Chairman
and
Chief Executive Officer
Caterpillar
Inc.
Peoria,
Illinois 61629
May
22,
2006
Dear
Institutional Investor:
After
speaking to several investors about our request to vote FOR our new
long-term incentive plan, I wanted to personally follow up with you on some
additional thoughts about the plan. As I said in my last letter to you, the
plan
expired in April 2006, and we are requesting 36 million shares, of which 16
million will be rolled over from the previous plan. Let me provide a bit more
color on why we believe the new plan is a good idea even from a share usage
(run
rate) point of view.
You
will
note that our performance has outpaced the market while our share usage has
dramatically decreased. In fact, we reduced our share usage from approximately
2.7% in 2004 to less than 1.5% in 2006. Below is a list of our share usage
over
the past 3 years:
| Ø |
2004
Grant
17.8M
|
| Ø |
2005
Grant
12.6M,
a
29.3% reduction
|
| Ø |
2006
Grant
9.8M, a 22.4% reduction
|
Dilution
would be
less than 5.5% of shares outstanding, and less than 3% for new shares. As is
typical after share increases are approved, the current overhang of
approximately 14% would be raised to approximately 19.5%. Please note that
the
plan caps the usage of the full value shares to 20% of total shares requested,
and authorization is expected to last us 3-4 years. I should also mention that
the benefits of SARs for “pool life” purposes would not be realized until 4 or 5
years down the road. Finally, the plan outlines a limit on the number of
restricted stock that can be issued under the plan (1/5 of the total
approved).
As
a reminder,
every option eligible employee is subject to strictly enforced and substantial
target ownership requirements. Option grants are adjusted downward if ownership
is not at an acceptable level.
I
believe that we
need to preserve flexibility in providing incentives to our management team
while keeping their interests aligned with the interests of all shareholders.
That is why I am again asking you to vote FOR
our long-term
incentive plan if you have not already done so. Thank you again for your
consideration.
Sincerely,
/s/James
W. Owens
James
W.
Owens
Chairman
&
CEO