CUMMINS ENGINE CO INC, DEF 14A, 1999-03-03

CUMMINS ENGINE CO INC
DEF 14A, 1999-03-03
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

[_] 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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Notes:
<PAGE>

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 6, 1999, at 10:30
a.m., local time, for the following purposes:

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

2. to ratify the appointment of Arthur Andersen LLP as auditors for the
year 1999;

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 15, 1999, 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.

Pamela F. Carter,
Secretary

March 3, 1999
<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 6, 1999, 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 3, 1999.

Holders of the Company's Common Stock of record at the close of business on
February 15, 1999 are entitled to vote at the Annual Meeting. On that date
there were issued and outstanding 42,136,242 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 15, 1999 (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
----------------- --------
<C> <S> <C>
Miller Anderson & Sherrerd, LLP 4,044,329(1) 9.60%
One Tower Bridge
West Conshohocken, PA 19428
Cummins Engine Company, Inc. 3,741,588 8.88%
Employee Benefits Trust
c/o The Vanguard Fiduciary
Trust Company
Post Office Box 2900
Valley Forge, PA 19482
Cummins Engine Company, Inc. 3,700,000 8.78%
Collective Investment Trust
for Pension Plans
c/o The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
FMR Corporation 2,860,306(2) 6.79%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- ---------
(1) The source of this information is a Schedule 13G dated February 15, 1999
disclosing beneficial ownership by MAS. MAS states in its 13G that it has
shared investment power for all of the shares, shared voting power for
3,574,429 shares and no sole voting or investment power.
(2) The source of this information is a Schedule 13G dated February 1, 1999
disclosing beneficial ownership by FMR. FMR states in its 13G that it has
sole investment power for 2,860,306 shares, sole voting power for 25,606
shares and no shared investment or voting 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 thirteen 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 27 of
this proxy statement.

3
<PAGE>

<TABLE>
<CAPTION>
Amount and Stock Units
First Year Nature of Beneficial Held as of Percent
Elected a Ownership as of February 28, of
Name and Occupation Age Director(1) February 28, 1999(2) 1999(3) Class
------------------- --- ----------- -------------------- ------------ -------
<S> <C> <C> <C> <C> <C>
William D. Ruckelshaus. 66 1974 2,250 6,989 *
Principal, Madrona
Investment Group,
L.L.C.
Henry B. Schacht....... 64 1969 51,812 0 *
Senior Advisor and
former Chairman,
Lucent Technologies,
Inc.,
communication
industry products
Theodore M. Solso...... 51 1994 223,393(7) 0 *
President and Chief
Operating Officer of
Cummins
Franklin A. Thomas..... 64 1973 1,955 6,069 *
Consultant, TFF Study
Group
J. Lawrence Wilson..... 63 1990 3,237 2,947 *
Chairman and Chief
Executive Officer,
Rohm and Haas
Company, chemical
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) Compensatory stock units payable only in cash. The value of each unit is
equal to the value of one share of the Company's Common Stock. See
director retirement plan discussion on page 6.
(4) These shares are held by a trust, of which Dr. Brown is a co-trustee,
settlor and beneficiary.
(5) Includes 154,000 shares which Mr. Henderson has the right to acquire
within the next 60 days through the exercise of stock options. Also
included are 5,572 shares held by Mr. Henderson's wife who has sole voting
and investment powers thereof.
(6) Includes 15,939 shares held by Mr. Miller for the benefit of his children.
(7) Includes 98,850 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 eight meetings during 1998. All of the directors
attended 75% or more meetings of the Board and Committees on which they
served.

The Board of Directors has established seven 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:

4
<PAGE>

Audit Committee. The members of the Audit Committee are R. J. Darnall
(Chairman), W. Y. Elisha and J. A. Johnson. 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 1998.

Compensation Committee. The members of the Compensation Committee are H. H.
Gray (Chairman), 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 five times during 1998.

Nominating and Organization Committee. The members of the Nominating and
Organization Committee are F. A. Thomas (Chairman), H. Brown, R. J. Darnall,
J. M. Deutch, W. Y. Elisha, H. H. Gray, J. A. Johnson, W. I. Miller, 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 four times during 1998.

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 1998.

Other Committees. In addition to the Committees described above, the Board
of Directors has established the following committees: Finance Committee (J.
L. Wilson, Chairman, W. I. Miller and H. B. Schacht); Proxy Committee (H. B.
Schacht, Chairman, and F. A. Thomas); and Technology Committee (H. Brown,
Chairman and J. M. Deutch).

Each director who is not an officer of the Company receives an annual fee of
$66,000, $33,000 of which is paid in cash and $33,000 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, Finance, Executive, Compensation,
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
1998, 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.

In early 1997, the Board of Directors determined to eliminate any future
service accruals under a non-employee director 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 were 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, are
evidenced by bookkeeping entries. Recipients have no voting or investment
power with respect to the stock units. The value of each director's stock
units is 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. The total
number of units credited to each director as a result of retirement plan
benefit conversion elections is listed in the director nominee table beginning
on page 3.

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 three 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 and works with management to establish 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 compensation 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 US industrial companies
with sales volumes similar to Cummins, when Cummins' financial
performance is at the median of those companies.

7
<PAGE>

. 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 1998.

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 US industrial
corporations (including the ten companies 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.

8
<PAGE>

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 US
industrial companies measured over recent history. In 1998, Return on Average
Net Assets was the measure used to compare performance.

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.

One-half of the bonus for senior managers of the Company's Business Units is
determined by the Return on Average Net Assets of the Business Units, and one-
half continued to be based on the Company's performance, as described above.
The Committee believes this formula provides appropriate balance, compensating
for performance measured at the Business Unit level as well as 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.

For 1998, a portion of the bonus for selected senior managers, including the
CEO and COO, was determined by performance against individual measures, as
determined by the Compensation Committee. The measures were based on achieving
diversity goals.

In order to comply with the requirements of Section 162(m), designated
officers (the Chief Executive Officer and the Chief Operating Officer in 1998)
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.

9
<PAGE>

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 all Award Cycles
has been 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.

For the Target Awards granted in 1997 and 1998, the payouts will be linked
to the Corporation's Common Stock price. The Target Award was made in stock
units, calculated as the Target Award dollars divided by the six-month average
Cummins stock price as of the grant date. The payout will be calculated as
(number of stock units granted) x (payout factor) x (six-month average Cummins
Stock Price as of the payout date). This design further links the interests of
senior managers and our shareholders.

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 1998) 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 since 1992, and again in February, 1998, 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 US 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 1998, Company performance was not as strong as in 1997, and the bonus
reflected the performance. Additionally, in the First and Third Quarters the
Company incurred special charges for coverage costs as a result of revised
estimates of liability for engines manufactured in previous years. These
charges were included in the calculation of bonuses for the CEO and other
senior officers, reducing the payments significantly.

In February, 1998 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 2002) under the Medium-Term Three Year Performance Plan.
This was the seventh 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 described on
page 5 of this Proxy Statement). The Nominating and Organization Committee
formally reviews the CEO's performance annually, based on how well the CEO
performed against his workplan, including the progress made by the Company in
implementing its business strategy and achieving its business objectives, both
short-term and long-term. This review, which is reported in detail to the
Committee, 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
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.

COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG CUMMINGS ENGINE CO., INC.,
S&P 500 INDEX AND PEER GROUP INDEX

[5 YEAR CHART APPEARS HERE]

Measurement Period Cummins Engine S&P
(Fiscal Year Covered) Co., Inc. 500 Index Peer Group
- --------------------- -------------- --------- ----------
<S> <C> <C> <C>
Measurement Pt-
12/31/1993 $100 $100 $100
FYE 12/31/1994 $85.40 $101.32 $97.55
FYE 12/31/1995 $71.50 $139.40 $120.53
FYE 12/31/1996 $91.02 $171.41 $152.61
FYE 12/31/1997 $118.87 $228.59 $211.39
FYE 12/31/1998 $73.18 $293.92 $176.33
</TABLE>
- ---------
* Arvin Industries, Inc., Case Corporation, Caterpillar, Inc., Dana
Corporation, Deere & Company, Detroit Diesel Corporation, Eaton 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 1998. 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) (2) (3) (4)
---------- -------- ----------- ------------
Stock Medium-
Restricted Options/ Term
Name and Stock SARs Performance All Other
Principal Position Year Salary Bonus Awards (#) Plans Compensation
- ---------------------- ---- -------- -------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
J. A. Henderson 1998 $781,875 $338,555 $ 641,844 157,500 $170,000 $15,560
Chairman of the Board 1997 $810,000 $544,229 $ 676,266 43,700 $255,000 $19,863
and Chief Executive
Officer 1996 $772,500 $333,675 $ 575,000 32,500 $375,000 $13,524
T. M. Solso 1998 $548,750 $222,233 $ 446,500 29,050 $100,000 $36,559
President and Chief 1997 $557,500 $346,013 $2,539,688 33,300 $131,250 $78,330
Operating Officer 1996 $517,500 $204,187 $ 391,000 22,100 $200,000 $47,896
F. J. Loughrey 1998 $409,270 $100,015 $ 306,969 11,500 $ 70,000 $23,563
Executive Vice
President 1997 $400,000 $266,694 $1,748,250 20,900 $ 93,750 $32,743
Group President-- 1996 $376,250 $134,750 $ 211,600 11,900 $ 93,750 $15,951
Industrial
C. R. Cordaro 1998 $325,625 $102,826 $ 251,156 11,300 $ 45,000 $20,810
Executive Vice
President 1997 $315,000 $171,975 $1,748,250 20,900 $ 45,000 $32,368
Group President-- 1996 $293,750 $101,531 $ 170,200 9,600 $ 68,750 $23,887
Automotive
M. D. Jones 1998 $291,074 $190,506 $ 145,113 8,500 $ 25,000 $19,260
Vice President-- 1997 $262,500 $184,767 $1,009,969 14,400 $ 45,000 $30,477
Filtration Group and 1996 $245,000 $117,113 $ 96,600 5,400 $ 68,750 $13,919
President--Fleetguard
</TABLE>
- ---------
(1) Pursuant to the Company's 1992 Stock Incentive Plan, a total of 106,410
shares of Restricted Stock were awarded in 1998, having a total value at
date of award of $5,939,008. The shares will be restricted for two years
and one month subsequent to award, then are vested in one-third annual
increments, if the participant remains an employee of the Company. As of
year-end 1998, the total number of shares of Restricted Stock and the
value thereof held by each executive officer was as follows: J. A.
Henderson, 49,283 shares, $1,749,547; T. M. Solso, 62,634 shares,
$2,223,507; F. J. Loughrey, 41,967 shares, $1,489,829; C. R. Cordaro,
39,417 shares, $1,399,304; M. D. Jones, 22,642 shares, $803,791. Dividends
are paid on all shares of Restricted Stock.

(2) Stock Options granted pursuant to the Company's 1992 Stock Incentive Plan.

(3) The payouts for 1998 represent payouts for the 1995-1997 Award Cycle under
the Three Year Performance Plan and the Senior Executive Three Year
Performance Plan. Payouts were postponed from June, 1998 to January, 1999.
Each 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.

(4) Amounts reported as "All Other Compensation" for 1998 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 $-0- and $15,560; T. M. Solso
$5,000 and $31,559; F. J. Loughrey $5,000 and $18,563; C. R. Cordaro
$5,000, and $15,810; M. D. Jones $5,000 and $14,260.

13
<PAGE>

Security Ownership of Management

Set forth below is information as of February 28, 1999, regarding the
beneficial ownership of Common Stock of the Company by the Chief Executive
Officer, each of the other named executive officers during 1998 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...................................... 284,216(1) *
Theodore M. Solso
President and Chief Operating Officer........ 223,393(2) *
F. Joseph Loughrey
Executive Vice President, Group President--
Industrial.................................. 107,896(3) *
C. Roberto Cordaro
Executive Vice President, Group President--
Automotive.................................. 107,160(4) *
M. D. Jones
Vice President--Filtration Group and
President--Fleetguard....................... 73,048(5) *
All directors and executive officers as a
group, a total of 22 persons................. 1,192,218(6) 2.83%
</TABLE>
- ---------
* Less than 1%
(1) See footnote 5 to the director nominee listing on page 4.
(2) See footnote 7 to the director nominee listing on page 4.
(3) Includes 46,350 shares which Mr. Loughrey has the right to acquire within
the next 60 days through the exercise of stock options.
(4) Includes 45,900 shares which Mr. Cordaro has the right to acquire within
the next 60 days through the exercise of stock options.
(5) Includes 29,350 shares which Mr. Jones has the right to acquire within the
next 60 days through the exercise of stock options.
(6) Includes 494,350 shares which the executive officers 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 1998, 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......... 155,000 22.0% $55.688 2/10/08 $5,437,884 $13,724,184
2,500 0.4% $30.875 9/25/08 $ 48,628 $ 122,728
T. M. Solso............. 24,500 3.5% $55.688 2/10/08 $ 859,537 $ 2,169,307
4,550 0.6% $35.719 9/16/08 $ 102,388 $ 258,407
F. J. Loughrey.......... 11,500 1.6% $55.688 2/10/08 $ 403,456 $ 1,018,246
C. R. Cordaro........... 11,300 1.6% $55.688 2/10/08 $ 396,439 $ 1,000,537
M. D. Jones............. 7,000 1.0% $55.688 2/10/08 $ 245,582 $ 619,802
1,500 0.2% $32.813 11/1/08 $ 31,008 $ 78,258
</TABLE>
- ---------
(1) Except for 2,500 granted to J. A. Henderson, 4,550 granted to T. M. Solso
and 1,500 granted to M. D. Jones, all of which were immediately
exercisable, Stock Options may not be exercised for two years subsequent
to grant and expire ten years from grant.

Stock option and stock appreciation right exercise activity during 1998, 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, 1998.

Aggregated Option/SAR Exercises in Last Fiscal Year, and FY-End Option/SAR
Value

<TABLE>
<CAPTION>
Number of Value Number of Unexercised Value of Unexercised
Securities Realized Options/SARs at FY-end In-the-Money Options/SARs
Underlying ($) (#) at FY-End ($)
Options/SARs --------- ------------------------- -------------------------
Name Exercisable Exercised Exercisable Unexercisable Exercisable Unexercisable
---- ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. A. Henderson......... 0 $ 0 154,000 164,000 $11,563 $-0-
T. M. Solso............. 0 $ 0 98,850 33,500 $ -0- $-0-
F. J. Loughrey.......... 0 $ 0 46,350 20,500 $ -0- $-0-
C. R. Cordaro........... 0 $ 0 45,900 20,300 $ -0- $-0-
M. D. Jones............. 0 $ 0 29,350 16,000 $ 4,031 $-0-
</TABLE>

15
<PAGE>

Estimated benefits payable to each named executive pursuant to long-term
incentive plan rights awarded during 1998 are disclosed in the following
table.

Long-Term Incentive Plan Awards in Last Fiscal Year/SAR Value

<TABLE>
<CAPTION>
Estimated Future Payouts
Number of Under Non-Stock
Shares, Units Price-Based Plans
or other Period Until ------------------------
Name Rights(1) Payout Threshold Target Maximum
---- ------------- ------------ --------- ------ -------
<S> <C> <C> <C> <C> <C>
J. A. Henderson............. 7,108 1999-2001 1,777 7,108 14,216
T. M. Solso................. 4,938 1999-2001 1,235 4,938 9,876
F. J. Loughrey.............. 2,993 1998-2000 748 2,993 5,986
C. R. Cordaro............... 2,394 1998-2000 599 2,394 4,788
M. D. Jones................. 1,272 1998-2000 318 1,272 2,544
</TABLE>
- ---------
(1) Stock units were awarded under the Company's 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 1998-2000 Award
Cycle under the Three Year Performance Plan (payable in 2001) and the
1999-2001 Award Cycle under the Senior Executive Three Year Performance
Plan (payable in 2002), 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 (25%
of the Target Award) will be earned if the Company's ROE is 50% of the
Peer Group companies' median ROE. The Maximum Payment (200% of the Target
Award) is earned if the Company's ROE is 200% of the Peer Group companies'
median ROE. The payouts will be equal to the number of stock units awarded
times the Payout Factor for the Award Cycle times the six-month trailing
average price of Common Stock at the end of the Award Cycle.

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.
Benefits are not offset or otherwise reduced by amounts payable or received
under Social Security. 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
(Base Salary Estimated Annual Benefit Upon Retirement
plus Short- --------------------------------------------------------------
Term Bonus) 10 Years 15 Years 20 Years 25 Years 30+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, 1998 for the Company's Chief Executive Officer and the other
named executive officers are as follows: J. A. Henderson, $1,272,830, 34
years; T. M. Solso, $820,846, 27 years; F. J. Loughrey, $557,893, 25 years; C.
R. Cordaro, $443,350, 20 years; M. D. Jones, $419,392, 28 years.

17
<PAGE>

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. Certain
named executive officers, as designated by the Compensation Committee, 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.
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.

Other Transactions and Agreements With Directors and Officers

In November, 1998 Irwin Financial Corporation ("IFC") purchased from the
Company a partial interest in one of the Company's business aircraft for
$1,177,000 and entered into an arrangement to share fixed and operating
expenses of such aircraft. No expense sharing payments were made by IFC to the
Company during 1998. Director nominee William I. Miller is Chairman and an
executive officer of IFC.

Pursuant to the Company's Key Employee Stock Investment Plan, certain
officers have 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,
1998, the largest aggregate amount owed for such purchases and loans at any
time since January 1, 1998, and the amount owed as of January 31, 1999:

<TABLE>
<CAPTION>
Amount of
Largest Indebtedness
Amount of as of
Indebtedness January 31, 1999
------------ ----------------
<S> <C> <C>
J. S. Blackwell............................. $247,575.00 $247,575.00
P. F. Carter................................ $243,475.00 $243,475.00
C. R. Cordaro............................... $329,957.81 $329,957.81
M. R. Gerstle............................... $272,387.50 $272,387.50
J. A. Henderson............................. $625,127.72 $625,127.72
M. D. Jones................................. $292,312.50 $292,312.50
R. J. Mills................................. $204,977.38 $204,977.38
K. M. Patel................................. $349,847.50 $349,847.50
T. M. Solso................................. $639,976.50 $639,976.50
</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 1998, no
executive officers sold shares to the Company pursuant to this policy.

18
<PAGE>

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 1999. 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.

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 1999 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

Shareholder Proposals

Shareholders may submit proposals to be considered for shareholder action at
the 2000 Annual Meeting of Shareholders and inclusion in the Company's Proxy
Statement and proxy card if they do so in accordance with the appropriate
regulations of the Securities and Exchange Commission. For such proposals to
be considered for inclusion in the Proxy Statement and form of proxy for the
2000 Annual Meeting of Shareholders, proposals must be received by the
Secretary of the Company no later than November 3, 1999.

If a shareholder desires to bring proper business before an annual meeting
of shareholders which is not the subject of a proposal timely submitted for
inclusion in the Company's Proxy Statement and form of proxy as described
above, the shareholder must follow procedures outlined in the Company's By-
Laws. Pursuant to the Company's By-Laws, a shareholder may propose business to
be considered at the annual meeting, provided that the shareholder (a) is a
shareholder of record at

19
<PAGE>

the time of giving notice to the Company of the proposal and is entitled to
vote at the annual meeting where the proposal will be considered, and (b)
complies with the notice procedures of Article I of the Company's By-Laws.
That Article provides that the proposing shareholder must deliver written
notice of the proposal to the Company's Secretary no later than 90 days
preceding the first Tuesday of April of the meeting year, unless the Board of
Directors establishes an earlier date than the first Tuesday of April for the
annual meeting, in which case written notice of the proposal must be delivered
not later than the close of business on the 10th day following the first
public disclosure of the earlier date. The required notice must contain
certain information, including information about the shareholder, as
prescribed by the By-Laws.

Expenses of Solicitation

The cost of this proxy solicitation will be borne by the Company. Morrow &
Co., 445 Park Avenue, New York, New York 10022, 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 materials.

March 3, 1999

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 Ameritech
Corporation, International Paper Company, 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.

PHOTO OF JAMES A HENDERSON
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
Cyprus Amax Minerals Company and Irwin Financial
Corporation, and is a member of the boards of Cummins
Engine Foundation and Otter Creek Golf Course in
Columbus, Indiana. He is also a member of the Board
of Trustees, DePauw University.

PHOTO OF THEO SOLSO
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 Evergreen Holdings,
Inc., Mattel, Inc. and Philip Morris Companies, Inc.
He is a Trustee of the California Institute of
Technology and the Rand Corporation.

PHOTO OF H. BROWN
HAROLD BROWN

Mr. Darnall is President and Chief Executive Officer
of ISPAT North America 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 served as Chairman,
President and Chief Executive Officer from 1992 to
1998. 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 The University of Chicago, the Glenwood
School for Boys, Junior Achievement of Chicago, and
The Museum of Science and Industry.

PHOTO OF R. DARNALL
ROBERT J. DARNALL

22
<PAGE>

Mr. Deutch has been an Institute Professor at the
Massachusetts Institute of Technology since 1990. He
joined the MIT faculty in 1970 and served as Dean of
Science from 1982 to 1985 and Provost from 1985 to
1990. Mr. Deutch received a B.A. in History and
Economics from Amherst College in 1961; and a B.S. in
Chemical Engineering in 1961 and Ph.D. in Physical
Chemistry in 1965, both from MIT. While on leave from
his current post at MIT, Mr. Deutch served as
Director of Central Intelligence and Director of the
Central Intelligence Agency during 1995 and 1996.
From 1994 through 1995 he was U.S. Deputy Secretary
of Defense and also served as Undersecretary of
Defense for Acquisition and Technology between 1993
and 1994. He was Director of Energy Research and
Undersecretary of the U.S. Department of Energy
during the Carter Administration. He is a Director of
Ariad, Citicorp, CMS Energy, Raytheon Corporation,
Sandia Laboratories and Schlumberger, and is also a
Trustee of The French Library, The Jerusalem
Foundation, Resources for the Future, and the Urban
Institute.

PHOTO OF JOHN DEUTCH
JOHN M. DEUTCH

Mr. Elisha is the retired Chairman and Chief
Executive Officer of Springs Industries, Inc. He 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
served as Springs Industries, Inc.'s Chief Executive
Officer from 1981 through 1997 and was Chairman of
its Board from 1983 until 1998. He also serves on the
Board of Directors for AT&T and Carolina Power &
Light. Mr. Elisha is an honorary trustee of the
Brookings Institution and a trustee of the Committee
for Economic Development. He is a member of the
Business Council and the Council on Competitiveness;
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.

PHOTO OF WALTER ELISHA
WALTER Y. ELISHA

23
<PAGE>

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, and
Ameritech Corporation.

[Photo of Hanna H. Gray]

HANNA H. GRAY

Mr. Johnson is Chairman of the Executive Committee of
the Board of Directors of the Federal National
Mortgage Association (Fannie Mae). After joining
Fannie Mae in 1990 as Vice Chairman, he served as
Chairman and Chief Executive Officer from 1991
through 1998. Mr. Johnson received a B.A. degree in
political science from the University of Minnesota
and an M.P.A. degree in public affairs from the
Woodrow Wilson School at Princeton. Prior to joining
Fannie Mae, Mr. Johnson held executive positions with
investment banking and consulting firms, and from
1977 to 1981 served as executive assistant to Vice
President Walter F. Mondale. He is chairman of The
John F. Kennedy Center for the Performing Arts and of
the Fannie Mae Foundation, and chairman of the board
of trustees of The Brookings Institution. Mr. Johnson
also serves on the boards of the Alliance To Save
Energy; Carnegie Corporation of New York; Carnegie
Endowment for International Peace; Dayton Hudson
Corporation; The Enterprise Foundation; Kaufman and
Broad Home Corporation; National Housing Endowment;
and United HealthCare Corporation. He is also a
member of The Business Council.

[Photo of James A. Johnson]

JAMES A. JOHNSON

<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 floor
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.

[Photo of William I. Miller]

WILLIAM I. MILLER

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, Coinstar
Inc., Solutia Inc. and Gargoyles, Inc.

[Photo of William D.
Ruckelshaus]

WILLIAM D.
RUCKELSHAUS

25
<PAGE>

Mr. Schacht is Senior Advisor and the former Chairman
of the Board of Lucent Technologies, Inc. He was also
Chief Executive Officer of Lucent from 1995 to 1997.
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., ALCOA, Johnson & Johnson, The
Chase Manhattan Corporation, The Chase Manhattan
Bank, N.A., and Knoll, Inc.; he is Chairman of the
Board of Trustees of the Ford Foundation, a Trustee
of The Yale Corporation and the Metropolitan Museum
of Art (NYC). He is also a member of the Business
Council, the Council on Foreign Relations and the
Management Executives' Society.

[Photo of Henry B. Schacht]

HENRY B. SCHACHT

Mr. Thomas is an attorney and 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
Citigroup, Inc., Conoco, Inc., ALCOA, Lucent
Technologies, Inc., and PepsiCo.

[Photo of Franklin A.
Thomas]

FRANKLIN A.
THOMAS

26
<PAGE>

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, the Vanguard Group of
Investment Companies and Mead Corporation. He serves
as Chairman of the Board of the Philadelphia High
School Academies, Inc. and is past Chairman of The
Chemical Manufacturers Association. Mr. Wilson has
been Chairman and Chief Executive Officer of Rohm and
Haas Company since 1988.

[Photo of J. Lawrence
Wilson]

J. LAWRENCE
WILSON

27
<PAGE>

Cummins Annual Shareholder Meeting

April 6, 1999 - 10:30 am. (E.S.T.)

Columbus East High School Auditorium

[MAP]

[LOGO]

<PAGE>

PROXY

CUMMINS ENGINE COMPANY, INC.

Proxy Solicited on Behalf of the Board of Directors of
the Company for Annual Meeting April 6, 1999

The undersigned hereby constitutes and appoints 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 6, 1999,
and at any adjournments thereof, on all matters coming before said meeting.

Election of Directors, Nominees:
Harold Brown, Robert J. Damall, John M. Deutch, Walter Y. Elisha, Hanna H. Gray,
James A. Henderson, James A. Johnson, William I. Miller, 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. 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
-------------
<PAGE>

[X] Please mark your votes as in this example. 9532

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.

- --------------------------------------------------------------------------------
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):

- ----------------------------------------------------------
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.

2. Proposal to ratify Arthur Andersen LLP as independent accountants.

FOR AGAINST ABSTAIN
[_] [_] [_]

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

The signer hereby revokes all proxies heretofore given by the signer to vote at
said meeting of 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