
2.29. "Period
of Restriction". means the period during which the
transfer of Shares of Restricted Stock is limited in some way, and the Shares
are subject to a substantial risk of forfeiture, as provided in Section
8.
2.30. "Permitted
Transferee" means any one or more of the
following: (a) Family Members; (b) a trust in which the Participant and/or
Family Members have more than fifty percent of the beneficial interest; (c)
a
foundation in which the Participant and/or Family Members control the management
of the assets; or (d) any other entity in which the Participant and/or Family
Members own more than fifty percent of the voting interests.
Page
48
2.31. "Plan".
means the Caterpillar Inc. 2006 Long-Term Incentive Plan, as set forth
herein.
2.32. "Restricted
Stock". means an Award granted
to
a Participant pursuant to Section 8.
2.33. "Section
16 Officer" means any Employee who is considered
an officer of the Company for purposes of Section 16 of the Exchange Act.
2.34. "Share"
or "Shares".
means shares of common stock of the Company.
2.35. "Stock
Appreciation Right" or
"SAR". means an Award, granted
alone or in connection with a related Option, designated as an SAR, pursuant
to
the terms of Section 7.
2.36. "Subsidiary"
means any partnership, limited liability company, corporation, trust or other
entity or association, directly or indirectly, through one or more
intermediaries, controlled by the Company. The term “control,” as used in the
immediately preceding sentence, means, with respect to a corporation or limited
liability company, the right to exercise, directly or indirectly, more than
fifty percent (50%) of the voting rights attributable to the controlled
corporation or limited liability company, and, with respect to any partnership,
trust, other entity or association, the possession, directly or indirectly,
of
the power to direct or cause the direction of the management or policies
of the
controlled entity.
2.37. "Tandem
SAR". means a SAR that is granted in connection
with a related Option pursuant to Section 7, the exercise of which shall
require
forfeiture of the right to purchase a Share under the related Option (and
when a
Share is purchased under the Option, the Tandem SAR shall similarly be
forfeited).
2.38. "Non-Tandem
SAR". means a SAR that is granted
independently of any Options, as described in Section 7.
Section
3.
Administration
3.1. Plan
Administration. The Committee, or any other
committee appointed by the Board, shall administer the Plan. The Committee
or
other committee appointed to administer the Plan shall consist of not less
than
two members. Members shall be non-Employee Directors of the Company, within
the
meaning of Rule 16b-3 of the Exchange Act and outside directors, within the
meaning of Code Section 162(m). The Board may, from time to time, remove
members
from, or add members to, the Committee. Members of the Board shall fill any
vacancies on the Committee. The foregoing notwithstanding, the Board shall
perform the functions of the Committee for purposes of granting Awards to
non-Employee Directors. However, the Board shall not have exclusive authority
with respect to other aspects of non-Employee Director Awards. If and to
the
extent that no committee exists that has the authority to administer the
Plan,
the Board shall administer the Plan.
3.2. Authority
of the Committee. Except as limited by law or by
the Certificate of Incorporation or Bylaws of the Company, and subject to
the
provisions herein, the Committee shall have full power to select Employees,
prospective Employees and Directors who shall participate in the Plan; determine
the sizes and types of Awards; determine the terms and conditions of Awards
in a
manner consistent with the Plan; construe and interpret the Plan and any
agreement or instrument entered into under the Plan; establish, amend, or
waive
rules and regulations for the Plan's administration; and amend the terms
and
conditions of any outstanding Award to the extent such terms and conditions
are
within the sole discretion of the Committee as provided in the Plan and subject
to Section 16. Further, the Committee shall make all other determinations,
which
may be necessary or advisable for the administration of the Plan. As permitted
by law, the Committee may delegate the authority granted to it
herein.
3.3. Electronic
Administration. The Committee may, in its discretion, utilize a
system for complete or partial electronic administration of the Plan and
may
replace any written documents described in the Plan with electronic
counterparts, as appropriate.
3.4. Decisions
Binding. All determinations and decisions made by
the Committee pursuant to the provisions of the Plan and all related orders
and
resolutions of the Board shall be final, conclusive and binding on all persons,
including the Company, its stockholders, Employees, Participants, and their
estates and beneficiaries.
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Section
4.
Shares
Subject to the Plan and Maximum Awards
4.1. Shares
Available for Awards.
(a) The
Shares available for Awards may be
either authorized and unissued Shares or Shares held in or acquired for the
treasury of the Company. The aggregate number of Shares that may be issued
or
used for reference purposes under the Plan or with respect to which Awards
may
be granted shall not exceed twenty million
(20,000,000) Shares, subject to adjustment as provided in
Section 4.3. In addition, seventeen million six hundred thousand (17,600,000)
Shares authorized but unissued pursuant to the Caterpillar Inc. 1996 Stock
Option and Long-Term Incentive Plan shall be reserved and available for grant
under the Plan. Notwithstanding the foregoing, the aggregate number of Shares
with respect to which ISOs may be granted shall not exceed the number specified
above, and provided further, that up to an aggregate of twenty percent (20%)
of
the authorized Shares under the Plan may be issued with respect to Awards
of
Restricted Stock and up to an aggregate of twenty percent (20%) of the
authorized Shares under the Plan may be issued with respect to Awards of
Performance Shares.
(b) Upon:
(i) a
payout of a Non-Tandem SAR or Tandem
SAR in the form of cash;
(ii) a
cancellation, termination,
expiration, forfeiture, or lapse for any reason (with the exception of the
termination of a Tandem SAR upon exercise of the related Options, or the
termination of a related Option upon exercise of the corresponding Tandem
SAR)
of any Award; or
(iii) payment
of an Option Price or payout
of any Award with previously acquired Shares or by withholding Shares which
otherwise would be acquired on exercise or issued upon such payout, the
number of
Shares underlying any such Award that were not issued as a result of any
of the
foregoing actions shall again be available for the purposes of Awards under
the
Plan. In addition, in the case of any Award granted in substitution for an
award
of a company or business acquired by the Company or a Subsidiary, Shares
issued
or issuable in connection with such substitute Award shall not be counted
against the number of Shares reserved under the Plan, but shall be available
under the Plan by virtue of the Company's assumption of the plan or arrangement
of the acquired company or business.
4.2. Individual
Participant Limitations. Unless and until the
Committee determines that an Award to a Named Executive Officer shall not
be
designed to comply with the Performance-Based Exception, the following rules
shall apply to grants of such Awards under the Plan:
(a) Subject
to adjustment as provided in
Section 4.3, the maximum aggregate number of Shares (including Options, SARs,
Restricted Stock and Performance Shares to be paid out in Shares) that may
be
granted in any one fiscal year to a Participant shall be 800,000
Shares.
(b) Except
as otherwise provided in
Section 7.5(b) regarding SAR exercise, the maximum aggregate cash payout
(including Performance Units and Performance Shares paid out in cash) with
respect to Awards granted in any one fiscal year that may be made to any
Participant shall be $5 million.
4.3. Adjustments
in Authorized Shares. In the event of any change
in corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether
or
not such reorganization comes within the definition of such term in Code
Section
368) or any partial or complete liquidation of the Company, an adjustment
shall
be made in the number and class of Shares available for Awards, the number
and
class of and/or price of Shares subject to outstanding Awards granted under
the
Plan and the number of Shares set forth in Sections 4.1 and 4.2, as may be
determined to be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; provided, however,
that the number of Shares subject to any Award shall always be a whole number
by
rounding any fractional Share (up or down) to the nearest whole
Share.
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50
Section
5.
Eligibility
and Participation
5.1. Eligibility.
Persons eligible to participate in the Plan include all current and future
Employees (including officers), persons who have been offered employment
by the
Company or a Subsidiary (provided that such prospective Employee may not
receive
any payment or exercise any right relating to an Award until such person
begins
employment with the Company or Subsidiary), and Directors, as determined
by the
Committee.
5.2. Participation.
Subject to the provisions of the Plan, the Committee shall determine and
designate, from time to time, the Employees, prospective Employees, and
Directors to whom Awards shall be granted, the terms of such Awards, and
the
number of Shares subject to such Award.
5.3. Foreign
Participants. In order to assure the viability of Awards granted to
Participants employed in foreign countries, the Committee may provide for
such
special terms as it may consider necessary or appropriate to accommodate
differences in local law, tax policy, or custom. Moreover, the Committee
may
approve such supplements to, or amendments, restatements, or alternative
versions of the Plan as it may consider necessary or appropriate for such
purposes without thereby affecting the terms of the Plan as in effect for
any
other purpose; provided, however, that no such supplements, amendments,
restatements, or alternative versions shall increase the share limitations
contained in Section 4 of the Plan.
Section
6.
Stock
Options
6.1. Grant
of Options.
(a) Option
Grant. Subject to the terms and
provisions of the Plan, Options may be granted to one or more Participants
in
such number, upon such terms and provisions, and at any time and from time
to
time, as determined by the Committee, in its sole discretion. The Committee
may
grant either Nonqualified Stock Options or (in the case of Options granted
to
Employees) Incentive Stock Options, and shall have complete discretion in
determining the number of Options of each granted to each Participant, subject
to the limitations of Section 4. Each Option grant shall be evidenced by
a
resolution of the Committee approving the Option grant.
(b) Award
Document. All Options shall be
evidenced by an Award Document. The Award Document shall specify the Option
Price, the term of the Option, the number of Shares subject to the Option,
and
such other provisions as the Committee shall determine, and which are not
inconsistent with the terms and provisions of the Plan. The Award Document
shall
also specify whether the Option is to be treated as an ISO within the meaning
of
Code Section 422. If such Option is not designated as an ISO, such Option
shall
be a NQSO.
6.2. Option
Price. The Committee shall
designate the Option Price for each Share subject to an Option under the
Plan,
provided that such Option Price shall not be less than 100% of the Fair Market
Value of Shares subject to an Option on the date the Option is granted, and
which Option Price may not be subsequently changed by the Committee except
pursuant to Section 4.3. With respect to a Participant who owns, directly
or
indirectly, more than 10% of the total combined voting power of all classes
of
the stock of the Company or any Subsidiary, the Option Price of Shares subject
to an ISO shall be at least 110% of the Fair Market Value of such Shares
on the
ISO's grant date.
6.3. Term
of Options. Each Option
granted to a Participant shall expire at such time as the Committee shall
determine at the time of grant, but in no event shall be exercisable later
than
the 10th anniversary of the grant date. Notwithstanding the foregoing, with
respect to ISOs, in the case of a Participant who owns, directly or indirectly,
more than 10% of the total combined voting power of all classes of the stock
of
the Company or any Subsidiary, no such ISO shall be exercisable later than
the
fifth anniversary of the grant date.
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51
6.4. Exercise
of Options. Options granted
under this Section 6 shall be exercisable at such times and be subject to
such
restrictions and conditions as the Committee shall in each instance approve,
which need not be the same for each grant or for each Participant, and shall
be
set forth in the applicable Award Document. Notwithstanding the preceding
sentence, the Fair Market Value of Shares to which ISOs are exercisable for
the
first time by any Participant during any calendar year (under all plans of
the
Company and its Subsidiaries) may not exceed $100,000. Any ISOs that become
exercisable in excess of such amount shall be deemed NQSOs to the extent
of such
excess. If the Award Document does not specify the time or times at which
the
Option shall first become exercisable, such an Option shall become fully
vested
and exercisable by the Participant on the third anniversary of the grant
date.
6.5. Payment. Options
granted under this Section 6 shall be exercised by the delivery of a notice
of
exercise to the Company (or its designated agent(s)), setting forth the number
of Shares with respect to which the Option is to be exercised, accompanied
by
full payment for the Shares. The Option Price upon exercise of any Option
shall
be payable to the Company in full either:
(a) in
cash or its equivalent, or
(b) by
tendering previously acquired
Shares having an aggregate Fair Market Value at the time of exercise equal
to
the total Option Price, or
(c) by
cashless exercise through delivery
of irrevocable instructions to a broker to promptly deliver to the Company
the
amount of proceeds from a sale of shares having a Fair Market Value equal
to the
purchase price.
6.6. Termination
of Employment or Service as a
Director. The Committee, in
its sole discretion, shall set forth in the applicable Award Document the
extent
to which a Participant shall have the right to exercise the Option or Options
following termination of his or her employment with the Company or any
Subsidiary or following termination of his or her service as a Director.
Such
provisions need not be uniform among all Options issued pursuant to the Plan,
and may reflect distinctions based on the reasons for such termination,
including, but not limited to, termination for Cause or for Good Reason,
or
reasons relating to the breach or threatened breach of restrictive covenants.
Subject to Section 15, in the event that a Participant's Award Document
does not set forth such provisions, the following provisions shall
apply:
(a) Long
Service Separation,
Death or Disability. If a Participant's employment with
the Company and/or any Subsidiary or service as a Director terminates by
reason
of Long Service Separation, death or Disability, to the extent that the Option
is not exercisable, all Shares covered by his or her Options shall immediately
become fully vested and shall remain exercisable until the earlier of (i)
the
remainder of the term of the Option, or (ii) 60 months from the date of such
termination. In the case of the Participant's death, the Participant's
beneficiary or estate may exercise the Option.
(b) Termination
for
Cause. If a Participant's employment with the Company
and/or any Subsidiary or service as a Director terminates for Cause, all
Options
granted to such Participant shall expire immediately and all rights to purchase
Shares (vested or nonvested) under the Options shall cease upon such
termination.
(c) Other
Termination. If a Participant's employment with the
Company and/or any Subsidiary or service as a Director terminates for any
reason
other than Long Service Separation, death, Disability, or for Cause, all
Options
shall remain exercisable until the earlier of (i) the remainder of the term
of
the Option, or (ii) 60 days from the date of such termination. In such
circumstance, the Option shall only be exercisable to the extent that it
was
exercisable as of such termination date and shall not be exercisable with
respect to any additional Shares.
6.7. Restrictions
on Shares. The Committee may
impose such restrictions on any Shares acquired pursuant to the exercise
of an
Option granted under this Section 6 as it may deem advisable, including,
without
limitation, restrictions under applicable Federal securities laws, under
the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state or foreign securities
laws
applicable to such Shares.
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52
6.8. Transferability
of Options.
(a) Incentive
Stock
Options. No ISO granted under the
Plan may be sold, transferred, pledged, assigned, or otherwise alienated
or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all ISOs granted to a Participant under the Plan shall be exercisable
during his or her lifetime only by such Participant.
(b) Nonqualified
Stock
Options. NQSOs may only be transferred in accordance with
this Section 6.8(b).
(i) Except
as otherwise provided in
paragraph (ii) below or in an Award Document no NQSO shall be assignable
or
transferable by a Participant other than by will, by the laws of descent
and
distribution or pursuant to a Domestic Relations Order (as such term is defined
in Section 414(p)(1)(B) of the Code).
(ii) NQSOs
(whether vested or unvested)
held by (A) Participants who are Section 16 Officers; (B) Participants who
are
Directors; or (C) any Participants who previously held the positions in clauses
(A) and (B) may be transferred by gift or by domestic relations order to
one or
more Permitted Transferees. NQSOs (whether vested or unvested) held by all
other
Participants and by Permitted Transferees may be transferred by gift or by
domestic relations order only to Permitted Transferees upon the prior written
approval of the Company's Director of Compensation + Benefits.
Section
7.
Stock
Appreciation Rights
7.1. Grant
of SARs.
(a) SAR
Grant. Subject
to the terms and provisions of the Plan, SARs may be granted to Participants
in
such number, upon such terms and provisions, and at any time and from time
to
time, as determined by the Committee in its sole discretion. The Committee
may
grant Non-Tandem SARs, Tandem SARs, or any combination of these forms of
SARs.
The Committee shall have complete discretion in determining the number of
SARs
granted to each Participant (subject to Section 4) and, consistent with the
provisions of the Plan, in determining the terms and conditions pertaining
to
such SARs. The Committee shall designate, at the time of grant, the grant
price
of a Non-Tandem SAR, which grant price shall not be less than 100% of the
Fair
Market Value of a Share on the grant date of the SAR. The grant price of
Tandem
SARs shall equal the Option Price of the related Option. Grant prices of
SARs
shall not subsequently be changed by the Committee, except pursuant to
Section 4.3.
(b) Award
Document. All SARs shall be evidenced by an Award
Document. The Award Document shall specify the grant price, the term of the
SAR,
and such other provisions as the Committee shall determine, and which are
not
inconsistent with the terms and provisions of the Plan.
7.2. Term
of SARs. The term of a SAR
granted under the Plan shall be determined by the Committee, in its sole
discretion; provided, however, that unless otherwise designated by the
Committee, such term shall not exceed ten years from the grant
date.
7.3. Exercise
of Tandem SARs. Tandem SARs
may be exercised for all or part of the Shares subject to the related Option
upon the surrender of the right to exercise the equivalent portion of the
related Option. A Tandem SAR may be exercised only with respect to the Shares
for which its related Option is then exercisable. Notwithstanding any other
provision of the Plan to the contrary, with respect to a Tandem SAR granted
in
connection with an ISO: (i) the Tandem SAR will expire no later than the
expiration of the underlying ISO; (ii) the value of the payout with respect
to
the Tandem SAR may be for no more than 100% of the difference between the
Option
Price of the underlying ISO and the Fair Market Value of the Shares subject
to
the underlying ISO at the time the Tandem SAR is exercised; and (iii) the
Tandem
SAR may be exercised only when the Fair Market Value of the Shares subject
to
the ISO exceeds the Option Price of the ISO.
7.4. Exercise
of Non-Tandem SARs.
Non-Tandem SARs may be exercised upon whatever terms and conditions the
Committee, in its sole discretion, imposes upon them.
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53
7.5. Payment
of SAR Amount.
(a) Upon
exercise of a SAR, a Participant
shall be entitled to receive payment from the Company in an amount determined
by
multiplying:
(i) The
excess of the Fair Market Value of
a Share on the date of exercise over the grant price; by
(ii) The
number of Shares with respect to
which the SAR is exercised.
(b) Unless
otherwise provided in the Award
Document, the payment upon SAR exercise may be in cash, in Shares of equivalent
value, or in some combination thereof. If and to the extent that the payment
upon SAR exercise is made in cash, such cash payment shall not be subject
to the
limitation of Section 4.2(b).
7.6. Termination
of Employment or Service as a
Director. The Committee, in
its sole discretion, shall set forth in the applicable Award Document the
extent
to which a Participant shall have the right to exercise the SAR or SARs
following termination of his or her employment with the Company or any
Subsidiary or following termination of his or her service as a Director.
Such
provisions need not be uniform among all SARs issued pursuant to the Plan,
and
may reflect distinctions based on the reasons for such termination, including,
but not limited to, termination for Cause or for Good Reason, or reasons
relating to the breach or threatened breach of restrictive covenants. Subject
to
Section 15, in the event that a Participant's Award Document does not set
forth
such provisions, the following provisions shall apply:
(a) Long
Service Separation,
Death or Disability. If a Participant's employment with
the Company and/or any Subsidiary or service as a Director terminates by
reason
of Long Service Separation, death or Disability, to the extent that the SARs
are
not exercisable, all of his or her SARs shall immediately become fully vested
and shall remain exercisable until the earlier of (i) the remainder of the
term
of the SAR, or (ii) 60 months from the date of such termination. In the case
of
the Participant's death, the Participant's beneficiary or estate may exercise
the SAR.
(b) Termination
for
Cause. If a Participant's employment with the Company
and/or any Subsidiary or service as a Director terminates for Cause, all
SARs
shall expire immediately and all rights thereunder shall cease upon such
termination.
(c) Other
Termination. If a Participant's employment with the
Company and/or any Subsidiary or service as a Director terminates for any
reason
other than Long Service Separation, death, Disability, or for Cause, all
SARs
shall remain exerciseable until the earlier of (i) the remainder of the term
of
the SAR, or (ii) 60 days from the date of such termination. In such
circumstance, the SAR shall only be exercisable to the extent it was exercisable
as of such termination date and shall not be exercisable with respect to
any
additional SARs.
7.7. Transferability
of SARs. SARs may only be transferred
in accordance with this Section 7.7.
(a) Except
as otherwise provided in
paragraph (b) below or in an Award Document, no SAR shall be assignable or
transferable by a Participant other than by will, by the laws of descent
and
distribution or pursuant to a Domestic Relations Order (as such term is defined
in Section 414(p)(1)(B) of the Code).
(b) SARs
held by (i) Participants who are
Section 16 Officers; (ii) Participants who are Directors; or (iii) any
Participants who previously held the positions in clauses (i) and (ii) may
be
transferred by gift or by domestic relations order to one or more Permitted
Transferees. SARs held by all other Participants and by Permitted Transferees
may be transferred by gift or by domestic relations order to Permitted
Transferees only upon the prior written approval of the Company's Director
of
Compensation and Benefits.
(c) Notwithstanding
the foregoing, with
respect to a Tandem SAR granted in connection with an ISO, no such Tandem
SAR
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and
distribution.
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Section
8.
Restricted
Stock
8.1. Grant
of Restricted Stock.
(a) Grant
of Restricted
Stock. Subject to the terms and
provisions of the Plan, the Committee, at any time and from time to time,
may
grant Shares of Restricted Stock to Participants in such amounts as the
Committee shall determine.
(b) Award
Document. All shares of Restricted Stock shall be
evidenced by an Award Document. The Award Document shall specify the Period
or
Periods of Restriction, the number of Shares of Restricted Stock granted,
and
such other provisions as the Committee shall determine pursuant to Section
8.3
or otherwise, and which shall not be inconsistent with the terms and provisions
of the Plan. If no Period of Restriction is set forth in the Award Document,
the
transfer and any other restrictions shall lapse (i) to the extent of one-third
of the Shares (rounded to the nearest whole) covered by the Restricted Stock
Award on the third anniversary of the grant date, (ii) to the extent of
two-thirds of the Shares (rounded to the nearest whole) covered by the
Restricted Stock Award on the fourth anniversary of the grant date, and (iii)
to
the extent of 100% of the Shares covered by the Restricted Stock Award on
the
fifth anniversary of the grant date.
8.2. Other
Restrictions. Subject to
Section 10 herein, the Committee may impose such other conditions and/or
restrictions on any Shares of Restricted Stock granted pursuant to the Plan
as
it may deem advisable including without limitation, a requirement that
Participants pay a stipulated purchase price for each Share of Restricted
Stock,
restrictions based upon the achievement of specific performance goals
(Company-wide, Subsidiary-wide, divisional, and/or individual), time-based
restrictions on vesting, which may or may not be following the attainment
of the
performance goals, sales restrictions under applicable stockholder agreements
or
similar agreements, and/or restrictions under applicable Federal or state
securities laws. The Company shall retain the certificates representing Shares
of Restricted Stock in the Company's possession until such time as all
conditions and/or restrictions applicable to such Shares have been satisfied.
Except as otherwise provided in this Section 8 or in any Award Document,
Shares
of Restricted Stock covered by each Restricted Stock grant made under the
Plan
shall become freely transferable by the Participant after the last day of
the
applicable Period of Restriction.
8.3. Voting
Rights. Unless otherwise
designated by the Committee at the time of grant, Participants to whom Shares
of
Restricted Stock have been granted hereunder may exercise full voting rights
with respect to those Shares during the Period of Restriction.
8.4. Dividends
and Other Distributions.
Unless otherwise designated by the Committee at the time of grant, Participants
holding Shares of Restricted Stock granted hereunder shall be credited with
regular cash dividends paid with respect to the underlying Shares while they
are
so held during the Period of Restriction. The Committee may apply any
restrictions to the dividends that the Committee deems appropriate. Without
limiting the generality of the preceding sentence, if the grant or vesting
of
Shares of Restricted Stock granted to a Named Executive Officer is designed
to
comply with the requirements of the Performance-Based Exception, the Committee
may apply any restrictions it deems appropriate to the payment of dividends
declared with respect to such Shares of Restricted Stock, such that the
dividends and/or the Shares of Restricted Stock maintain eligibility for
the
Performance-Based Exception. In the event that any dividend constitutes a
derivative security or an equity security pursuant to the rules under Section
16
of the Exchange Act, such dividend shall be subject to a vesting period equal
to
the remaining vesting period of the Shares of Restricted Stock with respect
to
which the dividend is paid.
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55
8.5. Termination
of Employment or Service as a
Director. The Committee, in
its sole discretion, shall set forth in the applicable Award Document the
extent
to which the Participant shall have the right to receive unvested Shares
of
Restricted Stock following termination of the Participant's employment with
the
Company and/or its Subsidiaries or termination of service as a Director.
Such
provisions need not be uniform among all Shares of Restricted Stock issued
pursuant to the Plan, and may reflect distinctions based on the reasons for
termination of employment including; but not limited to, termination of
employment for Cause or for Good Reason, or reasons relating to the breach
or
threatened breach of restrictive covenants; provided, however that, except
in
the cases of terminations connected with a Change of Control and terminations
by
reason of death or Disability, the vesting of Shares of Restricted Stock
that
qualify for the Performance-Based Exception and that are held by Named Executive
Officers shall not occur before the time they otherwise would have, but for
the
employment termination. Subject to Section 15, in the event that a Participant's
Award Document does not set forth such termination provisions, the following
termination provisions shall apply:
(a) Death
and
Disability. Unless the Award qualifies for the
Performance-Based Exception, if a Participant's employment with the Company
and/or any Subsidiary or service as a Director is terminated due to death
or
Disability, all Shares of Restricted Stock of such Participant shall immediately
become fully vested on the date of such termination and any restrictions
shall
lapse.
(b) Other
Termination. If a Participant's employment with the
Company and/or any Subsidiary or service as a Director is terminated for
any
reason other than death or Disability all Shares of Restricted Stock that
are
unvested at the date of termination shall be forfeited to the
Company.
8.6. Acceleration
of Vesting. Notwithstanding anything in this Section 8 to the
contrary, the Committee, in its sole discretion, shall have the authority
to
accelerate the vesting of Shares of Restricted Stock at any time.
8.7. Transferability.
Except as provided in this Section 8, the Shares of Restricted Stock granted
herein may not be sold, transferred, pledged, assigned, or otherwise alienated
or hypothecated, voluntarily or involuntarily, until the end of the applicable
Period of Restriction established by the Committee and specified in the Award
Document, or upon earlier satisfaction of any other conditions, as specified
by
the Committee in its sole discretion and set forth in the Award Document.
All
rights with respect to the Restricted Stock granted to a Participant under
the
Plan shall be available during his or her lifetime only to such
Participant.
Section
9.
Performance
Units and Performance Shares
9.1. Grant
of Performance Units/Shares.
(a) Grant
of Performance
Unit/Shares. Subject to the terms
of the Plan, Performance Units and/or Performance Shares may be granted to
Participants in such amounts and upon such terms, and at any time and from
time
to time, as shall be determined by the Committee, which shall not be
inconsistent with the terms and provisions of the Plan and shall be set forth
in
an Award Document.
(b) Award
Document. All Performance Units and Performance Shares
shall be evidenced by an Award Document. The Award Document shall specify
the
initial value of the Award, the performance goals and the Performance Period,
as
the Committee shall determine, and which are not inconsistent with the terms
and
provisions of the Plan.
9.2. Value
of Performance
Units/Shares. Each
Performance Unit shall have an initial value (which may be $0) that is
established by the Committee at the time of grant. Each Performance Share
shall
have an initial value equal to the Fair Market Value of a Share on the grant
date. The Committee shall set performance goals in its sole discretion which,
depending on the extent to which they are met will determine the number and/or
value of Performance Units and/or Performance Shares that will be paid out
to
the Participant. For purposes of this Section 9, the time period during which
the performance goals must be met shall be called a Performance
Period.
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56
9.3. Earning
of Performance
Units/Shares. Subject to
the terms of the Plan, after the applicable Performance Period has ended,
the
holder of Performance Units and/or Performance Shares shall be entitled to
receive payout on the number and value of Performance Units and/or Performance
Shares earned by the Participant over the Performance Period, to be determined
as a function of the extent to which the corresponding performance goals
have
been achieved, as established by the Committee.
9.4. Form
and Timing of Payment of Performance
Units/Shares. Except as
provided below, payment of earned Performance Units and/or Performance Shares
shall be made in a single lump sum as soon as reasonably practicable following
the close of the applicable Performance Period. Subject to the terms of the
Plan, the Committee, in its sole discretion, may pay earned Performance Units
and/or Performance Shares in the form of cash or in Shares (or in a combination
thereof) which have an aggregate Fair Market Value equal to the value of
the
earned Performance Units and/or Performance Shares at the close of the
applicable Performance Period. Such Shares may be granted subject to any
restrictions deemed appropriate by the Committee. At
the sole
discretion of the Committee, Participants may be entitled to receive any
dividends declared with respect to Shares which have been earned in connection
with grants of Performance Units and/or Performance Shares which have been
earned, but not yet distributed to Participants.
9.5. Termination
of Employment or Service as a
Director. The Committee, in
its sole discretion, shall set forth in the applicable Award Document the
extent
to which the Participant shall have the right to receive payment for Performance
Units and/or Performance Shares following termination of the Participant's
employment with the Company and/or its Subsidiaries or termination of service
as
a Director. Such provisions need not be uniform among all Performance Units
and/or Performance Shares granted pursuant to the Plan, and may reflect
distinctions based on the reasons for such termination including; but not
limited to, termination for Cause or for Good Reason, or reasons relating
to the
breach or threatened breach of restrictive covenants. Subject to Section
15, in
the event that a Participant's Award Document does not set forth such
termination provisions, the following termination provisions shall
apply:
(a) Long
Service Separation,
Death or Disability. Subject to Section 15, if a
Participant's employment with the Company and/or any Subsidiary or service
as a
Director is terminated during a Performance Period due to Long Service
Termination, death or Disability, the Participant shall receive a prorated
payout of the Performance Units and/or Performance Shares, unless the Committee
determines otherwise. The prorated payout shall be determined by the Committee,
shall be based upon the length of time that the Participant held the Performance
Units and/or Performance Shares during the Performance Period, and shall
further
be adjusted based on the achievement of the preestablished performance goals.
Unless the Committee determines otherwise in the event of a termination due
to
death, Disability or Long Service Separation, payment of earned Performance
Units and/or Performance Shares shall be made at the same time as payments
are
made to Participants who did not terminate employment during the applicable
Performance Period.
(b) Other
Termination. If a Participant's employment with the
Company and/or any Subsidiary or service as a Director is terminated during
a
Performance Period for any reason other than Long Service Termination, death
or
Disability all Performance Units and/or Performance Shares shall be forfeited
by
the Participant to the Company.
9.6. Nontransferability.
Except as otherwise provided in a Participant's Award Document, Performance
Units and/or Performance Shares may not be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated, other than by will or by the laws
of
descent and distribution. Further, except as otherwise provided in a
Participant's Award Document, a Participant's rights under the Plan shall
be
exercisable during the Participant's lifetime only by the Participant or
the
Participant's legal representative.
Page
57
Section
10.
Performance
Measures
10.1. Performance
Measures. Unless and until the Committee proposes for stockholder
vote and stockholders approve a change in the general performance measures
set
forth in this Section 10, the attainment of which may determine the degree
of
payout and/or vesting with respect to Awards to Named Executive Officers
that
are designed to qualify for the Performance-Based Exception, the performance
goals to be used for purposes of such grants shall be established by the
Committee in writing and stated in terms of the attainment of specified levels
of or percentage changes in any one or more of the following measurements:
(a)
revenue; (b) primary or fully-diluted earnings per Share; (c) earnings before
interest, taxes, depreciation, and/or amortization; (d) pretax income; (d)
cash
flow from operations; (e) total cash flow; (f) return on equity; (g) return
on
invested capital; (h) return on assets; (i) net operating profits after taxes;
(j) economic value added; (k) total stockholder return; (l) return on sales;
or
(m) any individual performance objective which is measured solely in terms
of
quantifiable targets related to the Company or the Company's business; or
any
combination thereof. In addition, such performance goals may be based in
whole
or in part upon the performance of the Company, a Subsidiary, division and/or
other operational unit under one or more of such measures.
10.2. Performance
Procedures. The degree of payout and/or vesting of such Awards
designed to qualify for the Performance-Based Exception shall be determined
based upon the written certification of the Committee as to the extent to
which
the performance goals and any other material terms and conditions precedent
to
such payment and/or vesting have been satisfied. The Committee shall have
the
sole discretion to adjust the determinations of the degree of attainment
of the
preestablished performance goals; provided, however, that the performance
goals
applicable to Awards which are designed to qualify for the Performance-Based
Exception, and which are held by Named Executive Officers, may not be adjusted
so as to increase the payment under the Award (the Committee shall retain
the
sole discretion to adjust such performance goals upward, or to otherwise
reduce
the amount of the payment and/or vesting of the Award relative to the
pre-established performance goals). In the event that applicable tax and/or
securities laws change to permit Committee sole discretion to alter the
governing performance measures without obtaining stockholder approval of
such
changes, the Committee shall have sole discretion to make such changes without
obtaining stockholder approval. In addition, in the event that the Committee
determines that it is advisable to grant Awards which shall not qualify for
the
Performance-Based Exception, the Committee may make such grants without
satisfying the requirements of Code Section 162(m) and, thus, which use
performance measures other than those specified above.
Section
11.
Award
Forfeitures
11.1. Forfeiture
of Options and Other
Awards. Each Award granted
hereunder shall be subject to the following additional forfeiture conditions,
to
which the Participant, by accepting an Award hereunder, agrees. If any of
the
events specified in Section 11.2 occurs (a "Forfeiture Event"), all of the
following forfeitures will result:
(a) The
unexercised portion of any Option,
whether or not vested, and any other Award not then settled (except for an
Award
that has not been settled solely due to an elective deferral pursuant to
Section
13 by the Participant and otherwise is not forfeitable in the event of any
termination of service of the Participant) will be immediately forfeited
and
canceled upon the occurrence of the Forfeiture Event; and
(b) The
Participant will be obligated to
repay to the Company, in cash, within five business days after demand is
made
therefor by the Company, the total amount of Award Gain (as defined herein)
realized by the Participant upon each exercise of an Option or settlement
of an
Award (regardless of any elective deferral pursuant to Section 13) that occurred
on or after (i) the date that is six months before the occurrence of the
Forfeiture Event, if the Forfeiture Event occurred while the Participant
was
employed by the Company or a Subsidiary, or (ii) the date that is six months
before the date the Participant's employment by, or service as a Director
with
the Company or a Subsidiary terminated, if the Forfeiture Event occurred
after
the Participant ceased to be so employed.
Page
58
11.2. Events
Triggering Forfeiture. The forfeitures specified
in Section 11.1 will be triggered upon the occurrence of any one of the
following Forfeiture Events at any time during the Participant's employment
by
or service as a Director with the Company or a Subsidiary or during the one-year
period following termination of such employment or service:
(a) Non-Solicitation.
The Participant, for his or her own benefit or for the benefit of any
other
person, company or entity, directly or indirectly, (i) induces or attempts
to
induce or hires or otherwise counsels, induces or attempts to induce or hire
or
otherwise counsel, advise, encourage or solicit any person to leave the
employment of or the service for the Company or any Subsidiary, (ii) hires
or in
any manner employs or retains the services of any individual employed by
or
providing services to the Company or any Subsidiary as of the date of his
or her
termination of employment, or employed by or providing services to the Company
or any Subsidiary subsequent to such termination, (iii) solicits, pursues,
calls
upon or takes away, any of the customers of the Company or any Subsidiary,
(iv)
solicits, pursues, calls upon or takes away, any potential customer of the
Company or any Subsidiary that has been the subject of a bid, offer or proposal
by the Company or any Subsidiary, or of substantial preparation with a view
to
making such a bid, proposal or offer, within six months before such
Participant's termination of employment with the Company or any Subsidiary,
or
(v) otherwise interferes with the business or accounts of the Company or
any
Subsidiary.
(b) Confidential
Information. The Participant discloses to any person or
entity or makes use of any "confidential or proprietary information" (as
defined
below in this subparagraph (b)) for his or her own purpose or for the benefit
of
any person or entity, except as may be necessary in the ordinary course of
employment with or other service to the Company or any Subsidiary. Such
"confidential or proprietary information" of the Company or any Subsidiary,
includes, but is not limited to, the design, development, operation, building
or
manufacturing of products manufactured and supplied by the Company and its
Subsidiaries, the identity of the Company's or any Subsidiary's customers,
the
identity of representatives of customers with whom the Company or any Subsidiary
has dealt, the kinds of services provided by the Company or any Subsidiary
to
customers and offered to be performed for potential customers, the manner
in
which such services are performed or offered to be performed, the service
needs
of actual or prospective customers, pricing information, information concerning
the creation, acquisition or disposition of products and services, customer
maintenance listings, computer software and hardware applications and other
programs, personnel information, information identifying, relating to or
concerning investors in the Company or any Subsidiary, joint venture partners
of
the Company or any Subsidiary, business partners of the Company or any
Subsidiary or other entities providing financing to the Company or any
Subsidiary, real estate and leasing opportunities, communications and
telecommunications operations and processes, zoning and licensing matters,
relationships with, or matters involving, landlords and/or property owners,
and
other trade secrets.
11.3. Agreement
Does Not Prohibit Competition or Other Participant
Activities. Although the conditions set forth in
this Section 11 shall be deemed to be incorporated into an Award, the Plan
does
not thereby prohibit the Participant from engaging in any activity, including
but not limited to competition with the Company and its Subsidiaries. Rather,
the non-occurrence of the Forfeiture Events set forth in Section 11.2 is
a
condition to the Participant's right to realize and retain value from his
or her
compensatory Awards, and the consequence under the Plan if the Participant
engages in an activity giving rise to any such Forfeiture Event are the
forfeitures specified herein. This provision shall not preclude the Company
and
the Participant from entering into other written agreements concerning the
subject matter of Sections 11.1 and 11.2 and, to the extent any terms of
this Section 11 are inconsistent with any express terms of such agreement,
this
Section 11 shall not be deemed to modify or amend such terms.
11.4. Committee
Discretion. The Committee
may, in its sole discretion, waive in whole or in part the Company's right
to
forfeiture under this Section 11, but no such waiver shall be effective unless
evidenced by a writing signed by a duly authorized officer of the Company.
In
addition, the Committee may impose additional conditions on Awards, by inclusion
of appropriate provisions in the Award Document. Nothing contained herein
shall
require the Committee to enforce the forfeiture provisions of this Section
11.
Failure to enforce these forfeiture provisions against any individual shall
not
be construed as a waiver of the Company's right to forfeiture under this
Section
11.
Page
59
Section
12.
Beneficiary
Designation
12.1. Beneficiary
Designations. Each Participant under the Plan may, from time to
time, name any beneficiary or beneficiaries (who may be named contingently
or
successively) to whom any benefit under the Plan is to be paid in case of
his or
her death before he or she receives any or all of such benefit. Each such
designation shall revoke all prior designations by the same Participant,
shall
be in a form prescribed by the Company, and will be effective only when filed
by
the Participant in writing with the Company during the Participant's lifetime.
In the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
Section
13.
Deferrals
13.1. Deferrals.
The Committee may permit a Participant to defer such Participant's receipt
of
the payment of cash or the delivery of Shares that would otherwise be due
to
such Participant upon the exercise of any Option or by virtue of the lapse
or
waiver of restrictions with respect to Restricted Stock, or the satisfaction
of
any requirements or goals with respect to Performance Units/Shares. If any
such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals. All
such
deferrals (and rules and procedures) shall be consistent with Code Section
409A
and any other applicable law.
Section
14.
Rights
and
Obligations of Parties
14.1. No
Guarantee of Employment or Service
Rights. Nothing in the Plan
shall interfere with or limit in any way the right of the Company to terminate
any Participant's employment at any time, nor confer upon any Participant
any
right to continue in the employ of the Company or any
Subsidiary.
14.2. Temporary
Absence. For purposes of the Plan, temporary absence from
employment because of illness, vacation, approved leaves of absence, and
transfers of employment among the Company and its Subsidiaries, shall not
be
considered to terminate employment or to interrupt continuous
employment.
14.3. Participation. No
Employee or Director shall have the right to be selected to receive an Award
under the Plan, or, having been so selected, to be selected to receive a
future
Award.
14.4. Right
of Setoff. The Company or
any Subsidiary may, to the extent permitted by applicable law, deduct from
and
set off against any amounts the Company or Subsidiary may owe to the Participant
from time to time, including amounts payable in connection with any Award,
owed
as wages, fringe benefits, or other compensation owed to the Participant,
such
amounts as may be owed by the Participant to the Company, although the
Participant shall remain liable for any part of the Participant's payment
obligation not satisfied through such deduction and setoff. By accepting
any
Award granted hereunder, the Participant agrees to any deduction or setoff
under
this Section 14.
14.5. Section
83(b) Election.
No election under Section 83(b) of the Code (to include in gross
income in the year of transfer the amounts specified in Code Section 83(b))
or
under a similar provision of the laws of a jurisdiction outside the United
States may be made, unless expressly permitted by the terms of the Award
Document or by action of the Committee in writing before the making of such
election. In any case in which a Participant is permitted to make such an
election in connection with an Award, the Participant shall notify the Company
of such election within ten days of filing notice of the election with the
Internal Revenue Service or other governmental authority, in addition to
any
filing and notification required pursuant to regulations issued under Code
Section 83(b) or other applicable provision.
14.6. Disqualifying
Disposition Notification.
If any Participant shall make any disposition of Shares delivered pursuant
to
the exercise of an Incentive Stock Option under the circumstances described
in
Code Section 421(b) (relating to certain disqualifying dispositions), such
Participant shall notify the Company of such disposition within ten days
thereof.
Page 60
Section
15.
Change
of
Control
15.1. Change
of Control. If a Participant's employment or service with the
Company and/or any Subsidiary terminates either without Cause or for Good
Reason
within the 12 month period following a Change of Control, unless otherwise
specifically prohibited under applicable laws, or by the rules and regulations
of any governing governmental agencies or national securities
exchanges:
(a) Any
and all Options and SARs granted
hereunder shall become immediately exercisable, and shall remain exercisable
throughout their entire term;
(b) Any
Period of Restriction and other
restrictions imposed on Restricted Stock shall lapse; and
(c) Unless
otherwise specified in an Award
Document, the maximum payout opportunities attainable under all outstanding
Awards of Performance Units and Performance Shares shall be deemed to have
been
fully earned for the entire Performance Period(s) as of the effective date
of
the Change of Control. The vesting of all such Awards shall be accelerated
as of
the effective date of the Change of Control, and in full settlement of such
Awards, there shall be paid out in cash to Participants within 30 days following
the effective date of the Change of Control the maximum of payout opportunities
associated with such outstanding Awards.
Section
16.
Amendment,
Modification, and Termination
16.1. Amendment,
Modification, and
Termination. The Board may
amend, suspend or terminate the Plan or the Committee's authority to grant
Awards under the Plan without the consent of stockholders or Participants;
provided, however, that any amendment to the Plan shall be submitted to the
Company's stockholders for approval not later than the earliest annual meeting
for which the record date is after the date of such Board action if such
stockholder approval is required by any federal or state law or regulation
or
the rules of any stock exchange or automated quotation system on which the
Shares may then be listed or quoted and the Board may otherwise, in its sole
discretion, determine to submit other amendments to the Plan to stockholders
for
approval; and provided further, that, without the written consent of an affected
Participant, no such Board action may materially and adversely affect the
rights
of such Participant under any outstanding Award. The Committee shall have
no
authority to waive or modify any other Award term after the Award has been
granted to the extent that the waived or modified term was mandatory under
the
Plan.
Section
17.
Withholding
17.1. Tax
Withholding. The Company
shall have the power and the right to deduct or withhold, or require a
Participant to remit to the Company, an amount sufficient to satisfy Federal,
state, and local taxes, domestic or foreign, required by law or regulation
to be
withheld with respect to any taxable event arising as a result of the
Plan.
17.2. Share
Withholding. With respect
to withholding required upon the exercise of Options or SARs, upon the lapse
of
restrictions on Restricted Stock, or upon any other taxable event arising
as a
result of Awards granted hereunder, the withholding requirement shall be
satisfied by the Company withholding Shares having a Fair Market Value on
the
date the tax is to be determined equal to the minimum statutory total tax
which
would be imposed on the transaction.
Page 61
Section
18.
Miscellaneous
18.1. Unfunded
Plan. The Plan is intended
to constitute an "unfunded" plan for incentive and deferred compensation.
With
respect to any payments not yet made to a Participant or obligation to deliver
Shares pursuant to an Award, nothing contained in the Plan or any Award shall
give any such Participant any rights that are greater than those of a general
creditor of the Company; provided that the Committee may authorize the creation
of trusts and deposit therein cash, Shares, other Awards or other property,
or
make other arrangements to meet the Company's obligations under the Plan.
Such
trusts or other arrangements shall be consistent with the "unfunded" status
of
the Plan unless the Committee otherwise determines with the consent of each
affected Participant. No such funding shall be established that would cause
an
amount to be taxable under Code Section 409A before it is received by a
Participant or cause an amount to be subject to additional tax under such
Section.
18.2. Forfeitures;
Fractional Shares. Unless otherwise determined by
the Committee, in the event of a forfeiture of an Award with respect to which
a
Participant paid cash consideration, the Participant shall be repaid the
amount
of such cash consideration. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award. The Committee shall determine whether
cash,
other Awards or other property shall be issued or paid in lieu of such
fractional Shares or whether such fractional Shares or any rights thereto
shall
be forfeited or otherwise eliminated.
18.3. Compliance
with Code Section 162(m).
The Company intends that Options and SARs granted to Named Executive Officers
and other Awards designated as Awards to Named Executive Officers shall
constitute qualified "performance-based compensation" within the meaning
of Code
Section 162(m) and regulations thereunder, unless otherwise determined by
the
Committee at the time of allocation of an Award. Accordingly, the terms of
Sections 4.2, 6, 7, 8.5, 8.6, 9 and 10, including the definitions of Named
Executive Officer and other terms used therein, shall be interpreted in a
manner
consistent with Code Section 162(m) and regulations thereunder. The foregoing
notwithstanding, because the Committee cannot determine with certainty whether
a
given Participant will be a Named Executive Officer with respect to a fiscal
year that has not yet been completed, the Committee may, in its discretion,
extend the terms of such Sections to any Participant that the Committee deems
appropriate. If any provision of the Plan or any Award Document relating
to a
Performance Award that is designated as intended to comply with Code Section
162(m) does not comply or is inconsistent with the requirements of Code Section
162(m) or regulations thereunder, such provision shall be construed or deemed
amended to the extent necessary to conform to such requirements, and no
provision shall be deemed to confer upon the Committee or any other person
sole
discretion to increase the amount of compensation otherwise payable in
connection with any such Award upon attainment of the applicable performance
objectives.
18.4. Gender
and Number; Headings.
Except where otherwise indicated by the context, any masculine term used
herein
also shall include the feminine; the plural shall include the singular and
the
singular shall include the plural. Headings are included for the convenience
of
reference only and shall not be used in the interpretation or construction
of
any such provision contained in the Plan.
18.5. Severability.
In the event any provision of the Plan shall be held illegal or invalid for
any
reason, the illegality or invalidity shall not affect the remaining parts
of the
Plan, and the Plan shall be construed and enforced as if the illegal or invalid
provision had not been included.
18.6. Successors.
All obligations of the Company under the Plan with respect to Awards granted
hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect merger,
consolidation, purchase of all or substantially all of the business and/or
assets of the Company or otherwise.
18.7. Requirements
of Law. The granting of
Awards and the issuance of Shares under the Plan shall be subject to all
applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be
required.
Page 62
18.8. Securities
Law Compliance. With respect
to "insiders," transactions under the Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange
Act. To
the extent any provision of the Plan or action by the Committee fails to
so
comply, it shall be deemed null and void, to the extent permitted by law
and
deemed advisable by the Committee. An "insider" includes any individual who
is,
on the relevant date, an officer, Director or more than 10% beneficial owner
of
any class of the Company's equity securities that is registered pursuant
to
Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange
Act.
18.9. Governing
Law. To the extent not
preempted by Federal law, the Plan, and all agreements hereunder, shall be
construed in accordance with and governed by the laws of the State of Illinois
without regard to the conflict of law provisions thereof.
Page 63
CATERPILLAR
INC.
EXECUTIVE
SHORT-TERM INCENTIVE PLAN
(Amended
and Restated as of 01/01/2007)
Section
1.
Purpose
Effective
as of
January 1, 2002, Caterpillar Inc. (the "Company") established the Caterpillar
Inc. Executive Incentive Compensation Plan to advance the interests of the
Company and its subsidiaries by providing an annual incentive bonus to be
paid
to certain executive officers of the Company based on the achievement of
pre-established quantitative performance goals. By this document, the Company
hereby amends and restates such plan in its entirety and renames the plan
the
"Caterpillar Inc. Executive Short-Term Incentive Plan" (the
"Plan").
The
Plan is a
performance-based compensation plan as defined in Section 162(m) of the Internal
Revenue Service of 1986, as amended ("Code") and payments under the Plan
are
intended to qualify for tax deductibility under Section 162(m). Payments
under
the Plan are intended to constitute performance-based compensation, and
distributions are intended to be short-term deferrals (and, therefore, not
deferred compensation), for purposes of Section 409A of the Code.
Section
2.
Administration
The
Plan shall be
administered by the Compensation Committee ("Committee") of the Board of
Directors of the Company ("Board"), which is composed solely of members of
the
Board that are outside directors, as that term is defined in Section 162(m)
of
the Code. The Committee shall have the authority to grant awards under the
Plan
to executive officers of the Company. Except as limited by the express
provisions of the Plan or by resolutions adopted by the Board, the Committee
also shall have the authority and discretion to interpret the Plan, to establish
and revise rules and regulations relating to the Plan, and to make any other
determinations that it believes necessary or advisable for administration
of the
Plan.
Section
3.
Performance Awards
3.1. Eligible
Participants
Individuals
who
occupy the positions of Chief Executive Officer and Group President as well
as
any other Company officers specifically designated by the Committee are eligible
to participate in the Plan ("Eligible Participants"). Absent a specific
designation by the Committee, participation in the Plan will be limited to
the
Chief Executive Officer and Group Presidents.
3.2. Award
Criteria
On
or prior to the
ninetieth day of each fiscal year of the Company ("Performance Period") for
which an award ("Performance Award") is payable hereunder, the Committee
shall
establish the performance factors ("Performance Measures") applicable to
the
award for that Performance Period, the objective criteria based on those
Performance Measures pursuant to which the bonus for that Performance Period
is
to be payable ("Performance Targets") and the amounts potentially payable
based
on the achievement or partial achievement of those Performance Targets. The
Committee shall have sole discretion to determine the Company Performance
Measures and Performance Targets applicable to the Performance Award, and
the
method of Performance Award calculation. Performance Measures may be based
on
any of the following factors, alone or in combination, as the Committee deems
appropriate: (i) revenue; (ii) primary or fully-diluted earnings per share;
(iii) earnings before interest, taxes, depreciation, and/or amortization;
(iv)
pretax income; (v) cash flow from operations; (vi) total cash flow; (vii)
return
on equity; (viii) return on invested capital; (ix) return on assets; (x)
net
operating profits after taxes; (xi) economic value added; (xii) total
stockholder return; (xiii) return on sales; (xiv) realized 6 Sigma benefits;
or
(xv) any individual performance objective which is measured solely in terms
of
quantifiable targets related to the Company or the Company's business.
Performance Targets may include a minimum, maximum and target level of
performance with the size of Performance Awards based on the level attained.
Once established, Performance Targets and Performance Measures shall not
be
changed during the Performance Period; provided, however, that the Committee
may, in its discretion, eliminate or decrease the amount of a Performance
Award
otherwise payable to an Eligible Participant.
Page 64
The
maximum dollar
amount that any Eligible Participant may be paid in any single year under
the
Plan may not exceed $4 million.
3.3. Payment
of Awards
As
soon as
practicable after the Company's audited financial statements are available
for
the Performance Period for which the incentive compensation will be paid,
the
Committee shall determine the Company's performance in relation to the
Performance Targets for that Performance Period. The Committee shall certify
in
writing the extent to which Performance Targets were satisfied.
The
Committee may
provide, when it establishes Performance Measures under Section 3.2, that
in
determining the Company's performance in relation to the Performance Targets
for
the Performance Period, adjustments shall be made in the method of calculating
attainment of performance objectives for one or more of the following reasons:
(i) to exclude the dilutive effects of acquisitions or joint ventures; (ii)
to
assume that any business divested by the Company achieved performance objectives
at targeted levels during the balance of a Performance Period following such
divestiture; (iii) to exclude restructuring and/or other nonrecurring charges;
(iv) to exclude exchange rate effects, as applicable, for non-U.S. dollar
denominated net sales and operating earnings; (v) to exclude the effects
of
changes to generally accepted accounting standards required by the Financial
Accounting Standards Board (FASB); (vi) to exclude the effects to any statutory
adjustments to corporate tax; (vii) to exclude the impact of any "extraordinary
items" as determined under generally accepted accounting principles (GAAP);
or
(viii) to exclude the effect of any change in the outstanding shares of common
stock of the Company by reason of any stock dividend or split, stock repurchase,
reorganization, recapitalization, merger, consolidation, spin-off, combination
or exchange of shares or other similar corporate change, or any distributions
to
common stockholders other than regular cash dividends; and (ix) to exclude
any
other unusual, non-recurring gain or loss or other extraordinary item. Any
adjustment provided for pursuant to the foregoing shall be set forth in
objective terms meeting the requirements for performance-based compensation
under Section 162(m) of the Code.
Performance
Awards
shall be paid in cash within two and one-half months after the end of the
Performance Period, or as soon as practicable thereafter, to the extent that
the
delay does not cause payments to fail to be short-term deferrals for purposes
of
Section 409A of the Code. Federal, state and local taxes will be withheld
as
appropriate.
3.4.
Termination of Employment
To
receive a
Performance Award, the Eligible Participant must be employed by the Company
or
one of its subsidiaries on the last day of the Performance Period. If an
Eligible Participant terminates employment before such date by reason of
death,
disability or retirement, a payout based on the time of employment during
the
Performance Period shall be distributed. Eligible Participants employed on
the
last day of the Performance Period, but not for the entire Performance Period,
shall receive a payout prorated for that part of the Performance Period for
which they were Eligible Participants. If the Eligible Participant is deceased
at the time of a Performance Award payment for which the Eligible Participant
is
eligible, the payment shall be made to the recipient's designated
representative.
Section
4.
Change of Control
4.1. Effect
on
Awards
Unless
the
Committee shall otherwise expressly provide in the agreement relating to
an
award under the Plan, upon the occurrence of a Change of Control as defined
below, all Performance Awards for a Performance Period not completed at
the time
of the Change of Control shall be payable to Eligible Participants in an
amount
equal to the product of the maximum award opportunity for the Performance
Award
and a fraction, the numerator of which is the number of months that have
elapsed
since the beginning of the Performance Period through the later of (i)
the date
of the Change of Control or (ii) for each Eligible Participant, the date
the
Eligible Participant terminates employment, and the denominator of which
is
twelve; provided, however, that if this Plan shall remain in effect after
a
Change of Control, a Performance Period is completed during that time,
and the
Eligible Participant's employment has not terminated, this provision shall
not
apply.
Page 65
4.2. Change
of
Control Defined
For
purposes of the
Plan, a "Change of Control" shall be deemed to have occurred if:
(a) Any
person
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934 ("Exchange Act")), directly or indirectly, of securities
of
the Company representing 15 percent or more of the combined voting power
of the
Company's then outstanding common stock, unless the Board by resolution negates
the effect of this provision in a particular circumstance, deeming that
resolution to be in the best interests of Company stockholders;
(b) During
any
period of two consecutive Performance Periods, there shall cease to be a
majority of the Board comprised of individuals who at the beginning of such
period constituted the Board;
(c) The
stockholders of the Company approve a merger or consolidation which would
result
in the voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) less than fifty percent of
the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation;
or
(d) Company
stockholders approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially
all
of its assets.
Section
5.
Amendment and Termination
The
Committee may
amend, suspend or terminate the Plan at any time in its sole and absolute
discretion. Any amendment or termination of the Plan, however shall not affect
the right of an Eligible Participant to receive any earned but unpaid
Performance Award. The Committee may amend the Plan without stockholder
approval, unless such approval is necessary to comply with applicable laws,
including provisions of the Exchange Act or the Code. However, termination
shall
not affect any awards previously granted under the Plan.
Section
6.
Section 162(m) Compliance
The
Company intends
that awards made pursuant to the Plan constitute "qualified performance-based
compensation" satisfying the requirements of Section 162(m) of the Code.
Accordingly, the Plan shall be interpreted in a manner consistent with 162(m)
of
the Code. If any provision of the Plan is intended to but does not comply
with,
or is inconsistent with, the requirements of section 162(m) of the Code,
such
provision shall be construed or deemed amended to the extent necessary to
conform to and comply with, Section 162(m) of the Code.
Nothing
in this
Plan precludes the Company from making additional payments or special awards
to
Eligible Participants outside of the Plan that may or may not qualify as
"performance-based" compensation under Section 162(m), provided that such
payment or award does not affect the qualification of any incentive compensation
payable under the Plan as "performance-based" compensation.
Section
7.
Employment Rights
No
provision of the
Plan nor any action taken by the Committee or the Company pursuant to the
Plan
shall give or be construed as giving any Eligible Participant any right to
be
retained in the employ of the Company or affect or limit the right of the
Company to terminate such employment.
Section
8.
Term
This
amendment and
restatement of the Plan applies to each of the four fiscal years of the
Company
in the period commencing January 1, 2007 and ending December 31, 2010,
subject
to the approval of the Plan by the Company's stockholders.
Page 66
PROXY
AND
VOTING INSTRUCTION
ANNUAL
MEETING OF STOCKHOLDERS—JUNE 14, 2006
This
proxy is solicited on behalf of the Board of Directors
At
the Annual
Meeting of Stockholders of Caterpillar Inc. (the Company) on June 14, 2006,
or at any adjournments thereof, the undersigned hereby (i) appoints D.E.
Kuper and J.J. Funk, and each of them, proxies with power of substitution
to
vote the common stock of the undersigned and/or (ii) directs THE NORTHERN
TRUST COMPANY or CIBC MELLON TRUST COMPANY, as Trustee, to appoint D.E. Kuper
and J.J. Funk, and each of them, proxies with power of substitution to vote
all
shares of the Company's stock credited to the accounts of the undersigned
under
any Caterpillar Inc. or subsidiary employee benefit plan at the close of
business on April 17, 2006, as directed hereon on the following matters,
and, in
their discretion, on any other matters that may come before the meeting.
To the
extent that the trustees have not received the directions from the undersigned
by June 13, 2006, the trustees will act in accordance with the employee benefit
plan documents.
You
are
encouraged to specify your choices by marking the appropriate boxes. However,
if
you wish to vote in accordance with the Board of Directors' recommendations,
simply sign and return this card.
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SEE REVERSE SIDE |
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^
TO VOTE BY
MAIL, PLEASE DETACH HERE ^
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PLEASE
VOTE
TODAY!
SEE
REVERSE
SIDE FOR THREE EASY WAYS TO VOTE.
ELECTRONIC
DELIVERY OF PROXY MATERIALS
Sign
up to receive
next year's annual report and proxy materials via the Internet. To sign up
for
this optional service, visit https://www.proxyvotenow.com/cat.
Please note you must type an "s"
after "http".
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ý
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Please
mark
your vote as in this example
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This
Proxy, when
properly executed, will be voted in the manner you have directed. If you
return
a signed proxy with no direction given, it will be voted in accordance with
the
Board of Directors' recommendations.
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Directors
recommend a
vote "FOR"
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1.
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Election
of Directors
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FOR
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WITHHOLD
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o
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o
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Nominees:
01.
David R.
Goode
02.
James W.
Owens
03.
Charles
D. Powell
04.
Joshua I.
Smith
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For,
except
vote withheld from the following nominee(s):
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FOR
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AGAINST
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ABSTAIN
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2.
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Amend
Articles of Incorporation
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o
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o
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o
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3.
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Approve
Long-term Incentive Plan
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o
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o
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o
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4.
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Approve
Short-term Incentive Plan
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o
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o
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o
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5.
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Ratify
Auditors
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o
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o
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o
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Directors
recommend a
vote "AGAINST"
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FOR
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AGAINST
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ABSTAIN
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6.
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Stockholder
Proposal—Declassify Board
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o
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o
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o
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7.
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Stockholder
Proposal—Separate CEO & Chair
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o
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o
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o
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8.
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Stockholder
Proposal—Majority Vote Standard
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o
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o
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o
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SIGNATURE
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DATE
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,
2006
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SIGNATURE
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DATE
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,
2006
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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.
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^
TO VOTE BY
MAIL, PLEASE DETACH HERE ^
|
YOUR
VOTE
IS IMPORTANT.
Please
take a
moment now to vote your shares of Caterpillar Inc.
common
stock for
the upcoming Annual Meeting of Stockholders.
YOU
CAN
VOTE TODAY IN ONE OF THREE WAYS:
1.
Vote by Telephone—Please call toll-free
at 1-888-216-1363 on a touch-tone telephone and follow the simple
recorded instructions. Then, if you wish to vote as recommended by the Board
of
Directors, simply press 1. If you do not wish to vote as the Board recommends,
you need only respond to a few simple prompts. Your vote will be confirmed
and
cast as you directed. (Telephone voting is available for residents of the
U.S.
and Canada only.)
OR
2.
Vote by Internet—Please access
https://www.proxyvotenow.com/cat and follow the simple
instructions on the screen. Please note you must type an "s" after "http".
You may vote by telephone or Internet 24 hours a day, 7 days a
week. Your telephone or Internet vote authorizes the named proxies in the
same manner as if you had executed a proxy card.
OR
3.
Vote by Mail—If you do not have access to a touch-tone
telephone or to the Internet, please complete, sign, date and return the
proxy
card in the envelope provided to: Caterpillar Inc., c/o Innisfree M&A
Incorporated, FDR Station, P.O. Box 5156, New York, NY 10150-5156.