-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L1b2fRyVSi0jImDc9vGlC2jTdMv0qHSh/SGrzqgDN3FGsO8Y1EJstp9/2q1B8Iek Mpy/1En0fkilHEffR1aJ9w== 0000950131-99-001977.txt : 19990402 0000950131-99-001977.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950131-99-001977 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATERPILLAR INC CENTRAL INDEX KEY: 0000018230 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION MACHINERY & EQUIP [3531] IRS NUMBER: 370602744 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00768 FILM NUMBER: 99581889 BUSINESS ADDRESS: STREET 1: 100 NE ADAMS ST CITY: PEORIA STATE: IL ZIP: 61629-7310 BUSINESS PHONE: 3096751000 FORMER COMPANY: FORMER CONFORMED NAME: CATERPILLAR TRACTOR CO DATE OF NAME CHANGE: 19860623 10-K405 1 FORM 10-K =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [CATERPILLAR LOGO] FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File No. 1-768 CATERPILLAR INC. (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation) 1-768 37-0602744 (Commission File Number) (IRS Employer I.D. No.) 100 NE Adams Street, Peoria, Illinois 61629 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (309) 675-1000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock ($1.00 par value) Chicago Stock Exchange New York Stock Exchange Pacific Exchange, Inc. Preferred Stock Purchase Rights Chicago Stock Exchange New York Stock Exchange Pacific Exchange, Inc. 9 3/8% Notes due July 15, 2000 New York Stock Exchange 9 3/8% Notes due July 15, 2001 New York Stock Exchange 9% Debentures due April 15, 2006 New York Stock Exchange 6% Debentures due May 1, 2007 New York Stock Exchange 9 3/8% Debentures due August 15, 2011 New York Stock Exchange 9 3/4% Sinking Fund Debentures due June 1, 2019 New York Stock Exchange 9 3/8% Debentures due March 15, 2021 New York Stock Exchange 8% Debentures due February 15, 2023 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of December 31, 1998, there were 357,198,355 shares of common stock of the Registrant outstanding, and the aggregate market value of the voting stock held by non-affiliates of the Registrant (assuming only for purposes of this computation that directors and officers may be affiliates) was $16,237,606,240. Documents Incorporated by Reference Portions of the documents listed below have been incorporated by reference into the indicated parts of this Form 10-K, as specified in the responses to the item numbers involved. . 1999 Annual Meeting Proxy Statement ("Proxy Statement") - Part III . Annual Report to Security Holders filed as an appendix to the 1999 Annual Meeting Proxy Statement ("Appendix") - Parts I, II, and IV =============================================================================== 1998 TABLE OF CONTENTS
Page Part I Item 1. Business............................................... 1 Item 1a. Executive Officers of the Registrant as of December 31, 1998............................. 3 Item 2. Properties............................................. 5 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 8 Item 6. Selected Financial Data................................ 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 8 Item 7a. Quantitative and Qualitative Disclosures About Market Risk................................... 11 Item 8. Financial Statements and Supplementary Data............ 11 Part III Item 10. Directors and Executive Officers of the Registrant................................... 11 Item 11. Executive Compensation................................. 12 Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 12 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 12
PART I Item 1. Business. Principal Lines of Business - --------------------------- Caterpillar operates in three principal lines of business: 1. Machinery - design, manufacture, and marketing of construction, mining, agricultural, and forestry machinery - track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid steer loaders, and related parts. 2. Engines - design, manufacture, and marketing of engines for Caterpillar Machinery, on-highway trucks, and locomotives; marine, petroleum, construction, industrial, and other applications; electric power generation systems; and related parts. Reciprocating engines meet power needs ranging from 5 to over 21,000 horsepower (4 to over 15 660 kilowatts). Turbines range from 1,340 to 18,000 horsepower (1000 to 13 500 kilowatts). 3. Financial Products - financing to customers and dealers for the purchase and lease of Caterpillar and noncompetitive related equipment, as well as some financing for Caterpillar sales to dealers. Also provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. This line of business consists primarily of Caterpillar Financial Services Corporation and its subsidiaries and Caterpillar Insurance Services Corporation. Due to financial information required by Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, we have also divided our business into eight operating segments for financial reporting purposes. Information about our operating segments, including geographic information, is incorporated by reference from Note 20 of the Notes to Consolidated Financial Statements on pages A-16 through A-19 of the Appendix. Nature of Operations - -------------------- We conduct operations in our Machinery and Engines' lines of business under highly competitive conditions, including intense price competition. In 1998, pricing strategies pursued by our competitors had a negative impact on price realization for our products, as price increases taken over the year were offset by, among other things, higher price discounting. Foreign currency exchange rate movements also affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors. In 1998, the effect of the stronger dollar on sales denominated in currencies other than U.S. dollars also had a negative impact on price realization for our products. Page 1 We place great emphasis upon the high quality and performance of our products and our dealers' service support. Although no one competitor is believed to produce all of the same types of machines and engines, there are numerous companies, large and small, which compete with us in the sale of each of our products. Machines are distributed principally through a worldwide organization of dealers, 64 located in the United States and 131 located outside the United States. Worldwide, these dealers have more than 1,400 places of business and serve 166 countries. Reciprocating engines are sold principally through the worldwide dealer organization and to other manufacturers for use in products manufactured by them. Some of the reciprocating engines manufactured by Perkins are also sold through their worldwide distributor network. Our dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are our dealers' principal business. Turbines and large marine reciprocating engines are sold through sales forces employed by Solar and MaK, respectively. Occasionally, these employees are assisted by independent sales representatives. Our Financial Products' line of business also conducts business under highly competitive conditions. Financing for users of Caterpillar products is available through a variety of competitive sources, principally commercial banks and finance and leasing companies. We emphasize prompt and responsive service to meet customer requirements and offer various financing plans designed to increase the opportunity for sales of our products and generate financing income for our company. Financial Products' activity is primarily conducted in the United States, with additional offices in Asia, Australia, Canada, Europe, and Latin America. During the first quarter of 1998, we acquired the net assets of Perkins Ltd. and the stock of several related subsidiaries for $1.328 billion. We paid for this acquisition using a combination of existing cash and new debt. Perkins is a leading manufacturer of small- to medium-sized diesel engines. Information about our operations in 1998 and outlook for 1999, including risks associated with foreign operations, are incorporated by reference from "Management's Discussion and Analysis" on pages A-21 through A-31 of the Appendix. Additional information about our outlook for 1999 and associated risks and uncertainties is incorporated by reference from reports filed on Form 8-K on January 20, 1999 and March 12, 1999. Patents and Trademarks - ---------------------- Our products are sold primarily under the marks "Caterpillar," "Cat," "Solar," "Barber-Greene," "MaK" and "Perkins." We own a number of patents and trademarks relating to the products we manufacture, which have been obtained over a period of years. These patents and trademarks have been of value in the growth of our business and may continue to be of value in the future. We do not regard any of our business as being dependent upon any single patent or group of patents. Page 2 Research and Development - ------------------------ We have always placed strong emphasis on product-oriented research and engineering relating to the development of new or improved machines, engines and major components. In 1998, 1997, and 1996, we spent $838 million, $700 million, and $570 million, respectively, on our research and engineering programs. Of these amounts, $643 million in 1998, $528 million in 1997, and $410 million in 1996 were attributable to new prime products, major component development and major improvements to existing products. The remainders were attributable to engineering costs incurred during the early production phase as well as ongoing efforts to improve existing products. We expect to continue the development of new products and improvements to existing products in the future, with a focus in the areas of power generation equipment, smaller machines, and agricultural products. Employment - ---------- At December 31, 1998, we employed 65,824 persons of whom 25,563 were located outside the United States. Sales - ----- Sales outside the United States were 49% of consolidated sales for 1998 and 51% for 1997 and 1996. Environmental Matters - --------------------- The company is regulated by federal, state, and international environmental laws governing our use of substances and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings, or competitive position. We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In making that estimate, we do not consider amounts expected to be recovered from insurance companies and others. The amount set aside for environmental clean-up is not material and is included in "Accounts payable and accrued expenses" in Statement 3 of the Appendix. If a range of liability estimates is available on a particular site, we accrue the lower end of that range. We cannot estimate costs on sites in the very early stages of clean-up. Currently, we have five of these sites and there is no more than a remote chance that a material amount for clean-up will be required. Item 1a. Executive Officers of the Registrant as of December 31, 1998 (except as noted)
- ------------------------------------------------------------------------------------------------------ Present Caterpillar Inc. Principal positions held during the Name and Age position and date of past five years other than initial election Caterpillar Inc. position currently held - ------------------------------------------------------------------------------------------------------ Glen A. Barton (59) Chairman and Chief . Vice Chairman (11/98 - 2/1/99) Executive Officer . Group President (1990 - 1998) (effective 2/1/99) - -------------------------------------------------------------------------------------------------------- Donald V. Fites (64) Retired (effective 2/1/99) . Chairman and Chief Executive Officer (1990 - 2/1/99) - -------------------------------------------------------------------------------------------------------- Gerald S. Flaherty (60) Group President (1990) - --------------------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------------------- Present Caterpillar Inc. Principal positions held during the Name and Age position and date of past five years other than initial election Caterpillar Inc. position currently held - ----------------------------------------------------------------------------------------------------------- James W. Owens (52) Group President (1995) . Vice President (1990-1995) . Chief Financial Officer (1993-1995) - -------------------------------------------------------------------------------------------------------- Gerald L. Shaheen (54) Group President (1998) . Vice President (1995-1998) . Managing Director, Caterpillar Overseas S.A.(1993-1995) - -------------------------------------------------------------------------------------------------------- Richard L. Thompson (59) Group President (1995) . Vice President (1989-1995) - -------------------------------------------------------------------------------------------------------- R. Rennie Atterbury III (61) Vice President, General Counsel and Secretary (1991) - ----------------------------------------------------------------------------------------------------------- James W. Baldwin (61) Vice President (1991) - ----------------------------------------------------------------------------------------------------------- Sidney C. Banwart (53) Vice President (1998) . Product Manager, Motor Graders, Decatur (1993-1995) . General Manager, Lafayette (1995-1997) - ----------------------------------------------------------------------------------------------------------- Vito H. Baumgartner (58) Vice President (1990) . Chairman, Caterpillar Overseas S.A. (1990-present) - ----------------------------------------------------------------------------------------------------------- Michael J. Baunton (47) Vice President (1998) . President, Walker Manufacturing (1993-1995) . Group Chief Executive, Perkins Group Ltd. (1995-1996) . Divisional Managing Director, Varity Perkins (1996-1998) - ----------------------------------------------------------------------------------------------------------- James S. Beard (57) Vice President (1990) . President, Caterpillar Financial Services Corporation (1987-present) - ----------------------------------------------------------------------------------------------------------- Richard A. Benson (55) Vice President (1989) . President, Caterpillar Industrial Inc. (1989-present) - ----------------------------------------------------------------------------------------------------------- Ronald P. Bonati (59) Vice President (1990) - ----------------------------------------------------------------------------------------------------------- James E. Despain (61) Vice President (1990) - ----------------------------------------------------------------------------------------------------------- Roger E. Fischbach (57) Vice President (1989) (will retire effective 4/1/99) - ----------------------------------------------------------------------------------------------------------- Michael A. Flexsenhar (59) Vice President (1995) . General Manager, Large Engines, Lafayette Plant (1991-1995) - ----------------------------------------------------------------------------------------------------------- Donald M. Ings (50) Vice President (1993) . President, Solar Turbines Incorporated (1993-1998) - ----------------------------------------------------------------------------------------------------------- Duane H. Livingston (57) Vice President (1995) . Director of Corporate Auditing, Corporate Services Division (1991-1995) - ----------------------------------------------------------------------------------------------------------- Robert R. Macier (50) Vice President (1998) . Vice President, Engineering, Solar Turbines (1990-1994) . Business Unit Manager, Joliet (1994-1998) - ----------------------------------------------------------------------------------------------------------- David A. McKie (54) Vice President (1998) . General Manager, Small Engines, Mossville Plant (1991-1995) . Managing Director, Caterpillar Belgium S.A. (1995-1998) - ----------------------------------------------------------------------------------------------------------- F. Lynn McPheeters (56) Vice President and Chief . Treasurer (1996-1998) Financial Officer (1998) . Executive Vice President, Caterpillar Financial Services Corporation (1990-1996) - ----------------------------------------------------------------------------------------------------------- Daniel M. Murphy (51) Vice President (1996) . Product Manager, Excavators, Aurora Plant (1990-1996) . General Manager, Mossville Engine Center (1996) - ----------------------------------------------------------------------------------------------------------- Douglas R. Oberhelman (45) Vice President (1995) . Managing Director and Vice General Manager, Strategic Planning, Shin Caterpillar Mitsubishi Ltd. (1991-1995) . Chief Financial Officer (1995-1998) - ----------------------------------------------------------------------------------------------------------- Gerald Palmer (53) Vice President (1992) - ----------------------------------------------------------------------------------------------------------- Robert C. Petterson (60) Vice President (1991) . Managing Director, Caterpillar Brasil S.A. (1992-1995) - ----------------------------------------------------------------------------------------------------------- John E. Pfeffer (56) Vice President (1995) . Business Unit Manager, York Plant (1993-1995) . Chairman, Shin Caterpillar Mitsubishi Ltd. (1995-present) - ----------------------------------------------------------------------------------------------------------- Siegfried R. Ramseyer (61) Vice President (1992) - ----------------------------------------------------------------------------------------------------------- Alan J. Rassi (58) Vice President (1992) - -----------------------------------------------------------------------------------------------------------
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- --------------------------------------------------------------------------------------------------- Present Caterpillar Inc. Principal positions held during the Name and Age position and date of past five years other than initial election Caterpillar Inc. position currently held - --------------------------------------------------------------------------------------------------- Gary A. Stroup (49) Vice President (1992) . General Manager, Hauling Units and Motor Graders Business Unit (1992-1995) . President, Solar Turbines Incorporated (1998-present) - --------------------------------------------------------------------------------------------------- Sherril K. West (51) Vice President (1995) . Marketing Support Services Manager, Corporate Services Division (1991-1995) - --------------------------------------------------------------------------------------------------- Donald G. Western (50) Vice President (1995) . Managing Director, Caterpillar Belgium S.A. (1990-1995) - --------------------------------------------------------------------------------------------------- Steven H. Wunning (47) Vice President (1998) . Vice President, Caterpillar Logistics Services, Morton Distribution Center (1990-1994) . President, Caterpillar Logistics, Logistics & Product Services Division (1994-1998) - --------------------------------------------------------------------------------------------------- Robert R. Gallagher (58) Controller (1990) - --------------------------------------------------------------------------------------------------- Kenneth J. Zika (51) Treasurer (1998) . Business Resource Manager, Track-Type Tractors Division, East Peoria Plant (1994-1997) . Cost Management & Business Services Manager, Corporate Services Division (1997-1998) - ---------------------------------------------------------------------------------------------------
Item 2. Properties. General Information - ------------------- Caterpillar's operations are highly integrated. Although the majority of our plants are involved primarily in the production of either machines or engines, several plants are involved in the manufacture of both. In addition, several plants are involved in the manufacture of components which are used in the assembly of both machines and engines. Caterpillar's parts distribution centers are involved in the storage and distribution of parts for machines and engines. Also, the research and development activities carried on at the Technical Center involve both machines and engines. Properties we own are believed to be generally well maintained and adequate for present use. Through planned capital expenditures, we expect these properties to remain adequate for future needs. Properties we lease are covered by leases expiring over terms of generally 1 to 10 years. We anticipate no difficulty in retaining occupancy of any leased facilities, either by renewing leases prior to expiration or by replacing them with equivalent leased facilities. Consolidations, Closures, and Sales - ----------------------------------- Over the last five years, we have consolidated operations and/or closed facilities in the ordinary course of business. In March 1996, we announced that the Precision Barstock Products operation located in York, Pennsylvania would be closed. We are in the final stages of closing the unit. Additional information regarding plant closing and consolidation costs is incorporated by reference from Note 19 of the Notes to Consolidated Financial Statements on page A-16 of the Appendix. Page 5 Headquarters - ------------ Our corporate headquarters are in Peoria, Illinois. Additional marketing headquarters are located both inside and outside the United States. The Financial Products Division is headquartered in leased offices located in Nashville, Tennessee. Distribution - ------------ Distribution of our products is conducted from parts distribution centers inside and outside the United States. Caterpillar Logistics Services, Inc. distributes other companies' products utilizing certain of our distribution facilities as well as other non-Caterpillar facilities located both inside and outside the United States. We also own or lease other storage facilities which support distribution activities. Technical Center, Training Centers, Demonstration Areas, and Proving Grounds - ---------------------------------------------------------------------------- We own a Technical Center located in Mossville, Illinois and various other training centers, demonstration areas, and proving grounds located both inside and outside the United States. Changes in Fixed Assets - ----------------------- During the five years ended December 31, 1998, changes in our investment in property, plant and equipment were as follows (stated in millions of dollars):
- ---------------------------------------------------------------------------------------------------------------- Expenditures Acquisitions/1/ Disposals and Net Increase Year ------------------------------------------------ Provisions for Other (Decrease) U.S. Outside U.S. U.S. Outside U.S. Depreciation Adjustments During Period - ---------------------------------------------------------------------------------------------------------------- 1994 $508 $186 $ 0 $ 0 $(680) $ (65) $ (51) - ---------------------------------------------------------------------------------------------------------------- 1995 $506 $173 $ 0 $ 0 $(679) $(132) $(132) - ---------------------------------------------------------------------------------------------------------------- 1996 $513 $258 $ 0 $136 $(690) $ (94) $ 123 - ---------------------------------------------------------------------------------------------------------------- 1997 $726 $380 $ 0 $ 2 $(710) $(107) $ 291 - ---------------------------------------------------------------------------------------------------------------- 1998 $880 $389 $21 $347 $(790) $ (39) $ 808 - ---------------------------------------------------------------------------------------------------------------- /1/Prior to 1996, Acquisition amounts, if any, are included with Expenditures. - ----------------------------------------------------------------------------------------------------------------
At December 31, 1998, the net book value of properties located outside the United States represented 32.7% of the net properties on the consolidated financial position. Additional information about our investment in plant, property and equipment is incorporated by reference from Note 1E on page A-7 and Note 9 on page A-12 of the Notes to Consolidated Financial Statements of the Appendix. Manufacturing, Remanufacturing, and Overhaul - -------------------------------------------- Manufacturing, remanufacturing, and overhaul of our products are conducted at the following locations. These facilities are believed to be suitable for their intended purposes with adequate capacities for current and projected needs for existing products. Page 6 - -------------------------------------------------------------------------------- Manufacturing - Inside the U.S. Michigan California . Menominee . Gardena Minnesota . San Diego . Mankato Florida . Minneapolis . Jacksonville . New Ulm Georgia Mississippi . Jefferson . Oxford . LaGrange Missouri . Thomasville . Boonville Illinois . West Plains . Aurora Nebraska . Champaign/1/ . Omaha . Decatur North Carolina . DeKalb . Clayton . Dixon . Franklin . East Peoria . Leland . Joliet . Morganton . Mapleton . Sanford . Mossville Ohio . Peoria . Marion . Pontiac Oregon . Sterling . Dallas Indiana South Carolina . Lafayette . Greenville Kansas . Sumter . Wamego Tennessee Kentucky . Dyersburg . Danville . Rockwood Texas . Houston - -------------------------------------------------------------------------------- Manufacturing - Outside the U.S. Australia India . Burnie/1/ . Bangalore/1/ . Melbourne . Mumbai/1/ . Perth Indonesia Belgium . Jakarta/2/ . Gosselies Italy Brazil . Bazzano . Piracicaba . Jesi Canada . Milan/1/ . Montreal Japan England . Akashi/1/ . Leicester . Sagamihara/1/ . Peterborough Mexico . Peterlee . Monterrey . Shrewsbury . Tijuana . Skinningrove The Netherlands . Slough/2/ . Hertogenbosch . Stafford Northern Ireland . Stockton . Belfast/1/ . Wolverhampton . Larne/1/ France People's Republic . Arras of China . Grenoble . Erliban/1/ . Rantigny . Shunde/1/ Germany . Tianjin/2/ . Kiel . Xuzhou/2/ . Wackersdorf Poland . Zweibrucken . Janow Lubelski/2/ Hungary Russia . Godollo/2/ . St. Petersburg South Africa . Johannesburg Sweden . Soderhamn /1/ Facility of affiliated company (50% or less owned) /2/ Facility of partially owned subsidiary (more than 50%, less than 100%) - -------------------------------------------------------------------------------- Remanufacturing and Overhaul - Inside the U.S. Mississippi . Corinth . Prentiss County Texas . De Soto . Mabank - -------------------------------------------------------------------------------- Remanufacturing and Overhaul - Outside the U.S. Australia Ireland . Melbourne . Dublin Belgium Malaysia . Gosselies . Kuala Lumpur Canada Mexico . Edmonton . Nuevo Laredo Indonesia . Tijuana . Bandung . Veracruz Nigeria . Port Harcourt - -------------------------------------------------------------------------------- Page 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information required by Item 5 is incorporated by reference from "Price Ranges" and "Number of Stockholders" on page A-32 and from "Dividends paid per share of common stock" on page A-27 of the Appendix. We have fifteen employee stock purchase plans administered outside the United States for our foreign employees. These plans are not registered with the Securities and Exchange Commission and are exempt from such registration pursuant to Regulation S under the Securities Act. As of December 31, 1998, those plans had approximately 4,697 participants in the aggregate. During the fourth quarter of 1998, a total of 14,593 shares of Caterpillar common stock or foreign denominated equivalents were distributed under the plans. Item 6. Selected Financial Data. Information required by Item 6 is incorporated by reference from the "Five-year Financial Summary" on page A-20 of the Appendix. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Information required by Item 7 is incorporated by reference from "Management's Discussion and Analysis" on pages A-21 through A-31 of the Appendix. The following information updates Appendix disclosure on our approach to the Year 2000 challenge. YEAR 2000 CHALLENGE - ------------------- Our Approach Caterpillar has a comprehensive plan to address the Year 2000 challenge. A Year 2000 Steering Committee, chaired by a member of our Executive Office, is charged with monitoring Year 2000 efforts of our business units and reporting status to our Executive Office and Board of Directors. Although this team has monitoring responsibility, vice presidents in charge of each business unit are responsible for identifying, evaluating, and implementing changes necessary to achieve readiness within their units. Page 8 Remediation History and Status Caterpillar began addressing the Year 2000 challenge as part of plant modernization and corporate restructuring initiatives in the late 1980s and early 1990s. New systems incorporated Year 2000 compliance by design. In 1994, Caterpillar's corporate information systems division initiated projects to address the Year 2000 issue. Today, all Caterpillar business units are engaged in a comprehensive effort to meet the Year 2000 challenge as it impacts their internal and external customers. We have established five Year 2000 phases under which units measure their progress: . Inventory -- identifying key business areas and related products and services (both internal and external) potentially impacted by the Year 2000 issue; . Analysis -- determining how a product or service is impacted and preparing a plan to address the issue; . Remediation -- making the necessary changes to bring the product or service into compliance; . Validation -- testing the product or service to ensure it is Year 2000 compliant; and . Implementation -- installing necessary changes in production. Internal Systems As of March 1, 1999, substantially all Caterpillar business units have completed an inventory of internal systems having potential Year 2000 issues. By internal systems, we mean both information technology and non-information technology systems. Analysis to address Year 2000 issues has been completed on all critical systems within the control of our units. Of those critical systems, about 94% have been remediated and 91% validated. For about 86% of all critical systems within our control, Year 2000 fixes have been implemented. About 81% of our business units report that mission-critical systems within their control will be fixed, tested, and in production by June 1, 1999. All units report that mission-critical and significant priority systems will attain that status by October 1, 1999. Caterpillar Products For some time, we have been assessing the potential impact of the Year 2000 challenge on the operation of machines and engines sold by Caterpillar. Our Electrical and Electronics business unit has substantially completed its review, evaluation, and testing of electronic components and service tools used on Caterpillar machines and engines for Year 2000 related problems. This review included all electronic control modules, display and monitoring systems, generator set control systems, and electronic service tools under the design control of that business unit. As a result of this assessment and others completed by Caterpillar, it is our position at this time that the Year 2000 challenge should not have any significant impact on the performance of previous, present, or future Caterpillar machines and engines. We note that our assessment of the Year 2000 impact across our product line is an ongoing process and subject to further review. We are committed to delivering the highest quality products and services to our customers currently and beyond the Year 2000. Page 9 Suppliers and Caterpillar Dealers We are actively assessing the Year 2000 readiness of our significant third-party suppliers. Those efforts include survey mailings, presentations, review of supplier Year 2000 statements, and follow-up activities with suppliers that have not responded to requests for information. For suppliers that have not responded, we are following up to achieve ultimately an acceptable comfort level with our supply chain. For suppliers posing a significant risk, contingency plans are being developed. Analysis to address Year 2000 issues has been completed on about 95% of critical dependencies (including suppliers, utilities, and transportation services) outside the control of our business units. For 71% of these critical dependencies, we have implemented Year 2000-ready solutions or confirmed that the business partner or dependency was already Year 2000 compliant. Dependencies reported as outside the control of our units may include those supplied by other units within Caterpillar as well as those supplied by outside companies. We are also assessing the readiness of our dealers. Efforts in the U.S. and outside the U.S. include mailings requesting information on remediation plans and status, periodic regional meetings with dealers and their information systems managers, and on-site assessments by Caterpillar managers responsible for specific dealer regions. Based on these communications, we expect that by the end of 1999 our dealers will be in a position to service customers without any significant business disruption related to the Year 2000 issue. We will continually monitor dealer progress against this time frame. Costs The following cost estimates, which are as of March 1, 1999, would not have a material impact on Caterpillar's results, financial position, or cash flow. As of March 1, 1999, we have incurred about two-thirds of these estimated total costs. As necessary, we will refine these estimates. We anticipate incurring $130-150 million in Year 2000-related costs. Of these costs, capital costs for the replacement of systems, hardware, or equipment are currently estimated to be $20-30 million. These budgeted costs may not include all of the cost of implementing contingency plans, which are in the process of being developed. These estimates also do not include litigation or warranty costs related to the Year 2000 issue, which at this time cannot be reasonably estimated. Risks Our estimates on cost, remediation time frame, and potential financial impact are based on information we have currently. There can be no assurance these estimates will prove accurate and actual results could differ materially from those currently anticipated. Page 10 Factors that could cause actual results to differ include unanticipated supplier or dealer failures; utilities, transportation, or telecommunications breakdowns; U.S. or non-U.S. government failures; and unanticipated failures on our part to address Year 2000-related issues. The most reasonably likely worst case scenario in light of these risks would involve a potential loss in sales resulting from production and shipping delays caused by Year 2000-related disruptions. Under this scenario, manual procedures would be required for order processing, invoicing, supplier management processing, warranty claim processing, and for certain factory machine tool operations. The degree of sales loss impact would depend on the severity of the disruption, the time required to correct it, whether the sales loss was temporary or permanent, and the degree to which our primary competitors were also impacted by the disruption. To minimize the potential impact of the most reasonably likely worst case scenario, each Caterpillar business unit is developing contingency plans. Finalized contingency plans may involve manual procedures for machine operation, manual procedures for collecting and reporting data, inventory adjustments for major components, and considering alternative sources of supply. Contingency plans, where deemed necessary, will be finalized by the end of 1999. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Information required by Item 7a is incorporated by reference from the following Notes to Consolidated Financial Statements - Notes 1G and 2 on page A-8 and A-9 of the Appendix and Notes 16 and 17 on page A-15 through A-16 of the Appendix and from "Derivative Financial Instruments" on pages A-27 through A-29 of the Appendix. Item 8. Financial Statements and Supplementary Data. Information required by Item 8 is incorporated by reference from the Report of Independent Accountants on page A-3, and the Financial Statements and Notes to Consolidated Financial Statements on pages A-4 through A-19 of the Appendix. PART III Item 10. Directors and Executive Officers of the Registrant. Information required by Item 10 relating to identification of directors is incorporated by reference from "Directors Up For Election This Year for Terms Expiring in 2002," "Directors Remaining in Office Until 2001," and "Directors Remaining in Office Until 2000" on pages 3 and 4 of the Proxy Statement. Identification of executive officers appears in Item 1a of this Form 10-K. There are no family relationships between the officers and directors of the Company. All officers serve at the pleasure of the Board of Directors and are regularly elected at a meeting of the Board of Directors in April of each year. Page 11 Item 11. Executive Compensation. Information required by Item 11 is incorporated by reference from "Director Compensation" on page 6, "Performance Graph" on page 8, "Report of the Compensation Committee on Executive Compensation" on pages 9 through 15, and "Executive Compensation Tables" on pages 16 through 18 of the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information required by Item 12 is incorporated by reference from "Caterpillar Stock Beneficially Owned by Officers and Directors (as of December 31, 1998)" on page 7 of the Proxy Statement and from "Persons Owning More than Five Percent of Caterpillar Stock (as of December 31, 1998)" on page 8 of the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements (Incorporated by reference from the Appendix): . Report of Independent Accountants (p. A-3) . Statement 1 - Consolidated Results of Operations (p. A-4) . Statement 2 - Changes in Consolidated Stockholders' Equity (p. A-4) . Statement 3 - Financial Position (p. A-5) . Statement 4 - Statement of Cash Flow (p. A-6) . Notes to Consolidated Financial Statements (pp. A-7 through A-19) 2. Financial Statement Schedule: . All schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto incorporated by reference. (b) There were four reports, one dated October 15, two dated October 16, and one dated December 16 filed on Form 8-K pursuant to Item 5 during the last quarter of 1998 and additional reports filed on Form 8-K on January 14, January 20, February 4, and March 12, 1999. No financial statements were filed as part of those reports. (c) Exhibits: 3.1 Restated Certificate of Incorporation (incorporated by reference from Exhibit 3(i) to the Form 10-Q filed for the first quarter of 1998). 3.2 Certificate of Designation, Preferences and Rights of the Terms of the Series A Junior Participating Preferred Stock (incorporated by reference from Exhibit 2 to Form 8-A filed December 11, 1996). Page 12 3.3 Bylaws, amended and restated. 4 Rights Agreement dated as of December 11, 1996, between Caterpillar Inc. and First Chicago Trust Company of New York (incorporated by reference from Exhibit 1 to Form 8-A filed December 11, 1996). 10.1 Caterpillar Inc. 1996 Stock Option and Long-Term Incentive Plan, amended and restated as of June 9, 1998 (incorporated by reference from Exhibit 10 to the Form 10-Q filed for the second quarter of 1998).** 10.2 Caterpillar Inc. 1987 Stock Option Plan, as amended and restated and Long Term Incentive Supplement (incorporated by reference from Exhibit 4.2 to Form S-3 (Reg. No. 333-43133) filed December 23, 1997).** 10.3 Supplemental Pension Benefit Plan, as amended and restated (incorporated by reference from Exhibit 10(c) to the 1993 Form 10-K).** 10.4 Supplemental Employees' Investment Plan, as amended and restated (incorporated by reference from Exhibit 10(d) to the 1996 Form 10-K).** 10.5 Caterpillar Inc. 1998 Corporate Incentive Compensation Plan Management and Salaried Employees, as amended and restated.** 10.6 Directors' Deferred Compensation Plan, as amended and restated (incorporated by reference from Exhibit 10(f) to the 1996 Form 10-K).** 10.7 Directors' Charitable Award Program (incorporated by reference from Exhibit 10(h) to the 1993 Form 10-K).** 10.8 Deferred Employees' Investment Plan, as amended and restated.** 11 Statement re: Computation of per Share Earnings (incorporated by reference from Note 15 of the Notes to Consolidated Financial Statements appearing on page A-15 of the Appendix). 12 Statement Setting Forth Computation of Ratios of Profit to Fixed Charges. 13 Annual Report to Security Holders attached as an Appendix to the Company's 1999 Annual Meeting Proxy Statement. 21 Subsidiaries and Affiliates of the Registrant. 23 Consent of Independent Accountants. 27 Financial Data Schedule. 99.1 Form 11-K for Caterpillar Foreign Service Employees' Stock Purchase Plan. ** Compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K. Page 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CATERPILLAR INC. (Registrant) By: /s/ R. R. ATTERBURY III -------------------------- Date: March 26, 1999 R. R. Atterbury III, Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Chairman of the Board, Director and March 26, 1999 /s/GLEN A. BARTON Chief Executive Officer -------------------------------- (Glen A. Barton) March 26, 1999 /s/GERALD S. FLAHERTY Group President -------------------------------- (Gerald S. Flaherty) March 26, 1999 /s/JAMES W. OWENS Group President -------------------------------- (James W. Owens) March 26, 1999 /s/GERALD L. SHAHEEN Group President -------------------------------- (Gerald L. Shaheen) March 26, 1999 /s/RICHARD L. THOMPSON Group President -------------------------------- (Richard L. Thompson) Vice President and March 26, 1999 /s/F. LYNN MCPHEETERS Chief Financial Officer -------------------------------- (F. Lynn McPheeters) Controller and March 26, 1999 /s/ROBERT R. GALLAGHER Chief Accounting Officer -------------------------------- (Robert R. Gallagher)
Page 14 March 26, 1999 /s/LILYAN H. AFFINITO Director -------------------------------- (Lilyan H. Affinito) March 26, 1999 /s/W. FRANK BLOUNT Director -------------------------------- (W. Frank Blount) March 26, 1999 /s/JOHN R. BRAZIL Director -------------------------------- (John R. Brazil) March 26, 1999 /s/JOHN T. DILLON Director -------------------------------- (John T. Dillon) March 26, 1999 /s/DONALD V. FITES Director -------------------------------- (Donald V. Fites) March 26, 1999 /s/JUAN GALLARDO Director -------------------------------- (Juan Gallardo) March 26, 1999 /s/DAVID R. GOODE Director -------------------------------- (David R. Goode) March 26, 1999 /s/JAMES P. GORTER Director -------------------------------- (James P. Gorter) March 26, 1999 /s/PETER A. MAGOWAN Director -------------------------------- (Peter A. Magowan) March 26, 1999 /s/GORDON R. PARKER Director -------------------------------- (Gordon R. Parker) March 26, 1999 /s/GEORGE A. SCHAEFER Director -------------------------------- (George A. Schaefer) March 26, 1999 /s/JOSHUA I. SMITH Director -------------------------------- (Joshua I. Smith) March 26, 1999 /s/CLAYTON K. YEUTTER Director -------------------------------- (Clayton K. Yeutter)
Page 15 EX-3.3 2 CATERPILLAR INC., BYLAWS EXHIBIT 3.3 CATERPILLAR INC. BYLAWS (as amended and restated February 10, 1999) Article I Offices Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. Article II Stockholders Section 1. Stockholder Meetings. (a) Place of Meetings. Meetings of stockholders shall be held at such places, within or without the State of Delaware, as may from time to time be designated by the board of directors. (b) Annual Meeting. (i) The annual meeting of stockholders shall be held on the second Wednesday in April in each year at a time designated by the board of directors, or at such a time and date as may be designated by the board. Exhibit 3.3 Page 1 of 9 (ii) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 45 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 60 days' notice of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the fifteenth (15th) day following the date on which such notice of the date of the annual meeting was mailed. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, (b) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (c) the class and number of shares of the corporation which are beneficially owned by the stockholder and (d) any material interest of the stockholder in such business. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 1(b)(ii). The presiding officer of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 1, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. (c) Special Meetings. Special meetings of the stockholders of this corporation for any purpose or purposes may be called at any time by the chairman of the board or the vice chairman, or by the board of directors pursuant to a resolution approved by a majority of the entire board of directors, but such special meetings may not be called by any other person or persons. (d) Notice of Meetings. Notice of every meeting of the stockholders shall be given in the manner prescribed by law. (e) Quorum. Except as otherwise required by law, the certificate of incorporation and these bylaws, the holders of not less than one-third of the shares entitled to vote at any meeting of the stockholders, present in person or by proxy, shall constitute a quorum and the act of the majority of such quorum shall be deemed the act of the stockholders. If a quorum shall fail to attend any meeting, the chairman of the meeting may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then, except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum and all matters shall be determined by a majority of votes cast at such meeting. Exhibit 3.3 Page 2 of 9 Section 2. Determination of Stockholders Entitled to Vote. To determine the stockholders entitled to notice of any meeting or to vote, the board of directors may fix in advance a record date as provided in Article VI, Section 1 hereof, or if no record date is fixed by the board a record date shall be determined as provided by law. Section 3. Voting. (a) Subject to the provisions of applicable law, and except as otherwise provided in the certificate of incorporation, each stockholder present in person or by proxy shall be entitled to one vote for each full share of stock registered in the name of such stockholder at the time fixed by the board of directors or by law as the record date of the determination of stockholders entitled to vote at a meeting. (b) Every stockholder entitled to vote may do so in person or by one or more agents authorized by proxy. Such authorization may be in writing or by transmission of an electronic communication, as permitted by law and in accordance with procedures established for the meeting. (c) Voting may be by voice or by ballot as the chairman of the meeting shall determine. (d) In advance of any meeting of stockholders the board of directors may appoint one or more persons (who shall not be candidates for office) as inspectors of election to act at the meeting. If inspectors are not so appointed, or if an appointed inspector fails to appear or fails or refuses to act at a meeting, the chairman of any meeting of stockholders may, and on the request of any stockholder or his proxy shall, appoint inspectors of election at the meeting. (e) Any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Article III Board of Directors Section 1. Election of Directors. (a) Number. The authorized number of directors of the corporation shall be fixed from time to time by the board of directors but shall not be less than three (3). The exact number of directors shall be determined from time to time either by a resolution or bylaw duly adopted by the board of directors. Exhibit 3.3 Page 3 of 9 (b) Classes of Directors. The board of directors shall be and is divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1987; each initial director in Class II shall hold office until the annual meeting of stockholders in 1988; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1989. Notwithstanding the foregoing provisions of this subsection (b), each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. (c) Newly Created Directorships and Vacancies. In the event of any increase or decrease in the authorized number of directors, the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the board of directors among the three classes of directors so as to maintain such classes as nearly equal in number as possible. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. Newly created directorships resulting from any increase in the number of directors and any vacancies on the board of directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office (and not by stockholders), even though less than a quorum of the board of directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. (d) Nomination of Directors. Candidates for director shall be nominated either (i) by the board of directors or a committee appointed by the board of directors or (ii) by nomination at any such stockholders' meeting by or on behalf of any stockholder entitled to vote at such meeting provided that written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation not later than (1) with respect to an election to be held at an annual meeting of stockholders, ninety (90) days in advance of such meeting, and (2) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the tenth (10th) day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation 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; (c) 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; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement Exhibit 3.3 Page 4 of 9 filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the board of directors; and (e) the consent of each nominee to serve as a director of the corporation if so elected. The presiding officer of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. (e) Removal. Any director may be removed from office without cause but only by the affirmative vote of the holders of not less than seventy-five percent (75%) of the outstanding stock of the corporation entitled to vote generally in the election of directors, voting together as a single class. (f) Preferred Stock Provisions. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of stock issued by this corporation having a preference over the common stock as to dividends or upon liquidation, shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies, nominations, terms of removal and other features of such directorships shall be governed by the terms of Article FOURTH of the certificate of incorporation and the resolution or resolutions establishing such class or series adopted pursuant thereto and such directors so elected shall not be divided into classes pursuant to Article SIXTH of the certificate of incorporation unless expressly provided by such terms. Section 2. Meetings of the Board of Directors. (a) Regular Meetings. Regular meetings of the board of directors shall be held without call at the following times: (i) 8:30 a.m. on the second Wednesday in February, April, June, August, October and December; (ii) one-half hour prior to any special meeting of the stockholders, and immediately following the adjournment of any annual or special meeting of the stockholders. Notice of all such regular meetings is hereby dispensed with. (b) Special Meetings. Special meetings of the board of directors may be called by the chairman of the board, any two (2) directors or by any officer authorized by the board. Notice of the time and place of special meetings shall be given by the secretary or an assistant secretary, or by any other officer authorized by the board. Such notice shall be given to each director personally or by mail, messenger, telephone or telegraph at his business or residence address. Notice by mail shall be deposited in the United States mail, postage prepaid, not later than the third (3rd) day prior to the date fixed for the meeting. Notice by telephone or telegraph shall be sent, and notice given personally or by messenger shall be delivered, at least twenty-four (24) hours prior to the time set for the meeting. Notice of a special meeting need not contain a statement of the purpose of the meeting. Exhibit 3.3 Page 5 of 9 (c) Adjourned Meetings. A majority of directors present at any regular or special meeting of the board of directors, whether or not constituting a quorum, may adjourn from time to time until the time fixed for the next regular meeting. Notice of the time and place of holding an adjourned meeting shall not be required if the time and place are fixed at the meeting adjourned. (d) Place of Meetings. Unless a resolution of the board of directors, or the written consent of all directors given either before or after the meeting and filed with the secretary, designates a different place within or without the State of Delaware, meetings of the board of directors, both regular and special, shall be held at the corporation's offices at 100 N.E. Adams Street, Peoria, Illinois. (e) Participation by Telephone. Members of the board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another, and such participation shall constitute presence in person at such meeting. (f) Quorum. At all meetings of the board one-third of the total number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action is approved by at least a majority of the required quorum for such meeting. Less than a quorum may adjourn any meeting of the board from time to time without notice. Section 3. Action Without Meeting. Any action required or permitted to be taken by the board of directors may be taken without a meeting if all members of the board consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the board. Section 4. Compensation of Directors. The directors may be paid such compensation for their services as the board shall from time to time determine. Directors who receive salaries as officers or employees of the corporation shall not receive additional compensation for their services as directors. Exhibit 3.3 Page 6 of 9 Section 5. Committees of the Board. There shall be such committees of the board of directors each consisting of two or more directors with such authority, subject to applicable law, as a majority of the board shall by resolution determine. Committees of the board shall meet subject to the call of the chairman of each committee and shall prepare and file with the secretary minutes of their meetings. Unless a committee shall by resolution establish a different procedure, notice of the time and place of committee meetings shall be given by the chairman of the committee, or at his request by the chairman of the board or by the secretary or an assistant secretary. Such notice shall be given to each committee member personally or by mail, messenger, telephone or telegraph at his business or residence address at the times provided in subsection (b) of Section 2 of this Article for notice of special meetings of the board of directors. One-third of a committee but not less than two members shall constitute a quorum for the transaction of business. Except as a committee by resolution may determine otherwise, the provisions of Section 3 and of subsections (c), (d) and (e) of Section 2 of this Article shall apply, mutatis mutandis, to meetings of board committees. Article IV Officers Section 1. Officers. The officers of the corporation shall be a chairman of the board, who shall be the chief executive officer, one or more group presidents, one or more vice presidents (one of whom shall be designated the chief financial officer), a secretary and a treasurer, together with such other officers as the board of directors shall determine. Any two or more offices may be held by the same person. Section 2. Election and Tenure of Officers. Officers shall be elected by the board of directors, shall hold office at the pleasure of the board, and shall be subject to removal at any time by the board. Vacancies in office may be filled by the board. Section 3. Powers and Duties of Officers. Each officer shall have such powers and duties as may be prescribed by the board of directors or by an officer authorized so to do by the board. Section 4. Compensation of Officers. The compensation of officers shall be determined by the board of directors; provided that the board may delegate authority to determine the compensation of any assistant secretary or assistant treasurer, with power to redelegate. Exhibit 3.3 Page 7 of 9 Article V Indemnification The corporation shall indemnify to the full extent permitted by, and in the manner permissible under, the laws of the State of Delaware any person made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director or officer of the corporation or any predecessor of the corporation, or served any other enterprise as a director or officer at the request of the corporation or any predecessor of the corporation. The foregoing provisions of this Article V shall be deemed to be a contract between the corporation and each director and officer who serves in such capacity at any time while this bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts. The foregoing rights of indemnification shall not be deemed exclusive of any other rights to which any director or officer may be entitled apart from the provisions of this Article. The board of directors in its discretion shall have power on behalf of the corporation to indemnify any person, other than a director or officer, made a party to any action, suit or proceeding by reason of the fact that he, his testator or intestate, is or was an employee of the corporation. Article VI Miscellaneous Section 1. Record Date. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting nor more than sixty (60) days prior to any other action. If not fixed by the board, the record date shall be determined as provided by law. (b) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board fixes a new record date for the adjourned meeting. Exhibit 3.3 Page 8 of 9 (c) Stockholders on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided by agreement or by applicable law. Section 2. Stock Certificates. (a) Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman of the board or the vice chairman or a vice president and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the stockholder. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. (b) The corporation may issue a new share certificate or a new certificate for any other security in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate or the owner's legal representative to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 3. Corporate Seal. The corporation shall have a corporate seal in such form as shall be prescribed and adopted by the board of directors. Section 4. Construction and Definitions. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these bylaws. Section 5. Amendments. Subject to the provisions of the certificate of incorporation, these bylaws may be altered, amended or repealed at any regular meeting of the stockholders (or at any special meeting thereof duly called for that purpose) by a majority vote of the shares represented and entitled to vote at the meeting; provided that in the notice of such special meeting notice of such purpose shall be given. Subject to the laws of the State of Delaware, the certificate of incorporation and these bylaws, the board of directors may by majority vote of those present at any meeting at which a quorum is present amend these bylaws, or enact such other bylaws as in their judgment may be advisable for the regulation of the conduct of the affairs of the corporation. Exhibit 3.3 Page 9 of 9 EX-10.5 3 CATERPILLAR CORPORATE INCENTIVE COMPENSATION PLAN Exhibit 10.5 CATERPILLAR INC. CORPORATE INCENTIVE COMPENSATION PLAN MANAGEMENT AND SALARIED EMPLOYEES (AMENDED AND RESTATED THROUGH DECEMBER 31, 1998) Section 1. Type of Plan and Purpose 1.1 Type of Plan and Purpose. This Plan is an incentive compensation plan. The purpose of the Plan is to provide contingent benefits to Employees to reflect their efforts in contribution to the profitability of the Company; and to serve as an incentive for Employees further to contribute to the continued and future financial success of the Company and to its ability to provide continued employment opportunities to its Employees. This Plan has been adopted in accordance with rules and guidelines established by the Stock Option and Officers' Compensation Committee of the Board of Directors of the company. Those guidelines permit business and service units of Caterpillar Inc. or its subsidiaries to adopt separate incentive compensation plans within parameters established by that Committee based upon measurements approved by the company's internal Incentive Compensation Review Committee. Those guidelines (a) generally require that a portion of the award under any such unit plan be based upon the corporate return on assets measurement established under this Plan, and (b) permit such unit plan to adopt a shorter eligibility period. Those unit incentive compensation plans with such a corporate measurement form a part of the Plan. It is understood that the duty of the Employers, their Boards of Directors, and the management they select is to provide the Employers' shareholders protection of, and a maximum return on, their investment, consistent with retention in the business of such profits as the Board of Directors of the Company deems prudent, and with fair and competitive prices, wages, benefits and other terms of employment; no provision of this Plan or any unit incentive compensation plan shall be construed as altering that objective or in any way limiting management of such Board of Directors in the performance of their duties. 1.2 Supplements. The succeeding provisions of this Plan will be expanded and/or modified by Supplements. Such Supplements will set forth the particulars wherein the provisions of this Plan, as applied to any group of Employees are expanded and/or differ from those set forth in the succeeding provisions of this Plan exclusive of such Supplements. All provisions of this Plan are subject to any express provisions to the contrary contained in any such Supplements. Exhibit 10.5 Page 1 of 8 Section 2. Definitions 2.1 Annual Salary Rate for any year means (i) in the case of a Participant who is a management employee, his monthly salary rate as of December 31 of that year (or his last day on the management payroll during that year if earlier) multiplied by 12; or (ii) in the case of a Participant who is a salaried employee, his weekly salary rate as of December 31 of that year (or his last day on the salaried payroll during that year if earlier) multiplied by 52. The Annual Salary Rate shall include any salary amount deferred under Part 2 of the Employees' Investment Plan and contributed as a basic Employer contribution thereunder, and any salary amount deferred under the Flexible Spending Account, but excludes any (a) bonuses or special cash awards, (b) commissions, (c) international service allowances, (d) extra shift or overtime payments, (e) night shift premiums, (f) pay for vacation time not used and (g) payments under this plan or other payments or contributions (other than EIP 2 contributions) under any employee benefit plan. 2.2 Company means Caterpillar Inc. or any successor to it by merger, consolidation, reorganization or otherwise. 2.3 Company Service means all periods of full-time employment with the Company and its subsidiaries, including all periods of leave of absence and all periods of layoff. 2.4 Effective Date of this Plan means January 1, 1993. 2.5 Employee means, subject to Subsection 3.1, any son who is a resident or citizen of the United States of America or Canada and who on or after the Effective Date is in the regular full-time employ of an Employer (or a part-time or temporary employee included in a group for whom approval to include in the Plan has been obtained from the Incentive Compensation Review Committee) on its salaried or management payrolls and is employed for work on the prevailing schedules of the department to which he is assigned, and who is included in a group to whom the Plan has been made available by extension by an Employer and includes any such person while absent from work under circumstances which do not break continuity of service. 2.6 Employer means the Company or any subsidiary of the Company that has adopted or adopts the Plan with the Company's written consent. 2.7 Officer means those Employees who fill the following positions: Vice President, Group President, and Chairman/Vice Chairman. For purposes of this Plan, the Controller and Treasurer are not included in the definition of Officer. Exhibit 10.5 Page 2 of 8 2.8 Participant means any Employee who is eligible to be covered by the Plan pursuant to Subsection 3.1. 2.9 The first Plan Year will begin on the effective date and will end on the first December 31 thereafter. Each subsequent Plan Year will end on the next following December 31. Section 3. Eligibility and Participation 3.1 Eligibility and Participation. Each Employee of the Employers shall be eligible to be covered by the Plan and become a Participant as of the latest to occur of (i) the Effective Date; (ii) the date he has completed 90 days of Company Service (does not include any time with ATS); and (iii) the date he is included in a group to which the Plan has been and continues to be extended by an Employer. Notwithstanding anything contained herein to the contrary, for all purposes of the Plan, any U.S. International Service Employee who is not an Employee of the Company or any of the other Employers shall be considered to be an eligible Employee if he then meets the requirements of Subparagraph (ii) above. As used herein, the term "U.S. International Service Employee" means an Employee who (i) on the direction or with the permission of an Employer is transferred to employment outside of the United States of America with a subsidiary (whether or not organized or incorporated within the United States of America) which has not adopted the Plan; and (ii) meets the definition of a U.S. International Service Employee contained in the Company's U.S. International Service Practices; and the term Employee shall also include such other persons as shall be designated by the Committee. A Participant in the Plan shall continue as such so long as he meets the definition of an Employee contained in Subsection 2.5 or considered to be an Employee pursuant to this Subsection 3.1. Notwithstanding the above, payment amounts shall not be duplicated under this Plan by amounts paid for the same period of service or corporate performance measurement under any other profit sharing plan, incentive compensation plan, gainsharing-type plan, or similar plan sponsored by Caterpillar Inc. or any of its subsidiaries, or would be paid except for any applicable waiting period expressed in such plan or except where specifically provided for in approved plan documentation. However, an Officer who is eligible to participate in an incentive compensation plan for a business or service unit under his control may participate in this Plan for that portion of his Annual Salary Rate not included in the calculation of his business or service unit incentive compensation payment. 3.2 Employment Requirements. Any Participant shall be eligible for an incentive compensation benefit under the Plan for any year, provided that he is actively employed by the Company and any of its subsidiaries on December 31 of that year or is on leave of absence or layoff from the Company or any of its subsidiaries on such December 31; except that any otherwise eligible Employee who died, retired, or received a separation payment in lieu of layoff during such year shall also be covered as if he were an active Employee on December 31 of that year. Exhibit 10.5 Page 3 of 8 Section 4. Amount of Benefit 4.1 Salary Grade 23 and Below. The amount payable to a Participant at Salary Grade 23 and below (as of December 31 of that year) shall be determined by multiplying the Participant's Annual Salary Rate times the following applicable rate of percentage for that salary grade times the applicable Corporate Performance Factor: Salary Grade Percentage ------------ ---------- 21 and below 7% 22 8% 23 9% 4.2 Salary Grade 24 and Above. The amount payable to a Participant at Salary Grade 24 and above (as of December 31 of that year) shall be determined by multiplying his Annual Salary Rate times the Team Award percentage (determined from Exhibit 1 for non-Officer Participants in Salary Grades 24 and above, and from Exhibit 2 for Officers), for his salary grade as of December 31, times the applicable Corporate Performance Factor, plus the amount of his Individual Award, if any. Designated Officers may participate in their units' incentive compensation plan and may be eligible for Team Awards based on their division results and the corporate performance of Caterpillar Inc. (each award to be prorated according to the approved weighting between the division results and corporate performance). Individual Awards may be made only from a discretionary pool. A separate Employee Discretionary Pool will be established for Participants (excluding Officers) for each Vice Presidential administrative area or for each group of Participants subject to a business or service unit incentive compensation plan. A separate discretionary pool will be established for Officers. The Individual Award, if any, for which only Participants in Salary Grades 24 and above are eligible, shall be determined solely at the discretion of the Participant's Unit Manager (or by the Compensation Committee of the Board of Directors for Officers) and shall not exceed the amount of the Employee's Team Award. In addition, the sum of the Individual Awards payable to all Participants in Salary Grade 24 and above shall not exceed the Employee Discretionary Pool Amount. The Employee Discretionary Pool Amount shall be 25% of the total amount of the Team Awards paid to Participants at Salary Grade 24 and above (excluding Officers). The sum of the Individual Awards payable to Participants who are Officers shall not exceed the Officer Discretionary Pool Amount. The Officer Discretionary Pool Amount shall be the sum of each Officer's percentage of annual salary rate (See Exhibit 1) adjusted by the Corporate Performance Factor defined in Section 4.4. The Officer Discretionary Pool will be calculated as if all officers participated wholly and exclusively in the Corporate Incentive Compensation Plan. Exhibit 10.5 Page 4 of 8 4.3 Individual Performance Level Less Than Five. Notwithstanding the provisions of Subparagraphs 4.1 or 4.2 to the contrary, Employees or Officers with a performance rating of Individual Performance Level 5 or those who have unsatisfactory/ unacceptable performance in units not using specific performance ratings will not be eligible for a Team Award or an Individual Award, and contributions shall not be made to either the Participant Discretionary Pool Amount or the Officer Discretionary Pool Amount for such Employees or Officers. 4.4 Corporate Performance Factor. The Corporate Performance Factor will be determined each year in relation to minimum, target and maximum corporate return on asset (ROA) levels determined by the Company (see Exhibit 3). The actual performance factor will be determined by interpolation based on the actual ROA achieved at the end of the year compared to these levels, and the participants team incentive compensation amount, if any, will be calculated accordingly. The achieved ROA will be determined by dividing Profit by the Average Gross Assets rounded to the nearest third decimal. The Company must achieve the minimum ROA percentage specified before any amount shall be payable. As used herein, the term "Average Gross Assets" means the total corporate assets averaged throughout the year. Total corporate assets excludes the assets of Financial Products but includes the investment in Financial Products and is reported in the Annual Report and the Quarterly Report to Stockholders under the column entitled Machinery and Engines as Supplemental Consolidating Data on the Statement of Financial Position. The average for the year will be calculated by adding together five points: the ending balance for the previous year and the ending balance for each of the four quarters during the year and dividing by five. The term "Profit" means the amount of profit for the year before income taxes reported in such Statement 1 (or any equivalent successor statement thereto which provides such amount of profit) in the subtotal immediately preceding the provision for income taxes line, but increased by the amount of expense for that year for incentive compensation amounts payable under the Plan and any other similar incentive compensation plan or profit sharing plan of the Employers (excluding any investment plan of the Employers) and any awards granted under any bonus plan of the Employers. Such Profit before income taxes would exclude the effect of extraordinary gains or losses, if any, as defined by generally accepted accounting principles. Profit shall also exclude income from nonconsolidated operations. Consolidated Financial Statements which are prepared using generally accepted accounting principles and as audited by the Company's independent certified public accountants shall be final and conclusive. 4.5 Percentage Determination. The Employee's Team Award percentage, Individual Award percentage, Employee Discretionary Pool Amount percentage, Officer Discretionary Pool Amount percentage, the Corporate Performance Factors, the Company's ROA target percentage, and the minimum and maximum percentage will be determined for each year by the Committee on Stock Options and Officer's Compensation. Exhibit 10.5 Page 5 of 8 4.6 RIP, EIP, etc. Credit. 100% of the amount paid under the Plan to an Employee shall be counted as compensation for the month in which payment is made for purposes of the Retirement Income Plan or any other pension plan sponsored by Caterpillar Inc. or its subsidiaries, in which the Employee is a Participant. No incentive compensation amount shall be taken into account under the Employee's Investment Plan, the Group Insurance Plan, or any other employee benefit plan or payroll practice of Caterpillar Inc. or its subsidiaries. 4.7 Proration of Payment Amount. If an Employee is not a Participant or is not actively employed by an Employer for the entire year but is eligible for an incentive compensation amount for the year pursuant to the provisions of Subsection 3.2, his payment amount will be prorated based upon his days of active employment in that year on the management or salaried payrolls while a Participant. Days while on disability leave of absence will be counted as days of active employment in accordance with uniform rules established by the Committee with respect to the maximum number of such days to be counted during any period of disability leave of absence, but in no event shall any days occurring after the expiration of a continuous period of absence of six months be counted. No other leaves of absence will be counted for purposes of calculating the payment amount. 4.8 Participation in Another Incentive Compensation Plan. If an Employee, who otherwise met the eligibility requirements of Section 3, ceased to be a Participant during the Plan Year because he became a participant in another incentive compensation plan sponsored by Caterpillar Inc. or one of its subsidiaries, he shall be eligible for a Team Award and/or an Individual Award under this Plan for that period of time that he was a Participant in this Plan. Twenty five percent (25%) of the prorated Team Award paid under this Plan shall be included in the Employee Discretionary Pool Amount. 4.9 Transfer from Hourly Payroll. Notwithstanding anything contained herein to the contrary, if a Participant or former Participant is employed by the Employers on December 31 of any Plan Year and does not receive a payment for any period of employment in that Plan Year under either this Plan or the profit sharing plan or an incentive compensation plan covering employees on the hourly payroll of the Employers, he shall receive a payment under this Plan for such period of employment in the same amount which would otherwise have been payable to him under the terms of this Plan or under such hourly plan but for his ineligibility thereunder because he was not participating therein on said December 31. 4.10 Supplemental Employees. Notwithstanding anything contained herein to the contrary, if (a) a Participant ceases to be a full-time Employee of an Employer, and (b) on December 31 of the year in which said Participant ceases to be a full-time Employee, he is and has thereafter been continuously employed as a supplemental employee on either a part-time or temporary basis by an Employer, his payment amount shall be prorated based upon his days of active regular full-time employment in that year on the salaried or management payroll while a Participant. His Annual Salary Rate shall be the rate in effect when he ceased full-time employment. Exhibbit 10.5 Page 6 of 8 Section 5. Incentive Compensation Payment 5.1 Date and Method of Payment. Any amount which is payable for any year shall be paid to an eligible Participant not later than 3 months of the year following the year for which the amount is computed. The amount of such payment shall be paid by check less required withholding for federal, state, local and other taxes. Payments will be made in the same currency in which the Employee receives his base salary. 5.2 Beneficiaries. If a Participant is deceased at the time any payment is payable to him, the amount of such payment shall be payable to the same person or persons and in the same proportionate amount as shall be payable to the beneficiary or beneficiaries of his basic life insurance under the Group Insurance Plan of his Employer. 5.3 Lost Participants. If any payment becomes distributable pursuant to Subsection 5.1 and the whereabouts of a Participant (or any beneficiary pursuant to Subsection 5.2) is then unknown to the Employer and the Employer shall fail to receive a claim for such payment from the person entitled thereto (or from any other person validly acting on his behalf), then such payment shall be disposed of in an equitable manner as permitted by law under rules adopted by the Plan Administrator. Section 6. Miscellaneous 6.1 Administration of the Plan. Except as otherwise expressly provided, the Plan shall be administered by the Incentive Compensation Review Committee ("the Committee"), appointed by the Chairman of the Board, who shall be the Plan Administrator and shall be authorized to (a) determine all questions arising in the administration of the Plan, (b) establish rules and procedures to carry out their duties and responsibilities, (c) delegate such duties and responsibilities to other employees of the Employers, and (d) do all other acts which in its judgment are necessary for the proper administration of this Plan. 6.2 Facility of Payment. If the Committee shall receive evidence satisfactory to it that any Participant or other person entitled to receive a benefit under this Plan is physically or mentally incompetent to receive such payment and to give a valid release therefor, the Committee at its discretion may make payment in one or more of the following ways: (a) directly to such Participant or person, (b) to his legal guardian or conservator, or (c) to his spouse or to any other person to be expended for his benefit. The decision of the Committee shall be in each case final and binding on all persons in interest. 6.3 Amendment and Termination of Plan. The Company shall have the power at any time and from time to time, by action of its Board of Directors, to amend or terminate this Plan; provided, however, that the Committee may also amend the Plan so long as such amendment does not change the duties and responsibilities of the Committee or the Stock Option and Officers' Compensation Committee of the Company's Board of Directors and so long as the cost of such amendment to the Employers does not exceed $100,000 per year. Exhibit 10.5 Page 7 of 8 6.4 Employment Rights. Participation in the Plan will not give any Employee or an Employer any right to be retained in the service of the Company or its subsidiaries, nor any right or claim to any payment under the Plan unless such right or claim has specifically accrued under the terms of the Plan. 6.5 Action by Employers. Any action required or permitted to be taken by any Employer hereunder may, except as otherwise expressly provided, be taken by the Group President or any Vice President of such Employer or by any other person designated by the Group President or any Vice President of the Employer to act for such Employer. 6.6 Gender and Number. Where the context permits, words in the masculine gender shall include the feminine gender, the plural shall include the singular, and the singular shall include the plural. Exhibit 10.5 Page 8 of 8 EX-10.8 4 CATERPILLAR INC. DEFERRED EMPLOYEES' INVEST PLAN Exhibit 10.8 CATERPILLAR INC. DEFERRED EMPLOYEES' INVESTMENT PLAN (restated 10/98) 1. Purpose ------- The purpose of the Caterpillar Inc. (Company) Deferred Employees' Investment Plan (DEIP), as set forth in the succeeding sections of this document, is to provide additional investment opportunities for those employees whose participation in Part 2 of the Employees' Investment Plan (EIP) is restricted because of limitations imposed by the Internal Revenue Code of 1986, as amended. The DEIP shall be effective June 30, 1995. 2. Eligibility ----------- An employee shall be eligible to participate in the DEIP if he is in salary grade 30 or higher and currently defers compensation into Part 2 of EIP (to the maximum allowed by EIP). 3. Participant Deferrals --------------------- An employee must make a valid election (to become a "Participant") on or before the last Company business day in November of any year to participate in the DEIP during the following calendar year. Such election shall defer a portion of his compensation not to exceed the excess of (a) 6% of his base salary over (b) the total amount deferred by him into Part 2 of EIP and into the Supplemental Employees' Investment Plan (SEIP) because of any limitation on the amount that can be deferred under Part 2 of EIP. Any such election must be made (on a form provided by the Company) and delivered to the Director, Compensation and Benefits before the end of normal office hours on such last Company business day in November and shall remain in effect until it is revised as provided herein. Effective January 1, 1996, an employee may also elect to defer all or part of the incentive compensation payable to him for a calendar year; provided, however, that such Participant's election must be filed with such Director on or before the last Company business day in November of the year in which such compensation shall have been accruing (except that in reference to such compensation accrued in 1995 such an election must be filed with such Director before the amount of such compensation is known). A Participant may elect to defer up to seventy percent (70%) of the base salary payable to him for a calendar year; provided, however, that such Participant's election must be filed with such Director on or before the last Company business day in November of the preceding calendar year. Exhibit 10.8 Page 1 of 5 If a Participant wants to change or terminate the amount of compensation deferred, he shall deliver a revised election form to the Director, Compensation and Benefits; provided, however, that: (i) such revised election shall become effective (when and so long as the Participant is eligible) for each calendar year following the year in which such form is delivered, and shall remain effective until such election is further revised as provided herein, and (ii) any such election must be filed before the end of normal office hours on the last Company business day in November. When an employee first becomes eligible to participate in the DEIP (including those employees who first become eligible on the effective date), he may elect to defer compensation (or file a revised election) in accordance with the foregoing, except that any such election with respect to compensation payable to him during the calendar year in which he becomes eligible for the DEIP (i) must be filed within a 30-day period that begins on the date he becomes eligible, and (ii) shall be applicable only to compensation paid for months that commence after the date of such election. 4. Status of Accounts ------------------ All amounts in the DEIP shall be held in the general funds of the Company, but the Company will establish an individual bookkeeping account for each Participant. Amounts of compensation deferred by the Participant will be credited to the individual account of the Participant in accordance with his election(s). Each Participant may elect to have all or a specified percentage if his deferred compensation allocated to: (a) an interest account; (b) a stock account and treated as though it were invested in Company common stock ("Stock Election"); or (c) a mutual fund account or accounts and treated as though it were invested in any of the following Preferred Group funds: Asset Allocation, Growth, International, Small Cap or Value. Exhibit 10.8 Page 2 of 5 Amounts allocated to the stock account of a Participant who is an officer of the Company subject to Section 16 of the Securities Exchange Act of 1934 ("Officer") may not be transferred to another of his accounts (nor may amounts allocated, respectively, to any such other account be transferred to his stock account) until at least six months after he ceases to be subject to such Section. Under such a Stock Election, dividend equivalents will accrue to the account (when dividends are payable) and will be reinvested and a Participant's account will in all other respects reflect share ownership for events such as a stock split but no voting rights will exist. The number of shares of stock equivalents shall be determined by dividing the amount of deferred compensation (or dividend equivalents credited) by the closing price of Company common stock on the New York Stock Exchange on the date of such deferral or dividend credit (or the next succeeding trading day if there is no trading on that date). Stock equivalents will be valued based on the closing price of Company common stock on the New York Stock Exchange as of the effective date of a transfer into or out of the stock account ("Transfer"), the date on which the Participant terminates employment, the date of distribution elected by the Participant hereunder or the date as of which he is considered totally and permanently disabled under EIP, whichever date applies (or the next succeeding trading day if there is no trading on that date). The Company will credit interest accounts on a quarterly basis. The interest rate will be equal to the base corporate lending rate (sometimes referred to as the "prime rate") applicable to commercial lending customers of Citibank, N.A., New York, New York (or any successor thereto) on the last business day of each calendar quarter. The annual interest rate will be divided by four and applied effective the last day of each quarter to the average daily amount in each Participant's account in that quarter. In any calendar quarter in which a Participant does not have amounts credited to his account for the entire period of that quarter, interest will be credited pro rata based on the number of business days that amounts are credited to his account in that quarter compared to the total number of business days in that quarter. Participants who are not Officers may Transfer or make changes to the investment allocation of future deferred compensation which shall be effective as of the first day of a calendar quarter, provided that such Participant shall have filed an appropriate form with the Director, Compensation and Benefits, by the twentieth (20th) day of the preceding month. All amounts in the DEIP and the establishment of individual bookkeeping accounts shall not be deemed to have created a trust, and no Participant shall have any ownership interest in any such account. A Participant's rights to any amounts credited to his account shall not be transferable or assignable. Each Participant will receive an annual report showing the status of his account at the close of each calendar year. Exhibit 10.8 Page 3 of 5 5. Disbursement ------------ Following his termination of employment with the Company (or total and permanent disability), the value of the Participant's DEIP account will be payable to him as soon as practicable in cash, in a lump sum (including interest up to the date of payment) unless such Participant has elected a later payment date in writing that is acceptable to and approved by the Director, Compensation and Benefits; provided, however, that no such election shall be effective unless it shall have been filed on or before the last Company business day in November of the calendar year preceding the calendar year of such termination. For Participants who are officers of the Company subject to Section 16 of the Securities Exchange Act of 1934, the payment date under DEIP, with respect to amounts in the stock account, must be at least six months after the date on which the Participant's final deferral into DEIP became irrevocable. A Participant may elect, either before or after termination of employment, an installment distribution for a period of up to 15 years; provided, however, that an election of installment distribution shall be effective only if it shall have been filed with the Director, Compensation and Benefits, before November 30 of the second year that precedes the year in which the distribution would otherwise occur. Notwithstanding the foregoing, effective for amounts deferred after December 31, 1996 (and any earnings thereon): (a) a Participant may elect one original scheduled withdrawal date as of which disbursement of elected amounts (and any earnings thereon) shall occur; provided that (i) such original date shall be the first day of any calendar quarter that is at least four years later than the year in which such an amount is deferred, and (ii) the Participant may change such original date to a later date, provided, however, that such change shall be effective only if it shall have been filed with the Director, Compensation and Benefits, before November 30 of the second year that precedes the year that includes such original date; (b) a Participant may elect unscheduled withdrawals of between 5% and 100% of account assets attributable to such amounts deferred after December 31, 1996 (and any earnings thereon); provided that (i) the amount withdrawn shall be subject to a forfeiture equal to 10%, and the Participant shall discontinue participation in the plan for the remainder of the year (in which such withdrawal occurs) and for the following year and (ii) the minimum withdrawal amount (before forfeiture) shall be $10,000; and (c) such withdrawals under (a) or (b) shall be applied against the assets of the Deferred Employees' Investment Plan as well as this plan, and shall be subject to such other rules of convenience and administration as shall be determined by the Director, Compensation and Benefits. Exhibit 10.8 Page 4 of 5 6. Death of a Participant ---------------------- Upon the death of a Participant prior to payment of his DEIP account, the balance in the Participant's account (including interest for the elapsed portion of the year of death) shall be determined as of the date of death. Such balance shall be paid as soon as reasonably possible thereafter in a lump sum payment to (i) the same beneficiary or beneficiaries and in the same proportionate amount as he shall have designated under the EIP, in the absence of any designation to the contrary, or (ii) the beneficiary or beneficiaries for purposes of the DEIP as such Participant shall have designated in writing (in a form acceptable to, and filed with, the Director, Compensation and Benefits). 7. Amendment or Termination ------------------------ The Compensation Committee of the Board of Directors or the Investment Plan Committee (for EIP) may at any time amend, merge, consolidate or terminate the DEIP, but no amendment, merger, consolidation or termination will have the effect of reducing the amount that any Participant is entitled to receive prior to such amendment, merger, consolidation or termination nor of changing the time of payment of any amount credited to a Participant's account. 8. Administration -------------- Except as otherwise expressly provided herein, the DEIP shall be administered under the direction of the Director, Compensation and Benefits, of the Company. Exhibit 10.8 Page 5 of 5 EX-12 5 STATEMENT OF RATIOS OF PROFIT TO FIXED CHARGES EXHIBIT 12 CATERPILLAR INC., CONSOLIDATED SUBSIDIARY COMPANIES, AND 50%-OWNED UNCONSOLIDATED AFFILIATED COMPANIES STATEMENT SETTING FORTH COMPUTATION OF RATIOS OF PROFIT TO FIXED CHARGES (Millions of dollars) YEARS ENDED DECEMBER 31,
1998 1997 1996 ------ ------ ------ Profit................................................................ $1,513 $1,665 $1,361 Add: Provision for income taxes....................................... $ 680 837 653 ------ ------ ------ Profit before taxes................................................... $2,193 $2,502 $2,014 Fixed charges: Interest and other costs related to borrowed funds/(1)/.......... $ 758 $ 586 $ 519 Rentals at computed interest factors/(2)/........................ 76 60 54 ------ ------ ------ Total fixed charges................................................... $ 834 $ 646 $ 573 ------ ------ ------ Profit before provision for income taxes and fixed charges............ $3,027 $3,148 $2,587 ====== ====== ====== Ratio of profit to fixed charges...................................... 3.6 4.9 4.5 ====== ====== ======
- ------------------ /(1)/ Interest expense as reported in the Consolidated Results of Operations plus the Company's proportionate share of 50 percent-owned unconsolidated affiliated companies' interest expense. /(2)/ Amounts represent those portions of rent expense that are reasonable approximations of interest costs. Exhibit 12 Page 1 of 1 EX-13 6 PROXY APPENDIX Exhibit 13 APPENDIX CATERPILLAR INC. GENERAL AND FINANCIAL INFORMATION 1998 A-1 TABLE OF CONTENTS
Page Report of Management................................................ A-3 Report of Independent Accountants................................... A-3 Consolidated Financial Statements and Notes......................... A-4 Five-year Financial Summary......................................... A-20 Management's Discussion and Analysis (MD&A) Machinery and Engines Sales Table by Geographic Region......... A-21 1998 Compared with 1997........................................ A-22 Supplemental Information....................................... A-23 Fourth-Quarter 1998 Compared with Fourth-Quarter 1997.......... A-25 1997 Compared with 1996........................................ A-25 Liquidity & Capital Resources.................................. A-26 Employment..................................................... A-27 Other Matters.................................................. A-27 Year 2000 Challenge............................................ A-29 Outlook........................................................ A-30 Supplemental Stockholder Information................................ A-32 Directors and Officers.............................................. A-33
A-2 REPORT OF MANAGEMENT Caterpillar Inc. - -------------------------------------------------------------------------------- The management of Caterpillar Inc. has prepared the accompanying consolidated financial statements for the years ended December 31, 1998, 1997, and 1996, and is responsible for their integrity and objectivity. The statements were prepared in conformity with generally accepted accounting principles, applying certain estimates and judgments as required. Management maintains a system of internal accounting controls which has been designed to provide reasonable assurance that: transactions are executed in accordance with proper authorization, transactions are properly recorded and summarized to produce reliable financial records and reports, assets are safeguarded, and the accountability for assets is maintained. The system of internal controls includes statements of policies and business practices, widely communicated to employees, which are designed to require them to maintain high ethical standards in their conduct of company affairs. The internal controls are augmented by careful selection and training of supervisory and other management personnel, by organizational arrangements that provide for appropriate delegation of authority and division of responsibility, and by an extensive program of internal audit with management follow-up. The financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants, in accordance with generally accepted auditing standards. They have made similar annual audits since the initial incorporation of our company. Their role is to render an objective, independent opinion on management's financial statements. Their report appears below. Through its Audit Committee, the Board of Directors reviews our financial and accounting policies, practices, and reports. The Audit Committee consists exclusively of seven directors who are not salaried employees and who are, in the opinion of the Board of Directors, free from any relationship that would interfere with the exercise of independent judgment as a committee member. The Audit Committee meets several times each year with representatives of management, including the internal auditing department, and the independent accountants to review the activities of each and satisfy itself that each is properly discharging its responsibilities. Both the independent accountants and the internal auditors have free access to the Audit Committee and meet with it periodically, with and without management representatives in attendance, to discuss, among other things, their opinions as to the adequacy of internal controls and to review the quality of financial reporting. /s/ Donald V. Fites Chairman of the Board /s/ F. L. McPheeters Chief Financial Officer January 20, 1999 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS TO THE STOCKHOLDERS OF CATERPILLAR INC.: In our opinion, the accompanying consolidated financial statements, in Statements 1 through 4, present fairly, in all material respects, the financial position of Caterpillar Inc. and its subsidiaries at December 31, 1998, 1997, and 1996, and the consolidated results of their operations and their consolidated cash flow for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Peoria, Illinois January 20, 1999 A-3 STATEMENT 1 Consolidated Results of Operations for the Years Ended December 31 (Millions of dollars except per share data) - --------------------------------------------------------------------------------
Supplemental consolidating data ------------------------------------------------ Consolidated Machinery and Engines/1/ Financial Products ------------------------- ------------------------- --------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- ------ ------ ----- Sales and revenues: Sales of Machinery and Engines (Note 1C).......... $19,972 $18,110 $15,814 $19,972 $18,110 $15,814 $ -- $ -- $ -- Revenues of Financial Products (Note 1C).......... 1,005 815 708 -- -- -- 1,117 839 732 ------- ------- ------- ------- ------- ------- ------ ------ ----- Total sales and revenues....................... 20,977 18,925 16,522 19,972 18,110 15,814 1,117 839 732 Operating costs: Cost of goods sold................................ 15,031 13,374 11,832 15,031 13,374 11,832 -- -- -- Selling, general, and administrative expenses..... 2,561 2,232 1,993 2,210 1,932 1,715 377 324 302 Research and development expenses................. 643 528 410 643 528 410 -- -- -- Interest expense of Financial Products............ 489 361 295 -- -- -- 501 373 316 ------- ------- ------- ------- ------- ------- ------ ------ ----- Total operating costs.......................... 18,724 16,495 14,530 17,884 15,834 13,957 878 697 618 ------- ------- ------- ------- ------- ------- ------ ------ ----- Operating profit.................................... 2,253 2,430 1,992 2,088 2,276 1,857 239 142 114 Interest expense excluding Financial Products..... 264 219 194 264 219 194 -- -- -- Other income (expense) (Note 3)................... 185 202 143 46 153 127 65 61 37 ------- ------- ------- ------- ------- ------- ------ ------ ----- Consolidated profit before taxes.................... 2,174 2,413 1,941 1,870 2,210 1,790 304 203 151 Provision for income taxes (Note 6)............... 665 796 613 554 724 558 111 72 55 ------- ------- ------- ------- ------- ------- ------ ------ ----- Profit of consolidated companies.................. 1,509 1,617 1,328 1,316 1,486 1,232 193 131 96 Equity in profit of unconsolidated affiliated companies (Note 10)............................. 4 48 33 4 48 33 -- -- -- Equity in profit of Financial Products' subsidiaries.................................... -- -- -- 193 131 96 -- -- -- ------- ------- ------- ------- ------- ------- ------ ------ ----- Profit.............................................. $ 1,513 $ 1,665 $ 1,361 $ 1,513 $ 1,665 $ 1,361 $ 193 $ 131 $ 96 ======= ======= ======= ======= ======= ======= ====== ====== ===== Profit per share of common stock (Note 15).......... $ 4.17 $ 4.44 $ 3.54 ======= ======= ======= Profit per share of common stock -- assuming dilution (Note 15)................................ $ 4.11 $ 4.37 $ 3.50 ======= ======= ======= Dividends declared per share of common stock........ $ 1.15 $ .95 $ .78 ======= ======= =======
/1/ Represents Caterpillar Inc. and its subsidiaries except for Financial Products, which is accounted for on the equity basis. The supplemental consolidating data is presented for the purpose of additional analysis. See Note 1B on Page A-7 for a definition of the groupings in these statements. Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the consolidated data. STATEMENT 2 Changes in Consolidated Stockholders' Equity for the Years Ended December 31 (Dollars in millions) - --------------------------------------------------------------------------------
1998 1997 1996 --------------- --------------- --------------- Common stock (Note 14): Balance at beginning of year............................................... $ (442) $ 50 $ 333 Common shares issued, including treasury shares reissued: 1998 -- 800,315; 1997 -- 1,426,532; 1996 -- 1,487,992.................... 16 26 20 Treasury shares purchased: 1998 -- 11,612,300; 1997 -- 14,118,412; 1996 -- 8,816,008................ (567) (706) (303) Issuance of common stock to effect 2-for-1 stock split..................... -- 188 -- ------ ------ ------ Balance at year-end........................................................ (993) (442) 50 ------ ------ ------ Profit employed in the business: Balance at beginning of year............................................... 5,026 3,904 2,840 Profit..................................................................... 1,513 1,513 1,665 1,665 1,361 1,361 Dividends declared......................................................... (416) (355) (297) Issuance of common stock to effect 2-for-1 stock split..................... -- (188) -- ------ ------ ------ Balance at year-end........................................................ 6,123 5,026 3,904 ------ ------ ------ Accumulated other comprehensive income: Foreign currency translation adjustment/2/ (Note 1F): Balance at beginning of year.............................................. 95 162 215 Aggregate adjustment for year............................................. (30) (30) (67) (67) (53) (53) ------ ------ ------ ------ ------ ----- Balance at year-end....................................................... 65 95 162 ------ ------ ------ ------ ------ ----- Minimum Pension Liability Adjustment/2/: Balance at beginning of year.............................................. -- -- -- Aggregate adjustment for year............................................. (64) (64) -- -- -- -- ------ ------ ------ ------ ------- ----- Balance at year-end....................................................... (64) -- -- ------ ------ ------ Comprehensive income........................................................ 1,419 1,598 1,308 ====== ====== ===== Stockholders' equity at year-end............................................. $5,131 $4,679 $4,116 ====== ====== ======
/2/ No reclassification adjustments to report. See accompanying Notes to Consolidated Financial Statements. A-4 STATEMENT 3 Caterpillar Inc. Financial Position at December 31 (Dollars in millions) - --------------------------------------------------------------------------------
Supplemental consolidating data ------------------------------------------------------- Consolidated Machinery and Engines/1/ Financial Products --------------------------- --------------------------- ------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- ------- ------ ------ Assets Current assets: Cash and short-term investments... $ 360 $ 292 $ 487 $ 303 $ 241 $ 445 $ 57 $ 51 $ 42 Receivables -- trade and other.... 3,660 3,331 2,956 2,604 3,346 2,960 1,875 285 175 Receivables -- finance (Note 5)... 3,516 2,660 2,266 -- -- -- 3,516 2,660 2,266 Deferred income taxes and prepaid expenses (Note 6)................ 1,081 928 852 1,081 935 876 18 9 15 Inventories (Notes 1D and 4)...... 2,842 2,603 2,222 2,842 2,603 2,222 -- -- -- ------- ------- ------- ------- ------- ------- ------- ------ ------ Total current assets................ 11,459 9,814 8,783 6,830 7,125 6,503 5,466 3,005 2,498 Property, plant, and equipment -- net (Notes 1E and 9)............... 4,866 4,058 3,767 4,125 3,483 3,242 741 575 525 Long-term receivables -- trade and other.............................. 85 134 128 85 134 128 -- -- -- Long-term receivables -- finance (Note 5)........................... 5,058 3,881 3,380 -- -- -- 5,058 3,881 3,380 Investments in unconsolidated affiliated companies (Note 10)..... 773 751 701 773 751 701 -- -- -- Investments in Financial Products' subsidiaries....................... -- -- -- 1,269 882 759 -- -- -- Deferred income taxes (Note 6)...... 955 1,040 1,093 980 1,075 1,132 8 5 3 Intangible assets (Note 1E)......... 1,241 228 233 1,241 228 233 -- -- -- Other assets (Note 17).............. 691 850 643 316 510 368 375 340 275 ------- ------- ------- ------- ------- ------- ------- ------ ------ Total assets.......................... $25,128 $20,756 $18,728 $15,619 $14,188 $13,066 $11,648 $7,806 $6,681 ======= ======= ======= ======= ======= ======= ======= ====== ====== Liabilities Current liabilities: Short-term borrowings (Note 12)... $ 809 $ 484 $ 1,192 $ 49 $ 53 $ 36 $ 760 $ 431 $1,156 Accounts payable and accrued expenses......................... 3,558 3,358 2,858 3,440 3,020 2,556 811 654 520 Accrued wages, salaries, and employee benefits................ 1,217 1,128 1,010 1,208 1,120 1,005 9 8 5 Dividends payable................. 107 92 76 107 92 76 -- -- -- Deferred and current income taxes payable (Note 6)................. 15 175 142 (19) 46 70 34 129 72 Deferred liability................ -- -- -- -- -- -- 143 -- -- Long-term debt due within one year (Note 13)................... 2,239 1,142 1,180 60 54 122 2,179 1,088 1,058 ------- ------- ------- ------- ------- ------- ------- ------ ------ Total current liabilities........... 7,945 6,379 6,458 4,845 4,385 3,865 3,936 2,310 2,811 Long-term debt due after one year (Note 13).......................... 9,404 6,942 5,087 2,993 2,367 2,018 6,411 4,575 3,069 Liability for postemployment benefits (Note 7).................. 2,590 2,698 3,019 2,590 2,698 3,019 -- -- -- Deferred income taxes and other liabilities (Note 6)............... 58 58 48 60 59 48 32 39 42 ------- ------- ------- ------- ------- ------- ------- ------ ------ Total liabilities..................... 19,997 16,077 14,612 10,488 9,509 8,950 10,379 6,924 5,922 ------- ------- ------- ------- ------- ------- ------- ------ ------ Contingencies (Notes 17 and 18) Stockholders' equity (Statement 2) Common stock of $1.00 par value (Note 14): Authorized shares: 900,000,000 Issued shares (1998, 1997, and 1996 -- 407,447,312) at paid-in amount................. 1,063 1,071 881 1,063 1,071 881 683 403 353 Profit employed in the business..... 6,123 5,026 3,904 6,123 5,026 3,904 615 506 404 Accumulated other comprehensive income............................ 1 95 162 1 95 162 (29) (27) 2 Treasury stock (1998 -- 50,248,957 shares; 1997 -- 39,436,972 shares; and 1996 -- 26,745,092 shares) at cost.............................. (2,056) (1,513) (831) (2,056) (1,513) (831) -- -- -- ------- ------- ------- ------- ------- ------- ------- ------ ------ Total stockholders' equity............ 5,131 4,679 4,116 5,131 4,679 4,116 1,269 882 759 ------- ------- ------- ------- ------- ------- ------- ------ ------ Total liabilities and stockholders' equity.............................. $25,128 $20,756 $18,728 $15,619 $14,188 $13,066 $11,648 $7,806 $6,681 ======= ======= ======= ======= ======= ======= ======= ======= ======
/1/ Represents Caterpillar Inc. and its subsidiaries except for Financial Products, which is accounted for on the equity basis. The supplemental consolidating data is presented for the purpose of additional analysis. See Note 1B on Page A-7 for a definition of the groupings in these statements. Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the consolidated data. See accompanying Notes to Consolidated Financial Statements. A-5 STATEMENT 4 Statement of Cash Flow for the Years Ended December 31 (Millions of dollars) - -------------------------------------------------------------------------------
Supplemental consolidating data ---------------------------------------------------- Consolidated Machinery and Engines/1/ Financial Products ------------------------- ------------------------- ------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- ------- ------- ------- Cash flow from operating activities: Profit..................................... $ 1,513 $ 1,665 $ 1,361 $ 1,513 $ 1,665 $ 1,361 $ 193 $ 131 $ 96 Adjustments for noncash items: Depreciation and amortization............. 865 738 696 697 599 575 168 139 121 Profit of Financial Products.............. -- -- -- (193) (131) (96) -- -- -- Other..................................... (72) 23 158 34 (16) 118 (137) 41 43 Changes in assets and liabilities: Receivables -- trade and other............ (104) (396) (319) 993 (341) (298) (1,258) (82) (14) Inventories............................... (104) (375) (111) (104) (375) (111) -- -- -- Accounts payable and accrued expenses..... 8 562 134 (114) 529 57 284 37 65 Other -- net.............................. (328) (121) (137) (177) (129) (143) (72) 57 20 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net cash provided by (used for) operating activities................................. 1,778 2,096 1,782 2,649 1,801 1,463 (822) 323 331 ------- ------- ------- ------- ------- ------- ------- ------- ------- Cash flow from investing activities: Capital expenditures -- excluding equipment leased to others................ (925) (824) (506) (918) (819) (500) (7) (5) (6) Expenditures for equipment leased to others (344) (282) (265) (9) (5) (8) (335) (277) (257) Proceeds from disposals of property, plant, and equipment...................... 141 138 135 17 15 21 124 123 114 Additions to finance receivables........... (8,537) (6,644) (5,802) -- -- -- (8,537) (6,644) (5,802) Collections of finance receivables......... 4,635 3,605 3,407 -- -- -- 4,635 3,605 3,407 Proceeds from sale of finance receivables.. 1,705 1,833 1,425 -- -- -- 1,705 1,833 1,425 Net intercompany borrowings................ -- -- -- 29 (94) 325 (244) -- -- Investments and acquisitions............... (1,428) (59) (612) (1,428) (59) (612) -- -- -- Other -- net............................... 173 (308) (166) (111) (290) (153) 4 (68) (33) ------- ------- ------- ------- ------- ------- ------- ------- ------- Net cash used for investing activities...... (4,580) (2,541) (2,384) (2,420) (1,252) (927) (2,655) (1,433) (1,152) ------- ------- ------- ------- ------- ------- ------- ------- ------- Cash flow from financing activities: Dividends paid............................. (400) (338) (289) (400) (338) (289) (49) (28) (12) Common stock issued, including treasury shares reissued........................... 6 11 10 6 11 10 280 50 20 Treasury shares purchased.................. (567) (706) (303) (567) (706) (303) -- -- -- Net intercompany borrowings................ -- -- -- 244 -- -- (29) 94 (325) Proceeds from long-term debt issued........ 4,590 2,284 1,088 627 462 37 3,963 1,822 1,051 Payments on long-term debt................. (1,153) (1,237) (1,335) (65) (177) (166) (1,088) (1,060) (1,169) Short-term borrowings -- net............... 388 258 1,262 (23) 17 18 411 241 1,244 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net cash provided by (used for) financing activities................................. 2,864 272 433 (178) (731) (693) 3,488 1,119 809 ------- ------- ------- ------- ------- ------- ------- ------- ------- Effect of exchange rate changes on cash..... 6 (22) 18 11 (22) 22 (5) -- (4) ------- ------- ------- ------- ------- ------- ------- ------- ------- Increase (decrease) in cash and short-term investments................................ 68 (195) (151) 62 (204) (135) 6 9 (16) Cash and short-term investments at the beginning of the period.................... 292 487 638 241 445 580 51 42 58 ------- ------- ------- ------- ------- ------- ------- ------- ------- Cash and short-term investments at the end of the period.............................. $ 360 $ 292 $ 487 $ 303 $ 241 $ 445 $ 57 $ 51 $ 42 ======= ======= ======= ======= ======= ======= ======= ======= =======
/1/ Represents Caterpillar Inc. and its subsidiaries except for Financial Products, which is accounted for on the equity basis. All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents. The supplemental consolidating data is presented for the purpose of additional analysis. See Note 1B on Page A-7 for a definition of the groupings in these statements. Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the consolidated data. See accompanying Notes to Consolidated Financial Statements. A-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Caterpillar Inc. (Dollars in millions except per share data) - -------------------------------------------------------------------------------- 1. Operations and summary of significant accounting policies ================================================================================ A. Nature of operations We operate in three principal lines of business: (1) Machinery -- design, manufacture, and marketing of construction, mining, agricultural, and forestry machinery -- track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid-steer loaders, and related parts. (2) Engines -- design, manufacture, and marketing of engines for Caterpillar Machinery, on-highway trucks and locomotives; marine, petroleum, construction, industrial, and other applications; electric power generation systems; and related parts. Reciprocating engines meet power needs ranging from 5 to over 21,000 horsepower (4 to over 15 660 kilowatts). Turbines range from 1,340 to 18,000 horsepower (1000 to 13 500 kilowatts). (3) Financial Products -- financing to customers and dealers for the purchase and lease of Caterpillar and noncompetitive related equipment, as well as some financing for Caterpillar sales to dealers. Also provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. This line of business consists primarily of Caterpillar Financial Services Corporation (Cat Financial) and its subsidiaries and Caterpillar Insurance Services Corporation. Our products are sold primarily under the marks "Caterpillar," "Cat," "Solar," "Barber-Greene," "MaK," and "Perkins." We conduct operations in our Machinery and Engines' lines of business under highly competitive conditions, including intense price competition. We place great emphasis upon the high quality and performance of our products and our dealers' service support. Although no one competitor is believed to produce all of the same types of machines and engines, there are numerous companies, large and small, which compete with us in the sale of each of our products. Machines are distributed principally through a worldwide organization of dealers, 64 located in the United States and 131 located outside the United States. Worldwide, these dealers have more than 1,400 places of business and serve 166 countries. Reciprocating engines are sold principally through the worldwide dealer organization and to other manufacturers for use in products manufactured by them. Some of the reciprocating engines manufactured by Perkins are also sold through their worldwide distributor network. Our dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are our dealers' principal business. Turbines and large marine reciprocating engines are sold through sales forces employed by Solar and MaK, respectively. Occasionally these employees are assisted by independent sales representatives. Manufacturing activities of the Machinery and Engines' lines of business are conducted in 41 plants in the United States; nine in the United Kingdom; four in China; three each in Australia, France, Germany, and Italy; two each in India, Japan, Mexico, and Northern Ireland; and one each in Belgium, Brazil, Canada, Hungary, Indonesia, Netherlands, Poland, Russia, South Africa, and Sweden. Thirteen parts distribution centers are located in the United States and ten are located outside the United States. The Financial Products' line of business also conducts operations under highly competitive conditions. Financing for users of Caterpillar products is available through a variety of competitive sources, principally commercial banks and finance and leasing companies. We emphasize prompt and responsive service to meet customer requirements and offer various financing plans designed to increase the opportunity for sales of our products and generate financing income for our company. Financial Products' activity is primarily conducted in the United States, with additional offices in Asia, Australia, Canada, Europe, and Latin America. B. Basis of consolidation The financial statements include the accounts of Caterpillar Inc. and its subsidiaries. Investments in companies that are owned 20% to 50% are accounted for by the equity method (see Note 10 on Page A-12). The accompanying financial statements and supplemental consolidating data, where applicable, have been grouped as follows: Consolidated -- Caterpillar Inc. and its subsidiaries. Machinery and Engines -- primarily our manufacturing, marketing, and parts distribution operations, with the Financial Products' subsidiaries on an equity basis. Financial Products -- our finance and insurance subsidiaries, primarily Cat Financial and Caterpillar Insurance Services Corporation. Certain amounts for prior years have been reclassified to conform with the current-year financial statement presentation. C. Sales and revenue recognition Sales of machines and engines are generally unconditional sales that are recorded when product is shipped and invoiced to independently owned and operated dealers or customers. Revenues primarily represent finance and lease revenues of Cat Financial, a wholly-owned subsidiary. Finance revenues are recognized over the term of the contract at a constant rate of return on the scheduled uncollected principal balance. Lease revenues are recognized in the period earned. Recognition of income is suspended when collection of future income is not probable. Income recognition is resumed if the receivable becomes contractually current and collection doubts are removed; previously suspended income is recognized at that time. D. Inventories Inventories are valued principally by the LIFO (last-in, first-out) method. The value of inventories on the LIFO basis represented approximately 85% of total inventories at current cost value at December 31, 1998, 1997, and 1996. If the FIFO (first-in, first-out) method had been in use, inventories would have been $1,978, $2,067, and $2,123 higher than reported at December 31, 1998, 1997, and 1996, respectively. E. Depreciation and amortization Depreciation of plant and equipment is computed principally using accelerated methods. Amortization of purchased intangibles is computed using the straight- line method, generally over a period of 20 years or less. The increase in intangible assets in 1998 was primarily related to the acquisition of Perkins (see Note 22 on Page A-19). F. Foreign currency translation The functional currency for most of our Machinery and Engines' consolidated companies is the U.S. dollar. The functional currency A-7 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- for most of our Financial Products' and equity basis companies is the respective local currency. Gains and losses resulting from the translation of foreign currency amounts to the functional currency are included in the results of operations. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in "Accumulated other comprehensive income," which is part of stockholders' equity. G. Derivative financial instruments We use derivative financial instruments (derivatives) to manage foreign currency, interest rate, and commodity price exposures that arise in the normal course of business. Derivatives that we use are primarily foreign currency contracts (forward and option), interest rate swaps, and commodity contracts (swap and option). Derivatives are not used for speculative purposes. Please refer to Note 2 for more information on derivatives, including the methods used to account for them. H. Estimates in financial statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts. Examples of the more significant estimates include: accruals and reserves for warranty and product liability losses, postemployment benefits, environmental costs, income taxes, and plant closing and consolidation costs. I. Future accounting changes In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This SOP requires the capitalization of certain costs associated with internally-developed, internal-use software that our company has historically expensed as incurred. We are required to adopt SOP 98-1 for the year beginning January 1, 1999. It will not have a material impact on the company's financial position, results of operations, or cash flows. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that an entity record all derivatives in the statement of financial position at their fair value. It also requires changes in fair value to be recorded each period in current earnings or other comprehensive income depending upon the purpose for using the derivative and/or its qualification, designation, and effectiveness as a hedging transaction. We are required to adopt this new accounting standard for the year beginning January 1, 2000. We are currently analyzing the impact of SFAS 133. Due to the inherent complexities of this standard, we have not yet determined the full impact that the adoption of SFAS 133 will have on our financial position, results of operations, or cash flows. However, at this time, we do not believe that the impact will be material. 2. Derivative financial instruments and risk management ================================================================================ A. Foreign exchange derivative instruments -- forward exchange and option contracts Our Machinery and Engines' operations are subject to foreign exchange risk. Currency exchange rates impact the U.S. dollar amount of sales made and costs incurred in foreign currencies. Our Financial Products' operations are subject to foreign exchange risk when the currency of debt obligations does not match the currency of the receivables portfolio. Forward exchange contracts and certain foreign currency option contracts are used to hedge our foreign exchange risks. Other than the up-front premiums that we pay on foreign currency option contracts, all cash flow related to these contracts occurs when the contracts mature. Our accounting treatment of foreign currency contracts depends upon the nature of the contracts: 1. Forward contracts designated as hedges of firm future foreign currency commitments and purchased foreign currency option contracts designated as hedges of probable foreign currency transactions: . No gains or losses are reported until the hedged transaction occurs, even if the contracts are terminated or mature prior to the time of the hedged transaction. . Gains and losses are recognized and reported on the same financial statement line as the hedged transaction when the hedged transaction occurs. . Gains and losses are immediately recognized in current income ("Other income (expense)" in Statement 1) in those unusual instances when the hedged transaction is no longer expected to occur, or a foreign currency contract is no longer effective as a hedge. 2. All other foreign currency contracts (those used to hedge net balance sheet exposures and anticipated net cash flow exposures for the next 12 months): . All gains or losses are recognized in current income ("Other income (expense)") as currency exchange rates change. . Net gains are reflected as an asset ("Receivables -- trade and other" in Statement 3) until cash is actually received. Conversely, net losses are shown as a liability ("Accounts payable and accrued expenses" in Statement 3) until cash is actually paid. The notional amounts of outstanding contracts to buy and sell foreign currency were:
December 31, 1998 1997 1996 ------ ------ ----- Hedges of firm commitments and/or probable foreign currency transactions.. $ 222 $ 166 $ 27 Hedges of balance sheet exposure and/or anticipated cash flow exposure for the next 12 months.......................... $1,802 $1,294 $ 911
In addition, we had outstanding cross-currency (primarily cross-European currency) contracts totaling $6, $6, and $122 at December 31, 1998, 1997, and 1996, respectively, to hedge various European currencies against the Deutsche mark (1998 cross-European currency contracts involved currencies of Non- European Monetary Union (EMU) countries). We use the Deutsche mark to manage our continental European currency cash flows against the dollar, and then use cross-European currency contracts to manage the risk of exchange rate movement between the Deutsche mark and the specific European currency of the cash flow. The maturity dates for our outstanding contracts, including the cross- European contracts, are primarily less than six months. Please refer to Note 16 and Table IV on Page A-15 for fair value information on foreign currency contracts. A-8 Caterpillar Inc. - -------------------------------------------------------------------------------- B. Interest rate derivative instruments We primarily use interest rate swap contracts to manage our exposure to interest rate changes and to lower the cost of borrowed funds. Interest rate swap contracts are linked to debt instruments and, in effect, change the characteristics of the debt (e.g., from fixed rate to floating rate). Interest rate swap contracts are not reflected in the financial statements at fair market value. The notional amounts of outstanding interest rate swap contracts were $3,083, $2,595, and $2,869 at December 31, 1998, 1997, and 1996, respectively. The difference between the interest payable and the interest receivable on each interest rate swap contract is recorded each reporting period as an adjustment to current income ("Interest expense excluding Financial Products" or "Interest expense of Financial Products" in Statement 1, as applicable). Interest rate swap contracts that are in a payable position are shown as interest payable ("Accounts payable and accrued expenses" in Statement 3); those in a receivable position are shown as an asset ("Other assets" in Statement 3). The actual cash settlement on these interest rate swap contracts occurs at times specified in the agreement. If an interest rate swap contract is terminated prior to its maturity, no immediate gain or loss is recognized in the financial statements, except in those cases where the debt instrument to which the contract is linked is also terminated. Please refer to Note 16 and Table IV on Page A-15 for fair value information of interest rate swap contracts. C. Commodity related derivative instruments Our Machinery and Engines' operations are also subject to commodity price risk (i.e., potential price increases of our production material as a result of price increases in raw material). We make limited use of commodity swap and/or option contracts to manage the risk of unfavorable price movement. The use of these types of derivative financial instruments has not been material. 3. Other income (expense) ================================================================================
Years ended December 31, 1998 1997 1996 ------ ------ ------ Investment and interest income....................... $ 101 $ 115 $ 90 License fees......................................... 18 25 26 Foreign exchange (losses) gains...................... (23) (10) 1 Miscellaneous income................................. 89 72 26 ------ ------ ------ $ 185 $ 202 $ 143 ====== ====== ====== 4. Inventories ================================================================================ December 31, 1998 1997 1996 ------ ------ ------ Raw materials and work-in-process.................... $1,041 $1,013 $ 909 Finished goods....................................... 1,605 1,404 1,123 Supplies............................................. 196 186 190 ------ ------ ------ $2,842 $2,603 $2,222 ====== ====== ======
5. Finance receivables ================================================================================ Finance receivables are receivables of Cat Financial, which generally can be repaid or refinanced without penalty prior to contractual maturity. Total finance receivables reported in Statement 3 are net of an allowance for credit losses. Please refer to Table I below for additional finance receivables information and Note 16 and Table IV on Page A-15 for fair value information. _______________________________________________________________________________ TABLE I -- Finance Receivables Information _______________________________________________________________________________ Contractual maturities of outstanding receivables:
December 31, 1998 Installment Financing Amounts Due In Contracts Leases Notes Total - -------------- ----------- --------- ------ -------- 1999................................................. $ 917 $1,220 $ 850 $2,987 2000................................................. 645 862 553 2,060 2001................................................. 417 581 436 1,434 2002................................................. 221 288 203 712 2003................................................. 78 115 177 370 Thereafter........................................... 15 95 812 922 ------ ------ ------ ------ 2,293 3,161 3,031 8,485 Residual value....................................... -- 896 -- 896 Less: Unearned income................................ 197 487 13 697 ------ ------ ------ ------ Total................................................ $2,096 $3,570 $3,018 $8,684 ====== ====== ====== ====== Impaired loans and leases: 1998 1997 1996 ------ ------ ------ Average recorded investment................................... $ 74 $ 47 $ 43 ====== ====== ====== At December 31: Recorded investment.......................................... $ 61 $ 30 $ 33 Less: Fair value of underlying collateral.................... 35 18 21 ------ ------ ------ Potential loss................................................ $ 26 $ 12 $ 12 ====== ====== ====== Allowance for credit loss activity: 1998 1997 1996 ------ ------ ------ Balance at beginning of year.................................. $ 84 $ 74 $ 57 Provision for credit losses................................... 70 39 41 Less: Net credit losses....................................... 38 19 21 Less: Other -- net............................................ 6 10 3 ------ ------ ------ Balance at end of year........................................ $ 110 $ 84 $ 74 ====== ====== ====== Cat Financial's net investment in financing leases: December 31, 1998 1997 1996 ------ ------ ------ Total minimum lease payments receivable....................... $3,161 $2,784 $2,383 Estimated residual value of leased assets: Guaranteed................................................... 229 206 162 Unguaranteed................................................. 667 519 402 ------ ------ ------ 4,057 3,509 2,947 Less: Unearned income......................................... 487 478 430 ------ ------ ------ Net investment in financing leases............................ $3,570 $3,031 $2,517 ====== ====== ======
================================================================================ A-9 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- 6. Income taxes ================================================================================ The components of profit before taxes were:
Years ended December 31, 1998 1997 1996 ------ ------ ------ U.S................................................. $1,880 $2,071 $1,565 Non-U.S............................................. 294 342 376 ------ ------ ------ $2,174 $2,413 $1,941 ====== ====== ====== The components of the provision for income taxes were: Years ended December 31, 1998 1997 1996 ------ ------ ------ Current tax provision: U.S. Federal....................................... $ 471 $ 571 $ 399 Non-U.S............................................ 102 103 83 State (U.S.)....................................... 45 54 36 ------ ------ ------ $ 618 $ 728 $ 518 ------ ------ ------ Deferred tax provision (credit): U.S. Federal....................................... 93 60 86 Non-U.S............................................ (55) 7 7 State (U.S.)....................................... 9 1 2 ------ ------ ------ 47 68 95 ------ ------ ------ Total provision..................................... $ 665 $ 796 $ 613 ====== ====== ====== Reconciliation of the U.S. federal statutory rate to effective rate: Years ended December 31, 1998 1997 1996 ------ ------ ------ U.S. statutory rate................................. 35.0 % 35.0 % 35.0 % (Decreases) increases in taxes resulting from: Net operating loss carryforwards................... (2.1)% (1.0)% (0.6)% Benefit of Foreign Sales Corporation............... (3.2)% (2.8)% (2.5)% Other--net......................................... 0.9 % 1.8 % (0.3)% ------ ------ ------ Provision for income taxes.......................... 30.6 % 33.0 % 31.6 % ------ ------ ------
We paid income taxes of $714, $709, and $452 in 1998, 1997, and 1996, respectively. During 1996, a settlement was reached with the U.S. Internal Revenue Service (IRS) covering tax years 1988 through 1991. The settlement had a slight favorable impact on our 1996 effective tax rate. We have recorded income tax expense at U.S. tax rates on all profits, except for undistributed profits of non-U.S. companies which are considered permanently invested. Determination of the amount of unrecognized deferred tax liability related to permanently invested profits is not feasible. Deferred tax assets and liabilities:
December 31, 1998 1997 1996 ---- ---- ---- Deferred tax assets: Postemployment benefits other than pensions.............................. $ 1,032 $ 1,107 $ 1,212 Warranty reserves................................. 194 159 114 Unrealized profit excluded from inventories................................. 179 201 176 Net operating loss carryforwards.................. 83 76 105 Inventory valuation method........................ 78 62 63 Other............................................. 198 213 233 ------- ------- ------- 1,764 1,818 1,903 ------- ------- ------- Deferred tax liabilities: Capital assets.................................... (263) (177) (161) Pension........................................... (51) (79) (86) ------- ------- ------- (314) (256) (247) ------- ------- ------- Valuation allowance for deferred tax assets......... (61) (129) (153) ------- ------- ------- Deferred taxes--net................................. $ 1,389 $ 1,433 $ 1,503 ======= ======= =======
As of December 31, 1998, amounts and expiration dates of net operating loss carryforwards in various non-U.S. taxing jurisdictions were: 2000 2001 2002 2003 Unlimited Total ------------------------------------------------------ $ 11 $ 4 $ 17 $ 18 $ 261 $ 311 In 1998, circumstances changed at certain of our European subsidiaries which allowed us to reduce the valuation allowance and to record additional deferred tax assets. The remaining valuation allowance primarily relates to one non-U.S. subsidiary. Circumstances could change in the future which would allow us to reduce the remaining valuation allowance and to record additional deferred tax assets. 7. Postemployment benefit plans ================================================================================ A. Pension plans We have both U.S. and non-U.S. pension plans covering substantially all of our employees. The defined benefit plans provide a benefit based on years of service and/or the employee's average earnings near retirement. Please refer to Table II on Page A-11 for additional financial information. B. Other postretirement benefit plans We have defined-benefit retirement health care and life insurance plans for substantially all of our U.S. employees. Please refer to Table II on Page A-11 for additional financial information. C. Other postemployment benefit plans We offer long-term disability benefits, continued health care for disabled employees, survivor income benefits insurance, and supplemental unemployment benefits to substantially all eligible U.S. employees. D. Summary of long-term liability:
December 31, 1998 1997 1996 ------ ------ ------ Pensions..................................... $ 66 $ 3 $ 3 Postretirement benefits other than pensions.. 2,457 2,628 2,948 Other postemployment benefits................ 67 67 68 ------ ------ ------ $2,590 $2,698 $3,019 ====== ====== ======
8. Operating leases ================================================================================ We lease certain computer and communications equipment, transportation equipment, and other property through operating leases. Total rental expense for operating leases was $224, $176, and $151 for 1998, 1997, and 1996, respectively. Minimum payments for operating leases having initial or remaining non- cancelable terms in excess of one year are: Years ended December 31, After 1999 2000 2001 2002 2003 2003 Total ------------------------------------------------------------ $136 $ 97 $ 66 $ 45 $ 35 $170 $ 549 A-10 Caterpillar Inc. - -------------------------------------------------------------------------------- ================================================================================ TABLE II -- Financial Information Related to Pension and Other Postretirement Benefit Plans - --------------------------------------------------------------------------------
Pension Benefits Other Postretirement Benefits --------------------------- -------------------------------- 1998 1997 1996 1998 1997 1996 -------- -------- ------- ---------- --------- --------- Change in benefit obligation: Benefit obligation, January 1.............................. $ 6,713 $ 6,082 $5,843 $ 3,603 $ 3,346 $ 3,031 Service cost............................................... 148 114 110 82 72 81 Interest cost.............................................. 484 434 417 256 249 226 Business combinations...................................... 504 -- -- -- -- -- Plan amendments............................................ 335 -- -- 226 -- -- Actuarial (gains) losses................................... 272 439 88 43 117 196 Foreign currency exchange rates............................ 49 71 4 -- -- -- Benefits paid.............................................. (471) (427) (380) (190) (181) (188) ------- ------- ------ ------- ------- ------- Benefit obligation, December 31............................ $ 8,034 $ 6,713 $6,082 $ 4,020 $ 3,603 $ 3,346 ------- ------- ------ ------- ------- ------- Change in plan assets: Fair value of plan assets, January 1....................... $ 7,718 $ 6,930 $6,199 $ 804 $ 547 $ 297 Actual return on plan assets............................... 983 1,188 1,023 104 76 74 Business combinations...................................... 448 -- -- -- -- -- Foreign currency exchange rate changes..................... 34 (24) 14 -- -- -- Voluntary employer contributions........................... -- -- -- 200 200 200 Benefits paid.............................................. (471) (427) (380) (185) (176) (186) Employer funding of benefits paid.......................... 44 51 74 175 157 162 ------- ------- ------ ------- ------- ------- Fair value of plan assets, December 31..................... $ 8,756 $ 7,718 $6,930 $ 1,098 $ 804 $ 547 ------- ------- ------ ------- ------- ------- Over (under) funded, December 31............................ $ 722 $ 1,005 $ 848 $(2,922) $(2,799) $(2,799) Unrecognized prior service cost............................ 577 332 319 208 (98) (289) Unrecognized net actuarial (gain) loss..................... (1,074) (1,058) (894) 51 38 (49) Unrecognized net asset existing at adoption of SFAS 87..... (42) (59) (77) -- -- -- ------- ------- ------ ------- ------- ------- Net amount recognized in financial position................ $ 183 $ 220 $ 196 $(2,663) $(2,859) $(3,137) ------- ------- ------ ------- ------- ------- Components of net amount recognized in financial position: Prepaid benefit costs...................................... $ 501 $ 404 $ 339 $ -- $ -- $ -- Accrued benefit liabilities................................ (318) (184) (143) (2,663) (2,859) (3,137) Intangible assets.......................................... 2 3 3 -- -- -- Adjustment for minimum pension liability................... (66) (3) (3) -- -- -- Accumulated other comprehensive income..................... 64 -- -- -- -- -- ------- ------- ------ ------- ------- ------- Net asset (liability) recognized........................... $ 183 $ 220 $ 196 $(2,663) $(2,859) $(3,137) ------- ------- ------ ------- ------- ------- Components of net periodic benefit cost: Service cost............................................... $ 148 $ 114 $ 110 $ 82 $ 72 $ 81 Interest cost.............................................. 484 434 417 256 249 226 Expected return on plan assets............................. (689) (580) (532) (74) (47) (26) Amortization of: Net asset existing at adoption of SFAS 87................ (23) (23) (22) -- -- -- Prior service cost/1/.................................... 88 62 63 (80) (190) (190) Net actuarial (gain) loss................................ (4) (1) (1) -- -- (1) ------- ------- ------ ------- ------- ------- Total benefit cost included in results of operations....... $ 4 $ 6 $ 35 $ 184 $ 84 $ 90 ======= ======= ====== ======= ======= ======= Rate assumptions as of December 31: Assumed discount rate/2/................................... 6.6% 7.0% 7.4% 6.8% 7.0% 7.5% Expected rate of compensation increase/2/................ 4.0% 4.0% 4.2% 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets/2/...... 9.6% 9.5% 9.4% 10.0% 9.5% 9.5%
For measurement purposes, a 6.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. This rate was assumed to decrease gradually to 4.5% in 2002. /1/Prior service costs are amortized using a straight-line method. For our pension plans, the straight-line method is used over the average remaining service period of employees expected to receive benefits from the plan amendment. For our other postretirement benefit plans, the straight-line method is used over the average remaining service period of employees impacted by the plan amendment. /2/Weighted-average rates. A-11 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE II Continued -- Financial Information Related to Pension and Other Postretirement Benefit Plans - -------------------------------------------------------------------------------- Effects of a one-percentage-point change in the assumed health care cost trend rates for 1998:
One-percentage- One-percentage- point increase point decrease --------------- ---------------- Approximate effect on the total of service and interest cost components of other postretirement benefit cost......... $39 $ (32) Approximate effect on accumulated postretirement benefit obligation......... $337 $(286)
The following amounts relate to our pension plans with accumulated benefit obligations in excess of plan assets:
At December 31, 1998 1997 1996 -------- -------- -------- Accumulated benefit obligation........ $(3,546) $ (69) $(2,459) Projected benefit obligation.......... $(3,593) $ (92) $(2,479) Fair value of plan assets............. $ 3,239 $ 41 $ 2,430
- -------------------------------------------------------------------------------- 9. Property, plant, and equipment - --------------------------------------------------------------------------------
December 31, 1998 1997 1996 -------- -------- -------- Land -- at original cost................ $ 140 $ 121 $ 122 Buildings and land improvements......... 2,949 2,773 2,704 Machinery, equipment, and other......... 5,871 5,309 5,047 Equipment leased to others.............. 1,063 843 779 Construction-in-process................. 372 357 165 -------- -------- -------- 10,395 9,403 8,817 Less: Accumulated depreciation.......... 5,529 5,345 5,050 -------- -------- -------- Property, plant, and equipment -- net... $ 4,866 $ 4,058 $ 3,767 ======== ======== ========
We had commitments for the purchase or construction of capital assets of approximately $295 at December 31, 1998. Assets recorded under capital leases/1/:
December 31, 1998 1997 1996 -------- -------- -------- Gross capital leases/2/............... $ 703 $ 717 $ 405 Less: Accumulated depreciation.......... 547 561 279 -------- -------- -------- Net capital leases...................... $ 156 $ 156 $ 126 ======== ======== ========
/1/ Included in Property, plant, and equipment table above. /2/ Consists primarily of machinery and equipment. Equipment leased to others (primarily by Financial Products):
December 31, 1998 1997 1996 -------- -------- -------- Equipment leased to others -- at original cost...................... $1,063 $ 843 $ 779 Less: Accumulated depreciation.......... 328 272 251 -------- -------- -------- Equipment leased to others -- net....... $ 735 $ 571 $ 528 ======== ======== ========
Scheduled minimum rental payments to be received for equipment leased to others:
December 31, After 1999 2000 2001 2002 2003 2003 - ------------------------------------------------------ $313 $239 $144 $96 $16 $8
10. Unconsolidated affiliated companies - -------------------------------------------------------------------------------- Combined financial information of the unconsolidated affiliated companies, accounted for by the equity method, was as follows:
Years ended September 30, 1998 1997 1996 ------- ------- ------- Results of Operations Sales................................... $2,909 $3,613 $3,729 ====== ====== ====== Profit.................................. $ 6 $ 104 $ 75 ====== ====== ======
September 30, 1998 1997 1996 ------- ------- ------- Financial Position Assets: Current assets......................... $1,569 $1,949 $1,995 Property, plant, and equipment -- net.. 788 792 733 Other assets........................... 351 331 395 ------- ------- ------- 2,708 3,072 3,123 ------- ------- ------- Liabilities: Current liabilities.................... 1,259 1,610 1,683 Long-term debt due after one year...... 274 203 133 Other liabilities...................... 94 129 145 ------- ------- ------- 1,627 1,942 1,961 ------- ------- ------- Ownership............................... $1,081 $1,130 $1,162 ======= ======= =======
At December 31, 1998, consolidated "Profit employed in the business" in Statement 2 included $164 representing undistributed profit of the unconsolidated affiliated companies. In 1998, 1997, and 1996, we received $10, $36, and $10, respectively, in dividends from unconsolidated affiliated companies. 11. Credit commitments - -------------------------------------------------------------------------------- December 31, 1998 Machinery Financial Consolidated and Engines Products ------------ ----------- --------- Credit lines available: U.S........................... $2,900/1/ $2,900/1/ $2,610/1/ Non-U.S....................... 1,781 152 1,629 ------ ------ ------ Total credit lines available.. 4,681 3,052 4,239 Utilized credit: Backup for bank borrowings.... 238 49 189 ------ ------ ------ Unused credit................. $4,443 $3,003 $4,050 ====== ====== ======
/1/The total U.S. line of credit of $2,900 is available to both Machinery and Engines and Financial Products (Cat Financial). Cat Financial may use up to 90% of the available line subject to a maximum debt to equity ratio. Machinery and Engines may use up to 100% of the available line subject to a minimum level of net worth. Based on these restrictions, and the allocating decisions of available credit made by management, the line of credit available to Cat Financial at December 31, 1998, was $2,610. Based on long-term credit agreements, $2,353, $2,301, and $1,522 of commercial paper outstanding at December 31, 1998, 1997, and 1996, respectively, were classified as long-term debt due after one year. A-12 12. Short-term borrowings - --------------------------------------------------------------------------------
December 31, 1998 1997 1996 ------ ------ ------ Machinery and Engines: Notes payable to banks............................... $ 49 $ 53 $ 36 Financial Products: Notes payable to banks............................... 189 145 257 Commercial paper..................................... 497 235 859 Other................................................ 74 51 40 ------ ------ ------ 760 431 1,156 ------ ------ ------ Total short-term borrowings........................... $ 809 $ 484 $1,192 ====== ====== ======
The weighted average interest rates on short-term borrowings outstanding were:
December 31, 1998 1997 1996 ------ ------ ------ Notes payable to banks................................ 4.7% 4.9% 3.7% Commercial paper...................................... 5.2% 5.2% 5.2% Other................................................. 5.2% 5.5% 5.5%
Please refer to Note 16 and Table IV on Page A-15 for fair value information on short-term borrowings. 13. Long-term debt - --------------------------------------------------------------------------------
December 31, 1998 1997 1996 ------ ------ ------ Machinery and Engines: Notes -- 9 3/8% due 2000............................ $ 150 $ 150 $ 149 Notes -- 9 3/8% due 2001............................ 184 184 183 Notes -- 6% due 2003................................ 253 -- -- Debentures -- 9% due 2006........................... 202 202 202 Debentures -- 6% due 2007........................... 147 141 136 Debentures -- 9 3/8% due 2011....................... 123 123 123 Debentures -- 9 3/4% due 2000-2019.................. 199 199 199 Debentures -- 9 3/8% due 2021....................... 236 236 236 Debentures -- 8% due 2023........................... 199 199 199 Debentures -- 6 5/8% due 2028....................... 299 -- -- Debentures -- 7 3/8% due 2097....................... 297 297 -- Medium-term notes................................... 96 153 185 Capital lease obligations........................... 510 438 281 Other............................................... 98 45 125 ------ ------ ------ 2,993 2,367 2,018 Financial Products: Commercial paper supported by revolving credit agreements (Note 11)...................... 2,353 2,301 1,522 Medium-term notes................................... 4,025 2,241 1,505 Other............................................... 33 33 42 ------ ------ ------ Total Financial Products.............................. 6,411 4,575 3,069 ------ ------ ------ Total long-term debt due after one year............... $9,404 $6,942 $5,087 ====== ====== ======
Other than the debt of the Financial Products' subsidiaries, all outstanding notes and debentures itemized above are unsecured direct obligations of Caterpillar Inc. The capital lease obligations are collateralized by leased manufacturing equipment and/or security deposits. The 6% notes may be redeemed in whole at their principal amount if we are required to pay additional taxes or duties as a result of a change in tax law and that obligation cannot be reasonably avoided. In addition, if the identity of beneficial owners of the notes must be disclosed in certain circumstances, we would be required either to redeem the notes or satisfy the information disclosure requirement through the payment of certain taxes or charges. We may also purchase the 6% notes at any time in the open market. The 6% debentures were sold at significant original issue discounts ($144). This issue is carried net of the unamortized portion of its discount, which is amortized as interest expense over the life of the issue. These debentures have a principal at maturity of $250 and an effective annual cost of 13.3%. We may redeem them, at our option, at an amount equal to the respective principal at maturity. We may redeem annually, at our option, an additional amount for the 9 3/4% sinking fund debenture issue, without premium, equal to 200% of the amount of the sinking fund requirement. Also, we may redeem additional portions of the sinking fund debentures by the payment of premiums which, starting in 1999, decrease periodically. The premium at the first redemption date of June 1, 1999, is 4.875%. We may redeem the 6 5/8% and the 7 3/8% debentures in whole or in part at our option at any time at a redemption price equal to the greater of 100% of the principal amount of the debentures to be redeemed or the sum of the present value of the remaining scheduled payments. The terms of other notes and debentures do not specify a redemption option prior to maturity. The medium-term notes are offered on a continuous basis through agents and are primarily at fixed rates. Machinery and Engines' medium-term notes have maturities from nine months to 30 years. At December 31, 1998, these notes had a weighted average interest rate of 7.7% with one month to six years remaining to maturity. Financial Products' medium-term notes have a weighted average interest rate of 5.48% with maturities up to 15 years at December 31, 1998. The aggregate amounts of maturities and sinking fund requirements of long- term debt during each of the years 1999 through 2003, including that due within one year and classified as current are:
December 31, 1999 2000 2001 2002 2003 ------ ------ ------ ------ ------ Machinery and Engines................... $ 60 $ 174 $ 203 $ 137 $ 221 Financial Products...................... 2,179 2,371 960 289 350 ------ ------ ------ ------ ------ $2,239 $2,545 $1,163 $ 426 $ 571 ====== ====== ====== ====== ======
Interest paid on short-term and long-term borrowings for 1998, 1997, and 1996 was $669, $508, and $474, respectively. Please refer to Note 16 and Table IV on Page A-15 for fair value information on long-term debt. 14. Capital stock - -------------------------------------------------------------------------------- A. Stock options In 1996, stockholders approved a plan providing for the granting of options to purchase common stock to officers and other key employees, as well as non- employee directors. This plan reserves 22,000,000 shares of common stock for issuance. Options vest at the rate of one-third per year over the three year period following the date of grant, and have a maximum term of ten years. Common shares issued under stock options, including treasury shares reissued, totaled 676,113; 1,264,539; and 1,313,932 in 1998, 1997, and 1996, respectively. Our plan grants options which have exercise prices equal to the average market price on the date of grant. We account for our A-13 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Therefore, no compensation expense is recognized in association with these options. As required by Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation," a summary of the pro forma net income and profit per share amounts are shown in Table III below. Consistent with the requirements of SFAS 123, compensation expense related to grants made prior to 1995 have not been taken into consideration. Therefore, the pro forma amounts for 1997 and 1996 are not representative of the impact of future disclosures. The fair value of each option grant is estimated at the date of grant using the Black-Scholes option- pricing model. Please refer to Table III below for additional financial information on our stock options. B. Restricted stock The 1996 Stock Option and Long-Term Incentive Plan permits the award of restricted stock to officers and other key employees, as well as non-employee directors. During 1998, 117,052 shares of restricted stock were awarded to officers and other key employees as Performance Awards, and 7,150 shares of restricted stock were granted to non-employee directors. C. Stockholders' rights plan We are authorized to issue 5,000,000 shares of preferred stock, of which 2,000,000 shares have been designated as Series A - ------------------------------------------------------------------------------- TABLE III -- Financial Information Related to Capital Stock SFAS 123 pro forma net income and earnings per share:
Years ended December 31, 1998 1997 1996 -------- -------- -------- Net Income: As reported............................... $1,513 $1,665 $1,361 Pro forma................................. $1,481 $1,640 $1,352 Profit per share of common stock: As reported: Basic.................................... $ 4.17 $ 4.44 $ 3.54 Assuming dilution........................ $ 4.11 $ 4.37 $ 3.50 Pro forma: Basic.................................... $ 4.08 $ 4.37 $ 3.51 Assuming dilution........................ $ 4.04 $ 4.32 $ 3.48
Weighted-average assumptions used in determining fair value of option grants:
Grant Year 1998 1997 1996 ------- ------- ------- Dividend yield............................ 1.91% 1.94% 2.13% Expected volatility....................... 19.80% 25.51% 24.19% Risk-free interest rates.................. 5.55% 6.42% 6.59% Expected lives............................ 5 years 4 years 4 years
Changes in the status of common shares subject to issuance under options:
1998 1997 1996 ----------------------------- ----------------------------- ----------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------------ ------------- ------------ ------------- ------------ ------------- Fixed Options Outstanding at beginning of year................... 15,056,412 $31.89 13,874,114 $25.31 13,267,648 $21.96 Granted to officers and key employees............. 4,695,495 $55.69 3,491,650 $51.66 3,334,100 $32.91 Granted to outside directors................. 44,000 $54.38 40,000 $39.19 44,000 $33.47 Exercised.................. (1,237,010) $23.22 (2,274,474) $22.16 (2,627,940) $18.03 Lapsed..................... (119,120) $45.74 (74,878) $32.61 (143,694) $28.23 ----------- ---------- ---------- Outstanding at end of year. 18,439,777 $38.50 15,056,412 $31.89 13,874,114 $25.31 =========== ========== ========== Options exercisable at year-end.................. 10,443,515 $28.48 8,386,814 $23.58 7,544,270 $20.44 Weighted-average fair value of options granted during the year...................... $13.01 $16.15 $8.12
Stock options outstanding and exercisable:
Options Outstanding Options Exercisable ---------------------------------------------------- -------------------------------- Weighted-Average Remaining # Outstanding Contractual Life Weighted-Average # Outstanding Weighted-Average Exercise Prices at 12/31/98 (Years) Exercise Price at 12/31/98 Exercise Price - --------------- ------------- ------------------ ---------------- ------------- ---------------- $11.78-$18.77 3,020,402 3.2 $16.02 3,020,402 $16.02 $26.77-$39.19 7,275,490 6.6 $30.50 6,221,118 $30.06 $51.66-$55.69 8,143,885 9.0 $53.98 1,201,995 $51.66 ------------ ------------ 18,439,777 7.1 $38.50 10,443,515 $28.48 ============ ============
- -------------------------------------------------------------------------------- A-14 Caterpillar Inc. - -------------------------------------------------------------------------------- Junior Participating Preferred Stock of $1.00 par value. None of the preferred shares have been issued. Stockholders would receive certain preferred stock purchase rights if someone acquired or announced a tender offer to acquire 15% or more of outstanding Caterpillar stock. In essence, those rights would permit each holder (other than the acquiring person) to purchase one share of Caterpillar stock at a 50% discount for every share owned. The rights, designed to protect the interests of Caterpillar stockholders during a takeover attempt, expire December 11, 2006. 15. Profit per share - -------------------- Years ended December 31, 1998 1997 1996 ------ ------ ------ Profit (A)................... $ 1,513 $ 1,665 $ 1,361 ============ ============ ============ Determination of shares: Weighted-average common shares outstanding (B)..... 363,189,005 375,124,745 384,960,440 Assumed conversion of stock options........... 4,941,357 5,416,215 3,724,630 ------------ ------------ ------------ Weighted-average common shares outstanding -- assuming dilution (C)...... 368,130,362 380,540,960 388,685,070 ============ ============ ============ Profit per share of common stock (A/B).......... $ 4.17 $ 4.44 $ 3.54 Profit per share of common stock -- assuming dilution (A/C).............. $ 4.11 $ 4.37 $ 3.50
Stock options to purchase 8,143,885 and 3,521,250 shares of common stock at a weighted-average price of $53.98 and $51.66 were outstanding during 1998 and 1997 respectively, but were not included in the computation of diluted profit per share, because the options' exercise price was greater than the average market price of the common shares. During 1996, there were no stock options excluded from the computation of diluted profit per share. 16. Fair values of financial instruments - ----------------------------------------- We used the following methods and assumptions to estimate the fair value of our financial instruments: Cash and short-term investments -- carrying amount approximated fair value. Long-term investments (other than investments in unconsolidated affiliated companies) -- fair value was estimated based on quoted market prices. Foreign currency contracts (forwards and options) -- fair value was estimated based on quoted market prices of comparable instruments. Finance receivables -- fair value was estimated by discounting the future cash flow using current rates, representative of receivables with similar remaining maturities. Historical bad debt experience was also considered. Short-term borrowings -- carrying amount approximated fair value. Long-term debt -- for Machinery and Engines' notes and debentures, fair value was estimated based on quoted market prices. For Financial Products, fair value was estimated by discounting the future cash flow using our current borrowing rates for similar types and maturities of debt, except for floating rate notes for which the carrying amount was considered a reasonable estimate of fair value. - -------------------------------------------------------------------------------- TABLE IV -- Fair Values of Financial Instruments - --------------------------------------------------------------------------------
Asset (Liability) 1998 1997 1996 -------------------------- ------------------- ------------------- At December 31 Carrying Fair Carrying Fair Carrying Fair Amount Value Amount Value Amount Value Reference # --------------- --------- -------- --------- -------- --------- -------------------- Cash and short-term investments.......... $ 360 $ 360 $ 292 $ 292 $ 487 $ 487 Statement 3, Note 17 Long-term investments.................... 450 450 701 701 508 508 Note 17 Foreign currency contracts............... 8 9 41 47 (3) (3) Note 2 Finance receivables -- net (excluding operating and finance type leases and currency swaps/1/)........... 7,709 7,770 5,788 5,815 4,954 4,980 Note 5 Short-term borrowings.................... (809) (809) (484) (484) (1,192) (1,192) Note 12 Long-term debt (including amounts due within one year) Machinery and Engines................. (3,053) (3,465) (2,421) (2,785) (2,140) (2,377) Note 13 Financial Products.................... (8,590) (8,634) (5,663) (5,721) (4,127) (4,176) Note 13 Interest rate swaps Machinery and Engines -- in a net receivable position........... 1 22 1 10 1 4 Note 2 in a net payable position.............. (6) -- (3) (1) (1) (3) Note 2 Financial Products -- in a net receivable position........... 14 19 -- 20 1 4 Note 2 in a net payable position.............. (2) (24) (3) (12) (4) (16) Note 2
/1/ Excluded items have a net carrying value at December 31, 1998, 1997, and 1996, of $865, $753, and $692, respectively. - -------------------------------------------------------------------------------- A-15 NOTES continued (Dollars in millions except per share data) _______________________________________________________________________________ Interest rate swaps -- fair value was estimated based on the amount that we would receive or pay to terminate our agreements as of year end. Please refer to Table IV on Page A-15 for the fair values of our financial instruments. 17. Concentration of credit risk - --------------------------------- Financial instruments with potential credit risk consist primarily of trade and finance receivables and short-term and long-term investments. Additionally, to a lesser extent, we have a potential credit risk associated with counterparties to derivative contracts. Trade receivables are primarily short-term receivables from independently owned and operated dealers which arise in the normal course of business. We perform regular credit evaluations of our dealers. Collateral is generally not required, and the majority of our trade receivables are unsecured. We do however, when deemed necessary, make use of various devices such as security agreements and letters of credit to protect our interests. No single dealer represents a significant concentration of credit risk. Finance receivables primarily represent receivables under installment sales contracts, receivables arising from leasing transactions and notes receivable. Receivables from customers in construction-related industries made up approximately one-third of total finance receivables at December 31, 1998, 1997, and 1996, respectively. We generally maintain a secured interest in the equipment financed. No single customer or region represents a significant concentration of credit risk. Short-term and long-term investments are held with high quality institutions and, by policy, the amount of credit exposure to any one institution is limited. Long-term investments are comprised of investments which collateralize capital lease obligations (see Note 13 on Page A-13) and investments of Caterpillar Insurance Co. Ltd. supporting insurance reserve requirements. Long-term investments are a component of "Other assets" in Statement 3. At December 31, 1998, 1997, and 1996, Cat Financial was contingently liable under guarantees for certain Caterpillar dealers' obligations totaling $254, $261, and $253, respectively, of which $119, $109, and $159, respectively, were outstanding. These guarantees have terms ranging up to two years and are fully secured by dealer assets. No loss has been experienced nor is any anticipated under these agreements. Outstanding derivative instruments, with notional amounts totaling $5,143, $4,079, and $3,957 and terms generally ranging up to five years, were held at December 31, 1998, 1997, and 1996, respectively. Collateral is not required of the counterparties or of our company. We do not anticipate nonperformance by any of the counterparties. Our exposure to credit loss in the event of nonperformance by the counterparties is limited to only those gains that we have recorded, but have not yet received cash payment. At December 31, 1998, 1997, and 1996, the exposure to credit loss was $22, $49, and $14, respectively. Please refer to Note 16 and Table IV on Page A-15 for fair value information. 18. Environmental matters - -------------------------- The company is regulated by federal, state, and international environmental laws governing our use of substances and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings, or competitive position. We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In doing that estimate, we do not consider amounts expected to be recovered from insurance companies and others. The amount set aside for environmental clean-up is not material and is included in "Accounts payable and accrued expenses" in Statement 3. If a range of liability estimates is available on a particular site, we accrue the lower end of that range. We cannot estimate costs on sites in the very early stages of clean-up. Currently, we have five of these sites and there is no more than a remote chance that a material amount for clean-up will be required. 19. Plant closing and consolidation costs - ------------------------------------------ The reserve for plant closing and consolidation costs includes the following:
December 31, 1998 1997 1996 ----- ----- ----- Write-down of property, plant, and equipment.. $ 78 $ 103 $ 102 Employee severance benefits................... 37 95 103 Rearrangement, start-up costs, and other...... 5 47 54 ----- ----- ----- Total reserve................................. $ 120 $ 245 $ 259 ===== ===== =====
The write-down of property, plant, and equipment establishes a new cost basis for assets that have been permanently impaired. Employee severance benefits (e.g., pension, medical, and supplemental unemployment benefits) are provided to employees affected by plant closings and consolidations. The reserve for such benefits is reduced as the benefits are provided. At December 31, 1998, the above reserve includes $49 of costs associated with the closure of the Component Products Division's Precision Barstock Products (PBP) operation located in York, Pennsylvania. The probable closing of the PBP manufacturing operation was announced in December 1991. In March 1996, it was announced that the facility would be closed. We are in the final stages of closing the unit. 20. Segment information - ------------------------ A. Basis for segment information The company is organized based on a decentralized structure that has established accountabilities to continually improve business focus and increase our ability to react quickly to changes in both the global business cycle and competitors' actions. Our current structure uses a product, geographic matrix organization comprised of multiple profit and service center divisions. Caterpillar is a highly integrated company. The majority of our profit centers are product focused. They are primarily responsible for the design, manufacture, and on-going support of their products; however, some of these product-focused profit centers also have marketing responsibilities. We also have geographically-based profit centers that are primarily focused on marketing; however, most of these profit centers also have some manufacturing responsibilities. One of our profit centers provides various financial services to our customers and dealers. The service center divisions perform corporate functions and provide centralized services. A-16 Caterpillar Inc. We have developed an internal measurement system to evaluate performance and to drive continuous improvement. This measurement system, which is not based on generally accepted accounting principles (GAAP), is intended to motivate desired behavior of employees and drive performance. It is not intended to measure a division's contribution to enterprise results. The sales and cost information used for internal purposes varies significantly from our consolidated, externally-reported information resulting in substantial reconciling items. Each division has specific performance targets and is evaluated and compensated based on achieving those targets. Performance targets differ from division to division; therefore, meaningful comparisons cannot be made among the profit or service center divisions. It is the comparison of actual results to budgeted results that makes our internal reporting valuable to management. Consequently, we feel that the financial information required by Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information" has limited value for our external readers. Due to Caterpillar's high level of integration and our concern that segment disclosures based on SFAS 131 requirements have limited value to external readers, we are continuing to disclose GAAP-based financial results for our three lines of business (Machinery, Engines, and Financial Products) in our Management's Discussion and Analysis beginning on page A-21. B. Description of segments The profit center divisions meet the SFAS 131 definition of "operating segments"; however, the service center divisions do not. Several of the profit centers have similar characteristics and have been aggregated. The following is a brief description of our seven reportable segments and the business activities included in the "All other" category. Asia/Pacific Marketing: Primarily responsible for marketing products through dealers in Australia, Asia (excluding Japan), and the Pacific Rim. Also includes the regional manufacturing of some products which are also produced by Construction & Mining Products. Construction & Mining Products: Primarily responsible for the design, manufacture, and on-going support of small, medium, and large machinery used in a variety of construction and mining applications. Also includes the design, manufacture, procurement, and marketing of components and control systems that are primarily consumed in the manufacturing of our machinery. EAME Marketing: Primarily responsible for marketing products through dealers in Europe, Africa, the Middle East, and the Commonwealth of Independent States. Also includes the regional manufacturing of some products which are also produced by Construction & Mining Products and Power Products. Financing & Insurance Services: Provides financing to customers and dealers for the purchase and lease of Caterpillar and noncompetitive related equipment, as well as some financing for Caterpillar sales to dealers. Also provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Latin America Marketing: Primarily responsible for marketing products through dealers in Latin America. Also includes the regional manufacturing of some products which are also produced by Construction & Mining Products and Power Products. Power Products: Primarily responsible for the design, manufacture, marketing, and ongoing support of reciprocating and turbine engines along with related systems. These engines and related systems are used in products manufactured in other segments, on-highway trucks, and locomotives; and in a variety of construction, electric power generation, marine, petroleum, and industrial applications. North America Marketing: Primarily responsible for marketing products (excluding Power Products) through dealers in the United States and Canada. All other: Primarily includes activities such as: service support and parts distribution to Caterpillar dealers worldwide; the design, manufacture, and ongoing support of agricultural machinery and paving products; logistics services for other companies; service tools for Caterpillar dealers; preventive maintenance products (filters and fluids); and the remanufacturing of Caterpillar engines and components. C. Segment measurement and reconciliations Please refer to Table V on Pages A-18 and A-19 for financial information regarding our segments. There are several accounting differences between our segment reporting and our GAAP-based external reporting. Our segments are measured on an accountable basis; therefore, only those items for which divisional management is directly responsible are included in the determination of segment profit/(loss) and assets. The following is a list of the more significant accounting differences: . Generally, liabilities are managed at the corporate level and are not included in segment operations. Segment accountable assets generally include inventories, receivables, property, plant, and equipment. . We account for intersegment transfers using a system of market-based prices. With minor exceptions, each of the profit centers either sells or purchases virtually all of its products to or from other profit centers within the company. Our high level of integration results in our internally-reported sales being approximately double that of our consolidated, externally- reported sales. . Segment inventories and cost of sales are valued using a current cost methodology. . Timing differences occur between our internal reporting and our external reporting such as: postretirement benefit expenses and profit that is recognized on intersegment transfers. . Interest expense is imputed (i.e., charged) to profit centers based on their level of accountable assets. This calculation takes into consideration the corporate debt to debt plus equity ratio and a weighted-average corporate interest rate. . In general, foreign currency fluctuations are neutralized for segment reporting. . Accountable profit is determined on a pre-tax basis. Reconciling items are created based on accounting differences between segment reporting and our consolidated, external reporting. Please refer to Table V on Pages A-18 and A-19 for financial information regarding significant reconciling items. Most of our A-17 NOTES continued (Dollars in millions except per share data) - -------------------------------------------------------------------------------- reconciling items are self-explanatory given the above explanations of accounting differences. However, for the reconciliation of profit, we have grouped the reconciling items as follows: . Corporate costs: Certain corporate costs are not charged to our segments. These costs are related to corporate requirements and strategies that are considered to be for the benefit of the entire organization. . Methodology differences: See previous discussion of significant accounting differences between segment reporting and consolidated, external reporting. . Methodology changes in segment reporting: Estimated restatements of prior periods to reflect changes in our internal-reporting methodology.
- ------------------------------------------------------------------------------------------------------------------------------------ TABLE V -- Segment Information (unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Business Segments: Asia/ Construction Financing Latin North Pacific & Mining EAME & Insurance America Power America All Marketing Products Marketing Services Marketing Products Marketing Other Total --------- ---------- --------- --------- --------- -------- --------- ------ -------- 1998 External sales and revenues... $1,093 197 3,289 1,114 1,763 5,300 7,414 866 $21,036 Intersegment sales and revenues..................... $ 2 8,678 937 -- 145 4,122 209 1,830 $15,923 Total sales and revenues...... $1,095 8,875 4,226 1,114 1,908 9,422 7,623 2,696 $36,959 Depreciation and amortization. $ 6 224 64 165 28 258 -- 54 $ 799/1/ Imputed interest expense...... $ 8 72 25 501 22 118 68 56 $ 870 Accountable profit (loss)..... $ (49) 1,090 211 201 85 410 118 191 $ 2,257 Accountable assets at Dec. 31. $ 289 2,349 862 10,539 741 3,479 1,595 2,030 $21,884 Capital Expenditures.......... $ 26 292 72 -- 19 349 -- 88 $ 846/1/ - ------------------------------------------------------------------------------------------------------------------------------------ 1997 External sales and revenues... $1,947 294 3,022 832 1,730 3,693 6,614 855 $18,987 Intersegment sales and revenues..................... $ 1 8,763 857 -- 147 3,645 207 1,718 $15,338 Total sales and revenues...... $1,948 9,057 3,879 832 1,877 7,338 6,821 2,573 $34,325 Depreciation and amortization. $ 5 228 67 136 27 165 1 48 $ 677/1/ Imputed interest expense...... $ 13 70 24 380 19 68 59 57 $ 690 Accountable profit............ $ 12 1,299 121 162 91 442 199 196 $ 2,522 Accountable assets at Dec. 31. $ 402 2,238 937 7,189 836 2,460 1,396 1,931 $17,389 Capital Expenditures.......... $ 23 243 67 7 18 287 1 105 $ 751/1/ - ----------------------------------------------------------------------------------------------------------------------------------- 1996 External sales and revenues... $2,172 314 2,937 715 1,270 2,890 5,632 734 $16,664 Intersegment sales and revenues..................... $ 2 7,815 633 -- 125 3,110 168 1,554 $13,407 Total sales and revenues...... $2,174 8,129 3,570 715 1,395 6,000 5,800 2,288 $30,071 Depreciation and amortization. $ 3 238 73 119 27 139 -- 45 $ 644/1/ Imputed interest expense...... $ 14 64 34 319 13 50 31 48 $ 573 Accountable profit............ $ 94 1,065 92 137 43 373 195 211 $ 2,210 Accountable assets at Dec. 31. $ 410 2,127 1,000 6,212 729 2,144 1,186 1,796 $15,604 Capital Expenditures.......... $ 20 172 56 -- 12 125 -- 73 $ 458/1/
/1/Amount differs from our consolidated, external reporting amount primarily because of service centers, which are not included in business segments.
Reconciliations: 1998 1997 1996 -------- -------- -------- Sales & Revenues ---------------- Total external sales and revenues from business segments.................. $21,036 $18,987 $16,664 Other................................... (59) (62) (142) ------- ------- ------- Total consolidated sales and revenues... $20,977 $18,925 $16,522 ======= ======= ======= Profit before taxes ------------------- Total accountable profit from business segments....................... $ 2,257 $ 2,522 $ 2,210 Corporate costs......................... (316) (317) (290) Methodology differences................. 168 14 (122) Methodology changes in segment reporting...................... -- 119 107 Other................................... 65 75 36 ------- ------- ------- Total consolidated profit before taxes.. $ 2,174 $ 2,413 $ 1,941 ======= ======= =======
December 31, 1998 1997 1996 ------- ------- ------- Assets ------ Total accountable assets from business segments....................... $21,884 $17,389 $15,604 Items not included in segment assets: Deferred income taxes & prepaids........ 2,036 1,968 1,945 Intangible assets & other assets........ 1,663 847 641 Investments in affiliated companies..... 534 539 536 Cash and short-term investments......... 360 292 487 Service center assets.................. 350 294 281 Liabilities included in segment assets.. 596 643 464 Inventory methodology differences....... (1,769) (1,700) (1,634) Intercompany trade receivables double counted in segment assets........ (1,217) -- -- Other................................... 691 484 404 ------- ------- ------- Total consolidated assets............... $25,128 $20,756 $18,728 ======= ======= =======
Continued on Page A-19 A-18 Caterpillar Inc. _______________________________________________________________________________ TABLE V Continued -- Segment Information (unaudited) _______________________________________________________________________________ Enterprise-Wide Disclosures: External sales and revenues from products and services:
1998 1997 1996 ------- ------- ------- Machinery.................. $13,448 $13,350 $11,862 Engines.................... 6,524 4,760 3,952 Financial Products......... 1,005 815 708 ------- ------- ------- Total consolidated....... $20,977 $18,925 $16,522 ======= ======= =======
Information about Geographic Areas:
Sales & Revenues/1/ Net property, plant, and equipment -------------------------------------- ------------------------------------- December 31, 1998 1997 1996 1998 1997 1996 ---------- ---------- ---------- ---------- ----------- --------- Inside United States........ $10,870 $ 9,492 $ 8,160 $3,038 $2,830 $2,638 Outside United States....... 10,107 9,433 8,362 1,828/2/ 1,228/2/ 1,129/2/ ---------- ---------- ---------- ---------- ----------- --------- Total..................... $20,977 $18,925 $16,522 $4,866 $4,058 $3,767 ========== ========== ========== ========== =========== =========
/1/ Sales of machinery and engines are based on dealer location. Revenues from services provided are based on location of customer. /2/ Amount includes $531, $189, and $139 of net property, plant, and equipment located in the United Kingdom as of December 31, 1998, 1997, and 1996, respectively. ________________________________________________________________________________ 21. Selected quarterly financial results (unaudited) - --------------------------------------------------------------------------------
1998 Quarter --------------------------------------------- 1st 2nd 3rd 4th ------- ------- ------- ------- Sales and revenues........... $4,794 $5,604 $5,173 $5,406 Less: Revenues............... 221 247 267 270 ------- ------- ------- ------- Sales........................ 4,573 5,357 4,906 5,136 Cost of goods sold........... 3,334 3,978 3,748 3,971 ------- ------- ------- ------- Gross margin................. 1,239 1,379 1,158 1,165 Profit....................... 430 446 336 301 Profit per share of common stock....................... $ 1.17 $ 1.22 $ .93 $ .84 Profit per share of common stock -- assuming dilution.. $ 1.15 $ 1.20 $ .92 $ .83 1997 Quarter -------------------------------------------- 1st 2nd 3rd 4th ------- ------- ------- ------- Sales and revenues........... $4,262 $4,870 $4,600 $5,193 Less: Revenues............... 190 194 215 216 ------- ------- ------- ------- Sales........................ 4,072 4,676 4,385 4,977 Cost of goods sold........... 2,981 3,450 3,278 3,665 ------- ------- ------- ------- Gross margin................. 1,091 1,226 1,107 1,312 Profit....................... 394 435 385 451 Profit per share of common stock....................... $ 1.04 $ 1.15 $ 1.03 $ 1.22 Profit per share of common stock -- assuming dilution.. $ 1.03 $ 1.13 $ 1.01 $ 1.20
22. Acquisition of Perkins - ---------------------------------------------------------------------------- During the first quarter of 1998, we acquired the net assets of Perkins Ltd. and the stock of several related subsidiaries for $1,328. We paid for this acquisition using a combination of existing cash and new debt. Perkins is a leading manufacturer of small to medium-sized diesel engines. The acquisition was accounted for using the purchase method of accounting. When we acquired Perkins we preliminarily used a 15-year amortization period for the purchased intangible assets. Subsequent review, including a more detailed analysis of the composition and benefit lives of these assets and a study of industry practices, led us to conclude that a 20-year amortization period was more appropriate. Therefore, amortization of acquired intangible assets, including goodwill, is being computed using the straight-line method over a period of 20 years. A-19 Five-year Financial Summary Caterpillar Inc. (Dollars in millions except per share data) - -------------------------------------------------------------------------------- Years ended December 31, 1998 1997 1996 1995 1994 ------- ------ ------ ------ ------ Sales and revenues............................................ $20,977 18,925 16,522 16,072 14,328 Sales........................................................ $19,972 18,110 15,814 15,451 13,863 Percent inside the United States........................... 51% 49% 49% 48% 51% Percent outside the United States.......................... 49% 51% 51% 52% 49% Revenues..................................................... $ 1,005 815 708 621 465 Profit........................................................ $ 1,513 1,665 1,361 1,136 955 Profit per share of common stock/1/........................... $ 4.17 4.44 3.54 2.86 2.35 Profit per share of common stock -- assuming dilution/1/......................................... $ 4.11 4.37 3.50 2.84 2.33 Dividends declared per share of common stock.................. $ 1.15 .95 .78 .65 .32 Return on average common stock equity......................... 30.9% 37.9% 36.3% 36.1% 37.4% Capital expenditures: Property, plant, and equipment............................... $ 925 824 506 464 501 Equipment leased to others................................... $ 344 282 265 215 193 Depreciation and amortization................................. $ 865 738 696 682 683 Research and engineering expenses............................. $ 838 700 570 532 435 As a percent of sales and revenues........................... 4.0% 3.7% 3.4% 3.3% 3.0% Wages, salaries, and employee benefits........................ $ 4,146 3,773 3,437 2,919 3,146 Average number of employees................................... 64,441 58,366 54,968 54,263 52,778 December 31, Total assets: Consolidated................................................. $25,128 20,756 18,728 16,830 16,250 Machinery and Engines/2/..................................... $15,619 14,188 13,066 12,375 12,142 Financial Products........................................... $11,648 7,806 6,681 5,712 4,737 Long-term debt due after one year: Consolidated................................................. $ 9,404 6,942 5,087 3,964 4,270 Machinery and Engines/2/..................................... $ 2,993 2,367 2,018 2,049 1,934 Financial Products........................................... $ 6,411 4,575 3,069 1,915 2,336 Total debt: Consolidated................................................. $12,452 8,568 7,459 6,400 5,903 Machinery and Engines/2/..................................... $ 3,102 2,474 2,176 2,219 2,037 Financial Products........................................... $ 9,350 6,094 5,283 4,181 3,866 Percent of total debt to total debt and stockholders' equity (Machinery and Engines)...................................... 37.7% 34.6% 34.6% 39.6% 41.2%
/1/ Computed on weighted-average number of shares outstanding. /2/ Represents Caterpillar Inc. and its subsidiaries except for Financial Products, which is accounted for on the equity basis. Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at the consolidated data. A-20 MANAGEMENT'S DISCUSSION AND ANALYSIS It is our objective to provide the most meaningful disclosures in our Management's Discussion and Analysis in order to explain significant changes in our company's results of operations and liquidity and capital resources. As discussed in Note 20A, "Basis for segment information" on Page A-16, our segment financial information is not based on generally accepted accounting principles and it is not intended to measure contributions to enterprise results. Therefore, it is impractical for us to try to discuss our company's results of operations and liquidity and capital resources solely based on segment information. Where practical, we have linked our discussions to segment information provided in Table V on Pages A-18 and A-19 (see Reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment on Page A-22). Our discussions will focus on consolidated results and our three principal lines of business as described below: Consolidated -- represents the consolidated data of Caterpillar Inc. and all its subsidiaries (affiliated companies that are more than 50% owned). Machinery -- design, manufacture, and marketing of construction, mining, agricultural, and forestry machinery -- track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopic handlers, skid-steer loaders, and related parts. Engines -- design, manufacture, and marketing of engines for Caterpillar Machinery, on-highway trucks, and locomotives; marine, petroleum, construction, industrial, and other applications; electric power generation systems; and related parts. Reciprocating engines meet power needs ranging from 5 to over 21,000 horsepower (4 to over 15 660 kilowatts). Turbines range from 1,340 to 18,000 horsepower (1000 to 13 500 kilowatts). Financial Products -- financing to customers and dealers for the purchase and lease of Caterpillar and noncompetitive related equipment, as well as some financing for Caterpillar sales to dealers. Also provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. This line of business consists primarily of Caterpillar Financial Services Corporation (Cat Financial) and its subsidiaries and Caterpillar Insurance Services Corporation. - --------------------------------------------------------------------------------
Machinery and Engines Sales Table by Geographic Region (Millions of dollars) Total North America EAME** Latin America Asia/Pacific ----------------------------------------------------------- 1998 Machinery Sales......................................... $13,448 $ 8,352 $ 2,871 $ 1,252 $ 973 Engine Sales/*/......................................... 6,524 3,097 2,134 666 627 ------- ------- ------- ------- ------- $19,972 $11,449 $ 5,005 $ 1,918 $ 1,600 ======= ======= ======= ======= ======= 1997 Machinery Sales......................................... $13,350 $ 7,606 $ 2,714 $ 1,252 $ 1,778 Engine Sales/*/......................................... 4,760 2,526 1,088 450 696 ------- ------- ------- ------- ------- $18,110 $10,132 $ 3,802 $ 1,702 $ 2,474 ======= ======= ======= ======= ======= 1996 Machinery Sales......................................... $11,862 $ 6,465 $ 2,569 $ 854 $ 1,974 Engine Sales/*/......................................... 3,952 2,034 948 384 586 ------- ------- ------- ------- ------- $15,814 $ 8,499 $ 3,517 $ 1,238 $ 2,560 ======= ======= ======= ======= =======
/*/Does not include internal engine sales of $1,268 million, $1,162 million, and $927 million in 1998, 1997, and 1996, respectively. Internal engine sales are valued at prices comparable to those for unrelated parties. /**/Europe, Africa & Middle East, and Commonwealth of Independent States. - -------------------------------------------------------------------------------- A-21 MANAGEMENT'S DISCUSSION AND ANALYSIS continued ________________________________________________________________________________ Reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment
(Millions of dollars) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ North America Geographic Region....................................................................... $11,449 $10,132 $ 8,499 Engine sales included in the Power Products segment................................................... (3,097) (2,526) (2,034) Company owned dealer sales included in the All Other segment.......................................... (389) (411) (329) North America Geographic Region sales which are included in the Latin America Marketing segment............................................................... (135) (132) (87) Other*................................................................................................ (414) (449) (417) ------- ------- ------- North America Marketing external sales................................................................ $ 7,414 $ 6,614 $ 5,632 ======= ======= ======= EAME.................................................................................................. $ 5,005 $ 3,802 $ 3,517 Power Products sales not included in the EAME Marketing segment....................................... (1,448) (587) (457) Other*................................................................................................ (268) (193) (123) ------- ------- ------- EAME Marketing external sales......................................................................... $ 3,289 $ 3,022 $ 2,937 ======= ======= ======= Latin America Geographic Region....................................................................... $ 1,918 $ 1,702 $ 1,238 Sales to the North America Geographic Region which are included in the Latin America Marketing segment..................................................................... 135 132 87 Power Products sales not included in the Latin America Marketing segment.............................. (385) (237) (193) Other................................................................................................. 95 133 138 ------- ------- ------- Latin America Marketing external sales................................................................ $ 1,763 $ 1,730 $ 1,270 ======= ======= ======= Asia/Pacific Geographic Region........................................................................ $ 1,600 $ 2,474 $ 2,560 Power Products sales not included in the Asia/Pacific Marketing segment............................... (370) (343) (206) Other................................................................................................. (137) (184) (182) ------- ------- ------- Asia/Pacific Marketing external sales................................................................. $ 1,093 $ 1,947 $ 2,172 ======= ======= ======= *Mostly represents external sales of the Construction & Mining Products and the All Other segments. - -----------------------------------------------------------------------------------------------------------------------------------
1998 COMPARED WITH 1997 - ----------------------- Sales and revenues of $20.98 billion rose $2.05 billion (approximately $850 million from Perkins), 11% over 1997's record of $18.93 billion. Profit of $1.51 billion was $152 million, 9% less than 1997's record of $1.67 billion. Continued spending for growth initiatives, including the impact of Perkins, more than offset the additional profit associated with higher sales and revenues. Profit per share of $4.11 was down 6% from the 1997 record of $4.37, and continues to benefit from the company's share repurchase programs. MACHINERY AND ENGINES Machinery sales were $13.45 billion, an increase of $98 million from 1997. The improvement resulted from an increase in physical volume as higher sales to end users and dealer rental fleets more than offset a slowdown in dealer inventory accumulation. Price realization was lower as price increases taken over the past year were more than offset by higher discounting and the effect of the stronger dollar on sales denominated in currencies other than U.S. dollars. Sales were higher in all regions of the world except Asia/Pacific where severe recessions resulted in lower industry demand and a large reduction in dealer inventories. Sales in North America were particularly strong reflecting good economic and industry growth as well as an increase in dealer inventory levels. Sales were up in both the United States and Canada. Sales were higher in Europe due to improved industry demand. In contrast, low commodity prices and sluggish economic growth kept sales in Africa & Middle East at 1997 levels. Latin America began the year with considerable momentum. However, a sharp economic downturn brought on by higher interest rates and government spending cuts kept sales at last year's levels. Engine sales were $6.52 billion, an increase of $1.76 billion or 37%. Excluding Perkins, sales were up $910 million or 19%. The increase was due primarily to higher physical volume resulting from improved end-user and Original Equipment Manufacturer (OEM) demand. Price realization was about the same. Sales excluding Perkins were up in all regions except Asia/Pacific, although turbine sales in developing Asia were higher despite the severe downturn. Sales in North America were up reflecting the strong on-highway truck market as well as increased demand for other applications. Sales also were higher in Latin America with increases in petroleum, power generation, and marine applications. Sales in Europe, Africa & Middle East, and Commonwealth of Independent States (EAME) were up due primarily to higher demand for petroleum and power generation applications. A-22 Caterpillar Inc. - --------------------------------------------------------------------------------
Operating Profit Table (Millions of dollars) 1998 1997 1996 - ----------------------------------------------------- Machinery............... $ 1,584 $ 1,808 $ 1,487 Engine.................. 504 468 370 ------- ------- ------- $ 2,088 $ 2,276 $ 1,857 ======= ======= =======
Caterpillar operations are highly integrated; therefore, we use a number of allocations to determine lines of business operating profit. - -------------------------------------------------------------------------------- Machinery operating profit decreased $224 million, or 12% from 1997. Margin (sales less cost of goods sold) was about the same, as the benefit from higher sales was mostly offset by higher fixed manufacturing costs and an unfavorable change in product sales mix. The unfavorable impact of the stronger dollar on sales was mostly offset by a favorable impact on costs. Selling, general, and administrative and research and development expenses were higher in support of major growth initiatives. Engine operating profit increased $36 million, or 8% from 1997. Margin (sales less cost of goods sold) increased due to the higher sales volume but was unfavorably impacted by higher fixed manufacturing costs (primarily due to Perkins) and an unfavorable change in product sales mix. Selling, general, and administrative and research and development expenses were higher in support of major growth initiatives, including Perkins. Interest expense was $45 million higher than a year ago due to higher average debt levels to support the Perkins acquisition and increased working capital needs. Other income/expense was income of $46 million compared with income of $153 million last year. The decrease was mostly due to the discounts taken on the sales of trade receivables to Caterpillar Financial Services Corporation (Cat Financial). Discounts taken on this revolving sale of receivables to Cat Financial are reflected in Machinery and Engines as other expense. Revenues offsetting these discounts as well as the related borrowing costs are reflected in Financial Products.
Table of Supplemental Information (Millions of dollars) 1998 1997 - -------------------------------------------- Identifiable Assets Machinery.............. $ 9,199 $ 9,463 Engines................ 6,420 4,725 ------- ------- Total................ $15,619 $14,188 ======= ======= Capital Expenditures Machinery.............. $ 511 $ 481 Engines................ 416 343 ------- ------- Total................ $ 927 $ 824 ======= ======= Depreciation and Amortization Machinery.............. $ 414 $ 392 Engines................ 283 207 ------- ------- Total................ $ 697 $ 599 ======= =======
Caterpillar operations are highly integrated; therefore, we use a number of allocations to determine lines of business financial data. - -------------------------------------------------------------------------------- FINANCIAL PRODUCTS Revenues were a record $1.12 billion, up $278 million or 33% compared with 1997. The increase was primarily due to Cat Financial's portfolio growth, resulting from record new retail business and the purchase of trade receivables from Caterpillar Inc. Selling, general, and administrative expenses were up $53 million, principally the result of record new business levels which increased provision for credit losses and depreciation on leased equipment. Other increases due to growth were partially offset by favorable reserve adjustments at Caterpillar Insurance Co. Ltd. (Cat Insurance). Interest expense was $128 million higher because of increased borrowings to support the larger portfolio. INCOME TAXES 1998 tax expense reflects an effective tax rate of 31% and includes a favorable adjustment to recognize deferred tax assets at certain European subsidiaries. The 1997 effective tax rate was 33%. UNCONSOLIDATED AFFILIATED COMPANIES The company's share of unconsolidated affiliated companies' profit was $4 million, down $44 million from a year ago. The major factor for the decrease was less favorable results at Shin Caterpillar Mitsubishi Ltd. SUPPLEMENTAL INFORMATION - ------------------------ Dealer Machine Sales to End Users and Deliveries to Dealer Rental Operations Sales and deliveries in North America were up in 1998 due to higher industry demand. The United States economy registered very good growth with Gross Domestic Product (GDP) increasing about 3.7%, significantly faster than the 2.0%-2.5% threshold required for industry expansion. Residential construction was exceptionally strong all year. Canada started the year with strength, but lower commodity prices and higher interest rates to defend the Canadian dollar caused a sharp mid-year deceleration in the economy. In total, sales to end users rose in all key construction sectors as well as nonmetals mining, petroleum, agriculture, and solid waste. Sales to end users fell in metals and coal mining and in industrial as well as forestry applications. Deliveries to dealer rental operations continued to rise. Sales and deliveries in the EAME region also were up in 1998 due to higher industry demand and an improvement in share of industry sales. GDP growth in Europe was near 3% resulting in better industry demand, although the United Kingdom represented an important exception as high interest rates and a strong currency depressed the economy. Sales to users were higher in Germany, France, Spain, and Italy but lower in the United Kingdom. In Africa & Middle East low commodity prices, sluggish growth, and spending reductions led to lower industry demand and slightly lower sales to users. Sales to users were higher in United Arab Emirates, about the same in Turkey, and lower in South Africa and Egypt. In the Commonwealth of Independent States sales were lower due to severe recession in Russia and economic difficulties in other countries. For the region as a whole, sales to users were higher for construction applications as well as metals and nonmetals mining. A-23 MANAGEMENT'S DISCUSSION AND ANALYSIS continued ________________________________________________________________________________ Sales and deliveries in Latin America were higher for the year despite a decline in the second half. In the first half, good economic growth led to strong industry demand and higher sales. In August, however, countries throughout the region raised interest rates and cut spending to defend their currencies. These actions along with low commodity prices led to slower growth for most countries, recession in Brazil and lower industry demand. For the year as a whole, sales to users rose in Brazil, Mexico, and Argentina, but fell in Colombia, Chile, and Peru. Sales to users were higher for construction applications, but lower for commodity applications, particularly metals mining. Sales and deliveries in Asia/Pacific were down considerably due to severe recessions in Southeast Asia, Korea, and Japan. Economic contraction, currency depreciation, high interest rates, government spending reductions, and high levels of uncertainty led to a very significant decline in sales to end users in Southeast Asia and Korea. In Japan, industry demand continued to fall as low interest rates and government spending failed to pull the economy out of recession. Economic growth in China slowed, but a large government spending initiative combined with lower interest rates bolstered the economy and led to higher sales to users. Good growth continued in Australia leading to higher industry demand and sales to users. For the Asia/Pacific region as a whole, sales to users were lower in all key construction and commodity sectors. Dealer Inventories of Machines Worldwide dealer new machine inventories at year end were about flat compared to year-end 1997 and moderately above normal relative to current selling rates. Higher inventories in North America, EAME, and Latin America offset a large decline in Asia/Pacific. At year end, inventories compared with current selling rates were about normal in EAME and Asia/Pacific. Inventories in North America were moderately above normal compared with current selling rates as dealers took advantage of special financing and inventory programs to improve product availability for the 1999 selling season. There was also some build up in anticipation of reloading rental fleets. Inventories in Latin America were significantly above current selling rates as sales fell more sharply than anticipated in the fourth quarter. Engine Sales to End Users and OEMs (excluding Perkins) Sales in North America were up due to higher industry demand and an increased share of industry sales. The on-highway truck market was particularly strong. Sales were also higher in other applications including petroleum, power generation, marine, and industrial. Sales of both reciprocating and turbine engines were higher. Sales were up in Canada as well as the United States. Sales in EAME also were up. In Europe, good economic growth led to higher sales of reciprocating engines for most applications, especially power generation. In Africa & Middle East, sales of turbines were higher for oil and natural gas projects. For the region as a whole, both reciprocating engine and turbine sales were up with gains in all applications except marine. Sales in Latin America were higher for the year despite the second-half economic slowdown. Significantly higher sales of turbines for oil and natural gas applications accounted for the increase. Sales in Asia/Pacific were down reflecting severe economic recession in Southeast Asia, Korea, and Japan. Sales were lower in power generation and industrial applications, flat in petroleum, and higher in marine and truck applications.
Machinery and Engines Sales Table (Millions of dollars) Total North America EAME** Latin America Asia/Pacific ----- ------------- ------ ------------- ------------ Fourth-Quarter 1998 Machinery Sales.................... $3,111 $1,942 $ 674 $267 $228 Engine Sales*...................... 2,025 858 662 262 243 ------ ------ ------ ---- ---- $5,136 $2,800 $1,336 $529 $471 ======= ====== ====== ==== ==== Fourth-Quarter 1997 Machinery Sales.................... $3,402 $1,926 $ 674 $381 $421 Engine Sales*...................... 1,575 739 382 195 259 ------ ------ ------ ---- ---- $4,977 $2,665 $1,056 $576 $680 ======= ====== ====== ==== ====
*Does not include internal engine sales of $304 million and $316 million in 1998 and 1997, respectively. Internal engine sales are valued at prices comparable to those for unrelated parties. **Europe, Africa & Middle East, and Commonwealth of Independent States. A-24 Caterpillar Inc. - -------------------------------------------------------------------------------- FOURTH-QUARTER 1998 COMPARED WITH FOURTH-QUARTER 1997 - --------------------------------- Fourth-quarter sales and revenues of $5.41 billion were a fourth-quarter record and were up 4% from fourth-quarter 1997. A 37% increase in Financial Products revenues and the additional sales provided by Perkins were partially offset by lower sales in other areas. Profit of $301 million was down 33% from the fourth- quarter record set in 1997 and profit per share of $.83 was down 31%. The profit from the higher sales and revenues was more than offset by lower margin rates and continued spending for growth initiatives. MACHINERY AND ENGINES Machinery sales were $3.11 billion, a decrease of $291 million or 9% from fourth-quarter 1997. The lower sales resulted primarily from a decrease in physical volume due to lower dealer sales to end users. Price realization was lower as price increases taken over the past year were more than offset by higher sales discounts. Sales were flat in North America as an increase in dealer inventories offset a slight reduction in sales to users. In EAME both company sales and end-user demand were flat. In Latin America and Asia/Pacific sales were lower due primarily to a drop in end-user demand, reflecting economic weakness in those areas. Engine sales were $2.03 billion, an increase of $450 million or 29%. Excluding Perkins, sales were up $210 million or 13%. The increase was due to higher physical sales volume resulting from improved end-user and OEM demand. Price realization was about the same. Sales excluding Perkins were up in all regions except Asia/Pacific. Sales in North America were higher due to heightened demand for both turbines and reciprocating engines. Sales in EAME and Latin America were up due primarily to higher turbine sales. Operating Profit Table
(Millions of dollars) 1998 1997 - --------------------------------------- Machinery............... $235 $418 Engine.................. 165 206 ---- ---- $400 $624 ==== ====
Caterpillar operations are highly integrated; therefore, we use a number of allocations to determine lines of business operating profit. - -------------------------------------------------------------------------------- Machinery operating profit decreased $183 million, or 44% from 1997. Margin (sales less cost of goods sold) was lower due to the lower sales volume, higher fixed manufacturing costs, and an unfavorable change in product sales mix. Selling, general, and administrative and research and development expenses were higher in support of major growth initiatives. Engine operating profit decreased $41 million, or 20% from 1997. Margin (sales less cost of goods sold) was about the same as the benefit from higher sales volumes was offset by higher fixed manufacturing costs (primarily due to Perkins) and an unfavorable change in product sales mix. Selling, general, and administrative expenses were higher primarily due to Perkins. Research and development expenses were slightly lower. Interest expense was $10 million higher than a year ago due to higher average debt levels supporting the Perkins acquisition and increased working capital needs. Other income/expense was expense of $6 million compared with income of $32 million last year. The decrease is mostly due to the discounts taken on the sales of trade receivables to Cat Financial and the agreement reached with the Environmental Protection Agency to reduce emissions. FINANCIAL PRODUCTS Revenues were a record $305 million, up $83 million or 37% compared with 1997. The increase was primarily due to Cat Financial's portfolio growth, resulting from strong new retail business and the purchase of trade receivables from Caterpillar Inc. Selling, general, and administrative expenses were up $22 million, principally the result of record new business levels which increased provision for credit losses and depreciation on leased equipment. Other increases due to growth were partially offset by favorable reserve adjustments at Cat Insurance. Interest expense was $32 million higher due to increased borrowings to support the larger portfolio. INCOME TAXES Fourth-quarter 1998 tax expense reflects an effective tax rate of 24% and includes a favorable adjustment to recognize deferred tax assets at certain European subsidiaries. The fourth-quarter 1997 effective tax rate was 33%. UNCONSOLIDATED AFFILIATED COMPANIES The company's share of unconsolidated affiliated companies' results was a loss of $7 million in 1998, compared with profit of $12 million in 1997. The major factor for the decrease was less favorable results at Shin Caterpillar Mitsubishi Ltd., including a fourth-quarter 1998 adjustment to write off certain deferred tax assets. 1997 COMPARED WITH 1996 - ----------------------- (has been changed to conform with 1998 presentation) Profit for 1997 was up 22% on a 15% increase in sales and revenues. Profit per share of common stock increased 25%, reflecting the impact of the higher profit and the ongoing share repurchase program. Profit of $1.67 billion or $4.37 per share was the best in our history, an improvement of $304 million over the profit of $1.36 billion or $3.50 per share in 1996. Sales and revenues of $18.93 billion were $2.40 billion higher and also an all-time record. An increase in physical sales volume of 15% was the most significant factor contributing to the higher sales and revenues and profit. MACHINERY AND ENGINES Machinery sales were $13.35 billion, an increase of $1.49 billion from 1996, setting another all-time record. Most of the improvement was due to higher sales volume resulting from higher dealer sales to end users. Sales were higher in most key applications including construction, sand and quarry operations, and forestry. Price realization was about the same as price increases taken over the past year and a favorable change in geographic sales mix were offset by the effect of the stronger dollar on sales denominated in currencies other than the U.S. dollar. A-25 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- Sales were higher in all regions of the world except Asia/Pacific. Sales in North America were particularly strong reflecting good economic and industry growth as well as strong industry demand for construction and mining equipment. A healthy farm economy also boosted industry demand for agricultural equipment. Sales were up in both the United States and Canada. Sales were higher in EAME primarily due to increased sales in Europe as dealers replenished their new machine inventory. Sales in Latin America were notably higher with sizable gains in Brazil, Mexico, Peru, Chile, and Argentina, all of which registered good economic growth. End-user demand was higher in all key construction sectors as well as metal and nonmetal mining. Lower demand was registered only in coal mining and agricultural applications. Sales in Asia/Pacific declined reflecting the impact of the currency crisis on the region's economy. Industry demand for machines declined sharply in the second half of the year in a number of Southeast Asia countries including Thailand, Indonesia, Malaysia, and the Phillipines. As a result, sales to end users for the entire year slipped below 1996 levels. Engine sales were $4.76 billion, an increase of $808 million from 1996. The improvement reflected higher end-user demand for reciprocating gas and diesel engines, as well as turbines. Company sales were higher in all key applications including on-highway trucks, power generation, oil and gas, industrial, and marine. Sales were also higher due to the acquisition of MaK Motoren GmbH & Co. KG on December 31, 1996. Price realization was about the same as price increases taken over the past year and a favorable change in geographic sales mix were offset by the effect of the stronger dollar on sales denominated in currencies other than the U.S. dollar. Sales were higher in all regions. Sales in North America were up considerably reflecting the strong on-highway truck market as well as increased demand for turbines and other reciprocating engines. Sales were higher in Latin America reflecting good economic growth of Brazil, Mexico, Peru, Chile, and Argentina. Sales in EAME were up due primarily to higher industry demand. Sales in Asia/Pacific increased primarily due to turbine sales in Australia and developing Asia. Sales of reciprocating engines remained near 1996 levels. Machinery operating profit increased $321 million, or 22% from 1996. Margin (sales less cost of goods sold) improved as the benefit from higher sales more than offset higher fixed manufacturing costs. Selling, general, and administrative and research and development expenses were higher in support of major growth initiatives and product line expansions. Engine operating profit increased $98 million, or 26% from 1996. Margin (sales less cost of goods sold) improved as the benefit from higher sales more than offset higher fixed manufacturing costs and an unfavorable change in product sales mix. Selling, general, and administrative and research and development expenses were higher in support of major growth initiatives and product line expansions. Interest expense of $219 million was $25 million higher than a year ago, mostly due to higher average debt levels. Other income/expense was income of $153 million compared with income of $127 million last year. The increase of $26 million is primarily due to several small favorable items, partially offset by an unfavorable change in foreign exchange gains and losses. FINANCIAL PRODUCTS Revenues of $839 million were a record, up $107 million or 15% compared with 1996, primarily the result of Cat Financial's larger portfolio. Selling, general, and administrative expenses were up $22 million, primarily due to Cat Financial's higher depreciation on leased equipment and other increases due to growth, partially offset by a favorable reserve adjustment at Cat Insurance. Interest expense was up $57 million due to increased borrowings to support the larger portfolio. Other income/expense was income of $61 million, an increase of $24 million from a year ago. The increase in other income was primarily the result of higher gains on sales of used equipment, exchange gains, increased use of securitization by Cat Financial, and higher investment income at Cat Insurance. INCOME TAXES The provision for income taxes was $796 million compared with $613 million for 1996. The $183 million increase reflects the higher before-tax profit and a higher effective tax rate of 33% compared with 31.6% for 1996. The higher tax rate accounted for $34 million of the increase. LIQUIDITY & CAPITAL RESOURCES Consolidated operating cash flow totaled $1.78 billion for 1998, compared with $2.10 billion during 1997. This decrease is largely due to an unfavorable change in accounts payable and accrued expenses. Total debt at year-end 1998 was $12.45 billion, an increase of $3.88 billion from year-end 1997. Over this period, debt related to Machinery and Engines increased $628 million to $3.10 billion, while debt related to Financial Products increased $3.26 billion to $9.35 billion. During 1995, we announced a plan to repurchase up to 10% of our outstanding common stock over a three to five year period. This share repurchase program was completed in the third quarter of 1998. In October 1998, the Board of Directors authorized another share repurchase program to reduce the number of outstanding shares to 320 million within the next three to five years. In total, 11.6 million shares were repurchased during the year. The number of shares outstanding at December 31, 1998, was 357.2 million. Machinery and Engines Operating cash flow totaled $2.65 billion for 1998, compared with $1.80 billion for 1997. The increase is primarily the result of a $1.33 billion favorable change in accounts receivable, largely due to the $1.22 billion sale of receivables to Cat Financial. Partially offsetting this favorable item was a $372 million net unfavorable change in accounts payable and accrued expenses and inventories. Capital expenditures, excluding equipment leased to others, totaled $918 million for 1998 compared with $819 million for 1997. Total debt increased by $628 million. As part of the company's long-term funding strategy, $250 million of Eurobond notes and $300 million of debentures were issued during the first and third quarter of 1998, respectively. The $250 million of five-year Eurobonds were issued at a premium. These bonds are due A-26 Caterpillar Inc. - -------------------------------------------------------------------------------- February 13, 2003, and were priced to yield 5.914% semi-annually with a coupon of 6%. The $300 million of 30-year debentures were issued at a discount. These bonds are due July 15, 2028, and were priced to yield 6.649% semi-annually with a coupon of 6.625%. These funds were utilized for general corporate purposes, including the acquisition of Perkins. Our additional debt has increased the percent of debt to debt plus stockholders' equity from 35% at December 31, 1997, to 38% at December 31, 1998. Financial Products Operating cash flow totaled $(822) million for 1998, compared with $323 million for 1997. This decrease resulted from the purchase of $1.22 billion of Machinery and Engines trade receivables. Cash used to purchase equipment leased to others totaled $335 million in 1998. In addition, net cash used for finance receivables was $2.20 billion for 1998, compared with $1.21 billion for 1997. Financial Products' debt was $9.35 billion at December 31, 1998, an increase of $3.26 billion from December 31, 1997, and is primarily comprised of $6.20 billion of medium-term notes, $189 million of notes payable to banks, and $2.85 billion of commercial paper. At December 31, 1998, finance receivables past due over 30 days were 1.5%, compared with 1.7% at December 31, 1997. The ratio of debt to equity of Cat Financial was 8.0:1 at December 31, 1998, compared with 7.8:1 at December 31, 1997. Financial Products had outstanding credit lines totaling $4.24 billion at December 31, 1998, which included $2.61 billion of shared revolving credit agreements with Machinery and Engines. These credit lines are with a number of banks and are considered support for our outstanding commercial paper, commercial paper guarantees, the discounting of bank and trade bills, and bank borrowings.
Dividends paid per share of common stock Quarter 1998 1997 1996 - --------------------------------------------------------------- First..................................... $ .25 $ .20 $ .18 Second.................................... .25 .20 .17 Third..................................... .30 .25 .20 Fourth.................................... .30 .25 .20 ----- ----- ----- $1.10 $ .90 $ .75 ===== ===== ===== - ---------------------------------------------------------------
EMPLOYMENT At the end of 1998, Caterpillar's worldwide employment was 65,824 compared with 59,863 one year ago. Hourly employment increased 2,459 to 36,707; salaried and management employment increased 3,502 to 29,117. The increases were almost entirely the result of acquisitions.
Full-Time Employees at Year End 1998 1997 1996 - --------------------------------------------------------- Inside U.S....................... 40,261 39,722 38,571 Outside U.S...................... 25,563 20,141 18,455 Total........................... 65,824 59,863 57,026 By Region: North America................... 40,485 39,941 38,698 EAME............................ 18,117 12,739 12,042 Latin America................... 5,302 5,340 4,540 Asia/Pacific.................... 1,920 1,843 1,746 Total......................... 65,824 59,863 57,026 - ---------------------------------------------------------
OTHER MATTERS ENVIRONMENTAL MATTERS The company is regulated by federal, state, and international environmental laws governing our use of substances and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings, or competitive position. We are cleaning up hazardous waste at a number of locations, often with other companies, pursuant to federal and state laws. When it is likely we will pay clean-up costs at a site and those costs can be estimated, the costs are charged against our earnings. In doing that estimate, we do not consider amounts expected to be recovered from insurance companies and others. The amount set aside for environmental clean-up is not material and is included in "Accounts payable and accrued expenses" in Statement 3. If a range of liability estimates is available on a particular site, we accrue the lower end of that range. We cannot estimate costs on sites in the very early stages of clean-up. Currently, we have five of these sites and there is no more than a remote chance that a material amount for clean-up will be required. DERIVATIVE FINANCIAL INSTRUMENTS I. Market Risk and Risk Management Policies Our earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates, interest rates, and commodity prices. Our risk management policy includes the use of derivative financial instruments to manage foreign currency exchange rate, interest rate, and commodity price exposures. Foreign Currency Exchange Rate Foreign currency exchange rate movements create a degree of risk to our operations by affecting: . The U.S. dollar value of sales made in foreign currencies, and . The U.S. dollar value of costs incurred in foreign currencies. Foreign currency exchange rate movements also affect our competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors. Our general policy is to use foreign currency derivative instruments as needed to operate our business and protect our interests. We enter into foreign currency derivative instruments only to manage risk -- not as speculative instruments. We buy and sell currencies only to cover business needs and to protect our financial and competitive position. Our general approach is to manage future foreign currency cash flow for Machinery and Engines' operations and net foreign currency balance sheet exposures for Financial Products' operations. Our Machinery and Engines' operations manufacture products in, and purchase raw materials from, many locations around the world. Consequently, our cost base is well diversified over a number of European, Asia/Pacific, and Latin American currencies, as well as the U.S. dollar. This diversified cost base serves to counterbalance the cash flow and earnings impact of non-U.S. dollar revenues and, therefore, minimizes the effect of exchange rate movements on consolidated earnings. We use derivative A-27 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- financial instruments to manage the currency exchange risk that results when the cash inflows and outflows by currency are not completely matched. In managing foreign currency for Machinery and Engines' operations, our objective is to maximize consolidated after-tax U.S. dollar cash flow. To this end, our policy allows for actively managing: . Cash flow related to firmly committed foreign currency transactions; . Anticipated foreign currency cash flow for the future rolling twelve- month period; and . Any hedges (derivative instruments) that are outstanding. We limit the types of derivative instruments we use to forward exchange contracts and foreign currency option contracts (net purchased option contracts). When using forward exchange contracts, we are protected from unfavorable exchange rate movements, but have given up any potential benefit from favorable changes in exchange rates. Purchased option contracts, on the other hand, protect us from unfavorable rate movements while permitting us to benefit from the effect of favorable exchange rate fluctuations. We do not use historic rate rollovers or leveraged options, nor do we sell or write foreign currency options, except in the case of combination option contracts that limit the unfavorable effect of exchange rate movements, while allowing a limited potential benefit from favorable exchange rate movements. The forward exchange or foreign currency option contracts that we use are not exchange traded. Each month, our financial officers approve the company's outlook for expected currency exchange rate movements, as well as the policy on desired future foreign currency cash flow positions (long, short, balanced) for those currencies in which we have significant activity. Financial officers receive a daily report on currency exchange rates, cash flow exposure, and open foreign currency hedges. Expected future cash flow positions and strategies are continuously monitored. Foreign exchange management practices, including the use of derivative financial instruments, are presented to the Audit Committee of our Board of Directors at least annually. In managing foreign currency risk for our Financial Products' operations, our objective is to minimize earnings volatility resulting from the translation of net foreign currency balance sheet positions. We use forward exchange contracts to offset the risk when the currency of our receivable portfolio does not match the currency of our debt portfolio. Interest Rate We use various interest rate derivative instruments, including interest rate swap agreements, interest rate cap (option) agreements, and forward rate agreements to manage exposure to interest rate changes and lower the cost of borrowed funds. All interest rate derivative instruments are linked to debt instruments upon entry. We enter into such agreements only with those financial institutions with strong bond ratings which, in the opinion of management, virtually negates exposure to credit loss. Our Financial Products' operations have a "match funding" objective whereby the interest rate profile (fixed rate or floating rate) of their debt portfolio must match the interest rate profile of their receivable, or asset portfolio within specified boundaries. In connection with that objective, we use interest rate derivative instruments to modify the debt structure to match the receivable portfolio. This "match funding" reduces the risk of deteriorating margins between interest-bearing assets and interest-bearing liabilities, regardless of which direction interest rates move. We also use these instruments to gain an economic and/or competitive advantage through lower cost of borrowed funds. This is accomplished by changing the characteristics of existing debt instruments or entering into new agreements in combination with the issuance of new debt. Commodity Prices Our Machinery and Engines' operations are subject to commodity price risk, as the price we must pay for raw materials changes with movements in underlying commodity prices. We use commodity swap and option agreements to reduce this risk. However, our use of these types of derivative financial instruments is not material. II. Sensitivity Exchange Rate Sensitivity Based on the anticipated and firmly committed cash inflows and outflows for our Machinery and Engines' operations for the next 12 months and the foreign currency derivative instruments in place at year end, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would adversely affect our expected 1999 cash flows for our Machinery and Engines' operations by $116 million. This is not materially different than the potential $92 million adverse impact on expected 1998 cash flows for our Machinery and Engines' operations that we reported last year based on similar assumptions and calculations. Since our policy for Financial Products' operations is to hedge the foreign exchange risk when the currency of our debt portfolio does not match the currency of our receivable portfolio, a 10% change in the value of the U.S. dollar relative to all other currencies would not have a material effect on our consolidated financial position, results of operations, or cash flow. Neither our policy nor the effect of a 10% change in the value of the U.S. dollar has changed from that reported at the end of last year. The effect of the hypothetical change in exchange rates ignores the affect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects shown above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar. In reality, some currencies may weaken while others may strengthen. Interest Rate Sensitivity For our Machinery and Engines' operations, we currently use interest rate swaps to lower the cost of borrowed funds by attaching fixed-to-floating interest rate swaps to fixed rate debt. A hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would adversely affect 1999 pretax earnings of Machinery and Engines by $8 million. Last year, similar assumptions and calculations yielded a potential $9 million adverse impact on 1998 pretax earnings. A-28 Caterpillar Inc. - -------------------------------------------------------------------------------- For our Financial Products' operations, we use interest rate derivative instruments primarily to meet our "match funding" objectives and strategies. A hypothetical 100 basis point adverse move (increase) in interest rates along the entire interest rate yield curve would adversely affect the 1999 pretax earnings of Financial Products by $14 million. This impact is not materially different from the potential $10 million adverse 1998 pretax earnings impact of a similar interest rate movement as reported last year. The effect of the hypothetical change in interest rates ignores the affect this movement may have on other variables including changes in actual sales volumes that could be indirectly attributed to changes in interest rates. The actions that management would take in response to such a change are also ignored. If it were possible to quantify this impact, the results could well be different than the sensitivity effects shown above. YEAR 2000 CHALLENGE - ------------------- Our Approach Caterpillar has a comprehensive plan to address the Year 2000 challenge. A Year 2000 Steering Committee, chaired by a member of our Executive Office, is charged with monitoring remediation efforts of our business units and reporting remediation status to our Executive Office and Board of Directors. Although this team has monitoring responsibility, vice presidents in charge of each business unit are responsible for identifying, evaluating, and implementing changes necessary to achieve readiness within their units. Remediation History and Status Caterpillar began addressing the Year 2000 challenge as part of plant modernization and corporate restructuring initiatives in the late 1980s and early 1990s. New systems incorporated Year 2000 compliance by design. In 1994, Caterpillar's corporate information systems division initiated projects to address the Year 2000 issue. Today, all Caterpillar business units are engaged in a comprehensive effort to meet the Year 2000 challenge as it impacts their internal and external customers. We have established five Year 2000 phases under which units measure their progress: .Inventory -- identifying key business areas and related products and services (both internal and external) potentially impacted by the Year 2000 issue; .Analysis -- determining how a product or service is impacted and preparing a plan to address the issue; .Remediation -- making the necessary changes to bring the product or service into compliance; .Validation -- testing the product or service to ensure it is Year 2000 compliant; and .Implementation -- installing necessary changes in production. Internal Systems As of December 31, 1998, substantially all Caterpillar business units have completed an inventory of internal systems having potential Year 2000 issues. By internal systems, we mean both information technology and non-information technology systems. Analysis to address Year 2000 issues has been completed on about 95% of critical systems within the control of our units. Of those critical systems, about 85% have been remediated and 80% validated. For about 75% of all critical systems within our control, Year 2000 fixes have been implemented. About 85% of our business units report that mission-critical systems within their control will be fixed, tested, and in production by June 1, 1999. Substantially all units (over 95%) report that mission-critical and significant priority systems will attain that status by October 1, 1999, with the remaining few units completed prior to year-end 1999. Caterpillar Products For some time, we have been assessing the potential impact of the Year 2000 challenge on the operation of machines and engines sold by Caterpillar. Our Electrical and Electronics business unit has substantially completed its review, evaluation, and testing of electronic components and service tools used on Caterpillar machines and engines for Year 2000 related problems. This review included all electronic control modules, display and monitoring systems, generator set control systems, and electronic service tools under the design control of that business unit. As a result of this assessment and others completed by Caterpillar, it is our position at this time that the Year 2000 challenge should not have any significant impact on the performance of previous, present, or future Caterpillar machines and engines. We note that our assessment of the Year 2000 impact across our product line is an ongoing process and subject to further review. We are committed to delivering the highest quality products and services to our customers currently and beyond the Year 2000. Suppliers and Caterpillar Dealers We are actively assessing the Year 2000 readiness of our significant third-party suppliers. Those efforts include survey mailings, presentations, review of supplier Year 2000 statements, and follow-up activities with suppliers that have not responded to requests for information. For suppliers that have not responded, we are following up to achieve ultimately an acceptable comfort level with our supply chain. For suppliers posing a significant risk, contingency plans are being developed. Analysis to address Year 2000 issues has been completed on about 92% of critical dependencies (including suppliers, utilities, and transportation services) outside the control of our business units. For 64% of these critical dependencies, we have implemented Year 2000-ready solutions or confirmed that the business partner or dependency was already Year 2000 compliant. Dependencies reported as outside the control of our units may include those supplied by other units within Caterpillar as well as those supplied by outside companies. We are also assessing the readiness of our dealers. Efforts in the U.S. and outside the U.S., include mailings requesting information on remediation plans and status, periodic regional meetings with dealers and their information systems managers, and on-site assessments by Caterpillar managers responsible for specific dealer regions. Based on these communications, we expect that by the end of 1999 our dealers will be in a position to service customers without any significant business disruption related to the Year 2000 issue. We will continually monitor dealer progress against this time frame. A-29 MANAGEMENT'S DISCUSSION AND ANALYSIS continued - -------------------------------------------------------------------------------- Costs The following cost estimates, which are as of December 31, 1998, would not have a material impact on Caterpillar's results, financial position, or cash flow. As of December 31, 1998, we have incurred about two-thirds of these estimated total costs. As necessary, we will refine these estimates. We anticipate incurring $130-150 million in Year 2000-related costs. Of these costs, capital costs for the replacement of systems, hardware, or equipment are currently estimated to be $20-30 million. These budgeted costs may not include all of the cost of implementing contingency plans, which are in the process of being developed. These estimates also do not include litigation or warranty costs related to the Year 2000 issue, which at this time cannot be reasonably estimated. Risks Our estimates on cost, remediation time frame, and potential financial impact are based on information we have currently. There can be no assurance these estimates will prove accurate and actual results could differ materially from those currently anticipated. Factors that could cause actual results to differ include unanticipated supplier or dealer failures; utilities, transportation, or telecommunications breakdowns; U.S. or non-U.S. government failures; and unanticipated failures on our part to address Year 2000-related issues. The most reasonably likely worst case scenario in light of these risks would involve a potential loss in sales resulting from production and shipping delays caused by Year 2000-related disruptions. Under this scenario, manual procedures would be required for order processing, invoicing, supplier management processing, warranty claim processing, and for certain factory machine tool operations. The degree of sales loss impact would depend on the severity of the disruption, the time required to correct it, whether the sales loss was temporary or permanent, and the degree to which our primary competitors were also impacted by the disruption. To minimize the potential impact of the most reasonably likely worst case scenario, each Caterpillar business unit is developing contingency plans. Finalized contingency plans may involve manual procedures for machine operation, manual procedures for collecting and reporting data, inventory adjustments for major components, and considering alternative sources of supply. Contingency plans, where deemed necessary, will be finalized by the end of 1999. OUTLOOK - ------- Summary World economic growth in 1999 is forecast to be similar to 1998 as improvement in Asia offsets slower growth in the Western Hemisphere and continued recession in Japan. Combined with low prices for metals and oil, this outlook is expected to result in slightly lower industry demand for construction and mining machinery. While machine demand is forecast to remain close to 1998 levels in the United States, lower demand in Japan, Latin America, Canada, and Australia should more than offset higher demand in Europe. Low prices for agricultural commodities are expected to depress worldwide industry demand for agricultural equipment. Worldwide industry demand for engines is forecast to be down slightly due to low oil prices and a softening in the OEM markets, including on-highway trucks. While declines are expected in the Western Hemisphere, demand elsewhere should remain near 1998 levels. In this environment, company sales and revenues for 1999 are expected to be slightly below 1998's record levels. Profit is expected to be moderately lower primarily because of the sales volume decrease and the continuing competitive pricing environment. As indicated at the end of the third quarter, our growth initiatives unfavorably impacted 1998 profit by about 10%. We expect that the dilutive effect in 1999 will be less than 1998 as some programs near completion. We anticipate the impact of our growth initiatives to be accretive in 2000. North America In the United States, Gross Domestic Product (GDP) growth is forecast to slow from 3.7% in 1998 to about 2.5% in 1999. Housing starts should remain strong, and the new six-year highway spending bill will significantly increase highway construction spending as well as aggregates production. Metal mining and agriculture, however, are expected to remain weak due to low worldwide prices. Overall, industry demand for machines is expected to remain at about last year's level. Industry demand for engines is forecast to decline due to lower on- highway truck and turbine engine demand. In Canada, slower economic growth is expected to result in slightly lower industry demand for both machines and engines. Company sales for the region are forecast to decline as dealers are not expected to increase new machine inventory as they did in 1998 and as industry demand for engines declines. EAME In Western Europe, GDP growth is expected to be about 2.7%, resulting in slightly higher industry demand for construction and mining machines. Demand in the United Kingdom, however, is anticipated to decline due to weak growth resulting from high interest rates and a strong currency. European demand for reciprocating engines is likely to be flat to down, but turbine demand is forecast to improve. In Africa & Middle East weak growth and low commodity prices are likely to keep industry demand for both machines and engines from exceeding 1998 levels. In Russia, continued recession and instability are forecast to result in lower industry demand. For the region as a whole, higher European industry demand for construction and mining machinery should lead to higher company sales. Latin America As a result of the January 13th Brazilian currency devaluation, recession is now forecast for the region. Brazil is likely to experience severe recession in the first half of 1999 which will likely adversely impact neighboring countries, particularly Argentina. The whole region is expected to suffer from higher interest rates and reductions in government spending as countries defend their currencies. Mexico is expected to avoid recession although growth will likely slow. For the region as a whole, industry demand for A-30 Caterpillar Inc. - ------------------------------------------------------------------------------- machines and engines is forecast to decline significantly, leading to a drop in company sales. Asia/Pacific In the Asia/Pacific region, the developing countries which experienced severe recession in 1998 should begin to stabilize and China should continue to grow at about 7%. As a result, GDP for developing Asia is expected to increase from .6% in 1998 to 3.3% in 1999. Industry demand for machines is forecast to be flat with an increase in China offsetting continued decline in Southeast Asia and Korea. Industry demand for engines should also be about flat. Japan is expected to remain in recession with GDP forecast to fall 1% and industry demand expected to further decline. In Australia, slower economic growth and low commodity prices will likely result in lower industry demand for both machines and engines. For the region as a whole, company sales are forecast to be up slightly as higher sales in developing Asia offset lower sales in Australia. The information included in the Outlook section is forward looking and involves risks and uncertainties that could significantly affect expected results. A discussion of these risks and uncertainties is contained in Form 8-K filed with the Securities & Exchange Commission on January 20, 1999. MANAGEMENT'S DISCUSSION AND ANALYSIS A-31 SUPPLEMENTAL STOCKHOLDER INFORMATION Shareholder Services: Stock Transfer Agent First Chicago Trust Company of New York P.O. Box 2500 Jersey City, NJ 07303-2500 phone: (800) 446-2617 (U.S. or Canada) (201) 324-0498 (Outside U.S. or Canada) (201) 222-4955 (Hearing impaired) Internet home page: www.fctc.com e-mail: fctc@em.fcnbd.com Caterpillar Assistant Secretary: Laurie J. Huxtable Assistant Secretary Caterpillar Inc. 100 N.E. Adams Street Peoria, IL 61629-7310 phone: (309) 675-4619 fax: (309) 675-6620 e-mail: huxtable_laurie_j@CAT.com Stock Purchase Plan: Current shareholders and other interested investors may purchase Caterpillar Inc. common stock directly through the DirectSERVICE(TM) Investment Program sponsored and administered by our Transfer Agent. Current shareholders can get more information on the program from our Transfer Agent using the contact information provided above. Non-shareholders can request program materials by calling: 800-955-4749 (U.S. and Canada) or 201-324-0498 (outside the U.S. and Canada). The DirectSERVICE Investment Program may also be accessed from our Investor Relations web site or First Chicago's home page. Investor Relations: Institutional analysts, portfolio managers, and representatives of financial institutions seeking additional information about the Company should contact: Director of Investor Relations James F. Masterson Caterpillar Inc. 100 N.E. Adams Street, Peoria, IL 61629-5310 phone: (309) 675-4549 fax: (309) 675-4457 e-mail: CATir@CAT.com Internet web site: www.CAT.com/investor Common Stock (NYSE: CAT) Listing Information: Caterpillar common stock is listed on the New York, Pacific and Chicago stock exchanges in the United States, and on stock exchanges in Belgium, France, Germany, Great Britain, and Switzerland. Price Ranges: Quarterly price ranges of Caterpillar common stock on the New York Stock Exchange, the principal market in which the stock is traded, were:
1998 1997 --------------------- ---------------------- Quarter High Low High Low - ------- ------- ------- -------- ------- First.... 59 1/4 44 1/2 41 7/8 36 1/4 Second... 60 3/4 51 1/16 54 11/16 38 3/16 Third.... 56 5/16 39 1/16 61 1/2 52 1/4 Fourth... 52 3/16 41 1/8 60 15/16 44
Number of Stockholders: Stockholders of record at year end totaled 34,527, compared with 32,409 at the end of 1997. Approximately 68% of our issued shares are held by institutions and banks, 25% by individuals, and 7% by Caterpillar benefit plans. Employees' investment and profit-sharing plans acquired 2,685,138 shares of Caterpillar stock in 1998. Investment plans, for which membership is voluntary, held 26,663,273 shares for employee accounts at 1998 year end. Profit-sharing plans, in which membership is automatic for most U.S. and Canadian employees in eligible categories, held 480,790 shares at 1998 year end. Company Publications: To request any of the following materials, call our Financial Hotline -- (800) CAT-7717 (U.S. & Canada) or (201) 332-8602 (outside U.S. or Canada); or visit our Investor Relations web site to download or request materials on-line: . Annual Report/Proxy Statement (early March) . Form 10-K (late April) . Form 10-Q (late May, Aug., and Nov.) . Financial Results Press Release (late Jan., April, July, and Oct.) . General Investor Packet To hear a summary of Caterpillar's latest financial results and current outlook or to request a copy of results by fax or mail, call our Financial Hotline. Annual Meeting: On Wednesday, April 14, 1999, at 10:30 a.m., Eastern Standard Time, the annual meeting of stockholders will be held at Graylyn International Conference Center of Wake Forest University, Winston-Salem, North Carolina. Requests for proxies are being sent to stockholders with this report mailed on or about February 26, 1999. Internet: Visit us on the Internet at www.CAT.com. A-32 DIRECTORS AND OFFICERS DIRECTORS Lilyan H. Affinito/2,4/ Former Vice Chairman, Maxxam Group Inc. Glen A. Barton/5/ Chairman and Chief Executive Officer, Caterpillar Inc. W. Frank Blount/1,3/ Director and Chief Executive Officer, Telstra Corporation Limited John R. Brazil/1,3/ President, Bradley University John T. Dillon/2,4/ Chairman and Chief Executive Officer, International Paper Donald V. Fites/3,4,5/ Former Chairman and Chief Executive Officer, Caterpillar Inc. Juan Gallardo/1,3/ Chairman and Chief Executive Officer, Grupo Embotelladoras Unidas S.A. de C.V. David R. Goode/1,2/ Chairman, President, and Chief Executive Officer, Norfolk Southern Corporation James P. Gorter/1,2/ Chairman, Baker, Fentress & Company Peter A. Magowan/2,4/ Former Chairman and CEO, Safeway Inc.; President and Managing General Partner, San Francisco Giants Gordon R. Parker/1,3/ Former Chairman, Newmont Mining Corporation George A. Schaefer/1,3/ Former Chairman and Chief Executive Officer, Caterpillar Inc. Joshua I. Smith/3,4/ Chairman and Chief Executive Officer, The MAXIMA Corporation Clayton K. Yeutter/2,4/ Of Counsel to Hogan & Hartson, Washington, D.C. /1/ Member of Audit Committee (David R. Goode, chairman) /2/ Member of Compensation Committee (James P. Gorter, chairman) /3/ Member of Nominating Committee (Joshua I. Smith, chairman) /4/ Member of Public Policy Committee (Clayton K. Yeutter, chairman) OFFICERS Glen A. Barton/5/ Chairman and Chief Executive Officer Gerald S. Flaherty Group President James W. Owens Group President Gerald L. Shaheen Group President Richard L. Thompson Group President R. Rennie Atterbury III Vice President, General Counsel and Secretary James W. Baldwin Vice President Sidney C. Banwart Vice President Vito H. Baumgartner Vice President Michael J. Baunton Vice President James S. Beard Vice President Richard A. Benson Vice President Ronald P. Bonati Vice President James E. Despain Vice President Roger E. Fischbach/6/ Vice President Michael A. Flexsenhar Vice President Donald M. Ings Vice President Duane H. Livingston Vice President Robert R. Macier Vice President David A. McKie Vice President F. Lynn McPheeters Vice President Daniel M. Murphy Vice President Douglas R. Oberhelman Vice President Gerald Palmer Vice President Robert C. Petterson Vice President John E. Pfeffer Vice President Siegfried R. Ramseyer Vice President Alan J. Rassi Vice President Gary A. Stroup Vice President Sherril K. West Vice President Donald G. Western Vice President Steven H. Wunning Vice President Robert R. Gallagher Controller Kenneth J. Zika Treasurer Robin D. Beran Assistant Treasurer Mary J. Callahan Assistant Secretary Laurie J. Huxtable Assistant Secretary __________ Note: All director/officer information is as of December 31, 1998, except as noted. /5/ Effective February 1, 1999 /6/ Will retire effective April 1, 1999 A-33 EX-21 7 SUBSIDIARIES AND AFFILIATES OF CATERPILLAR INC.
EXHIBIT 21 SUBSIDIARIES AND AFFILIATES OF CATERPILLAR INC. (as of December 31, 1998) Jurisdiction in Name of Company which Organized - ----------------------------------------- --------------- Aceros Fundidos Internacionales LLC Delaware Advanced Filtration Systems Inc. Delaware Amur Machinery & Services Company Russia Anchor Coupling Inc. Delaware Aquila Mining Systems Ltd. Canada Carter Machinery Company, Incorporated Delaware Caterpillar Agricultural Products Inc. Delaware Caterpillar Claas America LLC Delaware Claas Caterpillar Europe Verwaltungs GmbH Germany Claas Caterpillar Europe GmbH & Co. KG Germany Caterpillar Americas Co. Delaware Caterpillar Americas Funding Inc. Delaware NOIL Participacoes e Comercio S.A. Brazil Lion S.A. Brazil Caterpillar Americas Services, Inc. Delaware Caterpillar Andes S.A. Chile Caterpillar Asia Pacific Holding Inc. Delaware Caterpillar (China) Investment Co., Ltd. China Asia Forge (Tianjin) Ltd. China AsiaTrak (Tianjin) Ltd. China Caterpillar Xuzhou Ltd. China Caterpillar (HK) Limited Hong Kong Shanxi International Casting Co. Ltd. China Caterpillar (Thailand) Limited Thailand V-Trac Holdings Limited Cook Islands V-Trac Infrastructure Development Company Vietnam Caterpillar Asia Pte. Ltd. Singapore Caterpillar of Australia Ltd. Australia Caterpillar Brasil Ltda. Brazil Caterpillar Administracao e Participacoes S/C Ltda. Brazil Caterpillar of Canada Ltd. Canada Caterpillar Commercial Holding S.A. Switzerland Caterpillar Commercial SARL Switzerland Caterpillar Commercial LLC Delaware Caterpillar Commercial N.V. Belgium Caterpillar Group Services N.V. Belgium Hindustan Powerplus Limited India Caterpillar Commercial Services Ltd. Canada Exhibit 21
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Caterpillar Corporativo Mexico, S. de R.L. de C.V. Mexico Caterpillar Mexico, S.A. de C.V. Mexico Inmobiliara Conek, S.A. Mexico Caterpillar Torreon S. de R.L. de C.V. Mexico Caterpillar Servicios Mexico, S. de R.L. de C.V. Mexico Caterpillar of Delaware, Inc. Delaware Caterpillar Industrial Products, Inc. Delaware Nexus International Inc. Delaware Nexus International S.r.L. Italy Caterpillar Elphinstone Pty. Ltd. Australia Elphinstone Commercial Services Ltd. Canada Caterpillar Energy Company S.A. Guatemala Caterpillar Export Limited US Virgin Islands Caterpillar Financial Services Corporation Delaware Bio-energy Partners Illinois Caterpillar Credit Services Asia Pte. Ltd. Singapore Caterpillar Finance France S.A. France Caterpillar Financial Australia Limited Australia Caterpillar Financial Corporacion Financiera S.A., E.F. Spain Caterpillar Financial Funding Corporation Nevada Caterpillar Financial Member Company Delaware Caterpillar Financial Asset Sales Corporation Nevada Caterpillar Financial Nordic Services A.B. Sweden Caterpillar Financial Receivables Corporation Nevada Caterpillar Financial Renting, S.A. Spain Caterpillar Financial S.A. Arrendamento Mercantil Brazil Caterpillar Financial S.A. Credito, Financiamento e Investimento Brazil Caterpillar Financial Services CR, s.r.o. Czechoslovakia Caterpillar Financial Services Korea, Ltd Korea Caterpillar Financial Services Limited Canada Caterpillar Financial Services Malaysia Sdn Bhd Malaysia Caterpillar Financial Services Philippines Inc. Philippines Caterpillar Financial Services Poland Sp.z.o.o. Poland Caterpillar Financial Services (UK) Limited England Caterpillar Holding Germany GmbH Germany Caterpillar Financial Services Verwaltungs-GmbH Germany Caterpillar Financial Services GmbH & Co. KG Germany Caterpillar Leasing GmbH (Leipzig) Germany Caterpillar Vibra-Ram Verwaltungs-GmbH Germany Caterpillar Vibra-Ram GmbH & Co., KG Germany EDC European Excavator Design Center Verwaltungs-GmbH Germany EDC European Excavator Design Center GmbH & Co. KG Germany MaK Motoren Verwaltungs-GmbH Germany MaK Motoren GmbH & Co. KG Germany Germanischer Lloyd AG Germany Guangzhou MaK Diesel Engine Ltd. China MaK Beteiligungs GmbH Germany Exhibit 21
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Machinefabriek Bolier B.V. Netherlands Financieringsmaatschappij Boiler B.V. Netherlands Diesel Sales and Services Merwedehaven B.V. Netherlands Laminex V.o.F. Netherlands MaK Netherlands B.V. Netherlands MaK Americas (Canada) Inc. Canada Canadia Diesel Power Inc. Canada MaK Scandinavia A/S Denmark MaK Wohnungsbau GmbH & Co. KG Germany Perkins Motoren GmbH Germany Caterpillar International Bank Plc Ireland Caterpillar International Finance plc Ireland Caterpillar International Services Corporation Nevada Caterpillar International Services del Peru S.A. Peru Caterpillar Leasing Chile, S.A. Chile Caterpillar Leasing (Thailand) Limited Thailand Grupo Financiero Caterpillar Mexico, S.A. de C.V. Mexico Caterpillar Arrendadora Financiera, S.A. de C.V. Mexico Caterpillar Credito, S.A. de C.V. Mexico Caterpillar Factoraje Financiero, S.A. de C.V. Mexico GFCM Servicios, S.A. de C.V. Mexico MICA Energy Systems Michigan Caterpillar Forest Products Inc. Delaware Caterpillar Holding (France) S.A.R.L. France Caterpillar Logistics Services (France) SARL France MaK Mediterranee S.A.S. France Caterpillar Transmissions (France) SARL France Moteurs Perkins S.A. France Caterpillar Impact Products Limited United Kingdom Caterpillar Industrial Inc. Ohio Mitsubishi Caterpillar Forklift America Inc. Delaware FMS Equipment Rentals Inc. Delaware Material Handling Associates, Inc. Delaware Mitsubishi Caterpillar Forklift America de Argentina S.A. Argentina Rapidparts Inc. Delaware Mitsubishi Caterpillar Forklift Asia Pte. Ltd. Singapore Mistubishi Caterpillar Forklift Europe B.V. Netherlands Caterpillar Insurance Co. Ltd. Bermuda Caterpillar Assurance Company Limited Grand Cayman Island Caterpillar Insurance Services Corporation Tennessee Caterpillar International Leasing L.L.C. Delaware Caterpillar Investment Management Ltd. Delaware Caterpillar Securities Inc. Delaware Caterpillar Logistics Services, Inc. Delaware Caterpillar Logistics Services International N.V. Belgium Caterpillar Logistics N.V. Belgium Caterpillar Logistics Services Spain, S.A. Spain Exhibit 21
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Caterpillar Overseas Credit Corporation S.A. Switzerland Caterpillar Overseas S.A. Switzerland Caterpillar (Africa) (Proprietary) Limited South Africa Caterpillar Asia Limited Hong Kong Caterpillar Belgium S. A. Belgium Caterpillar China Limited Hong Kong Caterpillar Commercial S.A.R.L. France Caterpillar Commerciale S.r.L. Italy Caterpillar France S.A. France Caterpillar Hungary Ltd. Hungary Caterpillar Logistics Services Limited England Caterpillar MHI Marketing Ltd. Japan Mec-Track S.r.L. Italy Mec-3 S.r.L. Italy P.T. Natra Raya Indonesia Shin Caterpillar Mitsubishi Ltd. Japan Aishin Co. Japan Akashi GS Co., Ltd. Japan Chugoku Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Rex World Co., Ltd. Japan Top Try Co., Ltd. Japan Yeep Co. Japan CM Custom Product Co., Ltd. Japan CM Human Services Co., Ltd. Japan CM Logistics Services Co., Ltd. Japan CMEC Co., Ltd. Japan Diamond Office Management Co., Ltd. Japan Earthmoving Resources Corporation Japan East Kanto Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Clean World Co. Japan Takuma Co. Japan Tone Lease Co. Japan Hama-rental Co. Japan Hokkaido Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Shin Hokken Ltd. Japan Hokken Service Co. Japan Hokuriku Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Akira Shoji Co., Ltd. Japan Dia Rental Hokuriku Co., Ltd. Japan F. M. K. Co., Ltd. Japan RYOETSU Co., Ltd. Japan Itoh Tekkosho Co., Ltd. Japan Kinki Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Rental Sanwa Co., Ltd. Japan Space Attack Co., Ltd. Japan K-Lea Co., Ltd. Japan Kyoei Co. Japan Exhibit 21
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Machida Kiko Co., Ltd. Japan Nihon Kenki Lease Co., Ltd. Japan Rega Kyushu Co., Ltd. Japan Sagakiko-shokai Co., Ltd. Japan Sagami GS Co., Ltd. Japan SCM Operator Training Co., Ltd. Japan SCM Shoji Co., Ltd. Japan SCM System Service Co., Ltd. Japan Sowa System Co. Japan Tokai Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Seiryo Co., Ltd. Japan Tokuden Co. Japan Tokyo Rental Co., Ltd. Japan Osaka Rental Co., Ltd. Japan Tunnel Rental Co., Ltd. Japan Unix Inc. Japan West Kanto Caterpillar Mitsubishi Construction Equipment Sales, Ltd. Japan Aiwa Co., Ltd. Japan Nagano Kouki Co., Ltd. Japan Sanko Rental Co. Japan Solar Turbines Canada Ltd./Ltee. Canada Solar Turbines Europe S.A. Belgium Solar Turbines Overseas Pension Scheme Trustees Limited Guernsey Solar Turbines Services Nigeria Limited Nigeria Tractor Engineers Limited India Caterpillar Paving Products Inc. Oklahoma Caterpillar Materiels Routiers S.A. France Caterpillar Poland sp. zo.o. Poland Caterpillar Power India Private Limited India Caterpillar Power Systems Inc. Delaware Caterpillar Power Ventures Corporation Delaware Caterpillar Power Ventures International, Ltd. Bermuda Caterpillar Power Ventures International Mauritius Ltd. Mauritius Caterpillar Redistribution Services Inc. Delaware DUECOSA Limited Channel Islands Caterpillar Redistribution Services SARL Switzerland Caterpillar Rental Services Network Inc. Delaware Caterpillar Service Center Russia Caterpillar Services Limited Delaware Caterpillar Tosno Russia Caterpillar (U.K.) Limited England Brown Group Holdings Limited England and Wales Archer Components Limited England Artix Aviation Limited England Automotive Development Centre Limited England Caterpillar Peterlee Limited England Caterpillar Stockton Limited England and Wales Exhibit 21
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D. J. Industries Limited England Caterpillar EPG Limited England and Wales Caterpillar Logistics Services (UK) Limited England and Wales Caterpillar Skinningrove Limited England and Wales MaK (London) Limited United Kingdom Memorygraph Company Limited England Perkins Engines Company Ltd. England and Wales Perkins Engines (Australia) Pty. Ltd. Australia Perkins Engines (Far East) Pty. Ltd. Singapore Perkins Pension Trust Limited England and Wales Perkins Executive Pension Trust Limited England and Wales Systemjoin Limited England and Wales Turner Powertrain Systems Limited England Caterpillar Waco Inc. Delaware Caterpillar World Trading Corporation Delaware Caterpillar Work Tools Canada Ltd. Canada Caterpillar Work Tools, Inc. Kansas Cyclean, Inc. Delaware Depositary (Bermuda) Limited Bermuda F.G. Wilson, L.L.C. Delaware F.G. Wilson (Engineering) Limited Northern Ireland Everton Engineering (N.I.) Limited Northern Ireland F.G. Wilson Australia PTY Limited Australia F.G. Wilson Engineering (Dublin) Limited Ireland F.G. Wilson (Engineering) HK Limited Hong Kong F.G. Wilson Engineering Vertriebs-GmbH Germany F.G. Wilson Incorporated Delaware F.G. Wilson (Proprietary) Limited South Africa F.G. Wilson S.A. France F.G. Wilson Singapore Pte Limited Singapore F.G. Wilson Technology India Pvt. Ltd. India Genrent Limited Northern Ireland F.G. Wilson (USA) LLC Delaware Heartland Community Development Corporation Not-for-Profit Hydropro S.r.l. Italy Kato Engineering Inc. Delaware Leo, Inc. Washington Vanguard Hydraulic Pipelayer, Inc. Washington Lexington Real Estate Holding Corporation Delaware MaK Americas (USA) Inc. Illinois Material Handling Crane Systems, Inc. Ohio Buckeye Iron Works Company Ohio Mincom Pty Ltd. Australia Peoria Medical Research Corporation Illinois Perkins Engines Inc. Maryland Perkins Engines (Latin America) Inc. Delaware Perkins Technology Inc. Delaware Exhibit 21
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Rapisarda Industries SrL Italy Solar Turbines Incorporated Delaware OTSG, Inc. Delaware Solar Turbines International Company Delaware Energy Services International Group, Ltd. Delaware ESI do Brasil Ltda. Brazil Energy Services International Limited Bermuda P. T. Solar Services Indonesia Indonesia Servtech Limited Ireland Turboservices Sdn. Bhd. Malaysia Solar Turbines Services Company California Turbinas Solar de Venezuela, C.A. Venezuela Turbinas Solar S.A. de C.V. Mexico Turbo Tecnologia de Reparaciones S.A. de C.V. Mexico STI Capital Company Delaware Tecnologia Modificada S.A. de C.V. Mexico UNOC Equipment and Supply, L.L.C. Delaware UNOC Equipment and Supply Russia VALA CV Netherlands VALA Inc. Delaware VALA (UK) LP United Kingdom VALA LLC Delaware Varity International Inc. Delaware Perkins Holdings Limited Delaware Perkins Group Limited England and Wales Dorman Diesels Limited England and Wales F. Perkins Limited England and Wales Motores Perkins S.A. Mexico Motori Perkins S.P.A. Italy Perkins do Brazil Comercial Ltda. Brazil Perkins Engines Tianjin Company Limited China Perkins Engines Eastern (Singapore) Pte. Ltd. Singapore Perkins Engines Group Limited England and Wales Perkins Argentina S.A. Argentina Perkins Engines Leasing Limited England and Wales Perkins Limited England and Wales Motores Diesel Andino S.A. Peru Perkins Power Sales & Service Limited England and Wales Perkins Shibaura Engines Limited England and Wales Stylealpha Ltd. United Kingdom Veratech Holding B.V. Netherlands Heroco B.V. Netherlands Metaalwarenfabriek A.P. Verachtert B.V. Netherlands Verachtert GmbH Germany Veratech GmbH Germany Wright Equipment Company (Proprietary) Limited South Africa Exhibit 21
Page 7 of 7 EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Forms S-8 (No. 2-90123, as amended, 2-97450, as amended, 33-3718, as amended, 33-8003, 33-14116, 33-37353, 33-39280, 33-40598, 333-03609, 333- 32853, and 333-32851) of Caterpillar Inc. of our report dated January 20, 1999 related to the consolidated financial statements of Caterpillar Inc., appearing on page A-3 of the Appendix to the Company's 1999 Annual Meeting Proxy Statement which is incorporated in this Annual Report on Form 10-K. We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Forms S-3 (Nos. 33-46194, 333-22041, 333-43133, and 333-43983) of Caterpillar Inc. of our report dated January 20, 1999 related to the consolidated financial statements of Caterpillar Inc., appearing on page A-3 of the Appendix to the Company's 1999 Annual Meeting Proxy Statement which is incorporated in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Peoria, Illinois March 26, 1999 Exhibit 23 Page 1 of 1 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 120 240 3,660 0 2,842 11,459 10,395 5,529 25,128 7,945 9,404 0 0 407 4,724 25,128 19,972 20,977 15,031 18,724 (185) 0 264 2,174 665 1,513 0 0 0 1,513 4.17 4.11 Notes and accounts receivable - trade are reported net of allowances for doubtful accounts in the Statement of Financial Position. Amounts inapplicable or not disclosed as a separate line on the Statement of Financial Position or Results of Operations are reported as zero herein.
EX-99.1 10 FORM 11-K - FOREIGN SERVICE PLAN Exhibit 99.1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _____ to _____ Commission File Number 1-768 CATERPILLAR FOREIGN SERVICE EMPLOYEES' STOCK PURCHASE PLAN (Full title of the Plan) CATERPILLAR INC. (Name of issuer of the securities held pursuant to the Plan) 100 NE ADAMS STREET, PEORIA, ILLINOIS 61629 (Address of principal executive offices) ================================================================================ REQUIRED INFORMATION Item 1. Financial Statements for this Plan are not enclosed since the requirements to file such financial statements were deemed inapplicable in accordance with the letter from the Securities and Exchange Commission dated January 26, 1973. Item 2. (See response to Item 1). Item 3. (See response to Item 1). Item 4. Not Applicable [LOGO OF CATERPILLAR APPEARS HERE] -----END PRIVACY-ENHANCED MESSAGE-----