SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
cat 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, 2006
 
 
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)
 
37-0602744
(IRS Employer I.D. No.)
 
100 NE Adams Street, Peoria, Illinois
(Address of principal executive offices)
 
61629
(Zip Code)
 
Registrant's telephone number, including area code: (309) 675-1000
 



Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of each class
 
Name of each exchange
  on which registered  
 
 
 
Common Stock ($1.00 par value)
 
Chicago Stock Exchange
New York Stock Exchange
NYSE Arca*
 
Preferred Stock Purchase Rights
 
Chicago Stock Exchange
New York Stock Exchange
NYSE Arca*
 
9 3/8% Debentures due August 15, 2011
 
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
 
5.3% Debentures due September 15, 2035
 
New York Stock Exchange
       
* Caterpillar voluntarily delisted from NYSE Arca (formerly Pacific Exchange) in January 2007
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ü ] No [    ]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [    ] No [ ü ]

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 [ü] 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.  [ ü ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer [ ü ] Accelerated filer [     ] Non-accelerated filer [     ]

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ] No [ ü ]

As of June 30, 2006, there were 655,748,473 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 executive officers may be affiliates) was approximately $48,350,000,000.

As of December 31, 2006, there were 645,808,176 shares of common stock of the Registrant outstanding.

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.

Part III
2007 Annual Meeting Proxy Statement (Proxy Statement) expected to be filed with the Securities and Exchange Commission (SEC) on April 17, 2007 but not later than June 30, 2007 (within 120 days after the end of the calendar year).
 
Parts I, II, IV
General and Financial Information for 2006 containing the information required by SEC Rule 14a-3 for an annual report to security holders filed as Exhibit 13 to this Form 10-K.
 

 
 
                    TABLE OF CONTENTS
 



 
 
Business 
 
 
 
Business Risk Factors 
 
 
 
Unresolved Staff Comments 
 
 
 
Executive Officers of the Registrant as of December 31, 2006 
 
 
 
Properties 
 
 
 
Legal Proceedings 
 
 
 
Submission of Matters to a Vote of Security Holders 
 



 
 
Market for Registrant's Common Equity and Related Stockholder Matters 
 
 
 
Selected Financial Data 
 
 
 
Management's Discussion and Analysis of Financial
Condition and Results of Operations 
 
 
 
Quantitative and Qualitative Disclosures About Market Risk 
 
 
 
Financial Statements and Supplementary Data 
 
 
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
 
 
 
Controls and Procedures 
 
 
 
Other Information 
 



 
 
Directors, Executive Officers and Corporate Governance 
 
 
 
Executive Compensation 
 
 
 
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 
 
 
 
Certain Relationships and Related Transactions, Director Independence 
 
 
 
Principal Accountant Fees and Services 
 



 
 
Exhibits and Financial Statement Schedules 
 




 
 
  PART I
 
 Item 1. Business.

General
The company was originally organized as Caterpillar Tractor Co. in 1925 in the State of California. In 1986, the company reorganized as Caterpillar Inc. in the State of Delaware. As used herein, the term "Caterpillar," "we," "us," "our," or "the company" refers to Caterpillar Inc. and its subsidiaries unless designated or identified otherwise.
 
Principal Lines of Business / Nature of Operations
We operate in three principal lines of business:
 
1.
 
Machinery— A principal line of business which includes the design, manufacture, marketing and sales of construction, mining and forestry machinery—track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telehandlers, skid steer loaders and related parts. Also includes logistics services for other companies, and the design, manufacture, remanufacture, maintenance and services of rail-related products.
 
2.
 
Engines A principal line of business including the design, manufacture, marketing and sales of engines for Caterpillar machinery; electric power generation systems; on-highway vehicles and locomotives; marine, petroleum, construction, industrial, agricultural and other applications; and related parts. Also includes remanufacturing of Caterpillar engines and a variety of Caterpillar machine and engine components and remanufacturing services for other companies. Reciprocating engines meet power needs ranging from 5 to 21,500 horsepower (4 to over 16 000 kilowatts). Turbines range from 1,600 to 20,500 horsepower (1 200 to 15 000 kilowatts).
 
3.
 
Financial Products A principal line of business consisting primarily of Caterpillar Financial Services Corporation (Cat Financial), Caterpillar Insurance Holdings, Inc. (Cat Insurance), Caterpillar Power Ventures Corporation (Cat Power Ventures) and their respective subsidiaries. Cat Financial provides a wide range of financing alternatives to customers and dealers for Caterpillar machinery and engines, Solar gas turbines as well as other equipment and marine vessels. Cat Financial also extends loans to customers and dealers. Cat Insurance provides various forms of insurance to customers and dealers to help support the purchase and lease of our equipment. Cat Power Ventures is an investor in independent power projects using Caterpillar power generation equipment and services.
 

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 nine reportable segments for financial reporting purposes. Information about our reportable segments, including geographic information, appears in Note 24 - “Segment information” of Exhibit 13.

Other information about our operations in 2006 and outlook for 2007, including risks associated with foreign operations is incorporated by reference from - "Management's Discussion and Analysis" of Exhibit 13.
 
Company Strengths 
Caterpillar is the leader in construction and mining equipment, and diesel and natural gas engines and industrial gas turbines in our size range. The company is also a leading services provider through Cat Financial, Caterpillar Logistics Services Inc. and Caterpillar Remanufacturing Services Inc. Annual sales and revenues are $41.517 billion, making Caterpillar the largest manufacturer in our industry. Caterpillar is also a leading U.S. exporter. Through a global network of independent dealers, Caterpillar builds long-term relationships with customers around the world. For over 80 years, the Caterpillar name has been associated with the highest level of quality products and services. More information is available at www.CAT.com.
 
 Page 1

 
Competitive Environment
Caterpillar products and product support services are sold worldwide into a variety of highly competitive markets. In all markets, we compete on the basis of product performance, customer service, quality and price. From time to time, the intensity of competition results in price discounting in a particular industry or region. Such price discounting puts pressure on margins and can negatively impact operating profit.

Outside of the United States, certain competitors enjoy competitive advantages inherent to operating in their home countries.
 
  Machinery
 
The competitive environment for Caterpillar’s machinery business consists of some global competitors and many regional and specialized local competitors. Examples of global competitors include but are not limited to Komatsu Ltd., Volvo Construction Equipment (part of the Volvo Group AB), CNH Global N.V., Hitachi Construction Machinery Co., Terex Corporation, JCB and Ingersoll-Rand Company Limited. Each have varying numbers of product lines that compete with Caterpillar product lines, and each have varying degrees of regional focus. John Deere Construction and Forestry Division (part of Deere & Co.), for example, has numerous product lines that compete with Caterpillar primarily in North America and Latin America. Others, like Ingersoll-Rand, offer a limited range of products that compete against Caterpillar, but do compete globally.

During 2006, global industry demand continued to be strong and most competitors experienced increased sales and operating profit. Also in 2006, off-highway emissions regulations in Europe, North America and Japan required Caterpillar and its competitors to introduce products with emissions-compliant engines in a certain horsepower range. In some cases, competitors also timed product upgrades to coincide with these emissions requirements. The overall competitive environment in the machinery business continues to be intense, and the overall financial health of the industry continues to improve.

Caterpillar's logistics business provides integrated supply chain services for Caterpillar and over 60 other companies worldwide. It competes with global, regional and local competitors, including companies such as DHL and UPS. The unit has grown rapidly since its inception in 1987, and the contract logistics industry is expected to continue to grow at rates above that of the global economy as a whole.

Progress Rail (a newly acquired business) has achieved a leading market position in North America as a provider of a broad range of products and services for both railroad rolling stock and the railroad track infrastructure and a supplier of reconditioned and remanufactured railroad freight car and locomotive components. Progress Rail leverages its extensive network of plant and service facilities to provide customers high quality products and services with lower shipping costs and faster turnaround times. These elements, along with Progress Rail’s ability to source a substantial volume of reconditionable parts to its railcar and locomotive remanufacturing operations, provide Progress Rail with a sustainable cost advantage and competitive prices for its customers.
 
  Engines
 
Caterpillar operates in a very competitive engine/turbine manufacturing and packaging environment. The company manufactures diesel, heavy fuel and natural gas reciprocating engines for the on- and off-highway markets, and provides industrial turbines and turbine related services for oil and gas and power generation applications. Caterpillar designs, manufactures, assembles and distributes electrical generator sets and compression packages that can be customized with a wide range of ancillary equipment and performance options to create fully integrated electric power and compression systems.
 
Page 2


 
The competitive environment for off-highway engines/turbines and generator sets consists of a few global competitors who compete in a variety of Caterpillar’s markets, and a larger set of companies who compete in a limited size range and/or application. Principal global competitors include, but are not limited to, Cummins Inc., MTU Friedrichshafen and MTU Detroit Diesel (both part of Tognum GmbH) and Wartsila Corp. Other competitors, such as John Deere Power Systems (part of Deere & Co.), Siemens Power Generation (part of Siemens AG), General Electric Company and Volvo Penta (part of Volvo Group AB) compete in a portion of Caterpillar’s markets. An additional set of competitors, including Generac Power Systems, Inc., Kohler Co. and others, are packagers who source engines and/or other components from domestic and international suppliers, and market products regionally and internationally through a variety of distribution channels.

In the North American on-highway heavy-duty and mid-range diesel engine markets, competitors include, but are not limited to, Cummins Inc., Detroit Diesel Corp. and Mercedes-Benz (both part of DaimlerChrysler AG), Navistar International Corp. and Volvo Group AB. On-highway diesel engine competitors in overseas markets include, but are not limited to, Mercedes-Benz and Mitsubishi Fuso Truck & Bus Corp. (both part of Daimler Chrysler AG), Iveco Motors (part of Fiat S.p.A), MAN AG, Scania AB and Volvo Group AB. Some of these competitors are truck and/or bus manufacturers with proprietary diesel engines who also offer engines from independent manufacturers such as Caterpillar. During 2006, on-highway engine competitors worked to meet strong global demand for their products while, in North America, preparing to meet tightening January 1, 2007, United States Environmental Protection Agency (EPA) emissions requirements.

During 2006, Caterpillar continued in its leadership position in the North American on-highway truck market. Since the introduction of its five engine models with ACERT® Technology beginning in 2003, the company has shipped over 450,000 ACERT engines into the North American on-highway truck market and continued to maintain its leadership position in this market. Customer acceptance of Caterpillar ACERT engine performance, quality and reliability is strong, as evidenced by an unprecedented sixth J.D. Power and Associates Award.

Caterpillar received EPA certification for the C7, C13 and C15 ACERT engines in November 2006. The C9 ACERT engine EPA application was recently submitted, and certification is expected in early 2007.

Caterpillar also continued to focus investment and resources on leveraging ACERT Technology into off-road markets, as well as into more of its engine platforms. The building blocks for ACERT Technology are very flexible and scaleable and are being applied as needed based on engine platform and application. From October 2004 through year-end 2006, the company has shipped over 30,000 Caterpillar machines powered by engines with ACERT Technology. A line of ACERT industrial, electric power and marine engines has been released to further leverage the technology throughout Caterpillar’s businesses and engine platforms. Caterpillar was the first company to offer a full line of Tier 3/Stage IIIA emissions compliant off-highway engines.

Our 2007 on-highway ACERT engines have been validated in the field to meet the new emissions regulations while maintaining the fuel economy and durability characteristics of our current on-highway engines. The 2007 production engines began shipping in January with volumes to increase throughout the year. The ACERT Technologies in this product were expanded to include the aftertreatment system. Caterpillar Environmental Technologies Mexico, S. de R.L. de C.V. was formed to design and manufacture the diesel particulate filter (DPF).

We believe ACERT provides Caterpillar a valuable foundation now and in the future to meet emissions and performance requirements, and we plan to continue investing in developing and leveraging ACERT Technology systems and components.

Caterpillar’s remanufacturing business provides services for a variety of products and services to Caterpillar and other external clients. The remanufacturing business competes on a regional basis with similarly sized or smaller companies. The company launched the remanufacturing business in the 1970s with engines/turbines and is now one of the world’s largest remanufacturers, processing more than two million units annually and recycling more than 100 million pounds of remanufactured products each year. The business continues to grow at rates well above that of the global economy as a whole.
 
Page 3

 
Financial Products  
 
Cat Financial, incorporated in Delaware, is a wholly owned finance subsidiary of Caterpillar. Cat Financial's primary business is to provide retail financing alternatives for Caterpillar products to customers and Caterpillar dealers around the world. Such retail financing is primarily comprised of financing of Caterpillar equipment, machinery and engines. In addition, Cat Financial also provides financing for vehicles, power generation facilities and marine vessels that, in most cases, incorporate Caterpillar products. In addition to retail financing, Cat Financial provides wholesale financing to Caterpillar dealers and purchases short-term dealer receivables from Caterpillar. The various financing plans offered by Cat Financial are designed to increase the opportunity for sales of Caterpillar products and generate financing income for Cat Financial. A significant portion of Cat Financial's activities is conducted in North America. However, Cat Financial has additional offices and subsidiaries in Asia, Australia, Europe and Latin America.

For 25 years, Cat Financial has been providing financing in the various markets in which it participates, contributing to its knowledge of asset values, industry trends, product structuring and customer needs.

In certain instances, Cat Financial's operations are subject to supervision and regulation by state, federal and various foreign governmental authorities, and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions which, among other things, (i) regulate credit granting activities, (ii) establish maximum interest rates, finance charges and other charges, (iii) require disclosures to customers, (iv) govern secured transactions, (v) set collection, foreclosure, repossession and other trade practices, (vi) prohibit discrimination in the extension of credit and administration of loans, and (vii) regulate the use and reporting of information related to a borrower's credit experience.

Cat Financial's retail financing leases and installment sale contracts (totaling 60 percent*) include:
·  
Tax leases that are classified as either operating or finance leases for financial accounting purposes, depending on the characteristics of the lease. For tax purposes, Cat Financial is considered the owner of the equipment (17 percent*).
 
·  
Finance (non-tax) leases where the lessee is considered the owner of the equipment during the term of the lease, and the agreement either requires or allows the customer to purchase the equipment for a fixed price at the end of the term (17 percent*).
 
·  
Installment sale contracts, which are equipment loans that enable customers to purchase equipment with a down payment or trade-in and structured payments over time (25 percent*).
 
·  
Governmental lease-purchase plans in the United States that offer low interest rates and flexible terms to qualified non-federal government agencies (1 percent*).
 
Retail notes receivables include:
·  
Loans that allow customers and dealers to use their Caterpillar equipment as collateral to obtain financing (19 percent*).
 
Wholesale notes receivables, finance leases and installment sale contracts (totaling 21 percent*) include:
·  
Inventory/rental programs which provide assistance to dealers by financing their inventory, rental fleets and rental facilities (5 percent*).
 
·  
Short-term dealer receivables that Cat Financial purchases from Caterpillar and subsidiaries at a discount (16 percent*).
 
*Indicates the percentage of Cat Financial's total portfolio at December 31, 2006. For more information on the above and Cat Financial's concentration of credit risk, please refer to Note 8 - “Finance Receivables” of Exhibit 13.
 
Page 4

 
The retail financing business is highly competitive, with financing for users of Caterpillar equipment available through a variety of sources, principally commercial banks and finance and leasing companies. Cat Financial's competitors include CIT Group Inc.; CitiCapital, a business unit of Citigroup; General Electric Capital Corporation and local banks and finance companies. In addition, many of our manufacturing competitors use below-market interest rate programs (subsidized by the manufacturer) to assist machine sales. Caterpillar and Cat Financial work together to provide a broad array of financial merchandising programs around the world to respond to these competing offers.

Cat Financial's results are largely dependent upon Caterpillar dealers' ability to sell equipment and customers' willingness to enter into financing or leasing agreements. It is also affected by the availability of funds from its financing sources and general economic conditions such as inflation and market interest rates.

Cat Financial has a "match funding" policy that addresses interest rate risk by aligning the interest rate profile (fixed rate or floating rate) of its debt portfolio with the interest rate profile of its receivable portfolio (loans and leases with customers and dealers) within predetermined ranges on an ongoing basis. In connection with that policy, Cat Financial issues debt with a similar interest rate profile to its receivables, and also uses interest rate swap agreements to manage its interest rate risk exposure to interest rate changes and in some cases to lower its cost of borrowed funds. For more information regarding match funding, please see Note 3 - “Derivative financial instruments and risk management” of Exhibit 13.

In managing foreign currency risk for Cat Financial's operations, the objective is to minimize earnings volatility resulting from conversion and the remeasurement of net foreign currency balance sheet positions. This policy allows the use of foreign currency forward and option contracts to address the risk of currency mismatch between the receivable and debt portfolios. None of these foreign currency forward and option contracts are designated as a hedge.

Cat Financial provides financing only when acceptable criteria are met. Credit decisions are based on, among other things, the customer's credit history, financial strength and equipment application. Cat Financial typically maintains a security interest in retail-financed equipment and requires physical damage insurance coverage on financed equipment. Cat Financial finances a significant portion of Caterpillar dealers' sales and inventory of Caterpillar equipment, especially in North America. Cat Financial's competitive position is improved by marketing programs, subsidized by Caterpillar and/or Caterpillar dealers, which allow it to offer below-market interest rates. Under these programs, Caterpillar, or the dealer, subsidizes an amount at the outset of the transaction, which Cat Financial then recognizes as revenue over the term of the financing. Transaction processing time and supporting technologies continue to drive Cat Financial in its efforts to respond quickly to customers and improve internal processing efficiencies. We believe Cat Financial's web-based Cat FinancExpressSM transaction processing and information tool currently available in the United States, France, Canada and Australia provides Cat Financial a competitive advantage in those areas. Cat FinancExpress collects information on-line to provide finance quotes and credit decisions and then prints the related documents, all in a very short time frame.

Caterpillar Insurance Company, a wholly owned subsidiary of Cat Insurance is a U.S. insurance company domiciled in Missouri and primarily regulated by the Missouri Department of Insurance. The insurance company is licensed to conduct property and casualty insurance business in 49 states and the District of Columbia, and as such, is regulated in those jurisdictions as well. The State of Missouri acts as the lead regulatory authority and monitors the company's financial status to ensure that the company is in compliance with minimum solvency requirements, as well as other financial ratios prescribed by the National Association of Insurance Commissioners.

Caterpillar Life Insurance Company, a wholly owned subsidiary of Caterpillar, is a U.S. insurance company domiciled in Missouri and primarily regulated by the Missouri Department of Insurance. The insurance company is licensed to conduct life and accident and health insurance business in 24 states and the District of Columbia, and as such, is regulated in those jurisdictions as well. As the State of Missouri acts as the lead regulatory authority, it monitors the financial status to ensure that the company is in compliance with minimum solvency requirements, as well as other financial ratios prescribed by the National Association of Insurance Commissioners. The company also provides stop loss insurance protection to a Missouri VEBA trust used to fund medical claims of salaried retirees of Caterpillar under the voluntary benefit plan.
 
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Caterpillar Insurance Co. Ltd., a wholly owned subsidiary of Cat Insurance is a captive insurance company domiciled in Bermuda and regulated by the Bermuda Monetary Authority. The company is a Class 2 insurer (as defined by the Bermuda Insurance Amendment Act of 1995), which primarily insures affiliates and, as such, the Bermuda Monetary Authority requires an Annual Financial Filing for purposes of monitoring compliance with solvency requirements.

Caterpillar Product Services Corporation, a wholly owned subsidiary of Cat Insurance, is a warranty company domiciled in Missouri. It conducts a machine extended service contract program in Italy, France and Germany and also provides machine extended warranty reimbursement protection to dealers in those countries.

Caterpillar Insurance Services Corporation, a wholly owned subsidiary of Cat Holdings, is a Tennessee insurance brokerage company licensed in all 50 states and the District of Columbia. It provides brokerage services for all property and casualty and life and health lines of business.

Cat Holdings provides protection for claims under the following programs:

·  
Contractual Liability Insurance to Caterpillar dealers and Original Equipment Manufacturers (OEMs) for extended service contracts (parts and labor) offered by third party dealers and OEMs.
 
·  
Reinsurance for the worldwide cargo risks of Caterpillar products.
 
·  
Contractors' Equipment physical damage insurance for equipment manufactured by Caterpillar which is leased, rented or sold by third party dealers.
 
·  
Insurance for Caterpillar general liability, employer's liability, auto liability and property insurance.
 
·  
Brokerage services for property and casualty and life and health business.

Cat Power Ventures, a wholly owned subsidiary of Caterpillar, primarily invested equity and took ownership interests in power generation projects throughout the world that utilize Caterpillar power generation equipment. In some cases, these projects also utilize construction and operations and maintenance services that are provided by other Caterpillar subsidiaries. Cat Power Ventures has investments in power projects in Poland, the Dominican Republic and Tunisia and has created direct and indirect subsidiaries and affiliates to hold these investments. In December 2005, the company decided that it would no longer invest equity in power generation projects. As a result, Cat Power Ventures will not make any new equity investments in power generation projects and will sell its project investment portfolio. We expect these sales to be completed and for Cat Power Ventures to have ceased operations by the end of 2007.

Business Developments in 2006
In 2006, the company continued to focus on execution of our Vision 2020 strategy that was introduced in 2005. Through Vision 2020, we established key enterprise goals for 2010 grouped under the “3Ps” of people, performance and profitable growth. Our people goals include a highly engaged workforce and world-class safety. The performance goals are related to improved quality and market leadership in every major product group we serve. The profitable growth goals include a 2010 sales and revenues target.
 
Performance and Strategy
2006 marked the fourth straight year of double-digit profit growth and the third consecutive year of record sales and profit for Caterpillar, including 2006 sales and revenues of $41.517 billion and profit of $3.537 billion, or $5.17 per share.

In November 2006, the company’s Chairman and CEO, Jim Owens, updated analysts and investors on execution of the company’s strategy. Highlights of the update included: line of sight to $50+ billion of sales and revenues by 2010; profit per share growth in a range of 15 to 20 percent through 2010; strong cash flow through the end of the decade to fund continued growth and reward stockholders with continued dividend growth; strong internal focus on safety, quality and velocity with implementation of the Caterpillar Production System; continued focus on products, technology, and product support to deliver the best value to customers; and continued growth in the company’s less cyclical service-related businesses.
 
Page 6

 
In October 2006, the company announced plans to realign core manufacturing operations and to focus product design expertise on key industry segments. To achieve these goals, the company created three new divisions: the U.S. Operations Division; the Heavy Construction and Mining Division and the Infrastructure Development Division. The new divisions resulted from restructuring what was known as Wheel Loaders & Excavators Division, Track-Type Tractors Division, and Mining & Construction Equipment Division. The new alignment will maximize the company's manufacturing synergies and support the company's vision for unmatched quality, velocity and safety.

Sustainability
In 2006, the company released its first-ever Sustainability Report to highlight the company's efforts in sustainable development and its commitment to make sustainable development a "strategic area of improvement" in its new enterprise strategy. The company was selected as a member of the Dow Jones Sustainability World Index (DJSI World) for the sixth consecutive year. DJSI uses a best-in-class approach designed to identify best practices across the economic, social and environmental dimensions of corporate sustainability.

In November 2006, the company received certification from the U.S. Environmental Protection Agency (EPA) for the company’s C7, C13 and C15 engines equipped with ACERT Technology for 2007. This technology positions the company to meet future EPA emissions regulations and provides a long-term emissions solution for the global on-highway engine market. ACERT Technology relies on four basic systems — emissions air management, precision combustion, advanced electronics and effective aftertreatment. These four systems work to decrease particulate matter, oxides of nitrogen and hydrocarbon emissions, while preserving the engine’s reliability and durability, which keep owning and operating costs low.

Customer acceptance of Cat engines is reflected in the company’s unprecedented sixth J.D. Power and Associates Award, which the company received in 2006 for “Highest Customer Satisfaction With Vocational Heavy Duty Diesel Engines.”  No other engine manufacturer has ever won this customer feedback award, which measures customer satisfaction through J.D. Power’s annual survey of vehicle owners who operate in typically rugged vocations and use vehicles such as dump trucks or garbage trucks.

Growth in China
In 2006, the company made progress toward its commitment to continue expansion of our business in China in support of our overall enterprise strategy and Vision 2020. Caterpillar held “CONEXPO Asia 2006,” an international trade show for the construction industry, at the China National Agricultural Exhibition Center in Beijing. Also, the company relocated its Asia Pacific Operations headquarters from Tokyo, Japan, to Beijing, China. These activities support operational and sales success in China, which is a critical success factor for the company's long-term growth and profitability.

The company further expanded its business in China by signing an investment agreement with the Suzhou Industrial Park Administrative Committee to begin construction of a new wheel loader manufacturing facility in the Suzhou Industrial Park in China’s Jiangsu province. The company also signed a letter of intent with China's National Development and Reform Commission (NDRC) through which Caterpillar and NDRC will promote the development of China's remanufacturing industry. As part of the letter of intent, the company will provide expertise to assist NDRC and Chinese research institutions in supporting the development of the remanufacturing industry in China. The company and NDRC also agreed to form a Joint Working Group on Remanufacturing Programs to discuss matters related to the remanufacturing cooperation program in detail and to coordinate and promote further cooperation by both parties in sustainable manufacturing and other areas.

Caterpillar (China) Machinery Components Co., Ltd. in Wuxi began shipping hose and coupling assemblies in 2006, with valve production for SEM-built wheel loaders and Xuzhou-built motor graders scheduled to begin in late 2007.

Cat Logistics opened a new China Distribution Center in the Lingang Industrial Area in Shanghai. The distribution center provides parts for the company’s dealers in China and expanded parts distribution to dealers in Korea and Mongolia.

Solar Turbines and China National Offshore Oil Corporation (CNOOC) signed a long-term strategic agreement between the two companies. Under terms of the strategic agreement, Solar Turbines will be a CNOOC preferred aftermarket supplier for goods and services for Solar Gas Turbines equipment.
 
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Acquisitions/Alliances
In 2006, the company continued its efforts to profitably grow its business. These efforts include the following:

·  
The company announced plans to significantly increase the number of Cat-branded machines available to the Caterpillar dealer network for marketing to the forestry industry. Pursuant to the agreement with alliance partner Blount International, Inc. (Blount), the company is replacing the current TimberkingTM brand name with the Caterpillar® and Cat® brands. The Timberking line includes products manufactured by both the company and Blount and sold exclusively through the company’s dealers.
 
·  
The company acquired Progress Rail for $1.0 billion in cash, stock and assumption of debt. Progress Rail is based in Albertville, Alabama, and is a leading provider of remanufactured locomotive and railcar products and services to the North American railroad industry. The rail aftermarket services business is a strong fit with the company’s strategic direction and leverages the company’s remanufacturing capability. The acquisition provided excellent diversified growth to the company, enhancing its ability to deliver attractive profitability throughout the business cycles. Progress Rail offers a full range of reconditioned and remanufactured railcar components, rail and track products, railcar and locomotive repair, rail welding, maintenance of way equipment and railcar dismantling.
 
·  
As part of the company’s plan to improve operational excellence in Asia, the company completed the acquisition of a former joint venture engine operation in India. The joint venture was originally formed in 1988 as Hindustan PowerPlus Limited. It is now a wholly owned subsidiary of the company and has been renamed Caterpillar Power India Private Limited. The acquisition aligns operations in India more closely with the other power systems groups that are part of the global Caterpillar family.

Acquisitions
Information related to acquisitions appears in Note 25 - “Alliances and Acquisitions” of Exhibit 13.

Order Backlog
The dollar amount of backlog believed to be firm was approximately $14.5 billion at December 31, 2006, and $12.2 billion at December 31, 2005. Of the total backlog, approximately $1.9 billion at December 31, 2006, and $1.7 billion at December 31, 2005, was not expected to be filled in the following year. Our backlog is generally highest in the first and second quarters because of seasonal buying trends in our industry.

Dealers
Our machines are distributed principally through a worldwide organization of independent dealers (dealer network), 54 located in the United States and 128 located outside the United States. Worldwide, these dealers serve 182 countries and operate 3,576 places of business, including 1,639 dealer rental outlets. Reciprocating engines are sold principally through the dealer network and to other manufacturers for use in their products. Some of the reciprocating engines manufactured by Perkins Engines Company Limited (Perkins) also are sold through a worldwide network of 132 distributors located in 181 countries. Most of the electric power generation systems manufactured by FG Wilson are sold through a worldwide network of 200 dealers located in 180 countries.

These dealers do not deal exclusively with our products; however, in most cases sales and servicing of our products are the dealers' principal businesses. Turbines and large marine and large power generation reciprocating engines are sold through sales forces employed by the company. At times, these employees are assisted by independent sales representatives.

The company's relationship with each of its independent dealers is memorialized in a standard sales and service agreement. Pursuant to this agreement, the company grants the dealer the right to purchase and sell its products and to service the products in a specified geographic service territory. Prices to dealers are established by the company after receiving input from dealers on transactional pricing in the marketplace. The company also agrees to defend its intellectual property and to provide warranty and technical support to the dealer. The agreement further grants the dealer a non-exclusive license to use the company's trademarks, service marks and brand names. In some instances a separate trademark agreement exists between the company and a dealer.
 
Page 8

 
In exchange for these rights, the agreement obligates the dealer to develop and promote the sale of the company's products to current and prospective customers in the dealer's service territory. Each dealer specifically agrees to employ adequate sales and support personnel to market, sell and promote the company's products, demonstrate and exhibit the products, perform the company's product improvement programs, inform the company concerning any features that might affect the safe operation of any of the company's products, and maintain detailed books and records of the dealer's financial condition, sales and inventories and make these books and records available at the company's reasonable request.

These sales and service agreements are terminable at will by either party upon 90 days written notice and provide for termination automatically if the dealer files for bankruptcy protection or upon the occurrence of comparable action seeking protection from creditors.

Patents and Trademarks  
Our products are sold primarily under the brands "Caterpillar," "CAT," design versions of "CAT" and "Caterpillar," "Solar Turbines," "MaK," "Perkins," "FG Wilson" and "Olympian." 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.

Research and Development
We have always placed strong emphasis on product-oriented research and development relating to the development of new or improved machines, engines and major components. In 2006, 2005 and 2004, we spent $1,347 million, $1,084 million and $928 million, or 3.2 percent, 3.0 percent and 3.1 percent of our sales and revenues, respectively, on our research and development programs.

Employment
As of December 31, 2006, we employed 94,593 persons of whom 45,884 were located outside the United States. From a global, enterprise perspective, we believe our relationship with our employees is very good. We build and maintain a productive, motivated workforce by treating all employees fairly and equitably.

In the United States, most of our 48,709 employees are at-will employees and, therefore, not subject to any type of employment contract or agreement. At select business units, certain highly specialized employees have been hired under employment contracts that specify a term of employment and specify pay and other benefits.

As of December 31, 2006, there were 14,315 U.S. hourly production employees who were covered by collective bargaining agreements with various labor unions. The United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represents 12,085 Caterpillar employees under a six-year central labor agreement that will expire March 1, 2011. The International Association of Machinists (IAM) represents 2,036 employees under labor agreements that expire on April 30, 2012, and May 23, 2010.

Outside the United States, the company enters into employment contracts and agreements in those countries in which such relationships are mandatory or customary. The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction.

Sales
Sales outside the United States were 54 percent of consolidated sales for 2006, 53 percent for 2005 and 54 percent for 2004.

Environmental Matters
We strive to be a global leader in sustainability, and we promote enterprise-wide commitment to sustainable development consistent with our business goals, in line with our Vision 2020 strategy.
 
Page 9

 
The company is regulated by federal, state and international environmental laws governing our use, transport and disposal of substances and control of emissions. In addition to governing our manufacturing and other operations, these laws often impact the development of our products, including, but not limited to, required compliance with air emissions standards applicable to internal combustion engines. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings or competitive position.

We are engaged in remedial activities at a number of locations, often with other companies, pursuant to federal and state laws. When it is probable we will pay remedial costs at a site, and those costs can be reasonably estimated, the costs are charged against our earnings. In formulating that estimate, we do not consider amounts expected to be recovered from insurance companies or others. The amount recorded for environmental remediation is not material and is included in Statement 2 - “Consolidated Financial Position at December 31 - Accrued Expenses" of Exhibit 13.

We cannot reasonably estimate costs at sites in the very early stages of remediation. Currently, we have a few sites in the very early stages of remediation, and there is no more than a remote chance that a material amount for remedial activities at any individual site, or at all sites in the aggregate, will be required.

Available Information 
The company files electronically with the Securities and Exchange Commission (SEC) required reports on Form 8-K, Form 10-Q, Form 10-K and Form 11-K; proxy materials; ownership reports for insiders as required by Section 16 of the Securities Exchange Act of 1934; and registration statements on Forms S-3 and S-8, as necessary; and any other form or report as required. The public may read and copy any materials the company has filed with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished with the SEC are available free of charge through our Internet site (www.CAT.com/secfilings) as soon as reasonably practicable after filing with the SEC. Copies of our board committee charters, our board's Guidelines on Corporate Governance Issues, Worldwide Code of Conduct, and other corporate governance information are available on our Internet site (www.CAT.com/governance), or upon written request to the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629.
 
Additional company information may be obtained as follows:
 
Current information -
·  
phone our Information Hotline - (800) 228-7717 (U.S. or Canada) or (858) 244-2080 (outside U.S. or Canada) to request company publications by mail, listen to a summary of Caterpillar's latest financial results and current outlook, or to request a copy of results by facsimile or mail
·  
request, view, or download materials on-line or register for email alerts at www.CAT.com/materialsrequest

Historical information -
·  
view/download on-line at www.CAT.com/historical
 
 
 Item 1A. Business Risk Factors.
 
The statements in this section describe the most significant risks to our business and should be considered carefully in conjunction with the - “Management’s Discussion and Analysis” of Exhibit 13. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995. The discussion and analysis in this Form 10-K and in our 2006 Annual Report to Stockholders that are forward-looking and involve uncertainties that could significantly impact results. From time to time, we also provide forward-looking statements in other materials we issue to the public or in the form of oral presentation to the public. Forward-looking statements give current expectations or forecasts of future events about the company. You can identify these statements by the fact they do not relate to historical or current facts and by the use of words such as "believe," "expect," "estimate," "anticipate," "will be," "should," “plan,” “project,” “intend,” and similar words or expressions that identify forward-looking statements made on behalf of Caterpillar.
 
Page 10

 
In particular, these forward-looking statements include statements relating to future actions, prospective products, products’ approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, the outcome of contingencies and financial results. The statements are based on assumptions or on known or unknown risks and uncertainties. Although, we believe we have been prudent in our assumptions, we cannot guarantee the realization of these statements. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize or underlying assumptions prove inaccurate, actual results could materially differ from past results and those anticipated, estimated or projected. Uncertainties include factors that affect international businesses, as well as matters specific to the company and the markets it serves.

The company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You may however consult any further related disclosures we make in our Form 10-Q or any Form 8-K reports to the SEC.

The following is a cautionary discussion of risks, uncertainties and assumptions that we believe are significant to our business. These are factors that, individually or in the aggregate, we believe could make our actual results differ materially from expected and past results. You should note it is impossible to predict or identify all such factors and, as a result, you should not consider the following factors to be a complete discussion of risks and uncertainties.

Changes in Government Monetary and Fiscal Policies
Most countries have established central banks to regulate monetary systems and influence economic activities, generally by adjusting interest rates. Interest rate changes affect overall economic growth, which alter demand for residential and nonresidential structures, energy and mined products, which in turn affect sales of our products that serve these activities. Also, interest rates affect customers’ abilities to finance machine purchases and can change the optimal time to keep machines in a fleet. Our outlooks typically include assumptions about interest rates in a number of countries. Interest rates higher than those assumptions could result in lower sales than anticipated.

Government policies on taxes and spending affect our businesses. Throughout the world, government spending finances much infrastructure development, such as highways, airports, sewer and water systems, and dams. Tax regulations determine depreciation lives and the amount of money users can retain, both of which influence investment decisions. Developments more unfavorable than anticipated, such as declines in government revenues, decisions to reduce public spending or increases in taxes, could negatively impact our results.

Government can also impact international trade and investment through a variety of policies, such as import quotas, inspections, capital controls or tariffs. Developments worse than anticipated in the outlook, which could include lower import quotas, more detailed inspections or higher tariffs, could negatively impact our results.

Environmental Regulations
Our facilities and operations are subject to increasingly stringent environmental laws and regulations, including laws and regulations governing emissions to air, discharges to water and the generation, handling, storage, transportation, treatment and disposal of general, non-hazardous and hazardous waste materials. While we believe we are in compliance in all material respects with these environmental laws and regulations, we cannot ensure that we will not be adversely affected by costs, liabilities or claims with respect to existing or subsequently acquired operations, under present laws and regulations or those that may be adopted or imposed in the future. Compliance with all aforementioned existing laws has not had a material impact on our capital expenditures, earnings or competitive position.

Particularly our engines are subject to extensive statutory and regulatory requirements governing emissions and noise, including standards imposed by the EPA, state regulatory agencies in the U.S. and other various regulatory agencies around the world. Although current compliance with all existing emissions and noise requirements has not had a material effect on our capital expenditures, earnings or competitive position, governments may set new standards that could impact our operations in ways that are difficult to anticipate with accuracy. Thus, significant changes in standards, or the adoption of new standards, have the potential to impact our results negatively.
 
Page 11

 
Changes in Economic Conditions of Industries We Serve
The energy and mining industries are major users of our machines and engines. Decisions to purchase our machines and engines are dependent upon performance of these industries. If demand of output in these industries increases, the demand for our products would likely increase and vice versa. Prices of commodities in these industries are frequently volatile and change in response to economic growth, commodity inventories and any disruptions in production. We assume certain prices for key commodities in preparing our outlooks. Commodity prices lower than those assumed have the potential to negatively impact our sales.

The rates of infrastructure spending, housing starts, and commercial construction, play a significant role in our results. Our products are an integral component of these activities, and as these activities increase or decrease in the U.S. or abroad, demand for our products may be significantly impacted.

Changes in Price and Significant Shortages of Component Products
We are a significant user of steel and many commodities required for the manufacture of our products. So, increases in the prices of such commodities likely would boost costs higher than expected, negatively impacting profits.

We rely on suppliers to secure component products, particularly steel, required for the manufacture of our products. A disruption in deliveries from our suppliers or decreased in availability of such components or commodities could have an adverse affect on our ability to meet our commitments to customers or increase our operating costs. We believe our source of supply of raw materials will be generally sufficient for our need in the foreseeable future. However, our results of operations or financial condition could be negatively impacted should the supply turn out to be insufficient for our operations.

Currency Fluctuations
The reporting currency for our financial statements is the U.S. dollar. Certain of our assets, liabilities, expenses and revenues, are denominated in currencies other than the U.S. dollar. To prepare our consolidated financial statements, we must translate those assets, liabilities, expenses and revenues into U.S. dollars at the applicable exchange rates. As a result, increases and decreases in the value of the U.S. dollar vis-à-vis other currencies or vice versa will affect the amount of these items in our consolidated financial statements, even if their value has not changed in their original currency. This could have significant impact on our results if such increase or decrease in the value of the U.S. dollar or other currencies is substantial. 
 
Dealer/Original Equipment Manufacturers Sourcing Practices
We sell finished products through an independent dealer network or directly to OEMs. Both carry inventories of finished products as part of ongoing operations and adjust those inventories based on their assessments of future needs. Such adjustments can impact our results either positively or negatively.

In particular, some of our engine customers are truck manufacturers or OEMs that manufacture or could in the future manufacture engines for their own products. Despite their engine manufacturing abilities, these customers have chosen to outsource certain types of engine production to us due to the quality of our engine products and in order to reduce costs, eliminate production risks and maintain company focus. However, we cannot assure that these customers will continue to outsource engine manufacture in the future. Increased levels of production insourcing by these customers could result from a number of factors, such as shifts in our customers’ business strategies, acquisition by a customer of another engine manufacturer, the inability of third-party suppliers to meet specifications and the emergence of low-cost production opportunities in foreign countries. A significant reduction in the level of engine production outsourcing from our truck manufacturers or OEM customers could significantly impact our revenues and, accordingly, have a material adverse effect on our business, results of operations and financial condition.

Disease Epidemics
Historical data shows that major flu epidemics often caused sharp drops in economic output. Such epidemics are difficult to forecast, either in their occurrence or in their impact. So, such an event would have the potential to impact our results more unfavorably than we would assume in our outlooks.
 
Page 12

 
Impact of Acquisitions
We may from time to time engage in acquisitions involving some potential risks, including failure to successfully integrate and realize the expected benefits of such acquisitions. For example, with any past or future acquisitions, there is the possibility that:
 
·  
the business culture of the acquired business may not match well with our culture;
·  
technological and product synergies, economies of scale and cost reductions may not occur as expected;
·  
the company may acquire or assume unexpected liabilities;
·  
unforeseen difficulties may arise in integrating operations and systems;
·  
the company may fail to retain and assimilate employees of the acquired business;
·  
higher than expected finance costs due to unforeseen changes in tax, trade, environmental, labor, safety, payroll or pension policies in any jurisdiction in which the acquired business conducts its operations; and
·  
the company may experience problems in retaining customers and integrating customer bases.

Failure to continue implementing the company’s acquisition strategy, including successfully integrating acquired businesses, could have a material adverse effect on our business, financial condition and results of operations.

Competition
We operate in a highly competitive environment, and our outlook depends on a forecast of the company's share of industry sales predicated on our ability to compete with others in the marketplace. The company competes on the basis of product performance, customer service, quality and price. There can be no assurance that our product will be able to compete successfully with these other companies. Thus, our share of industry sales could be reduced due to aggressive pricing or product strategies pursued by competitors, unanticipated product or manufacturing difficulties, our failure to price our products competitively or an unexpected buildup in competitors' new machine or dealer-owned rental fleets, leading to severe downward pressure on machine rental rates and/or used equipment prices.

The environment remains competitive from a pricing standpoint. Our 2007 sales outlook assumes that the price increases announced for January 2007 hold in the marketplace. While we expect that the environment will continue to absorb these price actions, changes in marketplace acceptance would negatively impact our results. Moreover, additional price discounting to maintain our competitive position could result in lower than anticipated realization.

In addition, our results and ability to compete may be impacted positively or negatively by changes in the sales mix. Our outlook assumes a certain geographic mix of sales as well as a product mix of sales. If actual results vary from this projected geographic and product mix of sales, our results could be negatively impacted.

Litigation and Contingency
We face an inherent business risk of exposure to various types of claims and lawsuits. We are involved in various intellectual property, product liability, product warranty, environmental claims and lawsuits, including other legal proceedings that arise in the ordinary course of our business. Although, it is not possible to predict with certainty the outcome of every claim and lawsuit and the range of probable loss, we believe these lawsuits and claims will not individually or in the aggregate have a material impact on our results. However, we could in the future incur judgments or enter into settlements of lawsuits and claims that could have a material adverse effect on our results of operations in any particular period. In addition, while we maintain insurance coverage with respect to certain claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against any such claims.

As required by U.S. generally accepted accounting principles, we establish reserves based on our assessment of such contingencies. Subsequent developments in legal proceedings, may affect our assessment and estimates of the loss contingency recorded as a reserve requiring us to make additional materials payments, which could result in an adverse effect on our results of operations.
 
Page 13

 
Risks to Global Operations
Our global operations are dependent upon products manufactured, purchased and sold in the U.S. and internationally, including countries with political and economic instability, exposing our business operations to certain political and economic risks inherent in operating in some countries. These risks include:

·  
changes in regulations; imposition of currency restrictions and other restraints;
·  
imposition of burdensome tariffs and quotas;
·  
national and international conflict, including terrorist acts; and
·  
economic downturns, political instability and war or civil unrest may severely disrupt economic activity in affected countries.

As a normal practice, we do not assume such events in our outlooks unless already happening when the outlook is issued. So the occurrence of one of these events has the potential to negatively impact our results.

Risks to Financial Services Segment
Inherent in the operation of Cat Financial is the credit risk associated with its customers. The creditworthiness of each customer, and the rate of delinquencies, repossessions and net losses on customer obligations are directly impacted by several factors, including, but not limited to, relevant industry and economic conditions, the availability of capital, the experience and expertise of the customer's management team, commodity prices, political events and the sustained value of the underlying collateral. Additionally, interest rate movements create a degree of risk to our operations by affecting the amount of our interest payments and the value of our fixed rate debt. Our "match funding" policy addresses interest rate risk by aligning the interest rate profile (fixed or floating rate) of our debt portfolio with the interest rate profile of our receivables portfolio (loans and leases with customers and dealers) within pre-determined ranges on an ongoing basis. To achieve our match funding objectives, we issue debt with a similar interest rate profile to our receivables and also use interest rate swap agreements to manage our interest rate risk exposure to interest rate changes and in some cases to lower our cost of borrowed funds. If interest rates move upward more sharply than anticipated, our financial results could be negatively impacted. With respect to our insurance and investment management operations, changes in the equity and bond markets could cause an impairment of the value of our investment portfolio, thus requiring a negative adjustment to earnings.

Market Acceptance of Products
Our business relies on continued global demand for our brands and products. To achieve business goals, we must develop and sell products that appeal to our dealers, OEMs and customers. This is dependent on a number of factors including our ability to manage and maintain key dealer relationships and our ability to develop effective sales, advertising and marketing programs. In addition, our continued success is dependent on leading-edge innovation, with respect to both products and operations. This means we must be able to obtain patents that lead to the development of products that appeal to our consumers across the world. Failure to continue to deliver quality and competitive products to the marketplace, or to predict market demands for, or gain market acceptance of, our products, could have material impact on our business.

 
 Item 1B. Unresolved Staff Comments
 
Not applicable.
 
Page 14

 
 Item 1C. Executive Officers of the Registrant as of December 31, 2006.

 
 
Present Caterpillar Inc.
position and date of
initial election
Principal positions held during the
past five years if other than
Caterpillar Inc. position currently held


James W. Owens (60)
Chairman and Chief Executive Officer (2004)
·  Group President (1995-2003)
·  Vice Chairman (2003-2004)
Stuart L. Levenick (53)
Group President (2004)
·  Chairman, Shin Caterpillar Mitsubishi Ltd. (2000-2004)
·  Vice President (2000-2004)
Douglas R. Oberhelman (53)
Group President (2001)
 
Gerald L. Shaheen (62)
Group President (1998)
 
Gérard R. Vittecoq (58)
Group President (2004)
·  Vice President (2000-2004)
Steven H. Wunning (55)
Group President (2004)
 ·  Vice President (1998-2004)
James B. Buda (59)
Vice President, General Counsel and Secretary (2001)
 
David B. Burritt (51)
Vice President and Chief Financial Officer (2004)
·  Corporate 6 Sigma Champion (2001-2002)
·  Controller (2002 - 2004)
Bradley M. Halverson (46)
Controller (2004)
·  Business Resource Manager, Large Power Systems Division (2002)
·  Corporate Business Development Manager, Corporate Services Division (2002-2004)
 
 
 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 manufacturing of both. In addition, several plants are involved in the manufacturing 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 our Technical Center (as described below) 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 one to ten 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.

Headquarters and Other Key Offices
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 parts is conducted from parts distribution centers inside and outside the United States. Cat Logistics 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 that support distribution activities.
 
Page 15

Changes in Fixed Assets
During the five years ended December 31, 2006, changes in our investment in property, plant and equipment were as follows (stated in millions of dollars):
 
                 
   
Expenditures
 
Acquisitions
 
 
 
 
 
   
 
 
Provision for
 
Disposals
and Other
 
Net Increase(Decrease)
Year
 
U.S.
 
Outside U.S.
 
U.S.
 
Outside U.S.
 
Depreciation
 
Adjustments
 
During Period

 
 
 
 
 
 
 
2002
 
$
1,030
 
$
743
   
$
15
 
$
0
   
$
(1,199)
   
$
(151)
   
$
438
 
2003
 
$
1,000
 
$
765
   
$
0
 
$
0
   
$
(1,332)
   
$
(191)
   
$
242
 
2004
 
$
1,212
 
$
902
   
$
10
 
$
44
   
$
(1,366)
   
$
(371)
   
$
431
 
2005
 
$
1,383
 
$
1,032
   
$
0
 
$
0
   
$
(1,444)
   
$
(665)
   
$
306
 
2006
 
$
1,621
 
$
1,054
   
$
298
 
$
0
   
$
(1,554)
   
$
(556)
   
$
863
 




























At December 31, 2006, the net book value of properties located outside the United States represented about 33.6 percent of the net book value of all properties reflected in our consolidated financial position. Additional information about our investment in property, plant and equipment appears in Note 1 - “Operations and summary of significant accounting policies” and Note 10 - “Property, plant and equipment” of Exhibit 13.

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.

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 16

 

Inside the U.S.
 
Kentucky
 
Tennessee
 
·  Stafford
 
·  Reynosa
Alabama
 
·  Corbin
 
·  Knoxville
 
·  Rushden
 
·  Santa Catarina
·  Montgomery
 
·  Danville
 
·  Dyersburg
 
·  Shrewsbury
 
·  Saltillo
·  Albertville3
 
·  Decoursey
 
Texas
 
·  Stockton
 
·  Tijuana
California
 
·  Louisville
 
·  Channelview
 
·  Wimborne
 
·  Nuevo Laredo
·  Gardena
 
Louisiana
 
·  De Soto
 
·  Wolverhampton
 
·  Veracruz
·  San Diego
 
·  New Orleans
 
·  Forth Worth
 
France
 
·  Torreon
·  Mohave
 
Michigan
 
·  Mabank
 
·  Arras
 
The Netherlands
·  Rocklin
 
·  Menominee
 
·  San Antonio
 
·  Grenoble
 
·  Almere
Colorado
 
Minnesota
 
·  Sherman
 
·  Rantigny
 
·  s'-Hertogenbosch
·  Pueblo
 
·  Grand Rapids1
 
·  Waco
 
·  Chaumont1
 
Nigeria
Florida
 
·  Minneapolis
 
·  Waskom
 
Germany
 
·  Port Harcourt2
·  Jacksonville
 
·  New Ulm
 
Virginia
 
·  Kiel
 
Northern Ireland
Georgia
 
Mississippi
 
·  Roanoke
 
·  Rostock
 
·  Larne
·  Alpharetta
 
·  Corinth
 
Wyoming
 
Hungary
 
·  Monkstown
·  Griffin
 
·  Oxford
 
·  Laramie
 
·  Gödöllö
 
·  Springvale
·  Jefferson
 
·  Prentiss County
 
Outside the U.S.
 
India
 
Peoples Republic
·  LaGrange
 
Missouri
 
Australia
 
·  Bangalore2
 
of China
·  Patterson
 
·  Boonville
 
·  Burnie
 
·  Pondicherry
 
·  Erliban1
·  Toccoa
 
·  Kansas City
 
·  Melbourne
 
·  Thiruvallur
 
·  Guangzhou
·  Thomasville
 
·  West Plains
 
·  Wivenhoe
 
Indonesia
 
·  Qingzhou1
Illinois
 
Nebraska
 
Belgium
 
·  Bandung2
 
·  Shunde
·  Aurora
 
·  Lincoln
 
·  Gosselies
 
·  Jakarta
 
·  Tianjin2
·  Champaign1
 
·  Sidney
 
Brazil
 
Italy
 
·  Wuxi
·  Chicago
 
·  South Morrill
 
·  Curitiba
 
·  Anagni
 
·  Xuzhou2
·  Decatur
 
North Carolina
 
·  Parana
 
·  Atessa
 
Poland
·  Dixon
 
·  Clayton
 
·  Piracicaba
 
·  Bazzano
 
·  Janow Lubelski
·  East Peoria
 
·  Franklin
 
Canada
 
·  Fano
 
·  Radom1
·  Joliet
 
·  Morganton
 
·  Edmonton
 
·  Frosinone
 
·  Sosnowiec
·  Mapleton
 
·  Sanford
 
·  Montreal
 
·  Jesi
 
Russia
·  Mossville
 
Ohio
 
·  Surrey
 
·  Marignano
 
·  Tosno
·  Peoria
 
·  Dayton1
 
·  Winnipeg
 
·  Milan
 
Scotland
·  Pontiac
 
Pennsylvania
 
England
 
·  Minerbio
 
·  Aberdeen
·  Sterling
 
·  Steelton
 
·  Barwell
 
Japan
 
South Africa
·  Woodridge1
 
South Carolina
 
·  Desford
 
·  Akashi1
 
·  Boksburg
Indiana
 
·  Greenville
 
·  Ferndown
 
·  Sagamihara1
 
Switzerland
·  East Chicago
 
·  Jackson
 
·  Peterborough
 
Malaysia
 
·  Riazzino
·  Lafayette
 
·  Lexington
 
·  Peterlee
 
·  Kuala Lumpur1
 
Tunisia
Kansas
 
·  Newberry
 
·  Skinningrove
 
Mexico
 
·  Sfax
·  Lawrence
 
·  Summerville
     
·  Monterrey
   
·  Wamego
 
·  Sumter
           
 
1 Facility of affiliated company (50 percent or less owned)
2 Facility of partially owned subsidiary (more than 50 percent, less than 100 percent)
3 Headquarters of Progress Rail. Other significant Progress Rail facilities are included in the above list


Page 17
 
 Item 3. Legal Proceedings.
 
We have disclosed certain individual legal proceedings in this filing. Additionally, we are involved in other unresolved legal actions that arise in the normal course of business. The most prevalent of these unresolved actions involve disputes related to product design, manufacture and performance liability (including claimed asbestos and welding fumes exposure), contracts, employment issues or intellectual property rights. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of probable loss, we believe that these unresolved legal actions will not individually or in the aggregate have a material adverse effect on our consolidated financial position, liquidity or results of operations.

On August 24, 2006, Caterpillar announced the settlement of all current and pending litigation between Navistar International Corporation (Navistar), the parent company of International Truck and Engine Corporation, and Caterpillar. As part of the litigation settlement, Caterpillar received an up-front cash payment and a three-year promissory note from Navistar. Based on Caterpillar’s receivable balances related to the Navistar litigation at the time of settlement, the settlement resulted in a pre-tax charge to Caterpillar of approximately $70 million in the third quarter. 

On September 29, 2004, Kruse Technology Partnership (Kruse) filed a lawsuit against Caterpillar in the United States District Court for the Central District of California alleging that certain Caterpillar engines built from October 2002 to the present infringe upon certain claims of three of Kruse's patents on engine fuel injection timing and combustion strategies. Kruse seeks monetary damages, injunctive relief and a finding that the alleged infringement by Caterpillar was willful. Caterpillar denies Kruse's allegations, believes they are without merit and filed a counterclaim seeking a declaration from the court that Caterpillar is not infringing upon Kruse's patents and that the patents are invalid and unenforceable. The counterclaim filed by Caterpillar is pending, and no trial date is currently scheduled. In the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, liquidity or results of operations.

In November 2004, the U.S. Environmental Protection Agency (EPA) alleged that Caterpillar had constructed a facility in Emporia, Kansas, that failed to comply with Section 112(g)(2)(B) of the federal Clean Air Act. Caterpillar sold the Emporia, Kansas facility in December 2002. This matter has been settled and terminated by Consent Decree entered on June 12, 2006, in the United States District Court for the District of Kansas, and Caterpillar’s payment of a civil penalty of $300,000 on June 14, 2006. Accordingly, in the opinion of our management, this matter is closed and did not have a material adverse effect on our consolidated financial position, liquidity or results of operations.

On June 26, 2006, the UK Environment Agency filed a claim against Caterpillar Logistics Services (UK) Ltd. (CLS) before the Leicester & Rutland Magistrates Court in Leicestershire, UK. The complaint alleged that CLS failed to follow UK regulations in connection with the handling and disposal of special waste (primarily batteries) from January through September 2005. On August 17, 2006, CLS was fined £7,763 (approximately $15,000), thereby concluding the matter.

The World Trade Organization (WTO) previously found that the transitional and grandfathering provisions for extraterritorial income exclusion (ETI), under the American Jobs Creation Act of 2004, did not satisfy the United States' obligation to "withdraw" prohibited export subsidies. The WTO result allowed the European Union to impose already authorized sanctions on certain U.S. origin goods beginning May 16, 2006. The Tax Increase Prevention and Reconciliation Act of 2005, signed by President Bush on May 17, 2006, repealed the grandfathering provisions for ETI. In response, the European Union Trade Commissioner announced the cancellation of sanctions ending the dispute. We were not materially impacted by this resolution.
 
 Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.
Page 18

 
  PART II
 
 
Information required by Item 5 is incorporated by reference from - “Management’s Discussion and Analysis” and “Supplemental Stockholder Information” of Exhibit 13.
 
 
Performance Graph
 
CATERPILLAR INC.
Total Cumulative Stockholder Return for
Five-Year Period Ending December 31, 2006

The graph below shows the cumulative stockholder return assuming an investment of $100 on December 31, 2001, and reinvestment of dividends issued thereafter.
 
 Performance Graph
 
 
 
2001
2002
2003
2004
2005
2006






Caterpillar Inc.
$
100.00
 
$
90.13
 
$
167.78
 
$
201.07
 
$
242.73
 
$
261.80
 
S&P 500
$
100.00
 
$
77.92
 
$
100.25
 
$
111.14
 
$
116.59
 
$
135.00
 
S&P 500 Machinery
$
100.00
 
$
97.54
 
$
147.22
 
$
177.20
 
$
178.92
 
$
211.90
 
 
Page 19

 
Non-U.S. Employee Stock Purchase Plans
We have 30 employee stock purchase plans administered outside the United States for our foreign employees. As of December 31, 2006, those plans had approximately 12,700 participants in the aggregate. During the fourth quarter of 2006, approximately 90,500 shares of Caterpillar common stock or foreign denominated equivalents were distributed under the plans. Participants in some foreign plans have the option of receiving non-U.S. share certificates (foreign-denominated equivalents) in lieu of U.S. shares of Caterpillar common stock upon withdrawal from the plan. These equivalent certificates are tradable only on the local stock market and are included in our determination of shares outstanding.

Issuer Purchases of Equity Securities
Period
 
Total number
of Shares
Purchased
 
Average Price
Paid per Share
 
Total Number
of Shares Purchased Under the Program
 
Maximum Number
of Shares that May
Yet Be Purchased
Under the Program

 
 
 
 
October 1-31, 2006
 
2,433,000
   
$
61.64
   
2,433,000
   
8,634,518 1
 
November 1-30, 2006
 
3,320,000
     
60.23
   
3,320,000
   
5,583,743 1
 
December 1-31, 2006
 
-
     
-
   
-
   
5,808,176 1
 
   

 


 

     
Total
 
5,753,000
   
$
60.82
   
5,753,000
       
   

 


 

     

1 On October 8, 2003, the board of directors approved an extension of the share repurchase program (through October 2008) with the goal of reducing the company's outstanding shares to 320,000,000. The share repurchase program goal was adjusted for the stock split announced on June 8, 2005, to reflect an adjusted goal of 640,000,000 shares outstanding by October 2008. Amount represents the shares outstanding at the end of the period covered by this report less 640,000,000. In February 2007, the Board of Directors authorized a $7.50 billion stock repurchase program over the next five years, expiring on December 31, 2011.

 
Other Purchases of Equity Securities 
Period
 
Total number
of Shares
Purchased1
 
Average Price
Paid per Share
 
Total Number
of Shares Purchased Under the Program
 
Maximum Number
of Shares that May
Yet Be Purchased
Under the Program

 
 
 
 
October 1-31, 2006
 
428
   
$
66.88
   
N/A
   
N/A
 
November 1-30, 2006
 
6,730
     
60.55
   
N/A
   
N/A
 
December 1-31, 2006
 
--
     
--
   
N/A
   
N/A
 
   

 


           
Total
 
7,158
   
$
60.93
             
   

 


           

1 Represents shares delivered back to issuer for the payment of taxes resulting from the exercise of stock options by employees and Directors.

 
 Item 6. Selected Financial Data.

Information required by Item 6 is incorporated by reference from the - "Five-year Financial Summary" and "Management’s Discussion and Analysis” of Exhibit 13.
 
Page 20

 
 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” of Exhibit 13.  This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our discussion of cautionary statements and significant risks to the company’s business under Item 1A. (Risk Factors and Cautionary Factors That May Affect Future Results) of this Form 10-K.
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
Information required by Item 7A appears in Note 1 - “Operations and summary of significant accounting policies,” Note 3 - “Derivative financial instruments and risk management,” Note 19 - “Fair values of financial instruments” and Note 20 - “Concentration of credit risk” of Exhibit 13. Other information required by Item 7A is incorporated by reference from - “Management’s Discussion and Analysis” of Exhibit 13.
 
 Item 8. Financial Statements and Supplementary Data.
 
Information required by Item 8 is incorporated by reference from the - “Report of Independent Registered Public Accounting Firm” and from the - “Financial Statements and Notes to Consolidated Financial Statements” of Exhibit 13. Other information required by Item 8 is included in "Computation of Ratios of Earnings to Fixed Charges" filed as Exhibit 12 to this Form 10-K.
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
Not Applicable
 
 Item 9A. Controls and Procedures.

Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we conducted an evaluation of our disclosure controls and procedures; as such term is defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting
The management of Caterpillar Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the company's internal control over financial reporting as of December 31, 2006. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment we concluded that, as of December 31, 2006, the company's internal control over financial reporting was effective based on those criteria.
 
Page 21

 
Management has excluded Progress Rail Services from our assessment of internal control over financial reporting as of December 31, 2006 because we acquired Progress Rail Services on June 19, 2006. Progress Rail Services is a wholly owned subsidiary of Caterpillar Inc. whose total assets and total revenues represent three percent and two percent, respectively, of the related consolidated financial statement amount as of and for the year ended December 31, 2006.
 
Our management's assessment of the effectiveness of the company's internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The report appears under - “Report of Independent Registered Public Accounting Firm” of Exhibit 13.

Changes in Internal Control over Financial Reporting
During the last fiscal quarter, there has been no significant change in the company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
 
 Item 9B. Other Information.
 
Not Applicable
 
  PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.

Identification of Directors and Business Experience
Information required by this Item is incorporated by reference from the 2007 Proxy Statement.

Identification of Executive Officers and Business Experience
Information required by this Item appears in Item 1C of this Form 10-K.

Family Relationships
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 elected annually at a meeting of the board.

Legal Proceedings Involving Officers and Directors
Information required by this Item is incorporated by reference from the 2007 Proxy Statement.

Audit Committee Financial Expert
Information required by this Item is incorporated by reference from the 2007 Proxy Statement.

Identification of Audit Committee
Information required by this Item is incorporated by reference from the 2007 Proxy Statement.

Stockholder Recommendation of Board Nominees
Information required by this Item is incorporated by reference from the 2007 Proxy Statement.
 
Compliance with Section 16(a) of the Exchange Act
Information required by this Item relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the 2007 Proxy Statement.
 
Page 22

Code of Ethics
Our Worldwide Code of Conduct (Code), first published in 1974 and most recently amended in 2005, sets a high standard for honesty and ethical behavior by every employee, including the principal executive officer, principal financial officer and principal accounting officer/controller. The Code is posted on our website at www.CAT.com/governance and is incorporated by reference as Exhibit 14 to this Form 10-K. To obtain a copy of the Code at no charge, submit a written request to the Corporate Secretary at 100 NE Adams Street, Peoria, Illinois 61629-7310. We will post on our website any required amendments to or waivers granted under our Code pursuant to SEC or New York Stock Exchange disclosure rules.
 
 Item 11. Executive Compensation.

Information required by this Item is incorporated by reference from the 2007 Proxy Statement.
 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
Information required by this Item relating to security ownership of certain beneficial owners and management is incorporated by reference from the 2007 Proxy Statement.
 
Information required by this item relating to securities authorized for issuance under equity compensation plans is included in the following table:
 
Equity Compensation Plan Information
(as of December 31, 2006)

   
(a)
 
(b)
 
(c)
 
Plan category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights1
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 

 
 
 
 
Equity compensation plans
approved by security holders
 
69,381,778
   
38.6046
   
37,354,150
   
Equity compensation plans
not approved by security holders
 
n/a
   
n/a
   
n/a
   
   

 

 

 
Total
 
69,381,778
   
38.6046
   
37,354,150
   
   

 

 

 

1 Column (a) excludes any cash payments in-lieu-of stock.


 
 Item 13. Certain Relationships and Related Transactions.
 
Information required by this Item is incorporated by reference from the 2007 Proxy Statement.
 
 
 Item 14. Principal Accountant Fees and Services.
 
Information required by this Item is incorporated by reference from the 2007 Proxy Statement.  
 
Page 23

 
 
  PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 
(a)  The following documents are incorporated by reference from the indicated pages of Exhibit 13:
1. Financial Statements:
·  
Report of Independent Registered Public Accounting Firm
·  
Statement 1 - Results of Operations
·  
Statement 2 - Financial Position
·  
Statement 3 - Changes in Consolidated Stockholders' Equity
·  
Statement 4 - Statement of Cash Flow
·  
Notes to Consolidated Financial Statements
 
2. Financial Statement Schedules:
·  
All schedules are omitted because the required information is shown in the financial statements or the notes thereto incorporated by reference from Exhibit 13 or considered to be immaterial.
 
Page 24

 

(b)
 
Exhibits:
 
 
3.1
 
Restated Certificate of Incorporation (incorporated by reference from Exhibit 3(i) to the Form 10-Q filed for the quarter ended March 31, 1998).
 
 
3.2
 
Bylaws, amended and restated as of February 11, 2004 (incorporated by reference from Exhibit 3.3 to the Form 10-Q filed for the quarter ended March 31, 2004).
 
 
4.1
 
Indenture dated as of May 1, 1987, between the Registrant and The First National Bank of Chicago, as Trustee (incorporated by reference from Exhibit 4.1 to Form S-3 (Registration No. 333-22041) filed February 19, 1997.
 
 
4.2
 
First Supplemental Indenture, dated as of June 1, 1989, between Caterpillar Inc. and The First National Bank of Chicago, as Trustee (incorporated by reference from Exhibit 4.2 to Form S-3 (Registration No. 333-22041) filed February 19, 1997).
 
 
4.3
 
Appointment of Citibank, N.A. as Successor Trustee, dated October 1, 1991, under the Indenture, as supplemented, dated as of May 1, 1987 (incorporated by reference from Exhibit 4.3 to Form S-3 (Registration No. 333-22041) filed February 19, 1997).
 
 
4.4
 
Second Supplemental Indenture, dated as of May 15, 1992, between Caterpillar Inc. and Citibank, N.A., as Successor Trustee (incorporated by reference from Exhibit 4.4 to Form S-3 (Registration No. 333-22041) filed February 19, 1997).
 
 
4.5
 
Third Supplemental Indenture, dated as of December 16, 1996, between Caterpillar Inc. and Citibank, N.A., as Successor Trustee (incorporated by reference from Exhibit 4.5 to Form S-3 (Registration No. 333-22041) filed February 19, 1997).
 
 
4.6
 
Tri-Party Agreement, dated as of November 2, 2006, between Caterpillar Inc., Citibank, N.A. and U.S. Bank National Association appointing U.S. Bank as Successor Trustee under the Indenture dated as of May 1, 1987, as amended and supplemented.
 
 
10.1
 
Caterpillar Inc. 1996 Stock Option and Long-Term Incentive Plan, amended and restated as of August 18, 2004 (incorporated by reference from Exhibit 10.1 to Form 10-K for 2004 filed February 24, 2005).
 
 
10.2
 
Caterpillar Inc. 2006 Long-Term Incentive Plan as amended and restated through June 14, 2006.
 
 
10.3
 
Supplemental Pension Benefit Plan, as amended and restated January 2003 (incorporated by reference from Exhibit 10.3 to Form 10-K for 2004 filed February 24, 2005).
 
 
10.4
 
Supplemental Employees' Investment Plan, as amended and restated through December 1, 2002 (incorporated by reference from Exhibit 10.4 to Form 10-K for 2002).
 
 
10.5
 
Caterpillar Inc. Executive Incentive Compensation Plan, effective as of January 1, 2002 (incorporated by reference from Exhibit 10.5 to the 2002 Form 10-K).
 
 
10.6
 
Directors' Deferred Compensation Plan, as amended and restated through January 1, 2005.
 
 
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 through February 16, 2005 (incorporated by reference as Exhibit 10.8 to the 2005 Form 10-K).
 
 
11
 
Computations of Earnings per Share.
 
 
12
 
Computation of Ratios of Earnings to Fixed Charges.
 
 
13
 
General and Financial Information for 2006 containing the information required by SEC Rule 14a-3 for an annual report to security holders.
 
 
14
 
Caterpillar Worldwide Code of Conduct (incorporated by reference from Exhibit 14 to the 2005 Form 10-K).
 
 
21
 
Subsidiaries and Affiliates of the Registrant.
 
 
23
 
Consent of Independent Registered Public Accounting Firm.
 
 
31.1
 
Certification of James W. Owens, Chairman and Chief Executive Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
 
Certification of David B. Burritt, Vice President and Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32
 
Certification of James W. Owens, Chairman and Chief Executive Officer of Caterpillar Inc. and David B. Burritt, Vice President and Chief Financial Officer of Caterpillar Inc., as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
99.1
 
Annual CEO certification to the New York Stock Exchange for 2006 fiscal year.
 
 
99.2
 
Annual CEO certification for the NYSE Arca for 2006 fiscal year.
 
 
Page 25

 


Form 10-K
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)
 
        February 23, 2007
 
By:
/s/James B. Buda
     
   
 
James B. Buda, 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.
       
       February 23, 2007
/s/James W. Owens
 
Chairman of the Board, Director
and Chief Executive Officer
 
   
 
(James W. Owens)
 
   
       February 23, 2007
/s/Stuart L. Levenick
 
Group President
 
   
 
(Stuart L. Levenick)
 
   
       February 23, 2007
/s/Douglas R. Oberhelman
 
Group President
 
   
 
(Douglas R. Oberhelman)
 
   
      February 23, 2007
/s/Gerald L. Shaheen
 
Group President
 
   
 
(Gerald L. Shaheen)
 
   
       February 23, 2007
/s/Gerard R. Vittecoq
 
Group President
 
   
 
(Gerard R. Vittecoq)
 
   
        February 23, 2007
/s/Steven H. Wunning
 
Group President
 
   
 
(Steven H. Wunning)
 
   
        February 23, 2007
/s/David B. Burritt
 
Vice President and
Chief Financial Officer
 
   
 
(David B. Burritt)
 
   
        February 23, 2007
/s/Bradley M. Halverson
 
Controller and
Chief Accounting Officer
 
   
 
(Bradley M. Halverson)
   

Page 26


 
    February 23, 2007
 
/s/W. Frank Blount
 
Director
 
   
 
(W. Frank Blount)
   
        February 23, 2007
 
/s/John R. Brazil
 
Director
 
   
 
(John R. Brazil)
   
        February 23, 2007
 
/s/Daniel M. Dickinson
 
Director
 
   
 
(Daniel M. Dickinson)
   
        February 23, 2007
 
/s/John T. Dillon
 
Director
 
   
 
(John T. Dillon)
   
         February 23, 2007
 
/s/Eugene V. Fife
 
Director
 
   
 
(Eugene V. Fife)
   
         February 23, 2007
 
/s/Gail D. Fosler
 
Director
 
   
 
(Gail D. Fosler)
   
         February 23, 2007
 
/s/Juan Gallardo
 
Director
 
   
 
(Juan Gallardo)
   
         February 23, 2007
 
/s/David R. Goode
 
Director
 
   
 
(David R. Goode)
   
         February 23, 2007
/s/Peter A Magowan
 
 
Director
 
   
 
(Peter A. Magowan)
   
    February 23, 2007
/s/William A. Osborn
 
 
Director
 
   
 
(William A. Osborn)
   
    February 23, 2007
 
/s/Charles D. Powell
 
Director
 
   
 
(Charles D. Powell)
   
    February 23, 2007
 
/s/Edward B. Rust, Jr.
 
Director
 
   
 
(Edward B. Rust, Jr.)
   
    February 23, 2007
 
/s/Joshua I. Smith
 
Director
 
   
 
(Joshua I. Smith)
   


Page 27

 


Exhibit 4.6

TRI-PARTY AGREEMENT

This TRI-PARTY AGREEMENT (this "Instrument"), dated as of November 2, 2006, by and among CATERPILLAR INC., a Delaware corporation (the “Company”), CITIBANK, N.A., a national banking association duly organized and existing under the laws of the United States of America, (the "Prior Trustee") and U. S. BANK NATIONAL ASSOCIATION, a national banking association duly organized and existing under the laws of the United States of America (the "Successor Trustee").


WITNESSETH

WHEREAS, the Company and the Prior Trustee entered into the Indenture dated as of May 1, 1987, as amended and supplemented (the "Indenture"), providing for the issuance of the securities listed on Exhibit A hereto (the "Securities"); and

WHEREAS, the Prior Trustee has been acting as Trustee, Security Registrar and Paying Agent (“Trustee”) under the Indenture; and

WHEREAS, Section 610 of the Indenture provides that the Trustee may resign at any time by giving notice to the Company; and

WHEREAS, Section 610 of the Indenture further provides that in case the Trustee shall resign, the Company may appoint a successor Trustee; and

WHEREAS, Section 611 of the Indenture further provides that the successor Trustee shall be qualified under the provisions of Section 608 of the Indenture; and

WHEREAS, Section 611 of the Indenture further provides that any successor Trustee appointed under the Indenture shall execute, acknowledge and deliver to the Company and to the Prior Trustee an instrument accepting such appointment, thereupon the removal of the Prior Trustee shall become effective and the Successor Trustee without any further act, deed or conveyance, shall become fully vested with all the rights, powers, duties and responsibilities of the Prior Trustee;

NOW, THEREFORE, pursuant to the Indenture and in consideration of the covenants herein contained, it is agreed as follows (words and phrases not otherwise defined in this Instrument having the definitions given thereto in the Indenture):

1. Pursuant to the terms of the Indenture, the Prior Trustee has notified the Company that the Prior Trustee is resigning as Trustee, Security Registrar and Paying Agent under the Indenture effective November 6, 2006 and upon the acceptance of appointment by the Company of a Successor Trustee as evidenced by the signing of this instrument (the "Effective Date").
 
Page 1


 
2. Effective as of the Effective Date, the Prior Trustee hereby assigns, transfers, delivers and confirms to the Successor Trustee all of its rights, title and interest under the Indenture and all of its rights, title, interests, capacities, privileges, duties and responsibilities as Trustee, Security Registrar and Paying Agent under the Indenture, except as set forth in paragraph 19 hereof.

3. The Prior Trustee agrees to execute and deliver such further instruments and shall take such further actions as the Successor Trustee or the Company may reasonably request so as to more fully and certainly vest and confirm in the Successor Trustee all of the rights, title, interests, capacities, privileges, duties and responsibilities hereby assigned, transferred, delivered and confirmed to the Successor Trustee, including, without limitation, the execution and delivery of any instruments required to assign all liens in the name of the Successor Trustee.

4. Effective as of the Effective Date, the Company hereby accepts the resignation of the Prior Trustee and the Company appoints the Successor Trustee as Successor Trustee under the Indenture; and the Company confirms to the Successor Trustee all of the rights, title, interest, capacities, privileges, duties and responsibilities of the Trustee, Security Registrar and Paying Agent under the Indenture except as set forth in paragraph 19 hereof.

5. The Company agrees to execute and deliver such further instruments and to take such further action as the Successor Trustee may reasonably request so as to more fully and certainly vest and confirm in the Successor Trustee all the rights, title, interests, capacities, privileges, duties and responsibilities hereby assigned, transferred, delivered and confirmed to the Successor Trustee.

6. Effective as of the Effective Date, the Successor Trustee hereby accepts its appointment as Successor Trustee, Security Registrar and Paying Agent under the Indenture and shall be vested with all of the rights, title, interests, capacities, privileges, duties and responsibilities of the Trustee, Security Registrar and Paying Agent under the Indenture.

7. The Successor Trustee hereby represents that it is qualified and eligible under the provisions of Sections 608 and 609 of the Indenture to be appointed Successor Trustee and hereby accepts the appointment as Successor Trustee and agrees that upon the signing of this Instrument it shall become vested with all the rights, title, interest, capacities, privileges, duties and responsibilities of the Prior Trustee with like effect as if originally named as Trustee, Security Registrar and Paying Agent under the Indenture.

8. The Successor Trustee shall cause notice of the removal, appointment and acceptance effected hereby to be given to the owners of the Securities.

9. Effective as of the Effective Date, the Successor Trustee shall serve as Trustee, Security Registrar and Paying Agent as set forth in the Indenture at its designated corporate trust office set forth in paragraph 13 hereof.
 
Page 2


10. The Prior Trustee hereby represents and warrants to the Successor Trustee that:

 
a)
To the best of its knowledge no Event of Default and no event which, after notice or lapse of time or both, would become an Event of Default has occurred and is continuing under the Indenture.

 
b)
No covenant or condition contained in the Indenture has been waived by the Prior Trustee or to the best of its knowledge by the holders of the percentage in aggregate principal amount of the Securities required by the Indenture to effect any such waiver.

 
c)
There is no action, suit or proceeding pending or, to its knowledge, threatened against the Prior Trustee before any court or governmental authority arising out of any action or omission by the Prior Trustee as Trustee, Security Registrar and Paying Agent under the Indenture.

 
d)
As of the Effective Date, the Prior Trustee holds no moneys in any fund or account established by it as Trustee, Security Registrar and Paying Agent under the Indenture.

11. Each of the parties hereto hereby represents and warrants for itself that as of the date hereof, and the Effective Date:

 
a)
it has power and authority to execute and deliver this Instrument and to perform its obligations hereunder, and all such action has been duly and validly authorized by all necessary proceedings on its part; and

 
b)
this Instrument has been duly authorized, executed and delivered by it, and constitutes a legal, valid and binding agreement enforceable against it in accordance with its terms, except as the enforceability of this Instrument may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditor's rights or by general principles of equity limiting the availability of equitable remedies.

12. The parties hereto agree that this Instrument does not constitute an assumption by the Successor Trustee of any liability of the Prior Trustee arising out of any actions or inaction by the Prior Trustee under the Indenture.

13. The parties hereto agree that as of the Effective Date, all references to the Prior Trustee as Trustee, Security Registrar or Paying Agent in the Indenture shall be deemed to refer to the Successor Trustee. From and after the Effective Date, all notices, certificates or payments which were required by the terms of the Indenture and Securities to be given or paid to the Prior Trustee, as Trustee, Security Registrar and Paying Agent, shall be given or paid to:

U.S. Bank National Association
Attn: Corporate Trust Services
EP-MN-WS3C
60 Livingston Avenue
St. Paul, MN 55107-1419
 
Page 3


14. The removal, appointment and acceptance effected hereby shall become effective as of the opening of business on the Effective Date.

15. This Instrument shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws principles thereof.

16. This Instrument may be executed in any number of counterparts, each of which shall be an original, but which counterpart, shall together constitute but one and the same instrument.

17. Nothing contained in this Instrument shall in any way affect the obligations or rights of the Company or the Prior Trustee. This Instrument shall be binding upon and inure to the benefit of the Company, the Prior Trustee and the Successor Trustee and their respective successors and assigns.

18. All fees paid to the Prior Trustee in advance but unearned for the period from and after the Effective Date shall be credited to any current fees owed the Prior Trustee with balance, if any, remitted to the Company and the fees payable by the Company on and after the Effective Date under the Indenture shall henceforth be invoiced by and paid to the Successor Trustee at such address and account as shall hereafter be provided by the Successor Trustee to the Company.

19. This Instrument does not constitute a waiver or assignment by the Prior Trustee of any compensation, reimbursement, expenses or indemnity to which it is or may be entitled pursuant to the Indenture. The Company acknowledges its obligation set forth in Section 607 of the Indenture to indemnify the Prior Trustee for, and to hold the Prior Trustee harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Prior Trustee and arising out of or in connection with the acceptance or administration of the trust evidenced by the Indenture (which obligation shall survive the execution hereof).
 
Page 4

 
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed by their duly authorized officers, all as of the date and year first above written.


CATERPILLAR INC., as Company
 
By:
/s/ James B. Buda
Name
James B. Buda
Title:
Vice President and Secretary

 

CITIBANK, N.A., as Prior Trustee
 
By:
/s/ Wafaa Orfy
Name
Wafaa Orfy
Title:
Vice President

 

U. S. BANK NATIONAL ASSOCIATION, as Successor Trustee
 
By:
/s/ Raymond S. Haverstock
Name
Raymond S. Haverstock
Title:
Vice President

Page 5




Exhibit A
 
ISSUE DESCRIPTION
CUSIP
OUTSTANDING
INTEREST DUE




9.375 DEBS due 3/15/2021
149123AZ4
$
120,272,000
 
3/15 and 9/15
9.375% DEBS due 8/15/2011
149123BC4
$
123,275,000
 
2/15 and 8/15
8% DEBS due 2/15/2023
149123BD2
$
82,154,000
 
2/15 and 8/15
7.25% SEN DEBS due 2009
149123BG5
$
300,000,000
 
3/15 and 9/15
7-3/8% DEBS due 3/1/2097
149123 BE0
$
300,000,000
 
3/1 and 9/1
6.625% DEBS due 7/15/2028
149123 BF7
$
300,000,000
 
1/15 and 7/15
6.55% NOTES due 2011
149123 BH3
$
250,000,000
 
5/1 and 11/1
7.30% DEBS due 2031
149123 BJ9
$
350,000,000
 
5/1 and 11/1
6.95% DEBS due 2042
149123 BK6
$
250,000,000
 
5/1 and 11/1
5.30% DEBS due 2035
149123 BL4
$
307,320,000
 
3/15 and 9/15
5.70% NOTES due 2016
149123 BM2
$
500,000,000
 
2/15 and 8/15
6.05% DEBS due 2036
149123 BN0
$
750,000,000
 
2/15 and 8/15



 
TOTAL
$
3,633,021,000
   
   


 

Page 6


Exhibit 10.2
 
Caterpillar Inc.
2006 Long-Term Incentive Plan
(Amended and Restated through First Amendment)
 
 


Caterpillar Inc.
2006 Long-Term Incentive Plan
(Amended and Restated through First Amendment)
 
 
Section 1.
Establishment, Objectives and Duration
 
1.1.  Establishment. Subject to the approval of the stockholders of Caterpillar Inc., a Delaware corporation (the “Company”), the Company has established the Caterpillar Inc. 2006 Long-Term Incentive Plan (the “Plan”), as set forth herein. The Plan supersedes and replaces all prior equity and non-equity long-term incentive compensation plans or programs maintained by the Company; provided that, any prior plans of the Company shall remain in effect until all awards granted under such prior plans have been exercised, forfeited, canceled, expired or otherwise terminated in accordance with the terms of such grants.
 
1.2.  Purpose. The Plan is intended to provide certain present and future employees and Directors cash-based incentives, stock-based incentives and other equity interests in the Company thereby giving them a stake in the growth and prosperity of the Company and encouraging the continuance of their services with the Company or its Subsidiaries.
 
1.3.  Effective Date. The Plan is effective as of the later of (a) the date the Plan is adopted by the Board or (b) the date the Company’s stockholders approve the Plan (the “Effective Date”). The Plan will be deemed to be approved by the stockholders if it receives the affirmative vote of the holders of a majority of the shares of stock of the Company present or represented and entitled to vote at a meeting duly held in accordance with the applicable provisions of the Certificate of Incorporation or Bylaws of the Company.
 
1.4.  Duration.  The Plan shall remain in effect, subject to the right of the Company’s Board of Directors to amend or terminate the Plan at any time pursuant to Section 16, until all Shares subject to the Plan shall have been purchased or granted according to the Plan’s provisions. However, in no event may an Award be granted under the Plan on or after the tenth anniversary of the Effective Date. Upon termination of the Plan, no Awards may be granted but Awards previously granted shall remain outstanding in accordance with the terms of the Plan and the applicable Award Document.
 
Section 2.
Definitions and Construction
 
When a word or phrase appears in the Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be given the meaning ascribed to it in this Section unless a clearly different meaning is required by the context. The following words and phrases shall have the following meanings:
 
2.1.  Award means, individually or collectively, a grant under the Plan of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Performance Units.
 
2.2.   Award Document means any agreement, contract, or other written instrument that evidences an Award granted to the Participant under the Plan and sets forth the terms and provisions applicable to such Award.
 
Page 1

 
2.3.  Award Gain means (a) with respect to a given Option exercise, the product of (X) the excess of the Fair Market Value of a Share on the date of exercise over the Option Price times (Y) the number of shares as to which the Option was exercised at that date, and (b) with respect to any other settlement of an Award granted to the Participant, the Fair Market Value of the cash or Shares paid or payable to the Participant (regardless of any elective deferral pursuant to Section 13) less any cash or the Fair Market Value of any Shares or property (other than an Award that would have itself then been forfeitable hereunder and excluding any payment of tax withholding) paid by the Participant to the Company as a condition of or in connection such settlement.
 
2.4.  Board. means the Board of Directors of the Company.
 
2.5.   Cause. means, except as otherwise provided in an Award Document, a willful engaging in gross misconduct materially and demonstrably injurious to the Company. For this purpose, “willful” means an act or omission in bad faith and without reasonable belief that such act or omission was in or not opposed to the best interests of the Company.
 
2.6.   Change of Control. means the occurrence of any of the following events: (a) any person becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 15 percent or more of the combined voting power of the Company’s then outstanding common stock, unless the Board by resolution negates the effect of this provision in a particular circumstance, deeming that resolution to be in the best interests of Company stockholders; (b) during any period of two consecutive years, there shall cease to be a majority of the Board comprised of individuals who at the beginning of such period constituted the Board; (c) the stockholders of the Company approve a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto representing (either by remaining outstanding or by being converted into voting securities of the surviving entity) less than fifty percent of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (d) Company stockholders approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets.
 
2.7.  Code. means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation thereto.
 
2.8.   Committee. means the Compensation Committee of the Board, appointed to administer the Plan, as provided in Section 3.
 
2.9.   Company. means Caterpillar Inc., a Delaware corporation, and any successor to such entity as provided in Section 18.
 
2.10.   Director. means any individual who is a member of the Board.
 
2.11.   Disability. means, unless otherwise provided for in an employment, change of control or similar agreement in effect between the Participant and the Company or a Subsidiary or in an Award Document, (a) in the case of an Employee, the Employee qualifying for long-term disability benefits under any long-term disability program sponsored by the Company or Subsidiary in which the Employee participates, and (b) in the case of a Director, the inability of the Director to engage in any substantial gainful business activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or which has lasted or can be expected to last for a continuous period of not less than 12 months, as determined by the Committee, based upon medical evidence.
 
2.12.   Effective Date. means the date specified in Section 1.3.
 
2.13.   Employee. means any employee of the Company or any Subsidiary.
 
2.14.   Exchange Act. means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.
 
Page 2

 
2.15.   Fair Market Value. means, as of any given date, the fair market value of a Share on a particular date determined by such methods or procedures as may be established from time to time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of a Share as of any date shall be the mean between the high and low prices at which the Share is traded on the New York Stock Exchange for that date or, if no prices are reported for that date, the prices on the next preceding date for which prices were reported. Notwithstanding the foregoing, unless otherwise determined by the Committee, for purposes of Section 6.5(d) of the Plan, Fair Market Value means the actual price at which the Shares used to acquire Shares are sold.
 
2.16.  Family Member means any (a) child; (b) stepchild; (c) grandchild; (d) parent; (e) stepparent; (f) grandparent; (g) spouse; (h) former spouse; (i) sibling; (j) niece; (k) nephew; (l) mother-in-law; (m) father-in-law; (n) son-in-law; (o) daughter-in-law; (p) brother-in-law; or (q) sister-in-law of the Participant (including adoptive relationships). Family Member also shall mean any person sharing in the Participant’s household (other than a tenant or an employee).
 
2.17.  Good Reason. means, except as otherwise provided in an Award Document, the occurrence of any of the following circumstances (unless such circumstances are fully corrected by the Company before a Participant’s termination of employment):
 
    (a)  the Company’s assignment of any duties materially inconsistent with the Participant’s position within the Company, or which have a significant adverse alteration in the nature or status of the responsibilities of the Participant’s employment; or
 
    (b)  a material reduction by the Company in the Participant’s annual base salary, unless such reduction is part of a compensation reduction program affecting all similarly situated management employees.
 
2.18.  Incentive Stock Option. or ISO means the right to purchase Shares pursuant terms and conditions that provide that such right will be treated as an incentive stock option within the meaning of Code Section 422, as described in Section 6.
 
2.19.  Long Service Separation means, except as otherwise provided in an Award Document, a termination of employment with the Company or a Subsidiary after the attainment of age 55 and the completion of ten or more years of service with the Company and/or its Subsidiaries.
 
2.20.  Named Executive Officer”. means a Participant who is one of the group of covered employees as defined in the regulations promulgated under Code Section 162(m), or any successor provision or statute.
 
2.21.   Nonqualified Stock Option. or NQSO. means the right to purchase Shares pursuant to terms and conditions that provide that such right will not be treated as an Incentive Stock Option, as described in Section 6.
 
2.22.   Option. means an Incentive Stock Option or a Nonqualified Stock Option, as described in Section 6.
 
2.23.   Option Price. means the per share price of a Share available for purchase pursuant to an Option.
 
2.24.   Participant. means an Employee, prospective Employee, Director, beneficiary or any other person who has outstanding an Award granted under the Plan, and includes those former Employees and Directors who have certain post-termination rights under the terms of an Award granted under the Plan.
 
2.25.   Performance-Based Exception. means the exception for performance-based compensation from the tax deductibility limitations of Code Section 162(m).
 
2.26.   Performance Period. means the time period during which performance goals must be achieved with respect to an Award, as determined by the Committee.
 
Page 3

 
2.27.   Performance Share. means an Award granted to a Participant, as described in Section 9.
 
2.28.   Performance Unit. means an Award granted to a Participant, as described in Section 9.
 
2.29.  Period of Restriction. means the period during which the transfer of Shares of Restricted Stock is limited in some way, and the Shares are subject to a substantial risk of forfeiture, as provided in Section 8.
 
2.30.  Permitted Transferee means any one or more of the following: (a) Family Members; (b) a trust in which the Participant and/or Family Members have more than fifty percent of the beneficial interest; (c) a foundation in which the Participant and/or Family Members control the management of the assets; or (d) any other entity in which the Participant and/or Family Members own more than fifty percent of the voting interests.
 
2.31.   Plan. means the Caterpillar Inc. 2006 Long-Term Incentive Plan, as set forth herein.
 
2.32.   Restricted Stock. means an Award granted to a Participant pursuant to Section 8.
 
2.33.  Section 16 Officer means any Employee who is considered an officer of the Company for purposes of Section 16 of the Exchange Act.
 
2.34.  Share or Shares. means shares of common stock of the Company.
 
2.35.   Stock Appreciation Right or SAR. means an Award, granted alone or in connection with a related Option, designated as an SAR, pursuant to the terms of Section 7.
 
2.36.   Subsidiary. means any corporation, partnership, joint venture, affiliate, or other entity in which the Company is at least a majority-owner of all issued and outstanding equity interests or has a controlling interest.
 
2.37.  Tandem SAR. means a SAR that is granted in connection with a related Option pursuant to Section 7, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be forfeited).
 
2.38.   Non-Tandem SAR. means a SAR that is granted independently of any Options, as described in Section 7.
 
 
Section 3.
Administration
 
3.1.  Plan Administration. The Committee, or any other committee appointed by the Board, shall administer the Plan. The Committee or other committee appointed to administer the Plan shall consist of not less than two non-Employee Directors of the Company, within the meaning of Rule 16b-3 of the Exchange Act and not less than two outside directors, within the meaning of Code Section 162(m). The Board may, from time to time, remove members from, or add members to, the Committee. Members of the Board shall fill any vacancies on the Committee. Acts of a majority of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by unanimous consent of the members of the Committee, shall be valid acts of the Committee.
Page 4

 
3.2.  Authority of the Committee. Except as limited by law or by the Certificate of Incorporation or Bylaws of the Company, and subject to the provisions herein, the Committee shall have full power to select Employees, prospective Employees and Directors who shall participate in the Plan; determine the sizes and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan; construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend, or waive rules and regulations for the Plan’s administration; and amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the sole discretion of the Committee as provided in the Plan and subject to Section 16. Further, the Committee shall make all other determinations, which may be necessary or advisable for the administration of the Plan. As permitted by law, the Committee may delegate the authority granted to it herein.
 
3.3.  Electronic Administration. The Committee may, in its discretion, utilize a system for complete or partial electronic administration of the Plan and may replace any written documents described in the Plan with electronic counterparts, as appropriate.
 
3.4.  Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding on all persons, including the Company, its stockholders, Employees, Participants, and their estates and beneficiaries.
 
Section 4.  
Shares Subject to the Plan and Maximum Awards
 
4.1.  Shares Available for Awards.
 
(a)  The Shares available for Awards may be either authorized and unissued Shares or Shares held in or acquired for the treasury of the Company. The aggregate number of Shares that may be issued or used for reference purposes under the Plan or with respect to which Awards may be granted shall not exceed twenty million (20,000,000) Shares, subject to adjustment as provided in Section 4.3. In addition, seventeen million six hundred thousand (17,600,000) Shares authorized but unissued pursuant to the Caterpillar Inc. 1996 Stock Option and Long-Term Incentive Plan shall be reserved and available for grant under the Plan. Notwithstanding the foregoing, the aggregate number of Shares with respect to which ISOs may be granted shall not exceed the number specified above, and provided further, that up to an aggregate of twenty percent (20%) of the authorized Shares under the Plan may be issued with respect to Awards of Restricted Stock and up to an aggregate of twenty percent (20%) of the authorized Shares under the Plan may be issued with respect to Awards of Performance Shares.
 
(b)  Upon:
 
            (i)  a payout of a Non-Tandem SAR or Tandem SAR in the form of cash;
 
            (ii)  a cancellation, termination, expiration, forfeiture, or lapse for any reason (with the exception of the termination of a Tandem SAR upon exercise of the related Options, or the termination of a related Option upon exercise of the corresponding Tandem SAR) of any Award; or
 
            (iii)  payment of an Option Price or payout of any Award with previously acquired Shares or by withholding Shares which otherwise would be acquired on exercise or issued upon such payout,
 
the number of Shares underlying any such Award that were not issued as a result of any of the foregoing actions shall again be available for the purposes of Awards under the Plan. In addition, in the case of any Award granted in substitution for an award of a company or business acquired by the Company or a Subsidiary, Shares issued or issuable in connection with such substitute Award shall not be counted against the number of Shares reserved under the Plan, but shall be available under the Plan by virtue of the Company’s assumption of the plan or arrangement of the acquired company or business.
 
Page 5

 
4.2.  Individual Participant Limitations. Unless and until the Committee determines that an Award to a Named Executive Officer shall not be designed to comply with the Performance-Based Exception, the following rules shall apply to grants of such Awards under the Plan:
 
(a)  Subject to adjustment as provided in Section 4.3, the maximum aggregate number of Shares (including Options, SARs, Restricted Stock and Performance Shares to be paid out in Shares) that may be granted in any one fiscal year to a Participant shall be 800,000 Shares.
 
(b)  Except as otherwise provided in Section 7.5(b) regarding SAR exercise, the maximum aggregate cash payout (including Performance Units and Performance Shares paid out in cash) with respect to Awards granted in any one fiscal year that may be made to any Participant shall be $5 million.
 
4.3.  Adjustments in Authorized Shares. In the event of any change in corporate capitalization, such as a stock split, or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368) or any partial or complete liquidation of the Company, an adjustment shall be made in the number and class of Shares available for Awards, the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan and the number of Shares set forth in Sections 4.1 and 4.2, to prevent dilution or enlargement of rights. Such adjustment shall be made in a manner determined by the Committee, in its sole discretion, to be appropriate and equitable; provided, however, that (a) no such adjustment shall cause an increase in the fair value of an Award for purposes of Statement of Financial Accounting Standards No. 123 (revised 2004) or any successor thereto; and (b) the number of Shares subject to any Award shall always be a whole number by rounding any fractional Share (up or down) to the nearest whole Share.
 
 
Section 5.
Eligibility and Participation
 
5.1.  Eligibility.  Persons eligible to participate in the Plan include all current and future Employees (including officers), persons who have been offered employment by the Company or a Subsidiary (provided that such prospective Employee may not receive any payment or exercise any right relating to an Award until such person begins employment with the Company or Subsidiary), and Directors, as determined by the Committee.
 
5.2.  Participation.  Subject to the provisions of the Plan, the Committee shall determine and designate, from time to time, the Employees, prospective Employees, and Directors to whom Awards shall be granted, the terms of such Awards, and the number of Shares subject to such Award.
 
5.3.  Foreign Participants. In order to assure the viability of Awards granted to Participants employed in foreign countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy, or custom. Moreover, the Committee may approve such supplements to, or amendments, restatements, or alternative versions of the Plan as it may consider necessary or appropriate for such purposes without thereby affecting the terms of the Plan as in effect for any other purpose; provided, however, that no such supplements, amendments, restatements, or alternative versions shall increase the share limitations contained in Section 4 of the Plan.
 
Page 6

 
Section 6.
Stock Options
 
6.1.  Grant of Options.
 
(a)  Option Grant. Subject to the terms and provisions of the Plan, Options may be granted to one or more Participants in such number, upon such terms and provisions, and at any time and from time to time, as determined by the Committee, in its sole discretion. The Committee may grant either Nonqualified Stock Options or (in the case of Options granted to Employees) Incentive Stock Options, and shall have complete discretion in determining the number of Options of each granted to each Participant, subject to the limitations of Section 4. Each Option grant shall be evidenced by a resolution of the Committee approving the Option grant.
 
(b)  Award Document.  All Options shall be evidenced by an Award Document. The Award Document shall specify the Option Price, the term of the Option, the number of Shares subject to the Option, and such other provisions as the Committee shall determine, and which are not inconsistent with the terms and provisions of the Plan. The Award Document shall also specify whether the Option is to be treated as an ISO within the meaning of Code Section 422. If such Option is not designated as an ISO, such Option shall be a NQSO.
 
6.2.  Option Price.  The Committee shall designate the Option Price for each Share subject to an Option under the Plan, provided that such Option Price shall not be less than 100% of the Fair Market Value of Shares subject to an Option on the date the Option is granted, and which Option Price may not be subsequently changed by the Committee except pursuant to Section 4.3. With respect to a Participant who owns, directly or indirectly, more than 10% of the total combined voting power of all classes of the stock of the Company or any Subsidiary, the Option Price of Shares subject to an ISO shall be at least 110% of the Fair Market Value of such Shares on the ISO’s grant date.
 
6.3.  Term of Options.  Each Option granted to a Participant shall expire at such time as the Committee shall determine at the time of grant, but in no event shall be exercisable later than the 10th anniversary of the grant date. Notwithstanding the foregoing, with respect to ISOs, in the case of a Participant who owns, directly or indirectly, more than 10% of the total combined voting power of all classes of the stock of the Company or any Subsidiary, no such ISO shall be exercisable later than the fifth anniversary of the grant date. 
 
6.4.  Exercise of Options. Options granted under this Section 6 shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant, and shall be set forth in the applicable Award Document. Notwithstanding the preceding sentence, the Fair Market Value of Shares to which ISOs are exercisable for the first time by any Participant during any calendar year (under all plans of the Company and its Subsidiaries) may not exceed $100,000. Any ISOs that become exercisable in excess of such amount shall be deemed NQSOs to the extent of such excess. If the Award Document does not specify the time or times at which the Option shall first become exercisable, such an Option shall become fully vested and exercisable by the Participant on the third anniversary of the grant date.
 
6.5.  Payment. Options granted under this Section 6 shall be exercised by the delivery of a notice of exercise to the Company (or its designated agent(s)), setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full either:
 
(a)  in cash or its equivalent, or
 
(b)  by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price, or
 
(c)  by cashless exercise through delivery of irrevocable instructions to a broker to promptly deliver to the Company the amount of proceeds from a sale of shares having a Fair Market Value equal to the purchase price.
 
Page 7

 
6.6.  Termination of Employment or Service as a Director.  The Committee, in its sole discretion, shall set forth in the applicable Award Document the extent to which a Participant shall have the right to exercise the Option or Options following termination of his or her employment with the Company or any Subsidiary or following termination of his or her service as a Director. Such provisions need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for such termination, including, but not limited to, termination for Cause or for Good Reason, or reasons relating to the breach or threatened breach of restrictive covenants. Subject to Section 15, in the event that a Participant’s Award Document does not set forth such provisions, the following provisions shall apply:
 
(a)  Long Service Separation, Death or Disability. If a Participant’s employment with the Company and/or any Subsidiary or service as a Director terminates by reason of Long Service Separation, death or Disability, to the extent that the Option is not exercisable, all Shares covered by his or her Options shall immediately become fully vested and shall remain exercisable until the earlier of (i) the remainder of the term of the Option, or (ii) 60 months from the date of such termination. In the case of the Participant’s death, the Participant’s beneficiary or estate may exercise the Option.
 
(b)  Termination for Cause. If a Participant’s employment with the Company and/or any Subsidiary or service as a Director terminates for Cause, all Options granted to such Participant shall expire immediately and all rights to purchase Shares (vested or nonvested) under the Options shall cease upon such termination.
 
(c)  Other Termination. If a Participant’s employment with the Company and/or any Subsidiary or service as a Director terminates for any reason other than Long Service Separation, death, Disability, or for Cause, all Options shall remain exercisable until the earlier of (i) the remainder of the term of the Option, or (ii) 60 days from the date of such termination. In such circumstance, the Option shall only be exercisable to the extent that it was exercisable as of such termination date and shall not be exercisable with respect to any additional Shares.
 
6.7.  Restrictions on Shares. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Section 6 as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded, and under any blue sky or state or foreign securities laws applicable to such Shares.
 
6.8.  Transferability of Options.
 
(a)  Incentive Stock Options. No ISO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant.
 
(b)  Nonqualified Stock Options. NQSOs may only be transferred in accordance with this Section 6.8(b).
 
(i) Except as otherwise provided in paragraph (ii) below or in an Award Document, no NQSO shall be assignable or transferable by a Participant other than by will, by the laws of descent and distribution or pursuant to a Domestic Relations Order (as such term is defined in Section 414(p)(1)(B) of the Code).
 
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(ii) NQSOs (whether vested or unvested) held by (A) Participants who are Section 16 Officers; (B) Participants who are Directors; or (C) any Participants who previously held the positions in clauses (A) and (B) may be transferred by gift or by domestic relations order to one or more Permitted Transferees. NQSOs (whether vested or unvested) held by all other Participants and by Permitted Transferees may be transferred by gift or by domestic relations order only to Permitted Transferees upon the prior written approval of the Company’s Director of Compensation + Benefits.
 
 
 
Section 7.
Stock Appreciation Rights
 
7.1.  Grant of SARs.
 
(a)  SAR Grant.  Subject to the terms and provisions of the Plan, SARs may be granted to Participants in such number, upon such terms and provisions, and at any time and from time to time, as determined by the Committee in its sole discretion. The Committee may grant Non-Tandem SARs, Tandem SARs, or any combination of these forms of SARs. The Committee shall have complete discretion in determining the number of SARs granted to each Participant (subject to Section 4) and, consistent with the provisions of the Plan, in determining the terms and conditions pertaining to such SARs. The Committee shall designate, at the time of grant, the grant price of a Non-Tandem SAR, which grant price shall not be less than 100% of the Fair Market Value of a Share on the grant date of the SAR. The grant price of Tandem SARs shall equal the Option Price of the related Option. Grant prices of SARs shall not subsequently be changed by the Committee, except pursuant to Section 4.3.
 
(b)  Award Document. All SARs shall be evidenced by an Award Document. The Award Document shall specify the grant price, the term of the SAR, and such other provisions as the Committee shall determine, and which are not inconsistent with the terms and provisions of the Plan.
 
7.2.  Term of SARs.  The term of a SAR granted under the Plan shall be determined by the Committee, in its sole discretion; provided, however, that unless otherwise designated by the Committee, such term shall not exceed ten years from the grant date.
 
7.3.  Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. Notwithstanding any other provision of the Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR will expire no later than the expiration of the underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may be for no more than 100% of the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO.
 
7.4.  Exercise of Non-Tandem SARs.  Non-Tandem SARs may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon them.
 
7.5.  Payment of SAR Amount. 
 
(a)  Upon exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:
 
(i)  The excess of the Fair Market Value of a Share on the date of exercise over the grant price; by
 
(ii)  The number of Shares with respect to which the SAR is exercised.
 
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(b)  Unless otherwise provided in the Award Document, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in some combination thereof. If, and to the extent that the payment upon SAR exercise is made in cash, such cash payment shall not be subject to the limitation of Section 4.2(b).
 
7.6.  Termination of Employment or Service as a Director. The Committee, in its sole discretion, shall set forth in the applicable Award Document the extent to which a Participant shall have the right to exercise the SAR or SARs following termination of his or her employment with the Company or any Subsidiary or following termination of his or her service as a Director. Such provisions need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for such termination, including, but not limited to, termination for Cause or for Good Reason, or reasons relating to the breach or threatened breach of restrictive covenants. Subject to Section 15, in the event that a Participant’s Award Document does not set forth such provisions, the following provisions shall apply:
 
(a)  Long Service Separation, Death or Disability. If a Participant’s employment with the Company and/or any Subsidiary or service as a Director terminates by reason of Long Service Separation, death or Disability, to the extent that the SARs are not exercisable, all of his or her SARs shall immediately become fully vested and shall remain exercisable until the earlier of (i) the remainder of the term of the SAR, or (ii) 60 months from the date of such termination. In the case of the Participant’s death, the Participant’s beneficiary or estate may exercise the SAR.
 
(b)  Termination for Cause. If a Participant’s employment with the Company and/or any Subsidiary or service as a Director terminates for Cause, all SARs shall expire immediately and all rights thereunder shall cease upon such termination.
 
(c)  Other Termination. If a Participant’s employment with the Company and/or any Subsidiary or service as a Director terminates for any reason other than Long Service Separation, death, Disability, or for Cause, all SARs shall remain exerciseable until the earlier of (i) the remainder of the term of the SAR, or (ii) 60 days from the date of such termination. In such circumstance, the SAR shall only be exercisable to the extent it was exercisable as of such termination date and shall not be exercisable with respect to any additional SARs.
 
7.7.  Transferability of SARs.  SARs may only be transferred in accordance with this Section 7.7.
 
(a)  Except as otherwise provided in paragraph (b) below or in an Award Document, no SAR shall be assignable or transferable by a Participant other than by will, by the laws of descent and distribution or pursuant to a Domestic Relations Order (as such term is defined in Section 414(p)(1)(B) of the Code).
 
(b)  SARs held by (i) Participants who are Section 16 Officers; (ii) Participants who are Directors; or (iii) any Participants who previously held the positions in clauses (i) and (ii) may be transferred by gift or by domestic relations order to one or more Permitted Transferees. SARs held by all other Participants and by Permitted Transferees may be transferred by gift or by domestic relations order to Permitted Transferees only upon the prior written approval of the Company’s Director of Compensation and Benefits.
 
(c)  Notwithstanding the foregoing, with respect to a Tandem SAR granted in connection with an ISO, no such Tandem SAR may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution.
 
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Section 8.
Restricted Stock
 
8.1.  Grant of Restricted Stock.
 
(a)  Grant of Restricted Stock.  Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to Participants in such amounts as the Committee shall determine.
 
(b)  Award Document. All shares of Restricted Stock shall be evidenced by an Award Document. The Award Document shall specify the Period or Periods of Restriction (consistent with the next sentence), the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine pursuant to Section 8.3 or otherwise, and which shall not be inconsistent with the terms and provisions of the Plan. Shares of Restricted Stock not in excess of five percent of the number of shares that may be issued with respect to Awards of Restricted Stock, as provided in Section 4.1, may have a Period or Periods of Restriction as determined by the Committee in its sole discretion, and any other shares of Restricted Stock shall have a Period of Restriction, as determined by the Committee, that shall not lapse in any respect until on or after the third anniversary of the grant date. If no Period of Restriction is set forth in the Award Document, the transfer and any other restrictions shall lapse (i) to the extent of one-third of the Shares (rounded to the nearest whole) covered by the Restricted Stock Award on the third anniversary of the grant date, (ii) to the extent of two-thirds of the Shares (rounded to the nearest whole) covered by the Restricted Stock Award on the fourth anniversary of the grant date, and (iii) to the extent of 100% of the Shares covered by the Restricted Stock Award on the fifth anniversary of the grant date.
 
8.2.  Other Restrictions. Subject to Section 10 herein, the Committee may impose such other conditions and/or restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including without limitation, a requirement that Shares will not be issued until the end of the applicable Period of Restriction, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock, restrictions based upon the achievement of specific performance goals (Company-wide, Subsidiary-wide, divisional, and/or individual), time-based restrictions on vesting, which may or may not be following the attainment of the performance goals, sales restrictions under applicable shareholder agreements or similar agreements, and/or restrictions under applicable Federal or state securities laws. The Company shall retain the certificates representing Shares of Restricted Stock in the Company’s possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied. Except as otherwise provided in this Section 8 or in any Award Document, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the applicable Period of Restriction.
 
8.3.  Voting Rights.  Unless otherwise designated by the Committee at the time of grant, Participants to whom Shares of Restricted Stock have been granted hereunder may exercise full voting rights with respect to those Shares during the Period of Restriction.
 
8.4.  Dividends and Other Distributions.  Unless otherwise designated by the Committee at the time of grant, Participants holding Shares of Restricted Stock granted hereunder shall be credited with regular cash dividends paid with respect to the underlying Shares while they are so held during the Period of Restriction. The Committee may apply any restrictions to the dividends that the Committee deems appropriate. Without limiting the generality of the preceding sentence, if the grant or vesting of Shares of Restricted Stock granted to a Named Executive Officer is designed to comply with the requirements of the Performance-Based Exception, the Committee may apply any restrictions it deems appropriate to the payment of dividends declared with respect to such Shares of Restricted Stock, such that the dividends and/or the Shares of Restricted Stock maintain eligibility for the Performance-Based Exception. In the event that any dividend constitutes a derivative security or an equity security pursuant to the rules under Section 16 of the Exchange Act, such dividend shall be subject to a vesting period equal to the remaining vesting period of the Shares of Restricted Stock with respect to which the dividend is paid.
 
 
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8.5.  Termination of Employment or Service as a Director. The Committee, in its sole discretion, shall set forth in the applicable Award Document the extent to which the Participant shall have the right to receive unvested Shares of Restricted Stock following termination of the Participant’s employment with the Company and/or its Subsidiaries or termination of service as a Director. Such provisions need not be uniform among all Shares of Restricted Stock issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of employment including; but not limited to, termination of employment for Cause or for Good Reason, or reasons relating to the breach or threatened breach of restrictive covenants; provided, however that, except in the cases of terminations connected with a Change of Control and terminations by reason of death or Disability, the vesting of Shares of Restricted Stock that qualify for the Performance-Based Exception and that are held by Named Executive Officers shall not occur before the time they otherwise would have, but for the employment termination. Subject to Section 15, in the event that a Participant’s Award Document does not set forth such termination provisions, the following termination provisions shall apply:
 
(a)  Death and Disability. Unless the Award qualifies for the Performance-Based Exception, if a Participant’s employment with the Company and/or any Subsidiary or service as a Director is terminated due to death or Disability, all Shares of Restricted Stock of such Participant shall immediately become fully vested on the date of such termination and any restrictions shall lapse.
 
(b)  Other Termination. If a Participant’s employment with the Company and/or any Subsidiary or service as a Director is terminated for any reason other than death or Disability all Shares of Restricted Stock that are unvested at the date of termination shall be forfeited to the Company.
 
8.6.  Acceleration of Vesting. Notwithstanding anything in this Section 8 to the contrary, the Committee, in its sole discretion, shall have the authority to accelerate the vesting of Shares of Restricted Stock at any time.
 
8.7.  Transferability. Except as provided in this Section 8, the Shares of Restricted Stock granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, voluntarily or involuntarily, until the end of the applicable Period of Restriction established by the Committee and specified in the Award Document, or upon earlier satisfaction of any other conditions, as specified by the Committee in its sole discretion and set forth in the Award Document. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant. 
 
Section 9.
Performance Units and Performance Shares
 
9.1.  Grant of Performance Units/Shares.
 
(a)  Grant of Performance Unit/Shares.  Subject to the terms of the Plan, Performance Units and/or Performance Shares may be granted to Participants in such amounts and upon such terms, and at any time and from time to time, as shall be determined by the Committee, which shall not be inconsistent with the terms and provisions of the Plan and shall be set forth in an Award Document.
 
(b)  Award Document. All Performance Units and Performance Shares shall be evidenced by an Award Document. The Award Document shall specify the initial value of the Award, the performance goals and the Performance Period, as the Committee shall determine, and which are not inconsistent with the terms and provisions of the Plan.
 
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9.2.  Value of Performance Units/Shares.  Each Performance Unit shall have an initial value (which may be $0) that is established by the Committee at the time of grant. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the grant date. The Committee shall set performance goals in its sole discretion which, depending on the extent to which they are met will determine the number and/or value of Performance Units and/or Performance Shares that will be paid out to the Participant. For purposes of this Section 9, the time period during which the performance goals must be met shall be called a Performance Period. Performance Shares not in excess of five percent of the number of shares that may be issued with respect to Awards of Performance Shares, as provided in Section 4.1, may have a Performance Period as determined by the Committee in its sole discretion, and any other Performance Shares shall have a Performance Period, as determined by the Committee, of not less than one year.
 
9.3.  Earning of Performance Units/Shares.  Subject to the terms of the Plan, after the applicable Performance Period has ended, the holder of Performance Units and/or Performance Shares shall be entitled to receive payout on the number and value of Performance Units and/or Performance Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance goals have been achieved, as established by the Committee.
 
9.4.  Form and Timing of Payment of Performance Units/Shares.  Except as provided below, payment of earned Performance Units and/or Performance Shares shall be made in a single lump sum as soon as reasonably practicable following the close of the applicable Performance Period. Subject to the terms of the Plan, the Committee, in its sole discretion, may pay earned Performance Units and/or Performance Shares in the form of cash or in Shares (or in a combination thereof) which have an aggregate Fair Market Value equal to the value of the earned Performance Units and/or Performance Shares at the close of the applicable Performance Period. Such Shares may be granted subject to any restrictions deemed appropriate by the Committee. At the sole discretion of the Committee, Participants may be entitled to receive any dividends declared with respect to Shares which have been earned in connection with grants of Performance Units and/or Performance Shares which have been earned, but not yet distributed to Participants.
 
9.5.  Termination of Employment or Service as a Director. The Committee, in its sole discretion, shall set forth in the applicable Award Document the extent to which the Participant shall have the right to receive payment for Performance Units and/or Performance Shares following termination of the Participant’s employment with the Company and/or its Subsidiaries or termination of service as a Director. Such provisions need not be uniform among all Performance Units and/or Performance Shares granted pursuant to the Plan, and may reflect distinctions based on the reasons for such termination including; but not limited to, termination for Cause or for Good Reason, or reasons relating to the breach or threatened breach of restrictive covenants. Subject to Section 15, in the event that a Participant’s Award Document does not set forth such termination provisions, the following termination provisions shall apply:
 
(a)  Long Service Separation, Death or Disability. Subject to Section 15, if a Participant’s employment with the Company and/or any Subsidiary or service as a Director is terminated during a Performance Period due to Long Service Termination, death or Disability, the Participant shall receive a prorated payout of the Performance Units and/or Performance Shares, unless the Committee determines otherwise. The prorated payout shall be determined by the Committee, shall be based upon the length of time that the Participant held the Performance Units and/or Performance Shares during the Performance Period, and shall further be adjusted based on the achievement of the preestablished performance goals. Unless the Committee determines otherwise in the event of a termination due to death, Disability or Long Service Separation, payment of earned Performance Units and/or Performance Shares shall be made at the same time as payments are made to Participants who did not terminate employment during the applicable Performance Period.
 
(b)  Other Termination. If a Participant’s employment with the Company and/or any Subsidiary or service as a Director is terminated during a Performance Period for any reason other than Long Service Termination, death or Disability all Performance Units and/or Performance Shares shall be forfeited by the Participant to the Company.
 
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9.6.  Nontransferability.  Except as otherwise provided in a Participant’s Award Document, Performance Units and/or Performance Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant’s Award Document, a Participant’s rights under the Plan shall be exercisable during the Participant’s lifetime only by the Participant or the Participant’s legal representative. 
 
Section 10.
Performance Measures
 
10.1.  Performance Measures. Unless and until the Committee proposes for stockholder vote and stockholders approve a change in the general performance measures set forth in this Section 10, the attainment of which may determine the degree of payout and/or vesting with respect to Awards to Named Executive Officers that are designed to qualify for the Performance-Based Exception, the performance goals to be used for purposes of such grants shall be established by the Committee in writing and stated in terms of the attainment of specified levels of or percentage changes in any one or more of the following measurements: (a) revenue; (b) primary or fully-diluted earnings per Share; (c) earnings before interest, taxes, depreciation, and/or amortization; (d) pretax income; (d) cash flow from operations; (e) total cash flow; (f) return on equity; (g) return on invested capital; (h) return on assets; (i) net operating profits after taxes; (j) economic value added; (k) total stockholder return; (l) return on sales; or (m) any individual performance objective which is measured solely in terms of quantifiable targets related to the Company or the Company’s business; or any combination thereof. In addition, such performance goals may be based in whole or in part upon the performance of the Company, a Subsidiary, division and/or other operational unit under one or more of such measures.
 
10.2.  Performance Procedures. The degree of payout and/or vesting of such Awards designed to qualify for the Performance-Based Exception shall be determined based upon the written certification of the Committee as to the extent to which the performance goals and any other material terms and conditions precedent to such payment and/or vesting have been satisfied. The Committee shall have the sole discretion to adjust the determinations of the degree of attainment of the preestablished performance goals; provided, however, that the performance goals applicable to Awards which are designed to qualify for the Performance-Based Exception, and which are held by Named Executive Officers, may not be adjusted so as to increase the payment under the Award (the Committee shall retain the sole discretion to adjust such performance goals upward, or to otherwise reduce the amount of the payment and/or vesting of the Award relative to the pre-established performance goals). In the event that applicable tax and/or securities laws change to permit Committee sole discretion to alter the governing performance measures without obtaining stockholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining stockholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards which shall not qualify for the Performance-Based Exception, the Committee may make such grants without satisfying the requirements of Code Section 162(m) and, thus, which use performance measures other than those specified above.
 
Section 11.
Award Forfeitures
 
11.1.  Forfeiture of Options and Other Awards.  Each Award granted hereunder shall be subject to the following additional forfeiture conditions, to which the Participant, by accepting an Award hereunder, agrees. If any of the events specified in Section 11.2 occurs (a “Forfeiture Event”), all of the following forfeitures will result:
 
(a)  The unexercised portion of any Option, whether or not vested, and any other Award not then settled (except for an Award that has not been settled solely due to an elective deferral pursuant to Section 13 by the Participant and otherwise is not forfeitable in the event of any termination of service of the Participant) will be immediately forfeited and canceled upon the occurrence of the Forfeiture Event; and
 
 
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(b)  The Participant will be obligated to repay to the Company, in cash, within five business days after demand is made therefor by the Company, the total amount of Award Gain (as defined herein) realized by the Participant upon each exercise of an Option or settlement of an Award (regardless of any elective deferral pursuant to Section 13) that occurred on or after (i) the date that is six months before the occurrence of the Forfeiture Event, if the Forfeiture Event occurred while the Participant was employed by the Company or a Subsidiary, or (ii) the date that is six months before the date the Participant’s employment by, or service as a Director with the Company or a Subsidiary terminated, if the Forfeiture Event occurred after the Participant ceased to be so employed.
 
11.2.  Events Triggering Forfeiture. The forfeitures specified in Section 11.1 will be triggered upon the occurrence of any one of the following Forfeiture Events at any time during the Participant’s employment by or service as a Director with the Company or a Subsidiary or during the one-year period following termination of such employment or service:
 
(a)  Non-Solicitation. The Participant, for his or her own benefit or for the benefit of any other person, company or entity, directly or indirectly, (i) induces or attempts to induce or hires or otherwise counsels, induces or attempts to induce or hire or otherwise counsel, advise, encourage or solicit any person to leave the employment of or the service for the Company or any Subsidiary, (ii) hires or in any manner employs or retains the services of any individual employed by or providing services to the Company or any Subsidiary as of the date of his or her termination of employment, or employed by or providing services to the Company or any Subsidiary subsequent to such termination, (iii) solicits, pursues, calls upon or takes away, any of the customers of the Company or any Subsidiary, (iv) solicits, pursues, calls upon or takes away, any potential customer of the Company or any Subsidiary that has been the subject of a bid, offer or proposal by the Company or any Subsidiary, or of substantial preparation with a view to making such a bid, proposal or offer, within six months before such Participant’s termination of employment with the Company or any Subsidiary, or (v) otherwise interferes with the business or accounts of the Company or any Subsidiary.
 
(b)  Confidential Information. The Participant discloses to any person or entity or makes use of any “confidential or proprietary information” (as defined below in this subparagraph (b)) for his or her own purpose or for the benefit of any person or entity, except as may be necessary in the ordinary course of employment with or other service to the Company or any Subsidiary. Such “confidential or proprietary information” of the Company or any Subsidiary, includes, but is not limited to, the design, development, operation, building or manufacturing of products manufactured and supplied by the Company and its Subsidiaries, the identity of the Company’s or any Subsidiary’s customers, the identity of representatives of customers with whom the Company or any Subsidiary has dealt, the kinds of services provided by the Company or any Subsidiary to customers and offered to be performed for potential customers, the manner in which such services are performed or offered to be performed, the service needs of actual or prospective customers, pricing information, information concerning the creation, acquisition or disposition of products and services, customer maintenance listings, computer software and hardware applications and other programs, personnel information, information identifying, relating to or concerning investors in the Company or any Subsidiary, joint venture partners of the Company or any Subsidiary, business partners of the Company or any Subsidiary or other entities providing financing to the Company or any Subsidiary, real estate and leasing opportunities, communications and telecommunications operations and processes, zoning and licensing matters, relationships with, or matters involving, landlords and/or property owners, and other trade secrets.
 
11.3.  Agreement Does Not Prohibit Competition or Other Participant Activities. Although the conditions set forth in this Section 11 shall be deemed to be incorporated into an Award, the Plan does not thereby prohibit the Participant from engaging in any activity, including but not limited to competition with the Company and its Subsidiaries. Rather, the non-occurrence of the Forfeiture Events set forth in Section 11.2 is a condition to the Participant’s right to realize and retain value from his or her compensatory Awards, and the consequence under the Plan if the Participant engages in an activity giving rise to any such Forfeiture Event are the forfeitures specified herein. This provision shall not preclude the Company and the Participant from entering into other written agreements concerning the subject matter of Sections 11.1 and 11.2 and, to the extent any terms of this Section 11 are inconsistent with any express terms of such agreement, this Section 11 shall not be deemed to modify or amend such terms.
 
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11.4.  Committee Discretion.  The Committee may, in its sole discretion, waive in whole or in part the Company’s right to forfeiture under this Section 11, but no such waiver shall be effective unless evidenced by a writing signed by a duly authorized officer of the Company. In addition, the Committee may impose additional conditions on Awards, by inclusion of appropriate provisions in the Award Document. Nothing contained herein shall require the Committee to enforce the forfeiture provisions of this Section 11. Failure to enforce these forfeiture provisions against any individual shall not be construed as a waiver of the Company’s right to forfeiture under this Section 11.
 
Section 12.
Beneficiary Designation
 
12.1.  Beneficiary Designations. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate.
 
Section 13.
Deferrals
 
13.1.  Deferrals. The Committee may permit a Participant to defer such Participant’s receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant upon the exercise of any Option or by virtue of the lapse or waiver of restrictions with respect to Restricted Stock, or the satisfaction of any requirements or goals with respect to Performance Units/Shares. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. All such deferrals (and rules and procedures) shall be consistent with Code Section 409A and any other applicable law.
 
Section 14.
Rights and Obligations of Parties
 
14.1.  No Guarantee of Employment or Service Rights.  Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant’s employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any Subsidiary. 
 
14.2.  Temporary Absence. For purposes of the Plan, temporary absence from employment because of illness, vacation, approved leaves of absence, and transfers of employment among the Company and its Subsidiaries, shall not be considered to terminate employment or to interrupt continuous employment.
 
14.3.  Participation. No Employee or Director shall have the right to be selected to receive an Award under the Plan, or, having been so selected, to be selected to receive a future Award.
 
14.4.  Right of Setoff.  The Company or any Subsidiary may, to the extent permitted by applicable law, deduct from and set off against any amounts the Company or Subsidiary may owe to the Participant from time to time, including amounts payable in connection with any Award, owed as wages, fringe benefits, or other compensation owed to the Participant, such amounts as may be owed by the Participant to the Company, although the Participant shall remain liable for any part of the Participant’s payment obligation not satisfied through such deduction and setoff. By accepting any Award granted hereunder, the Participant agrees to any deduction or setoff under this Section 14. 
 
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14.5.  Section 83(b) Election.  No election under Section 83(b) of the Code (to include in gross income in the year of transfer the amounts specified in Code Section 83(b)) or under a similar provision of the laws of a jurisdiction outside the United States may be made, unless expressly permitted by the terms of the Award Document or by action of the Committee in writing before the making of such election. In any case in which a Participant is permitted to make such an election in connection with an Award, the Participant shall notify the Company of such election within ten days of filing notice of the election with the Internal Revenue Service or other governmental authority, in addition to any filing and notification required pursuant to regulations issued under Code Section 83(b) or other applicable provision.
 
14.6.  Disqualifying Disposition Notification.  If any Participant shall make any disposition of Shares delivered pursuant to the exercise of an Incentive Stock Option under the circumstances described in Code Section 421(b) (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten days thereof.
 
Section 15.
Change of Control
 
15.1.  Change of Control. If a Participant’s employment or service with the Company and/or any Subsidiary terminates either without Cause or for Good Reason within the 12 month period following a Change of Control, unless otherwise specifically prohibited under applicable laws, or by the rules and regulations of any governing governmental agencies or national securities exchanges:
 
(a)  Any and all Options and SARs granted hereunder shall become immediately exercisable, and shall remain exercisable throughout their entire term;
 
(b)  Any Period of Restriction and other restrictions imposed on Restricted Stock shall lapse; and
 
(c)  Unless otherwise specified in an Award Document, the maximum payout opportunities attainable under all outstanding Awards of Performance Units and Performance Shares shall be deemed to have been fully earned for the entire Performance Period(s) as of the effective date of the Change of Control. The vesting of all such Awards shall be accelerated as of the effective date of the Change of Control, and in full settlement of such Awards, there shall be paid out in cash to Participants within 30 days following the effective date of the Change of Control the maximum of payout opportunities associated with such outstanding Awards.
 
Section 16.
Amendment, Modification, and Termination
 
16.1.  Amendment, Modification, and Termination.  The Board may amend, suspend or terminate the Plan or the Committee’s authority to grant Awards under the Plan without the consent of stockholders or Participants; provided, however, that any amendment to the Plan shall be submitted to the Company’s stockholders for approval not later than the earliest annual meeting for which the record date is after the date of such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted and the Board may otherwise, in its sole discretion, determine to submit other amendments to the Plan to stockholders for approval; and provided further, that, without the written consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any outstanding Award. The Committee shall have no authority to waive or modify any other Award term after the Award has been granted to the extent that the waived or modified term was mandatory under the Plan.
 
 
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Section 17.
Withholding
 
17.1.  Tax Withholding.  The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state, and local taxes, domestic or foreign, required by law or regulation to be withheld with respect to any taxable event arising as a result of the Plan.
 
17.2.  Share Withholding.  With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock, or upon any other taxable event arising as a result of Awards granted hereunder, the withholding requirement shall be satisfied by the Company withholding Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which would be imposed on the transaction.
 
Section 18.
Miscellaneous
 
18.1.  Unfunded Plan.  The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Shares pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Shares, other Awards or other property, or make other arrangements to meet the Company’s obligations under the Plan. Such trusts or other arrangements shall be consistent with the “unfunded” status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. No such funding shall be established that would cause an amount to be taxable under Code Section 409A before it is received by a Participant or cause an amount to be subject to additional tax under such Section.
 
18.2.  Forfeitures; Fractional Shares. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash consideration, the Participant shall be repaid the amount of such cash consideration. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated.
 
18.3.  Compliance with Code Section 162(m).  The Company intends that Options and SARs granted to Named Executive Officers and other Awards designated as Awards to Named Executive Officers shall constitute qualified “performance-based compensation” within the meaning of Code Section 162(m) and regulations thereunder, unless otherwise determined by the Committee at the time of allocation of an Award. Accordingly, the terms of Sections 4.2, 6, 7, 8.5, 8.6, 9 and 10, including the definitions of Named Executive Officer and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Named Executive Officer with respect to a fiscal year that has not yet been completed, the Committee may, in its discretion, extend the terms of such Sections to any Participant that the Committee deems appropriate. If any provision of the Plan or any Award Document relating to a Performance Award that is designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements, and no provision shall be deemed to confer upon the Committee or any other person sole discretion to increase the amount of compensation otherwise payable in connection with any such Award upon attainment of the applicable performance objectives.
 
18.4.  Gender and Number; Headings.  Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. Headings are included for the convenience of reference only and shall not be used in the interpretation or construction of any such provision contained in the Plan. 
 
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18.5.  Severability.  In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
 
18.6.  Successors. All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect merger, consolidation, purchase of all or substantially all of the business and/or assets of the Company or otherwise.
 
18.7.  Requirements of Law.  The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
 
18.8.  Securities Law Compliance. With respect to “insiders,” transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. An “insider” includes any individual who is, on the relevant date, an officer, Director or more than 10% beneficial owner of any class of the Company’s equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act.
 
18.9.  Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Illinois without regard to the conflict of law provisions thereof.
 
 
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Exhibit 10.6
 
CATERPILLAR INC.
DIRECTORS’ DEFERRED COMPENSATION PLAN
 
(Amended and Restated as of January 1, 2005)
 
 


CATERPILLAR INC.
DIRECTORS’ DEFERRED COMPENSATION PLAN
(Amended and Restated as of January 1, 2005)
 
PREAMBLE
Previously, Caterpillar Inc. (the “Company”) adopted the Caterpillar Inc. Directors’ Deferred Compensation Plan (the “Plan”) to provide members of its Board of Directors with an opportunity to defer the payment of compensation. The Plan has been amended and/or restated on a number of occasions with the most recent amendment and restatement being effective as of April 12, 1999. By execution of this document, the Company amends and restates the Plan effective as of January 1, 2005 to comply with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended.
 
ARTICLE I
DEFINITIONS
 
1.1  General. When a word or phrase appears in the Plan with the initial letter capitalized, and the word or phrase does not begin a sentence, the word or phrase shall generally be a term defined in this Article I. The following words and phrases used in the Plan with the initial letter capitalized shall have the meanings set forth in this Article I, unless a clearly different meaning is required by the context in which the word or phrase is used or the word or phrase is defined for a limited purpose elsewhere in the Plan document:
 
    (a)  Board means the Board of Directors of the Company, or any authorized committee of the Board.
 
    (b)  C+B Officer” means the Company’s Director of Compensation + Benefits.
 
    (c)  Code means the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.
 
    (d)  Company means Caterpillar Inc., and, to the extent provided in Section 9.7 (Successors) below, any successor corporation or other entity resulting from a merger or consolidation into or with the Company or a transfer or sale of substantially all of the assets of the Company.
 
    (e)  Company Share Equivalent Account means the hypothetical investment fund described in Section 5.4 (Special Company Share Equivalent Account Provisions).
 
    (f)  Company Stock means common stock issued by the Company.
 
    (g)  Compensation means the cash remuneration payable from time to time to a Director for services as a Director. Compensation shall include such remuneration attributable to annual fees, fees payable for attendance at meetings and fees payable for other services performed for or on behalf of the Company. Compensation shall not include expense reimbursements. Compensation also shall not include equity and equity-equivalent grants or gains realized on the sale of shares, the exercise or other disposition of options, or similar transactions related to equity equivalents.
 
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    (h)  Deferral Account” means the bookkeeping account maintained under the Plan to record amounts deferred under Section 3.3 (Deferrals).
 
    (i)  Deferral Agreement means the deferral agreement(s) described in Section 3.1 (Deferral Agreement) that are entered into by a Participant pursuant to the Plan.
 
    (j)  Deferrals means the deferrals made by a Participant in accordance with Section 3.3 (Deferrals).
 
    (k)  Director means a member of the Board.
 
    (l)  Disability” or “Disabled means that a Participant (1) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (2) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Participant’s employer.
 
    (m)  Distribution Election Form” means the election form by which a Participant elects the manner in which his accounts shall be distributed pursuant to Section 6.3 (Form of Distribution).
 
    (n)  Effective Date means January 1, 2005.
 
    (o)  Interest Fund means the hypothetical investment fund described in Section 5.3 (Special Interest Fund Provisions).
 
    (p)  Investment Funds means the Interest Fund and the Caterpillar Share Equivalent Account.
 
    (q)  Key Employee means a “key employee” as defined in Section 416(i) of the Code without regard to Section 416(i)(5).
 
    (r)  Participant means a Director who affirmatively elects to participate in the Plan pursuant to Section 2.1 (Eligibility).
 
    (s)  Plan means the Caterpillar Inc. Directors’ Deferred Compensation Plan, as set forth herein.
 
    (t)  Plan Administratormeans the C+B Officer. The Plan Administrator may delegate his authority hereunder in his sole and absolute discretion.
 
    (u)  Plan Year means the calendar year.
 
    (v)  Separation from Servicemeans separation from service as determined in accordance with any regulations, rulings or other guidance issued by the Department of the Treasury pursuant to Section 409A(a)(2)(A)(i) of the Code, as it may be amended or replaced from time to time.
 
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    (w)  Unforeseeable Emergency means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in section 152(a) of the Code) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. For purposes of the Plan, an “Unforeseeable Emergency” shall not include a Participant’s need to send his or her child to college or a Participant’s desire to purchase a home.
 
    (x)  Valuation Datemeans, except as otherwise provided herein, the last day of each month of the Plan Year.
 
1.2  Construction. The masculine gender, when appearing in the Plan, shall include the feminine gender (and vice versa), and the singular shall include the plural, unless the Plan clearly states to the contrary. Headings and subheadings are for the purpose of reference only and are not to be considered in the construction of the Plan. If any provision of the Plan is determined to be for any reason invalid or unenforceable, the remaining provisions shall continue in full force and effect. All of the provisions of the Plan shall be construed and enforced according to the laws of the State of Illinois and shall be administered according to the laws of such state, except as otherwise required by ERISA, the Code, or other Federal law.
 
ARTICLE II
ELIGIBILITY
2.1  Eligibility. Any Director who is not an Employee of the Company or any of its affiliates is eligible to participate in the Plan. An eligible Director shall elect to participate in the Plan by completing a Deferral Agreement as provided in Section 3.1 (Deferral Agreement).
 
ARTICLE III
DEFERRALS
 
3.1  Deferral Agreement. In order to make Deferrals, a Participant must complete a Deferral Agreement in the form prescribed by the Plan Administrator. In the Deferral Agreement, the Participant shall agree to reduce his Compensation in exchange for Deferrals. The Deferral Agreement shall be delivered to the Plan Administrator (or his designee) by the time specified in Section 3.2 (Timing of Deferral Elections). An election made by a Participant pursuant to a Deferral Agreement shall be irrevocable with respect to the Plan Year covered by the election. Notwithstanding the foregoing, the Plan Administrator may permit a Participant to revoke an election if the Participant has experienced an Unforeseeable Emergency, but only to the extent that revoking the election would help the Participant meet the related emergency need.
 
3.2  Timing of Deferral Elections.
 
    (a)  General Rule. Deferral Agreements shall be completed by the Director and delivered to the Plan Administrator prior to the beginning of the Plan Year in which the Compensation to be deferred is otherwise payable to the Director. The Deferral Agreement will remain in effect from year-to-year until changed by the Participant in accordance with the preceding sentence. The Plan Administrator, in his discretion, may require an earlier time by which the election to defer Compensation must be completed.
 
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    (b)  Initial Deferral Election. For the Plan Year in which a Director first becomes eligible to participate in the Plan (but only if the Director has never been eligible to participate in another “account balance plan,” other than a separation pay plan, of the Company or an affiliate that is aggregated with the Plan under Section 409A of the Code), the Director may elect to make Deferrals and with respect to services to be performed subsequent to the date of the election by completing and delivering a Deferral Agreement within 30 days after the date the Director becomes eligible to participate in the Plan.
 
3.3  Amount of Deferrals. Any Participant may elect to defer, pursuant to a Deferral Agreement, the receipt of 50% to 100% (designated in whole percentages) of the Compensation otherwise payable to the Participant by the Company in any Plan Year. The amount deferred pursuant to this Section 3.3 shall be allocated to the Deferral Account maintained for the Participant.
 
ARTICLE IV
VESTING
 
4.1  Vesting. Subject to Section 9.1 (Participant’s Rights Unsecured), each Participant shall at all times be fully vested in all amounts credited to or allocable to his Deferral Account and his rights and interest therein shall not be forfeitable for any reason.
 
ARTICLE V
INVESTMENT OF ACCOUNTS
 
5.1  Adjustment of Accounts. Except as otherwise provided elsewhere in the Plan, as of each Valuation Date, each Participant’s Accounts will be adjusted to reflect deferrals under Article III (Deferrals) and the positive or negative rate of return on the Investment Funds selected by the Participant pursuant to Section 5.2(b) (Investment Direction - Participant Directions). The rate of return will be credited or charged in accordance with policies applied uniformly to all Participants.
 
5.2  Investment Direction.
 
    (a)  Investment Funds. Each Participant may direct the hypothetical investment of amounts credited to his Plan accounts in the Investment Funds.
 
    (b)  Participant Directions. Each Participant may direct that all of the amounts attributable to his accounts be invested in either the Company Share Equivalent Account or Interest Fund or may direct that fractional (percentage) increments of his accounts be invested in the Company Share Equivalent Account and Interest Fund as he shall desire in accordance with such procedures as may be established by the Plan Administrator.
 
    (c)  Changes and Intra-Fund Transfers. Participant investment directions may be changed, and amounts may be transferred between the Investment Funds, in accordance with the procedures established by the Plan Administrator. The designation will remain in effect until changed by the timely submission of a new designation.
 
    (d)  Default Selection. In the absence of any designation, a Participant will be deemed to have directed the investment of his accounts in the Interest Fund.
 
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    (e)  Impact of Election. The Participant’s selection of Investment Funds shall serve only as a measurement of the value of the Participant’s Accounts pursuant to Section 5.1 (Adjustment of Accounts) and this Section 5.2. Neither the Company nor the Plan Administrator is required to actually invest a Participant’s accounts in accordance with the Participant’s selections.
 
    (f)  Investment Performance. Accounts shall be adjusted on each Valuation Date to reflect investment gains and losses as if the accounts were invested in the hypothetical Investment Funds selected by the Participants in accordance with this Section 5.2 and charged with any and all reasonable expenses as provided in paragraph (g) below. The earnings and losses determined by the Plan Administrator in good faith and in his discretion pursuant to this Section shall be binding and conclusive on the Participant, the Participant’s beneficiary and all parties claiming through them.
 
    (g)  Charges. The Plan Administrator may (but is not required to) charge Participants’ accounts for the reasonable expenses of administration including, but not limited to, carrying out and/or accounting for investment instructions directly related to such accounts.
 
5.3  Special Interest Fund Provisions.
 
    (a)  General. The Interest Fund shall accrue interest at a rate equal to (i) prior to January 1, 2007, 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); or (ii) from and after January 1, 2007, the rate on U.S. Treasury Notes with a maturity of ten years. Such interest shall accrue and compound quarterly and be determined as of the last business day of each calendar quarter.
 
    (b)  Installment Distributions Commencing Prior to January 1, 2007. Notwithstanding the provisions of Section 5.3(a) (Special Interest Fund Provisions - General) to the contrary, if a Participant elected to receive installment distributions pursuant to Section 6.3 (Form of Distribution) and such distributions commenced on or before December 31, 2006, interest shall accrue to such Participants’ accounts at a rate 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).
 
5.4  Special Company Share Equivalent Account Provisions.
 
    (a)  General. A Participant’s interest in the Company Share Equivalent Account shall be expressed in whole and fractional hypothetical units of the Company Share Equivalent Account. As a general matter, the Company Share Equivalent Account shall track an investment in Company Stock and shall generally reflect share ownership for events such as stock splits. Dividend equivalents will accrue to the Company Share Equivalent Account quarterly and will be reinvested. Because investment in the Company Share Equivalent Account is investment in a hypothetical account, there shall be no voting or similar rights associated therewith. The units shall be determined by dividing the amount of deferred into the Company Share Equivalent Account (or dividends credited) by the average of the high and low prices of Company 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).
 
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    (b)  Investment Directions. A Participant’s ability to direct investments into or out of the Company Share Equivalent Account shall be subject to such procedures as the Plan Administrator may prescribe from time to time to assure compliance with Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934, as amended, and other applicable requirements. Such procedures also may limit or restrict a Participant’s ability to make (or modify previously made) deferral and distribution elections pursuant to Articles III and VI, respectively. In furtherance, and not in limitation, of the foregoing, to the extent a Participant acquires any interest in an equity security under the Plan for purposes of Section 16(b), the Participant shall not dispose of that interest within six months, unless specifically exempted by Section 16(b) or any rules or regulations promulgated thereunder.
 
    (c)  Compliance with Securities Laws. Any election by a Participant to hypothetically invest any amount in the Company Share Equivalent Account, and any elections to transfer amounts from or to the Company Share Equivalent Account to or from any other Investment Fund, shall be subject to all applicable securities law requirements, including but not limited to the last sentence of paragraph (b) next above and Rule 16b-3 promulgated by the Securities Exchange Commission. To the extent that any election violates any securities law requirement, or the Company’s stock trading policies and procedures, the election shall be void.
 
    (d)  Compliance with Company Trading Policies and Procedures. Any election by a Participant to hypothetically invest any amount in the Company Share Equivalent Account, and any elections to transfer amounts from or to the Company Share Equivalent Account to or from the other Investment Fund, shall be subject to all Company Stock trading policies promulgated by the Company. To the extent that any election violates any such trading policy or procedures, the election shall be void.
 
ARTICLE VI
DISTRIBUTIONS
 
6.1  Limitation on Right to Receive Distribution. A Participant (or the Participant’s beneficiary in the case of the Participant’s death) shall not be entitled to receive a distribution prior to the first to occur of the following events:
 
    (a)  The Participant’s Separation from Service, or, in the case of a Participant who is a Key Employee, the date which is six months after the Participant’s Separation from Service;
 
    (b)  The date the Participant becomes Disabled;
 
    (c)  The Participant’s death;
 
    (d)  A specified time (or pursuant to a fixed schedule) specified at the date of deferral of compensation;
 
    (e)  An Unforeseeable Emergency; or
 
    (f)  To the extent provided by the Secretary of the Treasury, a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company.
 
The provisions of this Section 6.1 are intended to impose restrictions on distributions. This Section 6.1 does not describe the instances in which distributions will be made. Rather, distributions will be made only if and when permitted both by this Section 6.1 and another provision of the Plan.
 
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6.2  General Right to Receive Distribution. Following a Participant’s Separation from Service or Disability, the Participant’s Plan accounts will be distributed to the Participant at the time and in the manner provided in Sections 6.5 (Timing of Distribution) and 6.3 (Form of Distribution).
 
6.3  Form of Distribution. Accounts shall be distributed in cash in a single lump sum payment or in up to ten annual installments. Distributions shall be subject to such uniform rules and procedures as may be adopted by the Plan Administrator from time to time. The method of payment shall be selected by the Participant in the initial Distribution Election Form (which may be contained in and be a part of a Deferral Agreement) submitted by the Participant to the Plan Administrator on entry into the Plan.
 
6.4  Amount of Distribution. The amount distributed to a Participant shall equal the sum of the vested amounts credited to the Participant’s accounts as of the Valuation Date immediately preceding the date of the distribution. Amounts invested in the Company Share Equivalent Account shall be based on the fair market value of the Company Stock on the relevant Valuation Date determined pursuant to uniform and non-discriminatory rules established by the Plan Administrator.
 
6.5  Timing of Distribution. Funds will be distributed (or in the case of installment distributions, such installments shall commence) as soon as practicable after the January 1 coincident with or next following the Participant’s Separation from Service (but not sooner than the six-month anniversary of such Separation in the case of a Key Employee). Notwithstanding the foregoing, in the event that Separation from Service occurs due to death or Disability, funds may be distributed in a lump sum as soon as practicable after Separation from Service. 
 
6.6  Payment Upon Death.
 
    (a)  If a Participant should die before receiving a full distribution of his Plan accounts, distribution shall be made to the beneficiary designated by the Participant. If a Participant has not designated a beneficiary, or if no designated beneficiary is living on the date of distribution, such amounts shall be distributed to the Participant’s estate.
 
    (b)  Timing and Form of Payment to Beneficiary.
 
        (i)  Payments Commenced at Time of Death. If, at the time of the Participant’s death, installment payments of the Participant’s accounts has commenced pursuant to this Article VI, such payments shall continue to the Participant’s beneficiary in the same time and the same form as if the Participant has remained alive until the last installment payment was scheduled to be made.
 
        (ii)  Payments Not Commenced at Time of Death. If, at the time of the Participant’s death, payments of the Participant’s accounts has not commenced pursuant to this Article VI, the distributions made pursuant to this Section 6.7 shall be made to the Participant’s beneficiary in accordance with the then current and valid distribution election made by the Participant (or, in the absence of such a distribution election, in accordance with the “default” provisions of Section 6.3 (Form of Distribution)).
 
6.7  Payment Upon Unforeseeable Emergency. Notwithstanding any provision of the Plan to the contrary, if a Participant incurs an Unforeseeable Emergency, the Participant may elect to make a withdrawal from the adjusted balance of the Participant’s account. Distribution shall only be made on account of Unforeseeable Emergency if, as determined under regulations of the Secretary of the Treasury, the amounts distributed with respect to an emergency do not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved:
 
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    (a)  through reimbursement or compensation by insurance or otherwise;
 
    (b)  by liquidation of the Participant’s assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; or
 
    (c)  by cessation of deferrals under the Plan.
 
A Participant who wishes to receive a distribution pursuant to this Section 6.8 shall apply for such distribution to the Plan Administrator and shall provide information to the Plan Administrator reasonably necessary to permit the Plan Administrator to determine whether an Unforeseeable Emergency exists and the amount of the distribution reasonably needed to satisfy the emergency need.
 
6.8  De Minimis Distribution. Subject to Section 6.5 (Timing of Distribution) regarding Key Employees, if a Participant incurs a Separation from Service and as of the “payment date,” the value of the Participant’s accounts is $10,000.00 or less, the Participant’s accounts shall be distributed to the Participant in a single lump sum regardless of any elections made by the Participant pursuant to Section 6.3 (Form of Distribution). For purposes of this Section 6.9, the “payment date” shall be the date on which the Participant’s accounts are distributed pursuant to this Section 6.9. In no event shall the “payment date” be later than the later of (a) December 31 of the Plan Year in which the Participant’s Separation of Service occurs and (b) the date which is two and one-half months immediately following the Participant’s Separation from Service.
 
6.9  Withholding. All distributions will be subject to all applicable tax and withholding requirements.
 
6.10  Ban on Acceleration of Benefits. Notwithstanding any other provision of the Plan to the contrary, neither the time nor the schedule of any payment under the Plan may be accelerated except as provided in regulations or other guidance issued by the Internal Revenue Service or the Department of the Treasury.
 
 
ARTICLE VII
ADMINISTRATION OF THE PLAN
 
7.1  General Powers and Duties.
 
    (a)  General. The Plan Administrator shall perform the duties and exercise the powers and discretion given to him in the Plan document and by applicable law and his decisions and actions shall be final and conclusive as to all persons affected thereby. The Company and the Adopting Affiliates shall furnish the Plan Administrator with all data and information that the Plan Administrator may reasonably require in order to perform his functions. The Plan Administrator may rely without question upon any such data or information.
 
    (b)  Disputes. Any and all disputes that may arise involving Participants or beneficiaries shall be referred to the Plan Administrator and his decision shall be final. Furthermore, if any question arises as to the meaning, interpretation or application of any provisions of the Plan, the decision of the Plan Administrator shall be final.
 
    (c)  Agents. The Plan Administrator may engage agents, including recordkeepers, to assist him and he may engage legal counsel who may be counsel for the Company. The Plan Administrator shall not be responsible for any action taken or omitted to be taken on the advice of such counsel, including written opinions or certificates of any agent, counsel, actuary or physician.
 
    (d)  Insurance. At the C+B Officer’s request, the Company shall purchase liability insurance to cover the C+B Officer in his activities as the Plan Administrator.
 
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    (e)  Allocations. The Plan Administrator is given specific authority to allocate responsibilities to others and to revoke such allocations. When the Plan Administrator has allocated authority pursuant to this paragraph, the Plan Administrator is not to be liable for the acts or omissions of the party to whom such responsibility has been allocated.
 
    (f)  Records. The Plan Administrator shall supervise the establishment and maintenance of records by its agents, the Company and each Adopting Affiliate containing all relevant data pertaining to any person affected hereby and his or her rights under the Plan. In addition, the Plan Administrator may, in its discretion, establish a system for complete or partial electronic administration of the Plan and may replace any written documents described in the Plan with electronic counterparts as it deems appropriate.
 
    (g)  Interpretations. The Plan Administrator, in his sole discretion, shall interpret and construe the provisions of the Plan (and any underlying documents or policies).
 
    (h)  Electronic Administration. The Plan Administrator shall have the authority to employ alternative means (including, but not limited to, electronic, internet, intranet, voice response or telephonic) by which Participants may submit elections, directions and forms required for participation in, and the administration of, the Plan. If the Plan Administrator chooses to use these alternative means, any elections, directions or forms submitted in accordance with the rules and procedures promulgated by the Plan Administrator will be deemed to satisfy any provision of the Plan calling for the submission of a written election, direction or form.
 
    (i)  Accounts. The Plan Administrator shall combine the various accounts of a Participant if he deems such action appropriate. Furthermore, the Plan Administrator shall divide a Participant’s accounts into sub-accounts if he deems such action appropriate.
 
The foregoing list of powers and duties is not intended to be exhaustive, and the Plan Administrator shall, in addition, exercise such other powers and perform such other duties as he may deem advisable in the administration of the Plan, unless such powers or duties are expressly assigned to another pursuant to the provisions of the Plan.
 
ARTICLE VIII
AMENDMENT
 
8.1  Amendment. The Company reserves the right to amend the Plan when, in the sole discretion of the Company, such amendment is advisable.
 
8.2  Effect of Amendment. Any amendment of the Plan shall apply prospectively only and shall not directly or indirectly reduce the balance of any Plan account as of the effective date of such amendment.
 
8.3  Termination. The Company expressly reserves the right to terminate the Plan. In the event of termination, the Company shall specify whether termination will change the time at which distributions are made; provided that any acceleration of a distribution is consistent with Section 409A of the Code. In the absence of such specification, the timing of distributions shall be unaffected by termination.
 
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ARTICLE IX
GENERAL PROVISIONS
 
9.1  Participant’s Rights Unsecured. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any distributions hereunder. The right of a Participant or his or her designated beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Company, and neither the Participant nor a designated beneficiary shall have any rights in or against any specific assets of the Company. All amounts credited to a Participant’s accounts hereunder shall constitute general assets of the Company and may be disposed of by the Company at such time and for such purposes as it may deem appropriate. Nothing in this Section shall preclude the Company from establishing a “Rabbi Trust,” but the assets in the Rabbi Trust must be available to pay the claims of the Company’s general creditors in the event of the Company’s insolvency.
 
9.2  No Guaranty of Benefits. Nothing contained in the Plan shall constitute a guaranty by the Company or any other person or entity that the assets of the Company will be sufficient to pay any benefit hereunder.
 
9.3  Section 409A Compliance. The Company intends that the Plan meet the requirements of Section 409A of the Code and the guidance issued thereunder. The Plan shall be construed and interpreted in a manner consistent with that intention.
 
9.4  Spendthrift Provision. No interest of any person or entity in, or right to receive a distribution under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor shall any such interest or right to receive a distribution be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims in bankruptcy proceedings. This Section shall not preclude arrangements for the withholding of taxes from deferrals, credits, or benefit payments, arrangements for the recovery of benefit overpayments, arrangements for the transfer of benefit rights to another plan, or arrangements for direct deposit of benefit payments to an account in a bank, savings and loan association or credit union (provided that such arrangement is not part of an arrangement constituting an assignment or alienation).
 
9.5  Domestic Relations Orders. Notwithstanding the provisions of Section 9.4 (Spendthrift Provision) to the contrary and to the extent permitted by law, the amounts payable pursuant to the Plan may be assigned or alienated pursuant to a “Domestic Relations Order” (as such term is defined in Section 414(p)(1)(B) of the Code).
 
9.6  Incapacity of Recipient. If the Plan Administrator is served with a court order holding that a person entitled to a distribution under the Plan is incapable of personally receiving and giving a valid receipt for such distribution, the Plan Administrator shall postpone payment until such time as a claim therefore shall have been made by a duly appointed guardian or other legal representative of such person. The Plan Administrator is under no obligation to inquire or investigate as to the competency of any person entitled to a distribution. Any payment to an appointed guardian or other legal representative under this Section shall be a payment for the account of the incapacitated person and a complete discharge of any liability of the Company and the Plan therefore.
 
9.7  Successors. The Plan shall be binding upon the successors and assigns of the Company and upon the heirs, beneficiaries and personal representatives of the individuals who become Participants hereunder.
 
9.8  Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, neither the Plan Administrator, the Company, nor any individual acting as the Plan Administrator’s, or the Company’s employee, agent, or representative shall be liable to any Participant, former Participant, beneficiary or other person for any claim, loss, liability or expense incurred in connection with the Plan.
 
Page 10



EXHIBIT 11
CATERPILLAR INC.
AND ITS SUBSIDIARIES
 
COMPUTATIONS OF EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31,
 
(Dollars in millions except per share data)
 
 
2006
 
2005
 
2004
 

 

 

Profit for the period (A):
$
3,537
 
$
2,854
 
$
2,035
 
 
 
 
 
 
 
 
 
Determination of shares (in millions):
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding (B)
 
658.7
 
 
678.4
 
 
684.5
Shares issuable on exercise of stock awards, net of shares assumed
to be purchased out of proceeds at average market price
 
25.1
 
 
27.4
 
 
22.9
Average common shares outstanding for fully diluted computation (C)
 
683.8
 
 
705.8
 
 
707.4
 
 
 
 
 
 
 
 
 
Profit per share of common stock:
 
 
 
 
 
 
 
 
Assuming no dilution (A/B)
$
5.37
 
$
4.21
 
$
2.97
Assuming full dilution (A/C)
$
5.17
 
$
4.04
 
$
2.88
 
 
 
 
 
 
 
 
 
Shares outstanding as of December 31 (in millions)
 
645.8
 
 
670.9
 
 
685.9


EXHIBIT 12
 
CATERPILLAR INC.
AND CONSOLIDATED SUBSIDIARIES
 
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Millions of dollars)
 
YEARS ENDED DECEMBER 31,
 
     
2006
 
2005
 
2004
 
2003
 
2002
     
 
 
 
 
Earnings (1)
 
$
4,890
 
$
3,910
 
$
2,714
 
$
1,488