<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] No fee required
[_] 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 1, 1997, at 10:30
a.m., local time, for the following purposes:
1. to elect twelve directors of the Company for the ensuing year;
2. to ratify the appointment of Arthur Andersen LLP as auditors for the
year 1997;
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 14, 1997, 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 1, 1997
<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 1, 1997, 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 1, 1997.
Holders of the Company's Common Stock of record at the close of business on
February 14, 1997 are entitled to vote at the Annual Meeting. On that date
there were issued and outstanding 41,907,422 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 14, 1997 (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>
FMR Corporation 5,959,786(1) 14.22%
82 Devonshire Street
Boston, MA 02109
Miller Anderson & Sherrerd, LLP 5,751,687(2) 13.72%
One Tower Bridge
West Conshohocken, PA 19428
Cummins Engine Company, Inc. 3,750,000 8.95%
Employee Benefits Trust
c/o The Vanguard Fiduciary Trust Com-
pany
Post Office Box 2900
Valley Forge, PA 19482
The Capital Group Companies, Inc. 2,500,260(3) 5.97%
333 South Hope Street
Los Angeles, CA 90071
Cummins Engine Company, Inc. 2,222,080 5.30%
and Affiliates Employee
Stock Ownership Trust
c/o The Vanguard Fiduciary Trust Com-
pany
Post Office Box 2900
Valley Forge, PA 19482
</TABLE>
- ---------
(1) The source of this information is a Schedule 13G dated February 14, 1997
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 117,776
shares and no shared investment or voting power.
(2) The source of this information is a Schedule 13G dated February 14, 1997
disclosing beneficial ownership by MAS, and information known to the
Company regarding a purchase transaction that occurred on January 8, 1997.
MAS states in its 13G that it has shared investment power for 3,851,687
shares, shared voting power for 3,255,287 shares and no sole voting or
investment power.
(3) The source of this information is a Schedule 13G dated February 25, 1997
disclosing beneficial ownership by certain operating subsidiaries of the
Capital Group Companies, Inc. These entities were reported to possess, in
the aggregate, sole voting power for 260 shares, sole investment power for
all of the shares and no shared voting or investment power.
2
<PAGE>
ELECTION OF DIRECTORS
(ITEM 1)
It is intended that votes will be cast pursuant to the accompanying proxy
for the election of the twelve 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.
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 21 through 26 of
this proxy statement.
<TABLE>
<CAPTION>
AMOUNT AND
FIRST YEAR NATURE OF BENEFICIAL PERCENT
ELECTED A OWNERSHIP AS OF OF
NAME AND OCCUPATION AGE DIRECTOR(1) FEBRUARY 28, 1997(2) CLASS
------------------- --- ----------- -------------------- -------
<S> <C> <C> <C> <C>
Harold Brown...................... 69 1985 946(3) *
Counselor, Center for Strategic &
International Studies; Partner,
Warburg, Pincus & Co., venture
banking firm
Robert J. Darnall................. 58 1989 1,562 *
Chairman, President and Chief
Executive Officer, Inland Steel
Industries, Inc., steel
manufacturing and materials
distribution
Walter Y. Elisha.................. 64 1991 1,562 *
Chairman and Chief Executive
Officer, Springs Industries,
Inc., manufacturer of home
furnishings, industrial and
specialty fabrics
Hanna H. Gray..................... 66 1977 746 *
President Emeritus and Professor
of History, University of
Chicago
James A. Henderson................ 62 1974 172,768(4) *
Chairman of the Board and Chief
Executive Officer of Cummins
William I. Miller................. 40 1989 37,324(5) *
Chairman, Irwin Financial
Corporation, financial services
company
Donald S. Perkins................. 69 1974 4,562 *
Retired Chairman, Jewel
Companies, Inc., diversified
retailing
William D. Ruckelshaus............ 64 1974 1,562 *
Principal, Madrona Investment
Group, L.L.C.
Henry B. Schacht.................. 62 1969 118,086(6) *
Chairman and Chief Executive
Officer, Lucent
Technologies, Inc.,
communication industry products
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
FIRST YEAR NATURE OF BENEFICIAL PERCENT
ELECTED A OWNERSHIP AS OF OF
NAME AND OCCUPATION AGE DIRECTOR(1) FEBRUARY 28, 1997(2) CLASS
------------------- --- ----------- -------------------- -------
<S> <C> <C> <C> <C>
Theodore M. Solso................ 49 1994 91,233(7) *
President and Chief Operating
Officer of Cummins
Franklin A. Thomas............... 62 1973 1,253 *
Consultant, TFF Study Group
J. Lawrence Wilson............... 61 1990 2,554 *
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) Includes 56,200 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.
(5) Includes 15,003 shares held by Mr. Miller for the benefit of his children.
(6) Includes 66,900 shares which Mr. Schacht has the right to acquire within
the next 60 days through the exercise of stock options granted to him
prior to his retirement as an employee of the Company.
(7) Includes 29,000 shares which Mr. Solso has the right to acquire within the
next 60 days through the exercise of stock options. Also included are
15,919 shares held by a family trust 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 six meetings during 1996. 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
4
<PAGE>
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 1996.
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 four times during 1996.
Nominating and Organization Committee. The members of the Nominating and
Organization Committee are F. A. Thomas (Chairman), H. Brown, R. J. Darnall,
W. Y. Elisha, H. H. Gray, W. I. Miller, D. S. Perkins, W. D. Ruckelshaus, H.
B. Schacht 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 three times during 1996.
Executive Committee. The members of the Executive Committee are J. A.
Henderson (Chairman), 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 1996.
Other Committees. In addition to the Committees described above, the Board
of Directors has established the following committees: Business Development
and Finance Committee (J. L. Wilson, Chairman, W. Y. Elisha and H. B.
Schacht); Employee Development and Benefits Committee (R. J. Darnall,
Chairman, W. I. Miller and F. A. Thomas); Proxy Committee (H. B. Schacht,
Chairman, and F. A. Thomas); and Technology Committee (H. Brown, Chairman, and
T. M. Solso).
Each director who is not an officer of the Company receives an annual fee of
$45,000, $27,000 of which is paid in cash and $18,000 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 and Finance,
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.
5
<PAGE>
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.
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
1996, 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.
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.
During 1996, the Company maintained a retirement plan for non-employee
directors who had no vested rights under any other pension plan sponsored by
the Company and who had 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 were to be 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 was to be
distributed to the director in one lump sum.
In early 1997, the Board of Directors determined to eliminate any future
service accruals under the retirement plan and to provide to each non-employee
director, in lieu thereof, an increase in the amount of the annual retainer
fee payable in restricted Common Stock from $6,000 to $18,000 based on the
trailing 30 trading day average of closing prices of the Common Stock on the
date of the Company's Annual Meeting each year. Directors with vested
retirement plan benefits on the date future accruals were eliminated will be
given an option to have their accrued benefits frozen and retained in the plan
for future payment, or to convert the present value (using the same actuarial
assumptions as are applicable to the payment of pension benefits to the
Company's employees) of their accrued benefits into phantom units of Common
Stock based on a trailing trading day average of closing prices of Common
Stock on the date of conversion. The stock units, including additional stock
units credited thereon as dividend equivalents, will be evidenced by
bookkeeping entries. Recipients will have no voting or investment power with
respect to the stock units. The value of each director's stock units will be
payable only in cash on or after the director's ceasing to be a member of the
Board or upon a change of control of the Company.
6
<PAGE>
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
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 sets the general compensation
philosophy of the Company. It reviews 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.
7
<PAGE>
. 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.
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 1996.
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 300 U.S. industrial
corporations (including the eleven companies
8
<PAGE>
that comprise the "Peer Group" companies used in the Shareholder Return
Performance Presentation on page 12 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.
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 1996, 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 1996, 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.
The Company organized into Business Units in the second half of 1996.
Beginning in 1997, one-half of the bonus for senior managers of the Company's
Business Units will be determined by the return on net assets of the Company's
Business Units, and one-half will continue to be based on the Company's
performance, as described above. The Committee believes this formula will
provide appropriate balance, compensating for performance measured at the
Business Unit level as well for the total Company. Basing a significant
portion of the bonus on total Company results rewards Business Units for
working in an integrated way, maximizing our total financial performance;
adding the Business Unit measure emphasizes business results each key manager
affects most directly.
In order to comply with the requirements of Section 162 (m), designated
officers (the Chief Executive Officer and the Chief Operating Officer in 1996)
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.
9
<PAGE>
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 1999 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 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 1996) 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
Annually in December 1992 through 1995, and in July, 1996, 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
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.
10
<PAGE>
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.
In 1994 and 1995, the Company exceeded market median financial performance
and the Short-Term Bonus payouts reflected this performance. However, Company
performance in 1996 lagged the market median, and this is reflected in lower
bonus payouts for the CEO in 1996. While the Company's Profit Before Tax was
27% less, the CEO's Short-Term Bonus was 48.7% less, from $646,500 in 1995 to
$333,675 in 1996.
In July, 1996 the CEO received grants of restricted stock and stock options
under the Long-Term 1992 Stock Incentive Plan, as well as a Target Award
(payable in 2000) under the Medium-Term Three Year Performance Plan. This was
the fifth set of grants under these Plans. The Committee intends to continue
making grants 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 CEO, on a yearly basis, discusses in detail his priorities and
objectives with the Nominating and Organization Committee (the members and
responsibilities of the Nominating and Organization Committee are shown on
page 5 of this proxy). The Nominating and Organization Committee formally
reviews the CEO's performance against his stated objectives, especially the
progress made by the Company in 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.
The Committee commends the CEO for the objectives he has very clearly
articulated and for excellent progress in their attainment. During 1996, an
especially noteworthy and significant accomplishment has been the
reorganization of the Company into a business unit structure that places
substantial and appropriate focus on the priorities of customer service and
shareholder value.
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
11
<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.
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG [COMPANY NAME HERE], S&P 500 INDEX AND PEER GROUP
<TABLE>
<CAPTION>
Measurement Period CUMMINS S&P
(Fiscal Year Covered) ENGINE 500 INDEX PEER GROUP
- --------------------- ------- --------- ----------
<S> <C> <C> <C>
Measurement Pt--
12/31/91 $100.00 $100.00 $100.00
FYE 12/31/92 $144.20 $107.64 $126.40
FYE 12/31/93 $199.62 $118.50 $199.56
FYE 12/31/94 $170.47 $120.06 $174.85
FYE 12/31/95 $142.73 $165.18 $209.60
FYE 12/31/96 $181.69 $203.11 $246.24
</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 four other most highly compensated executive officers during 1996. 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.
12
<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 1996 $772,500 $333,675 $575,000 37,500 $375,000 $ 0 $13,524
and Chief Executive 1995 $727,500 $646,500 $418,500 28,100 $382,500 $ 0 $52,700
Officer 1994 $654,000 $767,940 $346,000 22,600 $203,680 $1,081,250 $39,520
T. M. Solso
President and Chief 1996 $517,500 $204,187 $391,000 22,100 $200,000 $ 0 $47,896
Operating Officer 1995 $480,000 $390,500 $267,375 17,900 $225,000 $ 0 $38,024
1994 $405,417 $439,381 $177,325 11,500 $ 91,706 $ 378,438 $28,203
F. J. Loughrey
Executive Vice Presi-
dent 1996 $376,250 $134,750 $211,600 11,900 $ 93,750 $ 0 $15,951
Group President-- 1995 $347,292 $259,792 $162,750 10,800 $112,500 $ 0 $20,720
Industrial 1994 $275,000 $222,131 $129,750 8,000 $ 57,704 $ 173,000 $19,230
C. R. Cordaro
Executive Vice Presi-
dent 1996 $293,750 $101,531 $170,200 9,600 $ 68,750 $ 0 $23,887
Group President-- 1995 $270,000 $181,125 $131,750 8,800 $ 82,500 $ 0 $23,552
Automotive 1994 $257,500 $226,294 $ 75,688 4,900 $ 54,438 $ 173,043 $18,246
J. K. Edwards
Executive Vice Presi-
dent 1996 $293,750 $101,531 $170,200 9,600 $ 68,750 $ 0 $ 1,957
Group President-- 1995 $252,500 $168,750 $131,750 8,800 $ 82,500 $ 0 $17,458
Power Generation 1994 $235,000 $206,663 $ 86,500 6,000 $ 37,688 $ 86,414 $18,276
</TABLE>
- ---------
(1) Pursuant to the Company's 1992 Stock Incentive Plan, a total of 93,700
shares of Restricted Stock were granted in 1996, having a total value at
date of grant of $3,841,700. Shares are restricted for two years and one
month subsequent to grant, then are vested in 1/3 annual increments, if
the participant remains an employee of the Company. Dividends will be paid
on these shares. As of year-end 1996, the total number of shares of
Restricted Stock and the value thereof held by each executive officer was
as follows: J. A. Henderson, 37,167 shares, $1,709,682; T. M. Solso,
23,001 shares, $1,058,046; F. J. Loughrey, 13,201 shares, $607,246; J. K.
Edwards, 10,500 shares, $483,000; C. R. Cordaro, 10,084 shares, $463,864.
(2) Stock options awarded pursuant to the Company's 1992 Stock Incentive Plan
and 1986 Stock Option Plan.
(3) The payout for 1996 represents payout for the 1992 Award Cycle under the
Three Year Performance Plan. This was the second 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 Company'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 Company'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 1996 include,
respectively, matching contributions by the Company under the Retirement
and Savings Plan and "above market" earnings on previously deferred
compensation as follows: J. A. Henderson ($449 and $13,075); T. M. Solso
($2,014 and $45,882); F. J. Loughrey ($1,993 and $13,958); C. R. Cordaro
($1,979 and $21,908); J. K. Edwards ($1,957 and $0).
13
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
Set forth below is information as of February 28, 1997, regarding the
beneficial ownership of Common Stock of the Company by the Chief Executive
Officer, each of the other named executive officers during 1996 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............................ 172,768(1) *
Theodore M. Solso
President and Chief Operating
Officer...................................... 91,233(2) *
F. Joseph Loughrey
Executive Vice President
Group President--Industrial.................. 43,777(3) *
C. Roberto Cordaro
Executive Vice President
Group President--Automotive.................. 36,490(4) *
John K. Edwards
Executive Vice President
Group President--Power
Generation.................................. 32,886(5) *
All directors and executive officers as
a group, a total of 21 persons............... 668,610(6) 1.6%
</TABLE>
- ---------
*Less than 1%
(1) See footnote 4 to the director nominee listing on page 4.
(2) See footnote 7 to the director nominee listing on page 4.
(3) Includes 15,750 shares which Mr. Loughrey has the right to acquire within
the next 60 days through the exercise of stock options.
(4) Includes 13,150 shares which Mr. Cordaro has the right to acquire within
the next 60 days through the exercise of stock options.
(5) Includes 14,950 shares which Mr. Edwards has the right to acquire within
the next 60 days through the exercise of stock options.
(6) Includes 246,450 shares which the officers and directors have the right to
acquire within the next 60 days through the exercise of stock options.
14
<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 1996, 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......... 32,500 8.2% $40.625 7/8/06 $831,797 $2,099,297
5,000 1.3% $37.688 9/3/06 $118,716 $ 299,616
T. M. Solso............. 22,100 5.6% $40.625 7/8/06 $565,622 $1,427,522
F. J. Loughrey.......... 11,900 3.0% $40.625 7/8/06 $304,566 $ 768,666
J. K. Edwards........... 9,600 2.4% $40.625 7/8/06 $245,700 $ 620,100
C. R. Cordaro........... 9,600 2.4% $40.625 7/8/06 $245,700 $ 620,100
</TABLE>
Stock option and stock appreciation right exercise activity during 1996, 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, 1996.
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 56,200 60,600 $220,390 $371,225
T. M. Solso............. 0 $ 0 29,000 40,000 $117,555 $243,977
F. J. Loughrey.......... 0 $ 0 15,750 22,700 $ 53,880 $139,503
J. K. Edwards........... 0 $ 0 14,950 18,400 $114,010 $113,152
C. R. Cordaro........... 0 $ 0 13,150 18,400 $ 43,026 $113,152
</TABLE>
15
<PAGE>
Estimated benefits payable to each named executive pursuant to long-term
incentive plan rights awarded during 1996 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 $105,000 $420,000 $840,000
T. M. Solso............. 0 $ 71,250 $285,000 $570,000
F. J. Loughrey.......... 0 $ 38,750 $155,000 $310,000
C. R. Cordaro........... 0 $ 25,000 $100,000 $200,000
J. K. Edwards........... 0 $ 25,000 $100,000 $200,000
</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 1996-1998 Award
Cycle under the Three Year Performance Plan (payable in 1999), and the
1997-1999 Award Cycle under the Senior Executive Three Year Performance
Plan (payable in 2000), 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.
16
<PAGE>
PENSION PLAN TABLE
The Company maintains retirement pension programs for its employees,
including the executive officers named in the Summary Compensation Table on
page 13. Elements of the program for the executive officers include the
Company's Cash Balance Pension Plan, the Excess Benefit Plan which provides
pension benefits in excess of limitations imposed by the Internal Revenue
Code, and the Supplemental Life Insurance and Deferred Income Program. The
following table sets forth the estimated maximum annual pension benefits
payable on a straight life annuity basis under the program to the officers in
various compensation and years of service classifications upon retirement at
age 65. An officer who is among the Company's two highest paid executive
officers at the time of retirement will receive an annual benefit greater than
amounts reflected in the table by an amount equal to 10% of the officer's
covered compensation.
<TABLE>
<CAPTION>
AVERAGE
TOTAL CASH
COMPENSATION ESTIMATED ANNUAL BENEFIT UPON RETIREMENT
(BASE SALARY --------------------------------------------------------------
PLUS SHORT- 30+
TERM BONUS) 10 YEARS 15 YEARS 20 YEARS 25 YEARS YEARS
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 40,000 $ 60,000 $ 80,000 $ 90,000 $100,000
$ 275,000 $ 55,000 $ 82,500 $110,000 $123,750 $137,500
$ 350,000 $ 70,000 $105,000 $140,000 $157,500 $175,000
$ 425,000 $ 85,000 $127,500 $170,000 $191,250 $212,500
$ 500,000 $100,000 $150,000 $200,000 $225,000 $250,000
$ 575,000 $115,000 $172,500 $230,000 $258,750 $287,500
$ 650,000 $130,000 $195,000 $260,000 $292,500 $325,000
$ 725,000 $145,000 $217,500 $290,000 $326,250 $362,500
$ 800,000 $160,000 $240,000 $320,000 $360,000 $400,000
$ 875,000 $175,000 $262,500 $350,000 $393,750 $437,500
$ 950,000 $190,000 $285,000 $380,000 $427,500 $475,000
$1,025,000 $205,000 $307,500 $410,000 $461,250 $512,500
$1,100,000 $220,000 $330,000 $440,000 $495,000 $550,000
$1,175,000 $235,000 $352,500 $470,000 $528,750 $587,500
$1,250,000 $250,000 $375,000 $500,000 $562,500 $625,000
$1,325,000 $265,000 $397,500 $530,000 $596,250 $662,500
$1,400,000 $280,000 $420,000 $560,000 $630,000 $700,000
$1,475,000 $295,000 $442,500 $590,000 $663,750 $737,500
</TABLE>
Compensation for purposes of the pension program is the highest average
total cash compensation, including base salary and short-term bonus payments,
for any consecutive five-year period prior to retirement. Covered compensation
is disclosed under the "Salary" and "Bonus" columns of the Summary
Compensation Table. Covered compensation and full years of service as of
December 31, 1996 for the Company's Chief Executive Officer and the other
named executive officers are as follows: J. A. Henderson, $1,126,433, 32
years; T. M. Solso, $700,973, 25 years; F. J. Loughrey, $463,558, 23 years; C.
R. Cordaro, $398,052, 18 years; J. K. Edwards, $368,055, 24 years.
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 13. 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
17
<PAGE>
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. 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.
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
1996, 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 AND OFFICERS
As an employee of the Company, nominee James A. Henderson has deferred
receipt of certain amounts of his salary and bonus pursuant to the Company's
Deferred Compensation Plan. Amounts deferred have been included in the
respective Summary Compensation Tables of the Company's proxy statements for
the years in which earned. On March 26, 1996 the Company and Mr. Henderson
agreed that he would forego receipt of $1,215,119 of his Deferred Compensation
Plan account balance and future earnings thereon in exchange for entering into
a split-dollar life insurance arrangement with the Company. Under the terms of
the Deferred Compensation Plan, Mr. Henderson's unpaid balance would have
continued to accrue interest and would have been payable beginning one year
following the year of his retirement. Discounted at 7%, the present value cost
to the Company of the Deferred Compensation Plan liability, assuming the
Plan's expected rate of return on the unpaid balance, would have been
$970,706. Under the split-dollar arrangement, the Company will pay premiums of
$249,489 per year for ten years to a life insurance trust in connection with
an insurance policy or policies on the lives of Mr. Henderson and his wife and
will be refunded all of such premiums at the end of the 10th year, resulting
in an equal present value cost to the Company of $970,706.
Prior to his retirement from the Company, nominee Henry B. Schacht also
deferred receipt of certain amounts of compensation pursuant to the Deferred
Compensation Plan, which amounts had been included in the Summary Compensation
Tables. As of July 19, 1996, the total amounts deferred including accrued
interest thereon payable by the Company to Mr. Schacht was $2,116,723.
18
<PAGE>
On that date, the Company and Mr. Schacht agreed that he would forego receipt
of his Deferred Compensation Plan account balance and future earnings thereon
in exchange for a split-dollar life insurance arrangement similar to Mr.
Henderson's. Mr. Schacht's unpaid balance would have continued to accrue
interest and would have been payable in a lump sum in 2004. Discounted at 7%,
the present value cost to the Company of the Deferred Compensation liability,
under the same assumptions as for Mr. Henderson, would have been $1,767,127.
Under the split-dollar arrangement, the Company will pay premiums of $454,184
per year for ten years in connection with an insurance policy or policies on
the lives of Mr. Schacht and his wife and will be refunded all of such
premiums at the end of the 10th year, resulting in an equal present value cost
to the Company of $1,767,127.
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, 1996, the
largest aggregate amount owed for such purchases and loans at any time since
January 1, 1996, and the amount owed as of January 31, 1997:
<TABLE>
<CAPTION>
AMOUNT OF
LARGEST INDEBTEDNESS
AMOUNT OF AS OF
INDEBTEDNESS JANUARY 31, 1997
------------ ----------------
<S> <C> <C>
M. E. Chesnut............................... $ 80,750.00 $ 80,750.00
C. R. Cordaro............................... $220,000.00 $ 0
M. R. Gerstle............................... $ 70,162.50 $ 13,800.00
J. A. Henderson............................. $667,933.72 $667,933.72
M. D. Jones................................. $196,125.00 $ 0
K. M. Patel................................. $155,500.00 $155,500.00
B. S. Pitts................................. $ 84,250.00 $ 84,250.00
T. M. Solso................................. $182,500.00 $182,500.00
</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 1996, three
executive officers 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 1997. 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 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.
19
<PAGE>
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 1997 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
1997 SHAREHOLDER PROPOSALS
Proposals intended to be presented by shareholders of the Company at the
1998 Annual Meeting of Shareholders must be submitted to and received by the
Secretary of the Company for inclusion in the Company's proxy statement and
form of proxy for that Meeting not later than November 1, 1997.
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 1, 1997
20
<PAGE>
NOMINEES FOR BOARD OF DIRECTORS
Mr. Henderson was elected Chairman of the Board of
the Company in 1995 after serving as Chief 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 Company 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., Ryerson
Tull, 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.
JAMES A.
HENDERSON
Mr. Solso was elected President and Chief Operating
Officer of the Company 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 Company. 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
Amoco Corporation, 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.
THEODORE M. SOLSO
21
<PAGE>
Dr. Brown is Counselor at the Center for Strategic
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.
HAROLD BROWN
Mr. Darnall is Chairman, President and Chief
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, and he was also elected to Inland's Board of
Directors in 1983. 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., Ryerson Tull, Inc. and
the Federal Reserve Bank of Chicago, and as a Trustee
or Director of DePauw University, The University of
Chicago, the Glenwood School for Boys, and Junior
Achievement of Chicago.
ROBERT J.
DARNALL
22
<PAGE>
Mr. Elisha is Chairman and Chief Executive Officer of
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 an honorary trustee
of the Brookings Institution and a trustee 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 past
President of the American Textile Manufacturers
Institute. Mr. Elisha is also a Trustee of Wabash
College and has served as a member of the Board of
Directors of the Associates of the Harvard Business
School.
WALTER Y. ELISHA
Mrs. Gray is President Emeritus and Professor of
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.
HANNA H. GRAY
23
<PAGE>
Mr. Miller is Chairman of Irwin Financial
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.
WILLIAM I. MILLER
Mr. Perkins is the former Chairman of Jewel
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 AON
Corporation, Current Assets, Illinova and Illinois
Power Company, Inland Steel Industries, Inc., LaSalle
Street Fund, LaSalle U.S. Realty Income and Growth
Fund Inc., Lucent Technologies Inc., The Putnam
Funds, Ryerson Tull, Inc., 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
Golden Apple Foundation, Leadership for Quality
Education and a member of the Spencer Stuart Advisory
Board.
DONALD S. PERKINS
24
<PAGE>
Mr. Ruckelshaus is currently a Principal in the
Madrona Investment Group, L.L.C. and is Chairman of
Browning-Ferris Industries. He was Chairman and Chief
Executive Officer of Browning-Ferris Industries until
1996. Mr. Ruckelshaus received a B.A. from 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 of counsel 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., Weyerhaeuser Company, and
Gargoyles, Inc.
WILLIAM D.
RUCKELSHAUS
Mr. Schacht was named Chairman and Chief Executive
Officer of Lucent Technologies, Inc. in 1995. Mr.
Schacht served as Chairman of the Board of the
Company from 1977 to 1995 and Chief Executive Officer
from 1973 to 1994. He was President of the Company
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 Lucent
Technologies, Inc., 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.
HENRY B. SCHACHT
25
<PAGE>
Mr. Thomas is currently a Consultant with the TFF
Study Group and served as President of The Ford
Foundation until 1996. Mr. Thomas received a B.A.
from Columbia University in 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
Citicorp/Citibank, N.A., Alcoa, Lucent Technologies,
Inc., and PepsiCo. and serves as a Trustee for The
Ford Foundation.
FRANKLIN A.
THOMAS
Mr. Wilson has been Chairman and Chief Executive
Officer of Rohm and Haas Company since 1988. Mr.
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 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 Chemical Manufacturers
Association.
J. LAWRENCE
WILSON
26
<PAGE>
CUMMINS ANNUAL SHAREHOLDER MEETING
APRIL 1, 1997--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
--------------------------------
SIGNATURE DATE
<PAGE>
March 1, 1997
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 1996 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
