CUMMINS ENGINE CO INC, DEF 14A, 1996-03-04

CUMMINS ENGINE CO INC
DEF 14A, 1996-03-04
ENGINES & TURBINES

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<PAGE>
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))

[X] Definitive Proxy Statement

[X] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

Cummins Engine Company, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.

[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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Notes:
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CUMMINS ENGINE COMPANY, INC.
500 JACKSON STREET, BOX 3005, COLUMBUS, INDIANA 47202-3005

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To the Shareholders of
Cummins Engine Company, Inc.

Notice is hereby given that the Annual Meeting of the Shareholders of Cummins
Engine Company, Inc. will be held at the Columbus East High School Auditorium,
230 South Marr Road, Columbus, Indiana, on Tuesday, April 9, 1996, at 10:30
a.m., local time, for the following purposes:

1. to elect fifteen directors of the Company for the ensuing year;

2. to ratify the appointment of Arthur Andersen LLP as auditors for the
year 1996;

3. to transact any other business that may properly come before the meeting
or any adjournment thereof.

Only shareholders of Common Stock of the Company of record at the close of
business on February 23, 1996, are entitled to notice of and to vote at the
meeting.

Shareholders of Common Stock who do not expect to be present in person at the
meeting are urged to complete, sign and date the enclosed proxy and return it
promptly to the undersigned in the envelope provided.

The proxy may be revoked by the shareholder giving it at any time before the
voting. Any shareholders entitled to vote at the meeting who attend the meeting
will be entitled to cast their votes in person.

Mark R. Gerstle,
Secretary

March 4, 1996
<PAGE>

CUMMINS ENGINE COMPANY, INC.
500 JACKSON STREET, BOX 3005, COLUMBUS, INDIANA 47202-3005
PROXY STATEMENT

This proxy statement is being furnished in connection with the solicitation
by the Board of Directors of Cummins Engine Company, Inc. (the "Company" or
"Cummins") of proxies to be voted at the Annual Meeting of Shareholders to be
held on Tuesday, April 9, 1996, and at any adjournment thereof (the "Annual
Meeting"). This proxy statement, together with the enclosed proxy, is first
being mailed to the shareholders of the Company on or about March 4, 1996.

Holders of the Company's Common Stock of record at the close of business on
February 23, 1996 are entitled to vote at the Annual Meeting. On that date
there were issued and outstanding 40,149,855 shares of Common Stock, each of
which is entitled to one vote.

Each share of Common Stock represented by a properly executed proxy will be
voted at the Annual Meeting in accordance with the instructions indicated on
that proxy, unless such proxy has been previously revoked. If no instructions
are indicated on a signed proxy, the shares represented by such proxy will be
voted as recommended by the Board of Directors.

A shareholder may revoke the proxy at any time before it is voted by
delivering to the Secretary of the Company written notice of such revocation.
This notice must include the number of shares for which the proxy had been
given and the name of the shareholder of such shares as it appears on the stock
certificate(s) evidencing ownership of such shares. In addition, any
shareholder who has executed a proxy but is present at the Annual Meeting will
be entitled to cast its vote in person instead of by proxy, thereby cancelling
the previously executed proxy.
<PAGE>

PRINCIPAL SECURITY OWNERSHIP

The following table identifies those shareholders known to the Company to be
the beneficial owners of more than five percent of the Common Stock of the
Company and shows as to each such shareholder as of February 29, 1996 (i) the
number of shares beneficially owned by such shareholder(s) and the nature of
such beneficial ownership and (ii) the percentage of the entire class of Common
Stock so beneficially owned:

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
OWNERSHIP OF CLASS
----------------- --------
<S> <C> <C>
Ford Motor Company 3,200,000(1) 7.97%
The American Road
Dearborn, MI 48121
Tenneco Inc. General Employee Benefit Trust 3,200,000(2) 7.97%
c/o Bankers Trust Company
3000 Two Houston Center
909 Fannin, Suite 3000
Houston, TX 77010
FMR Corporation 2,916,686(3) 7.26%
82 Devonshire Street
Boston, MA 02109
Pioneering Management Corporation 2,724,500(4) 6.79%
60 State Street
Boston, MA 02109
Miller Anderson & Sherrerd, LLP 2,372,400(5) 5.91%
One Tower Bridge
West Conshohocken, PA 19428
Cummins Engine Company, Inc. 2,272,051 5.66%
and Affiliates Employee
Stock Ownership Trust
c/o The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
</TABLE>
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(1) These shares were issued to Ford Motor Company pursuant to an Investment
Agreement between the Company and Ford (the "Ford Investment Agreement").
In addition, Ford has an option to acquire an additional 2,961,404 shares
pursuant to a Stock Option Agreement between the Company and Ford (the
"Ford Option Agreement") which, if exercised, would result in Ford having
beneficial ownership of 15.35% of the Company's outstanding Common Stock.
Following exercise of the option, Ford is permitted to increase its
beneficial ownership of the Company's outstanding Common Stock to 20% by
purchasing shares in the open market. See "Other Agreements and
Transactions With Directors, Officers and Certain Shareholders."
(2) These shares were originally issued to Tenneco Inc. pursuant to an
Investment Agreement between the Company and Tenneco (the "Tenneco
Investment Agreement"). On December 29, 1993, the shares were transferred
by Tenneco to the master trust for retirement plans of Tenneco and its
subsidiaries. Munder Capital Management, 480 Pierce Street, Suite 300,
Birmingham, MI 48012 is the investment manager of the master trust account
holding the shares and possesses voting and investment powers over the
shares on behalf of the trust. See "Other Agreements and Transactions With
Directors, Officers and Certain Shareholders."

2
<PAGE>

(3) The source of this information is a Schedule 13G dated February 14, 1996
disclosing beneficial ownership by FMR. FMR states in its 13G that it has
sole investment power for all of the shares, sole voting power for 54,576
shares and no shared investment or voting power.
(4) The source of this information is a Schedule 13G dated January 26, 1996
disclosing beneficial ownership by Pioneering Management Corporation.
Pioneering states in its 13G that it has sole voting power for all of the
shares, sole investment power for 180,000 and shared investment power for
2,544,500 shares.
(5) The source of this information is a Schedule 13G dated February 12, 1996
disclosing beneficial ownership by MAS. MAS states in its 13G that it has
sole investment power for all of the shares, sole voting power for
1,458,600 shares and no shared investment or voting power.

ELECTION OF DIRECTORS

(ITEM 1)

It is intended that votes will be cast pursuant to the accompanying proxy for
the election of the fifteen nominees listed below, all of whom are presently
directors of the Company. All directors will serve for the ensuing year and
until their respective successors are elected and qualified. A shareholder may
withhold authority from such shareholder's proxy to vote for the election of
any or all of the nominees listed below.

The Board of Directors has no reason to believe that any of the nominees will
be unable to serve if elected. If, for any reason, one or more of such persons
should be unable to serve, it is intended that votes will be cast for a
substitute nominee or nominees designated by the Board of Directors unless the
Board of Directors decides to reduce the number of directors.

Messrs. Dabrowski and Mead have been nominated to serve as directors of the
Company pursuant to the terms of the Ford Investment Agreement and Tenneco
Investment Agreement, respectively. See "Other Agreements and Transactions With
Directors, Officers and Certain Shareholders" below.

The names of the nominees for directors, together with certain information
regarding them, are set forth below. Biographical sketches of these nominees,
which include their business experience during the past five years and
directorships of other corporations, are provided on pages 23 through 30 of
this proxy statement.

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<TABLE>
<CAPTION>
AMOUNT AND
FIRST YEAR NATURE OF BENEFICIAL PERCENT
ELECTED A OWNERSHIP AS OF OF
NAME AND OCCUPATION AGE DIRECTOR(1) FEBRUARY 29, 1996(2) CLASS
------------------- --- ----------- -------------------- -------
<S> <C> <C> <C> <C>
Walter Y. Elisha................. 63 1991 1,406 *
Chairman and Chief Executive
Officer, Springs Industries,
Inc., manufacturer of home
furnishings, industrial and
specialty fabrics
Hanna H. Gray.................... 65 1977 599 *
President Emeritus and Professor
of History, University of
Chicago
James A. Henderson............... 61 1974 111,892(5) *
Chairman of the Board and Chief
Executive Officer of Cummins
Dana G. Mead..................... 60 1993 402(6) *
Chairman and Chief Executive
Officer, Tenneco Inc., a
diversified industrial
corporation
J. Irwin Miller.................. 86 1934 667,796(7) 1.66%
Former Chairman of Cummins
William I. Miller................ 39 1989 36,739(8) *
Chairman, Irwin Financial
Corporation, financial services
company
Donald S. Perkins................ 68 1974 4,406 *
Retired Chairman, Jewel
Companies, Inc., diversified
retailing
William D. Ruckelshaus........... 63 1974 1,406 *
Chairman of the Board, Browning-
Ferris Industries, Inc., waste
management services company
Henry B. Schacht................. 61 1969 87,934(9) *
Chairman and Chief Executive
Officer, Lucent Technologies,
communication industry products
Theodore M. Solso................ 48 1994 68,024(10) *
President and Chief Operating
Officer of Cummins
Franklin A. Thomas............... 61 1973 1,077 *
President, The Ford Foundation
J. Lawrence Wilson............... 60 1990 2,402 *
Chairman and Chief Executive
Officer, Rohm and Haas Company,
chemicals and plastics
manufacturing
</TABLE>
- ---------
*Less than 1%.
(1) Except for Mr. Ruckelshaus, each Director has served continuously since the
year indicated. Mr. Ruckelshaus served on the Board of Directors from 1974
until 1983 when he returned to Federal Government service and was reelected
to the Board of Directors in 1985.
(2) Except as indicated, the voting and investment powers of the shares listed
are held solely by the reported owner.
(3) These shares are held by a trust, of which Dr. Brown is a co-trustee,
settlor and beneficiary.
(4) See note (1) to the Principal Security Ownership table regarding Ford Motor
Company's beneficial ownership of the Company's Common Stock.
(5) Includes 28,600 shares which Mr. Henderson has the right to acquire within
the next 60 days through the exercise of stock options. Also included are
400 shares held by Mr. Henderson's wife who has sole voting and investment
powers thereof.

4
<PAGE>

(6) See note (2) to the Principal Security Ownership table regarding beneficial
ownership by the Tenneco Inc. General Employee Benefit Trust of the
Company's Common Stock. Mr. Mead is a member of the Investment Committee of
the Tenneco Inc. General Employee Benefit Trust.
(7) Includes 638,948 shares beneficially owned by Mr. Miller with sole voting
and investment powers and 28,842 shares beneficially owned by Mr. Miller's
wife, Xenia S. Miller, with sole voting and investment powers. Does not
include 446,464 shares for which Mr. Miller possesses shared voting and
investment powers solely as an executor. If included, Mr. Miller's
aggregate beneficial ownership would be 2.7% of the Company's Common Stock.
(8) Includes 14,565 shares held by Mr. Miller for the benefit of his children.
Mr. W. I. Miller is Mr. J. I. Miller's son.
(9) Includes 36,900 shares which Mr. Schacht has the right to acquire within
the next 60 days through the exercise of stock options.
(10) Includes 17,500 shares which Mr. Solso has the right to acquire within the
next 60 days through the exercise of stock options. Also included are
14,604 shares held by Mr. Solso's wife who has sole voting and investment
powers thereof and 14,604 shares held by a family limited partnership of
which Mr. Solso is a general partner.

Directors will be elected by a plurality of the votes cast. Votes cast for a
nominee and, if no contrary instructions are indicated on a signed proxy, the
shares represented by such proxy will be voted for a nominee. Abstentions,
broker non-votes and instructions on a signed proxy withholding a vote will
result in a nominee receiving fewer votes. However, the number of votes
otherwise cast for the nominee will not be affected by such actions.

THE BOARD OF DIRECTORS AND ITS COMMITTEES

The Board of Directors held five meetings during 1995. All of the directors
attended 75% or more meetings of the Board and Committees on which they served.

The Board of Directors has established eight standing committees. The
functions performed by certain of these committees and the members of the Board
of Directors currently serving on these committees are as follows:

Audit Committee. The members of the Audit Committee are D. S. Perkins
(Chairman), H. H. Gray and W. D. Ruckelshaus. The Committee reviews the
accounting and auditing principles and procedures of the Company. The Audit
Committee reviews the scope, timing, and fees for the annual audit and the
results of audit examinations performed by the internal auditors and
independent public accountants, including their recommendations to improve the
system of accounting and internal controls. The Audit Committee met four times
during 1995.

Compensation Committee. The members of the Compensation Committee are H. H.
Gray (Chairman), H. Brown, D. S. Perkins, W. D. Ruckelshaus and F. A. Thomas.
The Compensation Committee administers and determines eligibility for and makes
awards under the Company's stock option and other stock incentive plans. The
Committee also reviews and evaluates the Company's executive compensation
standards and practices, including salaries, bonus distributions, deferred
compensation practices and participation in stock purchase plans. The
Compensation Committee met three times during 1995.

5
<PAGE>

Nominating and Organization Committee. The members of the Nominating and
Organization Committee are F. A. Thomas (Chairman), H. Brown, K. R. Dabrowski,
R. J. Darnall, W. Y. Elisha, H. H. Gray, D. G. Mead, W. I. Miller, D. S.
Perkins, W. D. Ruckelshaus and J. L. Wilson. The Nominating and Organization
Committee reviews and makes recommendations to the Board with respect to
membership, size, composition, procedures and organization of the Board of
Directors. The Committee also evaluates the Chief Executive Officer's
performance and monitors meeting attendance of Board members. This Committee
will consider shareholders' recommendations of nominees for election to the
Board of Directors. Shareholder recommendations, including biographical
information as to the proposed candidate and a statement from the shareholder
as to the qualifications and willingness of such person to serve on the
Company's Board of Directors, must be submitted in writing to the Secretary of
the Company in accordance with the procedures established in the Company's By-
Laws. The Nominating and Organization Committee replaced the former Nominating
Committee and met one time during 1995.

Executive Committee. The members of the Executive Committee are J. A.
Henderson (Chairman), J. I. Miller, W. I. Miller and T. M. Solso. The Executive
Committee is authorized to exercise the powers of the Board of Directors in the
management and direction of the business and affairs of the Company during the
intervals between meetings of the Board of Directors. The Executive Committee
met one time during 1995.

Other Committees. In addition to the Committees described above, the Board of
Directors has established the following committees: Business Development
Committee (J. L. Wilson, Chairman, W. Y. Elisha and H. B. Schacht); Employee
Development and Benefits Committee (R. J. Darnall, Chairman, D. G. Mead and W.
I. Miller); Proxy Committee (J. I. Miller, Chairman, H. B. Schacht and F. A.
Thomas); and Technology Committee (H. Brown, Chairman, K. R. Dabrowski, J. I.
Miller, T. M. Solso and F. A. Thomas).

Each director who is not an officer of the Company receives an annual fee of
$33,000, $27,000 of which is paid in cash and $6,000 of which is paid in the
form of restricted stock. Each non-officer director also receives $1,000 for
each special meeting of the Board of Directors attended. Committee chairmen
(other than the Executive or Proxy Committee) receive an additional annual fee
of $9,000. Non-chair members of the Audit, Business Development, Executive,
Compensation, Employee Development and Benefits, Nominating and Organization
and Technology Committees receive an additional $6,000 fee for each such
Committee membership. Committee members also receive $1,000 for attending a
Committee meeting (other than a meeting of the Executive Committee) that is not
held in connection with a regular or special meeting of the Board of Directors.

As part of the Company's overall support of charitable and educational
institutions and as an aid in attracting and retaining qualified directors, the
Company has established the Cummins Engine Company Charitable Bequest Program
in which all directors participate. Upon the death of a director, the Company
will donate ten equal annual installments of $100,000 to one or more qualifying
institutions designated by such director, subject to certain vesting
requirements based upon years of service as a director. The Company has
purchased life insurance policies on each director, the proceeds of which fund
donations under the program. Directors will not receive any financial benefit
from the program since all charitable deductions accrue solely to the Company.

6
<PAGE>

Nominee Harold Brown has a consulting arrangement with the Company pursuant
to which he provides consulting services in connection with the Company's
research and development activities and related technology issues. During 1995,
the Company paid Dr. Brown $50,000 for these services. In addition, the Company
has established a Science and Technology Advisory Council on which Dr. Brown
serves as Chairman. The Council advises senior management and the Board of
Directors on the direction and implication of developments in science,
technology and environmental issues that may have applicability to the
Company's current and future business goals and objectives. For his services on
the Council, Dr. Brown is paid an annual retainer of $17,000, including $7,000
for serving as Chairman, and an additional fee of $3,000 for each day of
meetings attended during the year.

Nominee Henry B. Schacht had a consulting arrangement with the Company during
1995 in order to retain, for the benefit of the Company, the knowledge and
judgment of Mr. Schacht in connection with strategic planning, business
alliances and other significant matters following his retirement from the
Company. Pursuant to the arrangement, Mr. Schacht was available to the Board
and senior management for at least one week during each month and was paid
$337,500 for his services during the year.

The Company has a deferred compensation plan for non-employee directors,
pursuant to which such directors may elect to defer receipt of all or any
portion of their compensation while they serve as a director of the Company.
Upon ceasing to be a director, the deferred compensation, plus accrued
interest, is paid to the director or the director's beneficiary in a lump sum
or in annual installments, not to exceed ten, as specified by the director.
Upon a change of control of the Company (as defined in the plan), such deferred
compensation and interest is paid in cash to the director in one lump sum.

The Company also maintains a retirement plan for non-employee directors who
have no vested rights under any other pension plan sponsored by the Company and
who have served as a director for 5 or more years. Under the plan, annual
payments equal to the amount of fees (excluding Committee fees) paid or payable
for the final year of service are made to a former director each year for the
lesser of 20 years or the number of years served as a director. Upon a change
of control of the Company (as defined in the plan), the actuarial present value
of accrued but unpaid benefits will be distributed in one lump sum.

EXECUTIVE COMPENSATION

COMPENSATION COMMITTEE REPORT

The Compensation Committee Report is organized as follows:

. Role of the Compensation Committee

. Objectives and Principles

. Compensation Program Elements

. Compensation of the Chief Executive Officer

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<PAGE>

ROLE OF COMPENSATION COMMITTEE

The Compensation Committee is made up of five members of the Board of
Directors of the Company, who are not current or former employees of the
corporation. The Committee has oversight responsibility for the Company's
executive compensation programs. The Committee reviews the general compensation
philosophy of the Company, the elements of the compensation program, the
specifics of each element, the goals and measurements used in the program, and
the results of the compensation program compared to the philosophy to determine
if the compensation program is performing as expected.

In addition, the Committee reviews the individual levels and awards for each
of the five most highly paid officers and takes appropriate action. In its
review, the Committee has direct access to advice from professional executive
compensation consultants. The Committee also reviews its actions with the full
Board of Directors.

OBJECTIVES AND PRINCIPLES OF EXECUTIVE COMPENSATION

Cummins' executive compensation is designed to attract, motivate, and retain
the personnel required to achieve the Company's performance goals in the
competitive global business environment. The program is designed to reflect the
individual's contribution and the performance of the Company. The program
attempts to strike an appropriate balance between short-term and long-term
performance.

The Company is committed to the concept of pay for sustained financial
performance. We evaluate performance over several periods of time. While the
specific elements of executive compensation vary from time to time, the
Compensation Committee focuses on this central principle of pay for performance
in reviewing the compensation program, any proposed changes, and the specific
awards.

The Committee follows several principles, in addition to pay for performance,
in designing and implementing compensation programs for its officers.

. Programs should provide competitive compensation opportunity; the concept
of opportunity is important in our program. We believe the executive
should have the opportunity to do well if the Company does well, but that
total compensation should vary in relation to the Company's performance.

. An individual's compensation should be at the median of the range when
compared to the compensation of individuals in U.S. industrial companies
with sales volumes similar to Cummins, when Cummins' financial
performance is at the median of those companies.

. There should be a balance between short-term and long-term elements of
compensation.

. The more senior a person's position, the more the compensation should be
"at risk", i.e., dependent on the performance of the Company.

. Stock should be an important part of the program in order to link the
management's compensation with shareholders' expectations; the greater
the level of responsibility of the person, the more the compensation
should be stock-based.

. The system should be as simple and as easily understood as possible.

. Payouts should not accumulate, causing large one-time payments.

8
<PAGE>

In addition to these principles, we have the following observations:

. No single program accomplishes these aims consistently; a mix of programs
is best.

. There is no single best comparator of performance with other companies; a
mix of comparators should be used.

. In this complex area, relative simplicity seems the best that can be
achieved.

. There is no perfect program; change should be expected from time to time
as the outcome of the Committee's periodic reviews.

Section 162(m) of the Internal Revenue Code ("Section 162(m)") limits the
corporate tax deduction to one million dollars for compensation paid annually
to any one of the named executive officers in the proxy, unless the
compensation meets certain requirements. The Committee adopted changes to the
compensation program, approved by shareholders in 1995, that qualify payments
under the Senior Executive Bonus Plan and Senior Executive Three Year
Performance Plan for tax deductibility under Section 162(m). These changes were
designed to maximize tax deductibility, while retaining the ability to attract,
retain and motivate executives to achieve our business objectives. Payments
under these plans were certified by the Compensation Committee for each payment
period in 1995.

As indicated below, the Base Salary of the named executive officers is set at
the median of the range of the salaries of individuals with similar positions
in companies of similar size to Cummins. The Committee intends to continue this
policy notwithstanding the enactment of Section 162(m).

COMPENSATION PROGRAM ELEMENTS

The Company's executive compensation program consists of four elements: Base
Salary, Short-Term Bonus, Medium-Term compensation, and Long-Term compensation.
Each is designed to accomplish a somewhat different objective. In total, they
are designed to fulfill the Company's basic goals of linking pay to financial
performance and paying competitively. All officers participate in each element
of the program.

We use survey data provided by our compensation consultants to determine
competitive levels of pay. These surveys include over 340 U.S. industrial
corporations (including the eleven companies that comprise the "Peer Group"
companies used in the Shareholder Return Performance Presentation on page 13 of
this Proxy Statement). Each element of pay described below is intended to
provide compensation for each position at the median of the amounts companies
of similar size in the survey would pay the same position.

1. Base Salary

Base Salary is reviewed annually. It is the only fixed portion of the
executive's compensation. Base Salary is normally set at the median of the
range of the salaries of individuals with similar positions in companies of
similar size to Cummins.

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<PAGE>

2. Short-Term Bonus

This element is designed to link executive pay to the short-term performance
of the Company. The payout is made quarterly, with the Payout Factor calculated
on a formula established by the Committee and reviewed annually. Each person is
assigned a participation rate that is a percent of salary. The quarterly bonus
is then determined as follows.

(Short-Term Bonus) equals (Annual Base Salary) times (participation
percentage assigned to each job) times (Payout Factor) times ( 1/4).

Participation rates are based on the same survey data as base salaries and
are set at the median of the range for like positions in similarly sized
companies.

The Payout Factor for the quarterly bonus is set to yield a 1.0 Payout Factor
for Company financial performance that is at the median of U.S. industrial
companies measured over recent history. In 1995, return on equity was the
measure used to compare performance. Return on equity levels are converted to
equivalent return on sales levels for use in the Payout Factor formula. In
determining the return on sales level equivalent to the market median return on
equity to establish the 1.0 Payout Factor point for the Short-Term Bonus Plan
for 1995, we used a full corporate tax rate, not taking credit for tax loss
carryforwards.

When the Company's performance is less than the median, the quarterly bonus
pays less than 1.0--and does not pay at all if the Company is not profitable.
When the Company's performance exceeds the median, the quarterly Payout Factor
is greater than 1.0 and compensation is greater than the median of those
companies included in our surveys.

In order to comply with the requirements of Section 162 (m), designated
officers (the Chief Executive Officer and the Chief Operating Officer in 1995)
were compensated under a modified version of the Short-Term Bonus Plan, called
the Senior Executive Bonus Plan. The Senior Executive Bonus Plan differs from
the Short-Term Bonus Plan in which many employees at all levels of the Company,
including all officers, participate, only in that the Compensation Committee
has no discretion to increase the payouts once it establishes the performance
measures each year.

3. Medium-Term: Three Year Performance Plan

The Three Year Performance Plan measures Cummins' performance versus the Peer
Group companies over a rolling three-year cycle. For each three-year Award
Cycle, a Target Award is granted to each participant, expressed as a dollar
amount.

The Committee establishes performance guidelines to determine the portion of
the granted amount to be paid for each three-year Award Cycle. A new Award
Cycle begins each year, hence payout opportunity is annual. The first payout
under this program was in 1995. The performance measure for Award Cycles ending
before 1998 is return on equity. The Committee establishes a scale of multiples
of the Target Award to be paid for various levels of Company performance over
each Award Cycle. The plan pays the full granted amount if Cummins' performance
(based on the applicable performance measure) is equal to the median of the
Peer Group companies over the three-year cycle. A portion or multiple of the
granted amount is paid if three-year performance

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<PAGE>

is less or greater than the median of these companies, based on a scale
established by the Committee. The maximum that can be paid is two times the
Target Award for performance that is twice the median of the Peer Companies.

As with the Short-Term Bonus Plan, to comply with the requirements of Section
162(m), designated officers (the Chief Executive Officer and Chief Operating
Officer in 1995) were compensated under a modified version of the Three Year
Performance Plan, called the Senior Executive Three Year Performance Plan. The
plans are identical except that the Committee's discretion to adjust payments
upward is eliminated in the Senior Executive Three Year Performance Plan.

4. Long-Term: The 1992 Cummins Stock Incentive Plan

In December 1992, 1993, 1994, and 1995 restricted stock and stock options
were granted to officers under the 1992 Cummins Stock Incentive Plan.
Restrictions on the restricted stock will lapse on one-third of each grant
annually, beginning two years and one month from the date of each grant. The
stock options expire ten years from grant, but cannot be exercised for the
first two years.

Grant amounts under the Medium-Term and Long-Term plan elements are set to
provide total compensation opportunity at the median of that provided by
similarly-sized U.S. industrial companies in our survey base, when combined
with Base Salary and Short-Term Bonus. The Committee reviews the proportion of
total compensation that is dependent on Company performance in determining the
allocation of the compensation opportunity among each of the Medium-Term and
Long-Term plan elements for each position. More senior positions have a larger
proportion of total compensation opportunity dependent on Company performance
than do less senior positions.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

James A. Henderson became Chief Executive Officer on July 12, 1994, and
Chairman on February 14, 1995, when Henry B. Schacht retired.

Approximately one-third of the CEO's annualized total compensation
opportunity is fixed Base Salary. Two-thirds of the total is based on Company
performance, assuming median Company financial performance. When the Company's
performance is better than the median, the variable compensation elements pay
more and comprise a larger portion of the total. When the Company's performance
is less than median, the variable elements pay less and comprise a smaller
proportion of the total.

The Base Salary and Short-Term Bonus participation rate of the CEO are set at
the median of our survey companies specifically as described under the Base
Salary and Short-Term Bonus sections appearing earlier in this report.

As it did in 1994, the Company exceeded market median financial performance
in 1995, and the Short-Term Bonus payouts reflect this performance. However,
Company performance in 1995 lagged that of 1994, and this is reflected in lower
bonus payouts for the CEO in 1995.

11
<PAGE>

In December, 1995 the CEO received grants of restricted stock and stock
options under the Long-Term 1992 Stock Incentive Plan. Target Awards under the
Medium-Term Senior Executive Three Year Performance Plan were granted in
February for the 1995-1997 Award Cycle (payable in 1998) and in December for
the 1996-1998 Award Cycle (payable in 1999). The Committee intends to continue
making grants under both plans annually.

In determining grant amounts for the CEO, as explained earlier, the Committee
set the total of the four elements of the executive compensation program--Base
Salary, Short-Term Bonus, Medium-Term Plan, and the Long-Term Plan--to provide
annualized compensation opportunity to the CEO equal to the median of the range
of total compensation opportunity provided for CEOs by the survey companies
described earlier in this report.

The Committee reviews the CEO's performance annually, based on how well the
Company is implementing its business strategy and achieving its business
objectives, both short-term and long-term. This review considers both
quantitative and qualitative performance matters, and is a key factor in
setting the CEO's compensation.

We hope this general discussion and the following tables and graphs help you
understand the Company's executive compensation philosophy and program.

Hanna H. Gray, Chairman
Harold Brown
Donald S. Perkins
William D. Ruckelshaus
Franklin A. Thomas

12
<PAGE>

SHAREHOLDER RETURN PERFORMANCE PRESENTATION

The following graph compares the cumulative total shareholder return on the
Common Stock of the Company for the last five fiscal years with the cumulative
total return on the S&P 500 Index and an index of peer companies selected by
the Company. The comparisons in this table are required by the Securities and
Exchange Commission and are not intended to forecast or be indicative of
possible future performance of the Company's stock.

<TABLE>

[GRAPH APPEARS HERE]

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG CUMMINS ENGINE, S&P 500 INDEX AND PEER GROUP

<CAPTION>
Measurement Period CUMMINS S&P
(Fiscal Year Covered) ENGINE 500 INDEX PEER GROUP
- ------------------- ---------- --------- ----------
<S> <C> <C> <C>
Measurement Pt-
1990 $100 $100 $100
FYE 1991 $148.20 $130.48 $102.87
FYE 1992 $213.72 $140.46 $131.05
FYE 1993 $295.84 $154.62 $205.29
FYE 1994 $252.64 $156.66 $181.56
FYE 1995 $211.54 $215.54 $215.54
</TABLE>
- --------
*Arvin Industries, Inc., Caterpillar, Inc., Dana Corporation, Deere &
Company, Dresser Industries, Inc., Eaton Corporation, Ford Motor Company,
General Motors Corporation, Ingersoll-Rand Company, Navistar International
Corporation and Paccar, Inc.

COMPENSATION TABLES AND OTHER INFORMATION

The summary compensation table and accompanying notes and other information
on the following pages include individual compensation information for the last
three fiscal years on the Company's Chairman and Chief Executive Officer and
the five other most highly compensated executive officers during 1995. Mr.
Hamilton resigned from the Company on December 9, 1995. The dollar value of
perquisites and other personal benefits for each of the named executive
officers was less than the established reporting threshold and is not included
in the table.
LOGO

13
<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------- ------------------------------------------
AWARDS PAYOUTS
------------------- ----------------------
(1) (3) (4) (5)
(2) MEDIUM-
RESTRICTED STOCK TERM
NAME AND STOCK OPTIONS/ PERFORMANCE LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARDS SARS (#) PLANS PAYOUTS COMPENSATION
------------------ ---- ------ ----- ---------- -------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. A. Henderson
Chairman of the Board 1995 $727,500 $646,500 $418,500 28,100 $382,500 $ 0 $52,700
and Chief Executive 1994 $654,000 $767,940 $346,000 22,600 $203,680 $1,081,250 $39,520
Officer 1993 $554,000 $415,500 $303,100 14,200 $ 0 $1,330,040 $31,999
T. M. Solso
President and Chief 1995 $480,000 $390,500 $267,375 17,900 $225,000 $ 0 $38,024
Operating Officer 1994 $405,417 $439,381 $177,325 11,500 $ 91,706 $ 378,438 $28,203
1993 $352,500 $242,344 $175,906 7,000 $ 0 $ 736,885 $21,140
F. J. Loughrey
Group Vice President-- 1995 $347,292 $259,792 $162,750 10,800 $112,500 $ 0 $20,720
Worldwide Operations 1994 $275,000 $222,131 $129,750 8,000 $ 57,704 $ 173,000 $19,230
and Technology 1993 $253,500 $142,594 $ 94,719 3,750 $ 0 $ 375,533 $15,437
C. R. Cordaro
Group Vice President-- 1995 $270,000 $181,125 $131,750 8,800 $ 82,500 $ 0 $23,552
Marketing 1994 $257,500 $226,294 $ 75,688 4,900 $ 54,438 $ 173,043 $18,246
1993 $242,500 $136,406 $ 59,538 2,750 $ 0 $ 375,480 $15,676
J. K. Edwards
Vice President-- 1995 $252,500 $168,750 $131,750 8,800 $ 82,500 $ 0 $17,458
International 1994 $235,000 $206,663 $ 86,500 6,000 $ 37,688 $ 6,414 $18,276
1993 $212,500 $116,781 $ 73,069 2,750 $ 0 $ 241,826 $18,330
P. B. Hamilton
Vice President and 1995 $327,917 $222,937 $ 0 0 $112,500 $ 0 $36,744
Chief Financial Officer 1994 $325,000 $285,638 $103,800 6,900 $ 68,591 $ 216,250 $27,674
(through 12/9/95) 1993 $307,500 $172,969 $ 94,719 3,750 $ 0 $ 469,363 $20,532
</TABLE>
- ---------
(1) Pursuant to the Corporation's 1992 Stock Incentive Plan, a total of 83,125
shares of Restricted Stock were granted in 1995, having a total value at
date of grant of $3,206,319. Shares are restricted for two years and one
month subsequent to grant, then are vested in 1/3 annual increments in
years 3 through 5 subsequent to grant, if the participant remains an
employee of the Company. Dividends will be paid on these shares. As of
year-end 1995, the total number of shares of Restricted Stock and the
value thereof held by each executive officer was as follows: J. A.
Henderson, 28,669 shares, $1,060,753; T. M. Solso 16,918 shares, $625,966;
F. J. Loughrey, 10,284 shares, $380,508; J. K. Edwards, 7,750 shares,
$286,750; C. R. Cordaro, 7,250 shares, $268,250.
(2) Stock Options awarded pursuant to the Corporation's 1992 Stock Incentive
Plan. Stock Options may not be exercised for two years subsequent to grant
and expire ten years from grant.
(3) The payout for 1995 represents payout for the 1992-1994 Award Cycle under
the Three Year Performance Plan. This was the first payout under the Three
Year Performance Plan. The payout is calculated as the individual's Target
Award times Payout Factor for the Award Cycle. The Payout Factor was based
on the Corporation's Return on Equity compared to the median ROE of a
panel of eleven comparator companies over the Three Year Award Cycle.
The payout in 1994 represents payout for the 1989-1993 Award Cycle under
the Five Year Performance Plan. This was the final payout under that plan.
The payout was calculated as Base Salary times the individual's
Participation Percentage times Payout Factor for the Award Cycle. The
Payout Factor was based on the Corporation's Return on Equity compared to
the median ROE of a panel of eleven comparator companies over the Five Year
Award Cycle.
(4) Represents shares distributed under the Company's Performance Share Plan.
The Performance Share Plan was adopted in 1987 under which executive
officers and other key employees were awarded Share Rights to be converted
into shares of the Company's Common Stock by December 31, 2006, or earlier
as financial performance goals established by the Compensation Committee
were achieved. The Plan was intended to cover the seven-year period 1988
through 1994. There were no distributions of Share Rights for Plan Year
1988, Plan Year 1989, or Plan Year 1990. The distribution for Plan Year
1991 was made in February 1992; the 1992 distribution was made in February
1993; the 1993 distribution was made in February 1994; the final
distribution was made in January 1995.
(5) Amounts reported as "All Other Compensation" for 1995 include,
respectively, matching contributions by the Company under the Retirement
and Savings Plan, "above market" earnings on previously deferred
compensation, and premium payments made to the Supplemental Life Insurance
and Deferred Income Program as follows: J. A. Henderson ($413, $24,889 and
$27,398); T. M. Solso ($1,778, $18,186 and $18,060); F. J. Loughrey
($1,746, $6,324 and $12,650); C. R. Cordaro ($1,746, $8,939, and $12,867);
J. K. Edwards ($1,746, $0 and $15,712); and P. B. Hamilton ($1,715,
$17,602, and $17,427).

14
<PAGE>

SECURITY OWNERSHIP OF MANAGEMENT

Set forth below is information as of February 29, 1996, regarding the
beneficial ownership of Common Stock of the Company by the Chief Executive
Officer, each of its five other named executive officers during 1995 and the
directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
OWNERSHIP OF CLASS
----------------- --------
<S> <C> <C>
James A. Henderson
Chairman of the Board and Chief
Executive Officer............................ 111,892(1) *
Theodore M. Solso
President and Chief Operating
Officer...................................... 68,024(2) *
F. Joseph Loughrey
Group Vice President--Worldwide
Operations and Technology.................... 26,514(3) *
C. Roberto Cordaro
Group Vice President--Marketing.............. 28,228(4) *
John K. Edwards
Vice President--International................ 20,524(5) *
Peter B. Hamilton
Vice President and Chief
Financial Officer
(through 12/9/95)............................ 28,474 *
All directors and executive officers as
a group, a total of 24 persons............... 1,179,771(6) 2.94%
</TABLE>
- ---------
* Less than 1%
(1) See footnote 5 to the director nominee listing on page 4.
(2) See footnote 10 to the director nominee listing on page 5.
(3) Includes 7,750 shares which Mr. Loughrey has the right to acquire within
the next 60 days through the exercise of stock options.
(4) Includes 8,250 shares which Mr. Cordaro has the right to acquire within the
next 60 days through the exercise of stock options.
(5) Includes 8,950 shares which Mr. Edwards has the right to acquire within the
next 60 days through the exercise of stock options.
(6) Includes 117,700 shares which the officers have the right to acquire within
the next 60 days through the exercise of stock options.

15
<PAGE>

The following table discloses, for each of the named executive officers,
information regarding individual grants of stock options and stock appreciation
rights made during 1995, and their potential realizable values.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERMS
---------------------------------------------- -------------------
% OF TOTAL
OPTIONS/SARS
(1) GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
---- ------------ ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
J. A. Henderson......... 28,100 7.8% $39.00 12/12/05 $690,417 $1,742,481
T. M. Solso............. 17,900 4.9% $39.00 12/12/05 $439,803 $1,109,979
F. J. Loughrey.......... 10,800 3.0% $39.00 12/12/05 $257,985 $ 651,105
J. K. Edwards........... 8,800 2.4% $39.00 12/12/05 $216,216 $ 545,688
C. R. Cordaro........... 8,800 2.4% $39.00 12/12/05 $216,216 $ 545,688
P. B. Hamilton.......... 0 -- -- -- -- --
</TABLE>

Stock option and stock appreciation right exercise activity during 1995, on
an aggregated basis for each of the named executives, is contained in the
following table. Also disclosed are the number and value of options and
appreciation rights, on an aggregated basis, held by each named executive as of
December 31, 1995.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR, AND FY-END OPTION/SAR
VALUE

<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS
SECURITIES OPTIONS/SARS AT AT
UNDERLYING VALUE FY-END (#) FY-END ($)
OPTIONS/SARS REALIZED ------------------------- -------------------------
NAME EXERCISED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. A. Henderson......... 0 $ 0 28,600 50,700 $ 0 $ 0
T. M. Solso............. 0 $ 0 17,500 29,400 $ 0 $ 0
F. J. Loughrey.......... 0 $ 0 7,750 18,800 $ 0 $ 0
J. K. Edwards........... 0 $ 0 8,950 14,800 $44,800 $ 0
C. R. Cordaro........... 0 $ 0 8,250 13,700 $ 0 $ 0
P. B. Hamilton.......... 4,000 $1,880 0 0 -- --
</TABLE>

16
<PAGE>

Estimated benefits payable to each named executive pursuant to long-term
incentive plan rights awarded during 1995 are disclosed in the following table.

LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR/SAR VALUE

<TABLE>
<CAPTION>
NUMBER OF ESTIMATED FUTURE PAYOUTS
SHARES, UNITS UNDER NON-STOCK BASED PLANS
OR OTHER PERIOD UNTIL ---------------------------
NAME RIGHTS(1) PAYOUT THRESHOLD TARGET MAXIMUM
---- ------------- -------------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
J. A. Henderson......... 0 $85,000 $340,000 $680,000(2)
$93,750 $375,000 $750,000(3)
T. M. Solso............. 0 $50,000 $200,000 $400,000(2)
$70,000 $280,000 $560,000(3)
F. J. Loughrey.......... 0 $35,000 $140,000 $280,000(4)
C. R. Cordaro........... 0 $22,500 $ 90,000 $180,000(4)
J. K. Edwards........... 0 $22,500 $ 90,000 $180,000(4)
P. B. Hamilton.......... 0 0 0 0
</TABLE>
- ---------
(1) No shares, units or other rights were awarded in the last fiscal year. The
Company has made targeted dollar awards under its Three Year Performance
Plan and Senior Executive Three Year Performance Plan, with payouts tied to
Company performance over a rolling three-year cycle, as determined by the
Compensation Committee of the Board of Directors. The Committee establishes
performance measures as guidelines. For the 1995-1997 Award Cycle under the
Three Year Performance Plan (payable in 1998), and the 1995-1997 Award
Cycle (payable in 1998) and the 1996-1998 Award Cycle (payable in 1999)
under the Senior Executive Three Year Performance Plan, the performance
guidelines are tied to achieving certain levels of return on equity (ROE)
compared to the Peer Group companies. The Target Award will be earned if
the Company's ROE is equal to the median ROE of the Peer Group companies.
The Threshold Payment will be earned if the Company's ROE is 50% of the
Peer Group companies' median ROE. The Maximum Payment is earned if the
Company's ROE is 200% of the Peer Group companies' ROE.
(2) Granted under the Senior Executive Three Year Performance Plan for the
1995-1997 Award Cycle, payable in 1998.
(3) Granted under the Senior Executive Three Year Performance Plan for the
1996-1998 Award Cycle, payable in 1999.
(4) Granted under the Three Year Performance Plan for the 1995-1997 Award
Cycle, payable in 1998.

17
<PAGE>

PENSION PLAN TABLE

The following table sets forth the estimated non-contributory annual benefits
upon normal retirement in 1995 under the Company's Retirement Plan (including
the Excess Benefit Retirement Plan) for specified compensation and years of
service classifications. The amounts shown are computed on the basis of an
ordinary life annuity and are not subject to deductions for Social Security
benefits or other amounts.

<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
AVERAGE YEARS OF SERVICE
BASE -------------------------------------------------------------
SALARY 10 15 20 25 30 35 40
------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$200,000 $24,478 $ 36,716 $ 48,955 $ 61,194 $ 73,433 $ 85,671 $ 97,910
$225,000 $27,603 $ 41,404 $ 55,205 $ 69,006 $ 82,808 $ 96,609 $110,410
$250,000 $30,728 $ 46,091 $ 61,455 $ 76,819 $ 92,183 $107,546 $122,910
$300,000 $36,978 $ 55,466 $ 73,955 $ 92,444 $110,933 $129,421 $147,910
$350,000 $43,228 $ 64,841 $ 86,455 $108,069 $129,683 $151,296 $172,910
$400,000 $49,478 $ 74,216 $ 98,955 $123,694 $148,433 $173,171 $197,910
$450,000 $55,728 $ 83,591 $111,455 $139,319 $167,183 $195,046 $222,910
$500,000 $61,978 $ 92,966 $123,955 $154,944 $185,933 $216,921 $247,910
$600,000 $74,478 $111,716 $148,955 $186,194 $223,433 $260,671 $297,910
$700,000 $86,978 $130,466 $173,955 $217,444 $260,933 $304,421 $347,910
$800,000 $99,478 $149,216 $198,955 $248,694 $298,433 $348,171 $397,910
</TABLE>

Compensation for purposes of the Retirement Plan is the highest average base
salary for any consecutive five-year period prior to retirement. Covered
compensation is disclosed under the "Salary" column of the Summary Compensation
Table on page 14. The average base salary and full years of service as of
December 31, 1995 for the Company's Chief Executive Officer and the other named
executive officers during 1995 are as follows: J. A. Henderson, $592,600, 31
years; T. M. Solso, $391,000, 24 years; F. J. Loughrey, $272,400, 22 years; C.
R. Cordaro, $248,000, 17 years; J. K. Edwards, $222,000, 23 years; and P. B.
Hamilton, $316,000, 12 years. Mr. Hamilton's average base salary is calculated
through 12/9/95.

CHANGE OF CONTROL ARRANGEMENTS

In the event of a change of control of the Company, the Company will provide
benefits to certain executives including the Chief Executive Officer and other
executive officers named in the Summary Compensation Table on page 14. Each of
the named executive officers would be entitled to three year's salary plus
twelve quarterly bonus payments. The Company will also provide for the full
vesting of certain insurance and retirement benefits and the continuation in
effect for a three-year severance period of certain other employee benefits. In
addition, the Company's retirement plans will allocate any actuarial surplus
assets to fund increased pension benefits, stock options previously granted
will become fully exercisable, and certain long-term incentive plan awards will
be paid in cash based on the completed portions of award cycles then in
progress. The value of supplemental and excess retirement annuity benefits will
also be paid in cash. A change of control for these purposes is defined in each
of the various plans and programs providing these benefits.

18
<PAGE>

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Company's Compensation Committee are Hanna H. Gray, Harold
Brown, Donald S. Perkins, William D. Ruckelshaus and Franklin A. Thomas.

Member Harold Brown has a consulting arrangement with the Company pursuant to
which he provides consulting services in connection with the Company's research
and development activities and related technology issues. During 1995, the
Company paid Dr. Brown $50,000 for these services. In addition, the Company has
established a Science and Technology Advisory Council on which Dr. Brown serves
as Chairman. The Council advises senior management and the Board of Directors
on the direction and implication of developments in science, technology and
environmental issues that may have applicability to the Company's current and
future business goals and objectives. For his services on the Council, Dr.
Brown is paid an annual retainer of $17,000, including $7,000 for serving as
Chairman, and an additional fee of $3,000 for each day of meetings attended
during the year.

OTHER TRANSACTIONS AND AGREEMENTS WITH DIRECTORS, OFFICERS AND CERTAIN
SHAREHOLDERS

Investment Agreements With Certain Shareholders

On July 16, 1990, the Company entered into (i) the Ford Investment Agreement,
pursuant to which, among other things, in consideration of $100,000,000
received from Ford, Ford was issued one share of a newly created series of the
Company's Preference Stock, designated Convertible Preference Stock, Series F
(the "Series F Preference Stock"), which Series F Preference Stock was
convertible into 1,600,000 shares of the Company's Common Stock and (ii) the
Tenneco Investment Agreement, pursuant to which, among other things, in
consideration of $100,000,000 received from Tenneco, Tenneco was issued one
share of a newly created series of the Company's Preference Stock, designated
Convertible Preference Stock, Series T (the "Series T Preference Stock"), which
Series T Preference Stock was convertible into 1,600,000 shares of Common
Stock. On September 12, 1990, the shares of Series F and T Preference Stock
were converted into 1,600,000 shares of Common Stock each for Ford and Tenneco,
respectively.

On July 16, 1990, the Company entered into the Ford Stock Option Agreement
pursuant to which, among other things, for a six year period Ford has an option
(the "Option") to purchase 2,961,404 shares of Common Stock, subject to
adjustment for various actions that Ford or the Company may or may not take, at
a price per share equal to the higher of (x) $31.25 per share and (y) 120% of
the market price at the time of exercise of the Option thereunder. The option
price and number of shares subject to the Option may be adjusted to reflect
certain changes in the Company's capitalization and other purchases of voting
securities by Ford. The impact of these provisions may be to adjust the
exercise price and amount of voting securities Ford would be permitted to
acquire pursuant to the Option.

On December 29, 1993, pursuant to a Consent and Amendment to the Tenneco
Investment Agreement, the Company consented to Tenneco's transfer of all of its
shares of the Company's Common Stock to the Tenneco Inc. General Employee
Benefit Trust (the "GEBT"). Under the Consent and Amendment, all of Tenneco's
rights and obligations under the Tenneco Investment Agreement were assigned to
and assumed by the GEBT.

19
<PAGE>

Each of Ford and the GEBT, pursuant to their respective rights under the
Investment Agreements, is entitled to designate one person (reasonably
satisfactory to the Company) for election to the Board. Ford is presently
entitled to designate at least one such person, and may in the future be
entitled to designate more, depending upon and in proportion to its percentage
ownership in the Company. In the event Ford owns at least 20% of the Company's
outstanding voting securities, it is entitled to designate a minimum of two
directors. The GEBT's right to designate a person for election to the Board
will be exercised by an investment manager pursuant to a direction from the
Investment Committee of the GEBT, provided that the investment manager may
decline to nominate the person who the Investment Committee directs it to
designate if such manager determines that its fiduciary duties under the
Employee Retirement Income Security Act of 1974 requires it to do so. Neither
Ford nor the GEBT will be entitled to designate any persons for election to the
Board if its respective percentage ownership of the voting power of the
Company's voting securities drops to below 10% as a result of the transfer of
voting securities. Messrs. Dabrowski and Mead have been nominated to serve as
directors of the Company pursuant to the Ford and Tenneco Investment
Agreements, respectively. See director nominee table beginning on page 3.

The term of each Investment Agreement is until the earliest of (i) the later
of six years and the first date on which the respective Investor ceases to
beneficially own voting securities representing at least 5% of the total voting
power of all then outstanding voting securities, and (ii) ten years; provided,
however, that certain provisions of the respective Investment Agreements will
explicitly survive their stated terms. Among the provisions which survive
termination of the agreement are the registration rights and share transfer
restrictions set forth in the Investment Agreement.

Other Transactions and Arrangements

Ford Motor Company and its affiliates purchase diesel engines, diesel engine
parts and related products from the Company. The Company reimburses certain of
Ford's warranty costs associated with these products and also purchases
gasoline engines and parts from Ford. During 1995, Ford paid the Company
approximately $367,100,000 and the Company paid Ford approximately $12,600,000
in connection with such transactions. Purchases of product on open account were
made on terms generally available to unaffiliated third parties at prices
determined through arms-length negotiation based upon market conditions and
other factors. The terms of sale for midrange engines to Ford and the pricing
for these products are governed by the Company's midrange engine supply
agreement with Ford.

Case Corporation and other subsidiaries of Tenneco Inc. purchase heavy-duty
and midrange diesel engines, components, service parts and related products and
services from the Company and its affiliates and the Company purchases engine
parts and components from Case. In 1995, Case and other Tenneco subsidiaries
paid the Company approximately $46,500,000 and the Company paid Case
approximately $833,000 for such purchases. In addition, a subsidiary of Case
and a subsidiary of the Company are partners in a joint venture which
manufactures midrange diesel engines for Case and the Company. Pursuant to the
partnership agreements, Case pays the Company for technical support and engine
order management services, and the Company pays Case for utilizing Case's
surplus joint venture manufacturing capacity. During 1995, Case paid the
Company approximately $7,065,000 and the Company paid Case approximately
$2,389,000

20
<PAGE>

pursuant to such agreements. Purchases from the Company were made on terms
generally available to unaffiliated third parties at prices determined through
arms-length negotiation based upon market conditions and other factors. Case's
purchases from the Case-Cummins joint venture, and the prices paid for such
purchases, are governed by the terms of the joint venture agreements.

During 1995, the Company had agreements with companies owned or controlled by
Mr. J. I. Miller, whereby the Company leased office space from and shared the
expense of dining room and food services with such companies. The net amount
paid by the Company was $268,985. The Company believes such amount is
competitive with the amount that it would have paid to unrelated third parties
for comparable space and services.

Pursuant to the Company's 1986 Stock Option Plan, 1992 Stock Incentive Plan
and its Key Employee Stock Investment Plan, certain officers have exercised
options and purchased shares of Common Stock of the Company on an installment
basis. The interest rate on these loans is the minimum annual rate permitted
under the Internal Revenue Code without imputation of income. The following
table shows, as to those executive officers and directors of the Company who
were indebted to the Company in excess of $60,000 since January 1, 1995, the
largest aggregate amount owed for such purchases and loans at any time since
January 1, 1995, and the amount owed as of January 31, 1996:

<TABLE>
<CAPTION>
AMOUNT OF
LARGEST INDEBTEDNESS
AMOUNT OF AS OF
INDEBTEDNESS JANUARY 31, 1996
------------ ----------------
<S> <C> <C>
M. E. Chesnut............................... $ 80,750.00 $ 80,750.00
C. R. Cordaro............................... $220,000.00 $220,000.00
R. L. Fealy................................. $ 71,500.00 $ 0.00
M. R. Gerstle............................... $ 70,162.50 $ 70,162.50
J. A. Henderson............................. $358,087.42 $316,103.44
M. D. Jones................................. $196,125.00 $196,125.00
T. M. Solso................................. $182,500.00 $182,500.00
R. B. Stoner................................ $225,000.00 $225,000.00
</TABLE>

The Company has a policy of purchasing from employees of the Company shares
of Common Stock of the Company that have been acquired under the Key Employee
Stock Investment Plan, 1986 Stock Option Plan and 1992 Stock Incentive Plan.
The purchase price for such shares is the closing price quoted on the New York
Stock Exchange Composite Tape on the date of purchase. During 1995, one
executive officer sold shares to the Company pursuant to this policy.

SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS

(ITEM 2)

The Board of Directors has voted to appoint Arthur Andersen LLP as the firm
of independent public accountants to audit the accounts of the Company for the
year 1996. Arthur Andersen LLP has acted as independent public accountants for
the Company since 1952. Although the selection and appointment of independent
public accountants is not required to be submitted to a vote of the
shareholders, the Board of Directors has decided, as in the past, to ask

21
<PAGE>

the Company's shareholders to ratify the appointment. A representative of
Arthur Andersen LLP will be present, will have the opportunity to make a
statement and will be available to answer appropriate questions at the Annual
Meeting of Shareholders.

The proposal to ratify the appointment of Arthur Andersen LLP as the firm of
independent public accountants to audit the accounts of the Company for the
year 1996 will be adopted if the number of votes cast in favor of ratification
exceeds the number of votes cast against ratification. Votes cast against and
abstentions on the Item will be counted as votes against the Item. Broker non-
votes will not change the number of votes cast for or against the Item. If the
shareholders do not ratify the selection of Arthur Andersen LLP, the selection
of independent public accountants will be determined by the Audit Committee and
the Board of Directors after careful consideration of all information submitted
by shareholders.

The Board of Directors recommends that shareholders vote FOR this Proposal.

OTHER BUSINESS

The Board of Directors does not know of any business to be presented for
action at the meeting other than that set forth in Items 1 and 2 of the Notice
of Annual Meeting of Shareholders. However, if other business properly comes
before the Meeting, the persons named in the enclosed proxy will vote the
returned proxies as the Board of Directors recommends.

OTHER INFORMATION

1996 SHAREHOLDER PROPOSALS

Proposals intended to be presented by shareholders of the Company at the 1997
Annual Meeting of Shareholders must be submitted to and received by the
Secretary of the Corporation for inclusion in the Company's proxy statement and
form of proxy for that Meeting not later than November 4, 1996.

EXPENSES OF SOLICITATION

The cost of this proxy solicitation will be borne by the Company. Morrow &
Co., 345 Hudson Street, New York, New York 10013, has been retained to assist
in the solicitation of proxies and will receive a fee not to exceed $6,500 plus
expenses. Proxies may also be solicited by directors, officers and employees of
the Company at no additional cost. Banks, brokerage houses and other
institutions, nominees or fiduciaries will be requested to forward the proxy
materials to the beneficial owners of the Common Stock and will be reimbursed
for their reasonable expenses incurred in forwarding such matters.

March 4, 1996

22
<PAGE>

NOMINEES FOR BOARD OF DIRECTORS

[PHOTO APPEARS HERE] Mr. Henderson was elected Chairman of the Board of
JAMES A. the Corporation in 1995 after serving as Chief
HENDERSON Executive Officer since 1994 and its President since
1977. He received a Bachelor of Arts degree from
Princeton University in 1956, served in the U.S. Navy
and received an M.B.A. from Harvard in 1963. He
joined the Corporation in 1964 as Assistant to the
Chairman and in 1965 was elected Vice President--
Management Development. After serving as Vice
President--Personnel and Vice President--Operations,
Mr. Henderson was elected Executive Vice President in
1971. He was also Chief Operating Officer from 1975
to 1994. He serves as a Director of Inland Steel
Industries, Inc., American Information Technologies
Corporation, Landmark Communications, Inc., and Rohm
and Haas Company. He is also President of the Board
of Trustees, The Culver Educational Foundation, a
member of the Policy Committee of the Business
Roundtable, and a member of The Business Council.

[PHOTO APPEARS HERE] Mr. Solso was elected President and Chief Operating
THEODORE M. SOLSO Officer of the Corporation in 1995 after serving as
Executive Vice President--Operations since 1992 and
Chief Operating Officer since 1994. From 1988 to 1992
he was Vice President and General Manager--Engine
Business after serving in various other executive
positions with the Corporation. Mr. Solso received a
B.A. from DePauw University in 1969 and an M.B.A.
degree from Harvard University in 1971. He is a
Director of Cyprus Amax Minerals Company and Irwin
Financial Corporation, and is a member of the boards
of Cummins Engine Foundation, Heritage Fund of
Bartholomew County and Otter Creek Golf Course in
Columbus, Indiana. He is also a member of the Board
of Trustees, DePauw University and of the Dean's
Advisory Boards of the Schools of Business of Hofstra
University and Indiana University.

23
<PAGE>

[PHOTO APPEARS HERE] Dr. Brown is Counselor at the Center for Strategic
HAROLD BROWN and International Studies and a partner in the
venture banking firm of Warburg, Pincus & Co. Dr.
Brown received an A.B. in 1945, an A.M. in 1946 and a
Ph.D. in Physics in 1949, all from Columbia
University. From 1947 to 1952, he taught and held
research positions at Columbia, the Stevens Institute
of Technology and the University of California at
Berkeley. He then was associated with Livermore
Laboratory at the University of California, becoming
Director in 1960. Dr. Brown was Director of Defense
Research and Engineering from 1961 until 1965, when
he was named Secretary of the Air Force, a position
he held until 1969 when he became President of the
California Institute of Technology. From January,
1977 until January, 1981, he served as Secretary of
Defense. From 1981 until 1984, he was Distinguished
Visiting Professor and from 1984 until June, 1992,
Chairman of the Foreign Policy Institute at The Johns
Hopkins University. Dr. Brown is a member of the
National Academy of Sciences, the National Academy of
Engineering and a Fellow of the American Physical
Society. He is a Director of Alumax, Inc., Evergreen
Holdings, Inc., International Business Machines
Corporation, Mattel, Inc. and Philip Morris
Companies, Inc. He is a Trustee of the California
Institute of Technology and the Rand Corporation.

[PHOTO APPEARS HERE] Mr. Dabrowski is Vice President, Commercial Truck
KENNETH R. Vehicle Center, Ford Automotive Operations. Mr.
DABROWSKI Dabrowski received bachelor's and master's degrees in
Mechanical Engineering from the University of Detroit
and an M.B.A. from Wayne State University. He joined
Ford Motor Company in 1964 as a co-op student,
advancing through a number of positions in
Engineering and Car Product Development until being
named Manager, Vehicle Engineering Department in
1973. From 1978 to 1985, Mr. Dabrowski served in a
number of executive engineering positions at Ford,
being appointed Executive Director, Body Engineering,
North American Automotive Operations in 1991. He
became Executive Director, Product Strategy Office in
1994, and was named to his current position in
September, 1994. He is a director of Geometric
Results, Inc., a Ford subsidiary, a member of the
Xerox Board of Engineering Excellence Board of
Directors, a director of Jiangling Motors Company,
China, and a member of the Engineering Society of
Detroit Board of Directors.

24
<PAGE>

[PHOTO APPEARS HERE] Mr. Darnall is Chairman, President and Chief
ROBERT J. DARNALL Executive Officer of Inland Steel Industries, Inc.
Mr. Darnall is a graduate of DePauw University, B.A.
in Mathematics in 1960; Columbia University, B.S. in
Civil Engineering in 1962; and the University of
Chicago, M.B.A. in 1973. He joined the Inland Steel
Company, predecessor of Inland Steel Industries, in
1962. Mr. Darnall advanced through a number of
positions at the company's Indiana Harbor Works steel
plant, becoming General Manager in 1979. He was
elected Vice President, Engineering and Corporate
Planning, in 1981, and Executive Vice President in
1982, at which time he was also elected to Inland's
Board of Directors. In 1984, he was elected President
of Inland Steel Company and Chief Operating Officer
of its Integrated Steel business segment. He became
President and Chief Operating Officer of Inland Steel
Industries, Inc. in 1986, and was named to his
current position in 1992. He serves as a Director of
Household International, Inc. and as a Trustee or
Director of DePauw University, The University of
Chicago, the Glenwood School for Boys, and Junior
Achievement of Chicago.

[PHOTO APPEARS HERE] Mr. Elisha is Chairman and Chief Executive Officer of
WALTER Y. ELISHA Springs Industries, Inc. Mr. Elisha is a graduate of
Wabash College and the Harvard Business School. He
has been a Director of Springs Industries, Inc. since
1980 and served as President and Chief Operating
Officer from 1980 to 1981. Mr. Elisha has served as
Springs Industries, Inc.'s Chief Executive Officer
since 1981 and has been Chairman of its Board since
1983. Mr. Elisha also serves on the Board of
Directors for AT&T. Mr. Elisha is a trustee of the
Brookings Institution and of the Committee for
Economic Development, a member of The Business
Roundtable serving on its Policy Committee, the
Business Council, the Council on Competitiveness, and
is a member of the President's Advisory Committee for
Trade Policy and Negotiations, and is President of
the American Textile Manufacturers Institute. He is
also a member of the Board of Directors of the
Associates of the Harvard Business School.

25
<PAGE>

[PHOTO APPEARS HERE] Mrs. Gray is President Emeritus and Professor of
HANNA H. GRAY History, University of Chicago. Mrs. Gray was
graduated with a B.A. from Bryn Mawr College in 1950
and a Ph. D. from Harvard in 1957. During 1950-51 she
was a Fulbright scholar at Oxford. She was an
Instructor at Bryn Mawr in 1953-54 and was on the
Harvard faculty from 1955-60. She became an Assistant
Professor at the University of Chicago in 1961, was
promoted to Associate Professor in 1964 and in 1972
was appointed Dean and Professor of History at
Northwestern University. Mrs. Gray was Provost and
Professor of History at Yale from 1974 to 1978 and
was acting President from 1977-78. She served as
President of the University of Chicago from 1978-
1993. She became President Emeritus of the University
of Chicago in 1993 and is now the Harry Pratt Judson
Distinguished Service Professor of History. Mrs. Gray
is a Fellow of the American Academy of Arts and
Sciences and a Trustee of numerous educational
institutions. She is also a Director of J.P. Morgan
and Company and Morgan Guaranty Trust Company,
Atlantic Richfield Company, and American Information
Technologies Corporation.

[PHOTO APPEARS HERE] Mr. Mead is Chairman and Chief Executive Officer of
DANA G. MEAD Tenneco Inc. Mr. Mead received a bachelor of science
in engineering from the U.S. Military Academy, West
Point, and a Ph.D. in political science and economics
from Massachusetts Institute of Technology. Following
a distinguished military career in regular Army units
in West Germany and Vietnam, and faculty and
administrative positions at the U.S. Military
Academy, he retired in 1978 having achieved the rank
of Colonel. In addition, from 1970 to 1974, Mr. Mead
served first as associate and then as deputy director
of the Domestic Council in the administration of
former President Nixon. He was also a White House
Fellow from 1970 to 1971. Since 1978, Mr. Mead held
various management and senior executive positions at
International Paper Co., where he was an executive
vice president and a director prior to joining
Tenneco in 1992. In addition to his role as Tenneco's
Chairman and Chief Executive Officer and a member of
its board of directors, he is also Chairman of Case
Corporation, a Tenneco subsidiary that manufactures
and markets agricultural and construction equipment.
Mr. Mead serves on the board of National Westminster
Bancorp, Alco Standard Corporation and Baker Hughes
Incorporated. He is the Chairman of the National
Association of Manufacturers, a member of the
President's Commission on White House Fellowships, a
Trustee-At-Large for the Association of Graduates,
U.S. Military Academy, West Point, a member of the
Board of Trustees of the Logistics Management
Institute, and a member of the Massachusetts
Institute of Technology Corporation Nominating
Committee and the Political Science Visiting
Committee.

26
<PAGE>

[PHOTO APPEARS HERE] Mr. Miller is the former Chairman of Cummins. Mr.
J. IRWIN MILLER Miller joined Cummins in 1934 as Vice President and
General Manager after receiving a B.A. from Yale
University and an M.A. from Oxford University. He was
named Executive Vice President of the Corporation in
1944, was President from 1947 to 1951 and was
Chairman of the Board from 1951 to 1977. He is a
Director of Irwin Financial Corporation, Columbus,
Indiana, and of the Irwin Management Company, Inc. He
is a member of The Business Council. He is also a
member of the American Academy of Arts and Sciences,
and of the American Philosophical Society.

[PHOTO APPEARS HERE] Mr. Miller is Chairman of Irwin Financial
WILLIAM I. MILLER Corporation. Mr. Miller received a B.A. from Yale
University in 1978 and an M.B.A. degree from Stanford
University in 1981. He was President of Irwin
Management Company, a family investment management
company, from 1984 to 1990. Since September, 1990, he
has been Chairman of Irwin Financial Corporation, a
publicly traded diversified financial services
company, of which he has been a Director since 1985.
Mr. Miller continues to serve as Chairman of the
Board and a Director of Irwin Management Company and
as Chairman of the Board of Tipton Lakes Company (a
real estate development firm). Mr. Miller is a
Director of Tennant Company (a manufacturer of
industrial cleaning equipment), a Director of the New
Perspective Fund, Inc. and a Trustee of the
EuroPacific Growth Fund (both are mutual funds). Mr.
Miller also is a Trustee of The Taft School,
Watertown, CT, and Public Radio International,
Minneapolis, MN.

27
<PAGE>

[PHOTO APPEARS HERE] Mr. Perkins is the former Chairman of Jewel
DONALD S. PERKINS Companies, Inc. Mr. Perkins graduated from Yale
University and the Harvard Business School. He served
in the U.S. Merchant Marines in the mid 1940s and the
Air Force in the early 1950s. Starting as a trainee
with the then Jewel Tea Company in 1953, he was
elected Vice President in 1960, Executive Vice
President three years later, President in 1965 and
Chairman and Chief Executive Officer in 1970. He
retired from Jewel Companies, Inc. in 1983. Mr.
Perkins also serves as a Director of the American
Telephone & Telegraph Company, AON Corporation,
Current Assets, Illinova, Inland Steel Industries,
Inc., LaSalle Street Fund, The Putnam Funds, Springs
Industries, Inc. and Time Warner Incorporated. He is
an Honorary trustee of The Brookings Institution,
trustee and Vice Chairman of Northwestern University,
trustee of the Hospital Research and Educational
Trust, Honorary Chairman of The Illinois Coalition
and Protector of the Thyssen-Bornemisza Continuity
Trust. He is also a member of The Business Council,
the Civic Committee of The Commercial Club of
Chicago, a Director of the Associates of the Harvard
Business School, the Golden Apple Foundation,
Leadership for Quality Education and a member of the
Spencer Stuart Advisory Board.

[PHOTO APPEARS HERE] Mr. Ruckelshaus is Chairman of Browning-Ferris
WILLIAM D. Industries, Inc. Mr. Ruckelshaus received a B.A. from
RUCKELSHAUS Princeton in 1957 and an LL. B. from Harvard in 1960
after serving in the U.S. Army. He was Deputy
Attorney General and Chief Counsel in the Indiana
Attorney General's Office from 1960-65. He was
elected to the Indiana House of Representatives,
where he served as Majority Leader in the 1967
session. Mr. Ruckelshaus first served in the Federal
Government from January, 1969 to October, 1973, as
Assistant Attorney General, as Administrator of the
Environmental Protection Agency, Acting Director of
the F.B.I. and Deputy Attorney General. He returned
as Administrator of the Environmental Protection
Agency from 1983 through January, 1985. He practiced
law in Washington, D.C., from 1973 until joining
Weyerhaeuser in 1976 as Senior Vice President. He was
a partner in the law firm of Perkins Coie, with
offices in Seattle, Portland, Anchorage and
Washington, D.C. from 1985 to 1988. Mr. Ruckelshaus
is a Director of Monsanto, Inc., Nordstrom, Inc.,
Texas Commerce Bankshares, Inc. and Weyerhaeuser
Company.

28
<PAGE>

[PHOTO APPEARS HERE] Mr. Schacht was named Chairman and Chief Executive
HENRY B. SCHACHT Officer of Lucent Technologies in 1995. Mr. Schacht
served as Chairman of the Board of the Corporation
from 1977 to 1995 and Chief Executive Officer from
1973 to 1994. He was President of the Corporation
from 1969 to 1977. Mr. Schacht joined Cummins as Vice
President--Finance in 1964, and served in various
executive positions. He earned a B.S. in Industrial
Administration from Yale in 1956 and, after serving
in the U.S. Navy, an M.B.A. from Harvard in 1962. Mr.
Schacht was with Irwin Management Company before
joining Cummins. He is a Director of American
Telephone and Telegraph Company, Aluminum Company of
America and The Chase Manhattan Corporation; a
Trustee of The Yale Corporation, Committee for
Economic Development and The Ford Foundation; and a
member of the Council for Foreign Relations, Inc. and
The Business Council.

[PHOTO APPEARS HERE] Mr. Thomas is President of The Ford Foundation. Mr.
FRANKLIN A. Thomas received a B.A. from Columbia University in
THOMAS 1956 and an LL. B. in 1963. From 1956 to 1960, he was
a navigator with the U.S. Air Force. Mr. Thomas
served as attorney for the Federal Housing Finance
Agency (1963-64), Assistant U.S. Attorney for the
Southern District of New York (1964) and a Deputy
Police Commissioner for New York City (1965-67). Mr.
Thomas was President and Chief Executive Officer of
the Bedford Stuyvesant Restoration Corporation from
1967 to 1977. He was an attorney and consultant
engaged in private practice from 1977 to 1979. He is
also a Director of AT&T, Citicorp/Citibank, N.A.,
Alcoa, and PepsiCo. and serves as a Trustee for The
Ford Foundation.

29
<PAGE>

[PHOTO APPEARS HERE] Mr. Wilson has been Chairman and Chief Executive
J. LAWRENCE Officer of Rohm and Haas Company since 1988. Mr.
WILSON Wilson received a bachelor's degree in mechanical
engineering from Vanderbilt University in 1958 and an
M.B.A. from Harvard University in 1963. He served as
an officer in the U.S. Navy from 1958 to 1961. Mr.
Wilson joined Rohm and Haas Company in 1965 as an
operations research analyst. He has since held
positions as President of a medical products
subsidiary, Director of the European region,
Treasurer and Chief Financial Officer, Business
Director for the Industrial Chemicals Group, Group
Vice President in charge of the company's
Administrative and Finance Division and the Corporate
Business Department, and Vice Chairman. Mr. Wilson
has been a Director of Rohm and Haas Company since
1977. Mr. Wilson is a member of the board of
Vanderbilt University, and the Vanguard Group of
Investment Companies. He serves as Chairman of the
Board of the Philadelphia High School Academies, Inc.
and is Chairman of the Executive Committee of The
Chemical Manufacturers Association.

30
<PAGE>

CUMMINS ANNUAL SHAREHOLDER MEETING
APRIL 9, 1996--10:30 A.M. (E.S.T.)
COLUMBUS EAST HIGH SCHOOL AUDITORIUM

[MAP APPEARS HERE]

<PAGE>

CUMMINS ENGINE COMPANY, INC.

PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
P THE COMPANY FOR ANNUAL MEETING APRIL 9, 1996
R
O
X
Y

The undersigned hereby constitutes and appoints J. Irwin Miller, Henry
B. Schacht and Franklin A. Thomas, and each of them, true and lawful
agents with full power of substitution in each, to vote as proxy of the
undersigned at the Annual Meeting of the shareholders of Cummins Engine
Company, Inc. to be held at the Columbus East High School Auditorium,
230 South Marr Road, Columbus, Indiana on April 9, 1996, and at any
adjournments thereof, on all matters coming before said meeting.

[_] BENEFIT TRUST PARTICIPANTS ONLY: By marking this box, the undersigned
hereby instructs the respective Trustees of the Company's Employee
Stock Ownership Trust and Cummins Stock Fund portion of the Company's
Retirement and Savings Plan to vote at said meeting the number of shares
of common stock of the Company held on the undersigned's behalf in said
Benefit Trusts ("Plan Shares") in the manner designated on this Proxy.

Election of Directors, Nominees:
Harold Brown, Kenneth R. Dabrowski, Robert J. Darnall, Walter Y. Elisha,
Hanna H. Gray, James A. Henderson, Dana G. Mead, J. Irwin Miller,
William I. Miller, Donald S. Perkins, William D. Ruckelshaus, Henry B.
Schacht, Theodore M. Solso, Franklin A. Thomas, J. Lawrence Wilson.

YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE
APPROPRIATE BOXES ON THE REVERSE SIDE. EXCEPT FOR PLAN
SHARES, YOU NEED NOT MARK ANY ITEM BOXES IF YOU WISH TO VOTE
SHARES IN ACCORDANCE WITH THE BOARD OF DIRECTORS'
RECOMMENDATIONS. THE PROXY COMMITTEE CANNOT VOTE YOUR SHARES
UNLESS YOU SIGN AND RETURN THIS CARD.

SEE REVERSE
SIDE
-------------------------------------------------------------------------------

[X] PLEASE 3111
MARK YOUR VOTES AS ----
IN THIS EXAMPLE.

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR ITEMS 1, AND 2, BUT
PLAN SHARES WILL BE VOTED IN ACCORDANCE WITH THE PROVISIONS OF THE BENEFIT
TRUSTS.
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2.
- --------------------------------------------------------------------------------
1. Election of Directors. (see reverse)
FOR [_] WITHHELD [_]

For, except vote withheld from the following nominee(s):

--------------------------------------------------------

2. Proposal to ratify Arthur Andersen LLP as independent accountants.
FOR [_] AGAINST [_] ABSTAIN [_]

TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL DIRECTOR NOMINEE, MARK ITEM 1
BOX "FOR" AND LIST NOMINEE'S NAME FOR WHICH AUTHORITY IS WITHHELD; OTHERWISE,
MARK "FOR" TO VOTE FOR ALL NOMINEES OR "WITHHELD" TO WITHHOLD AUTHORITY TO VOTE
FOR ALL NOMINEES.

- -------------------------------------------------------------------------------

The signer hereby revokes all proxies heretofore given by the signer to vote
at said meeting or any adjournments thereof.

NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or
guardian, please give full title as such.

--------------------------------
SIGNATURE DATE

<PAGE>

March 4, 1996

Dear Fellow Employee:

As a shareholder of Cummins stock, you are receiving today the Annual
Report to Shareholders, Proxy Statement and Proxy Card. In addition to other
Cummins shares you may own, you are a shareholder of Cummins stock through your
participation in the Cummins Employee Stock Ownership Plan ("ESOP") or Cummins
Stock Fund ("CSF") portions of the Cummins Retirement and Savings Plan, or both.

Each year, shareholders have an opportunity to elect Cummins' Board of
Directors and to vote on other business matters described in the Proxy
Statement. The ESOP and CSF Trustees are the only shareholders of record for
your benefit plan shares and will vote on the proposals in the Proxy based on
your Proxy Card vote. All shares held in the ESOP that are not voted or have
not been credited to employee accounts will be voted by the Trustee on each
proposal in the same proportion as all shares voted on that proposal by ESOP
participants. Please complete and return your Proxy Card in the enclosed
envelope as soon as possible. Be sure to mark the box on the face of the Proxy
Card to designate it as a Trustee instruction.

If you own additional shares of Cummins Stock, you should not receive a
separate packet of materials for those shares unless they are held in a
brokerage or custodial account on your behalf. With that exception, voting of
all your shares is intended to be accommodated on one Proxy Card.

ESOP participants who retired or otherwise ceased employment during the
fourth quarter of 1995 will be receiving a distribution of shares of stock and
cash for partial shares or cash in lieu of all shares if so elected, in the next
several weeks. Until such distribution, all former employees are considered
plan participants and should complete and return the enclosed Proxy Card if they
desire to vote their plan shares.

Should you have questions about the shareholder materials, please contact
Mark Gerstle (812-377-3520).

Sincerely,

B.S.Pitts/jdm Vice President - Human Resources