<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1994 COMMISSION FILE NUMBER 1-6263
AAR CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-2334820
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1111 NICHOLAS BOULEVARD, ELK GROVE VILLAGE, ILLINOIS 60007
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (708) 439-3939
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- - ----------------------------------- -----------------------------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
At June 30, 1994, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was approximately $218,718,000. The calculation of
such market value has been made for the purposes of this report only and should
not be considered as an admission or conclusion by the Registrant that any
person is in fact an affiliate of the Registrant.
On June 30, 1994, there were 15,906,792 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the Registrant's Annual Meeting
of Stockholders, to be held October 12, 1994, is incorporated by reference in
Part III to the extent described therein.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I
Item 1. Business..................................................................................... 2
Item 2. Properties................................................................................... 3
Item 3. Legal Proceedings............................................................................ 4
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 4
Executive Officers of the Registrant......................................................... 4
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.................................................................................... 6
Item 6. Selected Financial Data...................................................................... 7
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition........................................................................ 8
Item 8. Financial Statements and Supplementary Data.................................................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 36
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 37
Item 11. Executive Compensation....................................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 37
Item 13. Certain Relationships and Related Transactions............................................... 37
PART IV
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K...................................... 38
39
SIGNATURES..................................................................................................
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS
AAR CORP. and its subsidiaries are referred to herein collectively as the
"Company," unless the context indicates otherwise. The Company was organized in
1955 as the successor to a business founded in 1951 and was reincorporated in
Delaware in 1966. The Company supplies a variety of products and services for
aviation in the United States and abroad.
Certain of the Company's aviation-related activities and products are
subject to licensing, certification and other requirements imposed by the
Federal Aviation Administration and other regulatory agencies, both domestic and
foreign. The Company believes that it has all licenses and certifications that
are material to the conduct of its business.
The Company's trading activities include the purchase, sale and lease of a
wide variety of new, used and overhauled aviation products, principally aircraft
equipment such as engines, avionics, accessories, airframe and engine parts and
components. The Company also provides customized inventory supply and management
programs for certain aircraft and engine parts in support of customer
maintenance activities. The Company is also a distributor of new aviation
hardware and parts. The Company's primary sources of aviation products are
domestic and foreign airlines, independent aviation service companies and
airframe, engine and other original equipment manufacturers. The Company's
trading activities also include the purchase, sale, lease and lease financing of
new and used jet aircraft.
The Company provides a wide range of services, parts, component exchange and
other products as part of its overhaul activities. The Company overhauls,
repairs and modifies components for commercial and military aircraft, including
landing gear and engine components for most models of commercial aircraft. It
provides aircraft terminal services (fueling and aircraft storage), maintenance,
modification, special equipment installation and painting services for
commercial and business aircraft.
The Company manufactures, installs and repairs specialized aviation
products, including pallets, containers, cargo handling systems and lightweight
air logistics shelters, primarily for domestic and foreign military
organizations, airframe manufacturers, commercial airlines and others.
The Company furnishes Aviation Services directly through its own employees.
Domestic and foreign airlines, airframe, engine and other original equipment
manufacturers, aircraft leasing companies, domestic and foreign military
organizations and independent aviation support companies are the principal
customers for the Company's aviation trading activities. Principal customers of
the Company's aviation overhaul activities are commercial airlines, aircraft
leasing companies, business aircraft operators, military overhaul depots,
military contractors and original equipment manufacturers. Sales of Aviation
Services to commercial airlines are generally affected by such factors as the
number, type and average age of aircraft in service, the levels of aircraft
utilization (E.G., frequency of schedules), the number of airline operators and
the level of sales of new and used aircraft.
The Company is a leading independent supplier of Aviation Services to the
aviation aftermarket, which is highly competitive. Competition is based on
quality, ability to provide a broad range of products and services, speed of
delivery and price. During the past three years, demand for aviation aftermarket
products and services declined as airlines reduced operations and curtailed
purchases to counter the impact of the airlines' reduced traffic demand which
has not until recently showed signs of improvement. Additionally, during this
period many airlines continued experiencing financial losses, and certain
carriers ceased operations. Aggressive price competition among the airlines has
led carriers to continue to reduce costs and to defer or curtail
2
<PAGE>
nonessential spending. The ongoing soft demand for aviation products and
services was exacerbated by increased competition due to availability of parts
removed from grounded aircraft and from entry onto the market of inventories
from liquidated airlines. Aerospace manufacturers have over the last few years
experienced reduced demand caused by cancellations of new aircraft orders and
government spending cuts reducing their parts support requirements.
The Company competes with other independent distributors and independent
support facilities, as well as with airlines and original equipment
manufacturers, including aerospace equipment manufacturers, some of which have
greater resources than the Company. In certain of its leasing and commercial jet
aircraft trading activities, the Company faces competition from financial
institutions, syndicators, commercial and specialized leasing companies and
other entities that provide financing, some of which have greater resources than
the Company. The Company believes it has maintained a satisfactory competitive
position.
In addition to its aviation-related activities, the Company manufactures
highly engineered proprietary products, including industrial floor cleaning and
materials handling equipment and nuclear shielding material. The Company sells
these products directly and through independent distributors to a wide variety
of commercial customers and domestic and foreign governments. The markets for
these products are highly competitive, based on price, quality and availability.
At May 31, 1994, backlog believed to be firm was approximately $84,550,000
compared to $77,520,000 at May 31, 1993. An additional $82,620,000 of unfunded
government options on awarded contracts also existed at May 31, 1994. Of the
1994 year-end backlog that is firm, $41,460,000 is attributable to government
contracts for products related to the U.S. Government's rapid deployment
programs. It is expected that approximately $70,523,000 of the backlog will be
shipped in fiscal 1995.
Sales to the United States government and its agencies were approximately
$77,500,000 (19.0% of total net sales), $57,600,000 (15.0% of total net sales)
and $54,000,000 (12.8% of total net sales) in fiscal 1994, 1993 and 1992,
respectively. Because such sales are subject to competitive bidding and
government funding, no assurance can be given that such sales will continue at
levels previously experienced. The majority of the Company's government
contracts are for aviation products and services used for ongoing routine
military logistic support activities; unlike weapons systems and other high
technology military requirements, these products and services are less likely to
be affected by reductions in defense spending. The Company's contracts with the
United States government and its agencies are typically firm agreements to
provide aviation products and services at a fixed price and have a term of one
year or less, frequently subject to extension for one or more additional periods
of one year at the option of the government agency. Although the Company's
government contracts are subject to termination at the election of the
government, in the event of such a termination the Company would be entitled to
recover from the government all allowable costs incurred by the Company through
the date of termination.
At May 31, 1994, the Company employed approximately 1,860 persons worldwide.
For information concerning the Company's Business Segment activities,
including classes of similar products and services, see Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial Condition." For
information concerning export sales, see "Business Segment Information" in Note
1 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
Aviation trading activities are conducted from two buildings in Elk Grove
Village, Illinois, one owned by the Company, the other subject to an industrial
revenue bond mortgage until 1995. In addition to warehouse space, which is
mechanized for efficient access to the diverse inventory, these facilities
include executive offices, sales offices and a service center. Warehouse
facilities are
3
<PAGE>
leased in Cerritos, California and Hawthorne, New York for the purpose of
aviation hardware distribution and in Hamburg, Germany and Nantgarw, United
Kingdom for the purpose of aviation part and component distribution.
Aviation overhaul facilities are located in The Netherlands near Schiphol
International Airport (owned by the Company); Garden City, New York (owned by
the Company); Frankfort, New York (subject to an industrial revenue bond lease
to the Company until 2001, at which time the Company shall purchase the facility
for a nominal consideration); Windsor, Connecticut (in a building owned by the
Company); Miami, Florida (in leased facilities near the airport); Singapore (in
leased facilities adjacent to the airport); London, England (in leased
facilities); Paris, France (in leased facilities) and Oklahoma City, Oklahoma
(in facilities leased from airport authorities). The Company's experience
indicates that lease renewal is available on reasonable terms consistent with
its business needs.
The Company's principal manufacturing activities are conducted at owned
facilities in Cadillac and Livonia, Michigan. Industrial floor cleaning
equipment is manufactured in a plant located in Aberdeen, North Carolina
(subject to an industrial revenue bond lease to the Company until October 1994,
at which time the Company shall purchase the facility for a nominal
consideration) with a sales office in Bad Hamburg, Germany.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings other than
routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
SUPPLEMENTAL INFORMATION:
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning each executive officer of the Company is set forth
below:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY
- - --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Ira A. Eichner............................... 63 Chairman of the Board and Chief Executive Officer; Director
David P. Storch.............................. 41 President and Chief Operating Officer; Director
Robert D. Johnson............................ 47 Vice President-Services and Manufacturing Group
Howard A. Pulsifer........................... 51 Vice President; General Counsel; Secretary
</TABLE>
The term of each of the current executive officers of the Company expires on
October 12, 1994, the date of the annual meeting of the Board of Directors,
which will be held immediately after the 1994 Annual Meeting of Stockholders.
Mr. Eichner, the founder of the Company, has been Chairman of the Board of
the Company since 1973, and his directorship expires at the 1996 Annual Meeting.
Mr. Eichner has been a director and the Chief Executive Officer of the Company
since 1955. Mr. Eichner also serves as a director of United Stationers, Inc. Mr.
Eichner is Mr. Storch's father-in-law.
Mr. Storch was elected President of the Company in July, 1989. He had been a
Vice President of the Company since January, 1988. Mr. Storch joined the Company
in 1979 and had been President of a major subsidiary since June, 1984. Mr.
Storch has been a director of the Company since 1989, and his directorship
expires at the 1994 Annual Meeting. Mr. Storch is Mr. Eichner's son-in-law.
4
<PAGE>
Mr. Johnson joined the Company as Vice President-Services and Manufacturing
Group in June, 1993. He was previously with the General Electric Company for
more than 24 years in various management positions, most recently as General
Manager of several General Electric aircraft engines service and overhaul
operations. Mr. Johnson resigned from the Company effective July 6, 1994.
Mr. Pulsifer joined the Company as General Counsel in August, 1987 and was
elected a Vice President in October, 1989 and Secretary in May, 1990. He was
previously with United Airlines, Inc. for 14 years, most recently as Senior
Counsel.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange and the
Chicago Stock Exchange. On June 30, 1994, there were approximately 14,500
holders of the Common Stock of the Company, including participants in security
position listings.
Certain of the Company's debt agreements contain provisions restricting the
payment of dividends or repurchase of its shares. See Note 2 of Notes to
Consolidated Financial Statements included herein. Under the most restrictive of
these provisions, the Company may not pay dividends (other than stock dividends)
or acquire its capital stock if after giving effect thereto the aggregate
amounts paid on or after June 1, 1991 exceed the sum of (i) $29,300,000 plus
(ii) 50% of Consolidated Net Income of the Company after June 1, 1991. At May
31, 1994, unrestricted consolidated retained earnings available for payment of
dividends and purchase of the Company's shares totalled approximately
$10,320,000. Effective June 1, 1994 unrestricted consolidated retained earnings
increased to $15,067,000 due to the inclusion of 50% of the Consolidated Net
Income of the Company for fiscal 1994.
The table below sets forth for each quarter of the fiscal year indicated the
reported high and low sales price of the Company's Common Stock on the New York
Stock Exchange and the amount of dividends declared.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1993
------------------------------- ----------------------------
PER COMMON SHARE: MARKET PRICES MARKET PRICES
- - ---------------------------- -------------------- QUARTERLY ----------------- QUARTERLY
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- - ---------------------------- --------- --------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
First..................... 14 1/8 12 5/8 $.12 13 5/8 11 7/8 $.12
Second.................... 14 1/4 12 5/8 .12 12 1/2 11 1/8 .12
Third..................... 16 5/8 13 1/2 .12 12 7/8 11 .12
Fourth.................... 17 3/8 14 3/8 .12 14 5/8 11 5/8 .12
--------- ---------
$.48 $.48
--------- ---------
--------- ---------
</TABLE>
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
(000'S OMITTED EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
- - ----------------------------------------------
Net sales................................... $407,754 $382,780 $422,657 $466,542 $444,875
Gross profit................................ 71,910 68,436 83,440 92,246 100,763
Operating income............................ 21,824 5,343(2) 20,730(3) 30,401(4) 46,851
Interest expense............................ 9,564 8,107 8,356 10,073 9,989
Income (loss) before provision (benefit) for
income taxes.............................. 13,684 (1,917)(2) 13,620(3) 21,351(4) 38,155
Net income.................................. 9,494 283(2) 10,020(3) 14,801(4) 25,655
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Per share data:
Net income................................ $ .60 $ .02(2) $ .63(3) $ .93(4) $ 1.60
Cash dividends............................ $ .48 $ .48 $ .48 $ .48 $ .47
Average common shares
outstanding............................. 15,904 15,855 15,895 15,952 16,053
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
FINANCIAL POSITION AT YEAR END:
- - ------------------------------------------------------------
Working capital............................. $240,009(1) $193,399 $197,246 $189,172 $184,932
Total assets................................ 417,626 365,151 395,351 379,958 388,521
Short-term debt............................. 568(1) 25,025 25,005 16,500 33,821
Long-term debt.............................. 115,729(1) 66,298 67,323 68,953 72,329
Total debt.................................. 116,297(1) 91,323 92,328 85,453 106,150
Stockholders' equity........................ 189,488 189,216 196,737 193,778 189,548
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Number of shares outstanding at end of
year...................................... 15,906 15,900 15,899 15,891 16,082
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Book value per share of common stock........ $ 11.91 $ 11.90 $ 12.37 $ 12.19 $ 11.79
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
<FN>
- - ------------------------
Notes:
(1) In October 1993, the Company sold $50,000,000 of unsecured 7.25% Notes due
October 15, 2003. Proceeds were used to repay short-term bank borrowings
and utilized in the Company's operations.
(2) Fiscal 1993 includes non-cash restructuring expenses of $11,000,000 (or
$7,200,000 after-tax) primarily related to the writedown of certain
inventories to reflect the impact of market conditions (See Note 11 of
Notes to Consolidated Financial Statements) and a reduction in income tax
expense of $1,200,000 (See Note 3 of Notes to Consolidated Financial
Statements).
(3) Fiscal 1992 includes expenses of $5,800,000 (or $3,800,000 after-tax)
related to the Company's restructuring of its Oklahoma City maintenance
subsidiary (See Note 11 of Notes to Consolidated Financial Statements) and
a reduction in income tax expense of $700,000 (See Note 3 of Notes to
Consolidated Financial Statements).
(4) Fiscal 1991 includes expenses of $3,300,000 (or $2,150,000 after-tax)
primarily related to the restructuring of the Oklahoma City maintenance
subsidiary and an airline customer bankruptcy.
</TABLE>
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company reports its activities in one business segment: Aviation
Services. The table below sets forth net sales for the Company's classes of
similar products and services within this segment for each of the last three
fiscal years ended May 31.
THREE-YEAR NET SALES SUMMARY
Any comparison of net sales for the last three fiscal years should be viewed
in light of the economic weakness of the aerospace/aviation industry during much
of this period. The Company believes that industry conditions have stabilized
and in certain respects improved toward the end of this time frame. Airlines, in
general, have recently experienced increased aircraft utilization, seen growth
in revenue passenger and freight miles and posted modest operating gains. The
Company continued to aggressively pursue market opportunities, resulting in
improved revenues in fiscal 1994.
A decline in sales of aviation fasteners, due to lower demand by
aerospace/aviation manufacturers, offset what otherwise would have been an
increase in trading sales during the three year period. Further affecting the
decline in fastener sales was the Company's election not to make significant new
investments in inventory for fastener programs with uncertain return potential
in a shrinking market. During this period the Company experienced an increase in
engine and airframe parts sales.
Fiscal 1994 overhaul sales increased from the prior year in part due to an
increase in maintenance services at the Company's Oklahoma City facility.
Additionally, sales of manufactured products increased in fiscal 1994 from the
prior year due primarily to sales to the U.S. government for the rapid
deployment program.
The Company believes it is well positioned to take advantage of available
opportunities in the improving aerospace/aviation industry.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
(000'S OMITTED)
Net Sales:
Trading........................................... $199,433 $202,464 $209,410
Overhaul.......................................... 112,100 102,382 115,250
Manufacturing..................................... 96,221 77,934 97,997
-------- -------- --------
$407,754 $382,780 $422,657
-------- -------- --------
-------- -------- --------
</TABLE>
FISCAL 1994 COMPARED WITH FISCAL 1993
The Company's operating results improved in fiscal 1994 despite the highly
competitive and economically weak aerospace/aviation market. Consolidated net
sales for fiscal 1994 increased $24,974,000 or 6.5% over the prior fiscal year
primarily as a result of increased manufacturing and overhaul sales. Net income
increased $9,211,000 over the prior year, which included restructuring expenses
of $11,000,000 ($7,200,000 after tax) related to the write-down of certain
inventories. Excluding restructuring expenses, net income increased $2,011,000
or 26.9% as the result of sales increases and reduced selling, general and
administrative costs.
Manufacturing sales increased $18,287,000 or 23.5%, primarily from the sale
of products to the U.S. government. Overhaul sales increased $9,718,000 or 9.5%
due to increased demand for maintenance services at the Oklahoma City facility
and increased sales of rotable landing gear inventory. Trading sales increased
in its primary products, such as airframe and engine parts;
8
<PAGE>
however, these gains were offset by reduced demand for aviation fasteners and
the Company's decision not to enter into fastener programs requiring significant
inventory investment with uncertain returns. These factors resulted in an
overall decline in trading sales of $3,031,000 or 1.5%.
Consolidated gross profit increased $3,474,000 or 5.1% over the prior year
primarily due to increased sales revenue. Fiscal 1994 consolidated gross profit
included $700,000 from a reduction in the interest rate on a nonrecourse
leveraged lease obligation negotiated by the Company, and $1,300,000 from
leveraged lease repricing required to adjust for tax rate differentials. The
consolidated gross profit margin was slightly lower than the prior year, down
from 17.9% to 17.6%. Trading and manufacturing margins improved year over year
while overhaul margins declined. The overhaul margin decline was due to
increased price competition resulting from maintenance overcapacity in the
industry and airlines using lower-cost serviceable replacement components in
preference to overhaul services.
Consolidated operating income increased $16,481,000 over the prior year.
Without the fiscal 1993 restructuring expenses of $11,000,000, operating income
increased $5,481,000 or 33.5% due primarily to the increased sales and a
reduction of $2,007,000 in selling, general and administrative costs. The
Company maintained its effort to contain costs, reduce nonessential spending and
create operating efficiencies wherever possible.
Consolidated net income increased $9,211,000 notwithstanding increased
interest expense of $1,457,000 due to higher fixed-rate interest on debt from
the issuance of $50 million of new 7.25% long-term notes issued in October,
1993. Proceeds from this fixed-rate debt repaid $28 million of short-term bank
borrowings at lower interest rates. Higher margins on fiscal 1994 export sales
reduced the effective tax rate, which also contributed to the net income
increase.
FISCAL 1993 COMPARED WITH FISCAL 1992
Consolidated net sales for fiscal 1993 decreased $39,877,000 or 9% from the
prior fiscal year. Net income decreased $9,737,000 or 97% as the result of the
sales decrease, restructuring expenses of $11,000,000 (or $7,200,000 after tax)
and a reduction in the consolidated gross profit margin. The operating results
of each major business activity in fiscal 1993 were adversely impacted by the
continued weak economic environment, particularly in the aerospace/aviation
market.
Trading activities benefitted from increased sales of its primary products,
such as airframe and engine parts. Even with these increases, trading sales
decreased $6,946,000 or 3%, primarily due to reduced demand for aviation
fasteners. The demand for fasteners decreased due to aerospace/aviation
manufacturers' reduced requirements caused by delays and cancellations of new
aircraft orders and government budget cuts affecting certain defense
contractors. The sales of overhaul services decreased $13,986,000 or 12%,
primarily as a result of lower demand and the effect of downsizing the Oklahoma
City maintenance facility. The lower demand was caused by airlines downsizing
their active fleets and focusing on lowering maintenance costs. The resulting
maintenance overcapacity increased competition which resulted in lower prices
and a Company decision not to compete for certain overhaul work. Also, airlines
used lower-cost serviceable components, abundant in the marketplace, in
preference to overhauling certain units. Simultaneously, the Company took steps
within its overhaul activities to reduce costs. Manufacturing sales decreased
$18,945,000, or 20%; however, it should be noted that fiscal 1992 included
$11,000,000 of non-recurring product sales for the Persian Gulf conflict. Sales
for the government's rapid deployment program increased during fiscal 1993 and
the order backlog was higher at the end of fiscal 1993 as compared to the same
period in fiscal 1992. Further, sales were reduced due to the reduction and
deferral of orders for commercial and military aircraft cargo systems
9
<PAGE>
and spare parts, and lower sales at the Company's floor maintenance equipment
unit due to a recession-induced decline in demand, intense competition and the
effect of converting to a direct distribution system in Europe.
Consolidated gross profit contribution decreased $15,004,000 or 18% from
fiscal 1992 due to a reduction in sales and a decrease in consolidated gross
profit margin from 19.7% to 17.9%. Lower production and sales levels in relation
to fixed costs at a few units, as well as increased competition, hampered the
margin; the Company's floor maintenance equipment unit was most affected
incurring a loss for the year. Following aggressive cost-reduction efforts and
an improvement in sales, operating performance significantly improved in the
third and fourth quarters. The consolidated gross profit margin benefitted from
sales of airframe and engine parts at margins consistent with the prior year and
the effect of cost reductions at the Oklahoma City maintenance facility. Cost
reductions implemented company wide during fiscal 1993 benefitted ongoing
operations.
The Company reduced selling, general and administrative expenses $4,817,000
or 8% in response to a decrease in sales and competitive market conditions. The
Company continued its focus on cost containment and improvement in operating
efficiencies in an effort to maintain its operating margins.
In February, 1993 the Company recorded noncash restructuring expenses of
$11,000,000 for the writedown of certain inventories and associated costs. The
inventories most affected were parts for older-model commercial aircraft,
certain manufactured products and material supporting original equipment
manufacturers. The writedown resulted from the Company's assessment of the
impact on inventories of then very recent changes in the aerospace/aviation
market, as well as the continued recessionary environment. The Company believes
the reduction in inventory value improved its competitive position and
facilitated sale of the inventories.
The income tax benefit of $2,200,000 reported in fiscal 1993 included an
expense reduction of $1,200,000 from the reversal of income tax liabilities. The
income tax benefit before the expense reduction was higher than that determined
using the statutory rate as the result of state income tax refunds and the
effect of tax benefits on exempt earnings from export sales. The provision for
income taxes in fiscal 1992 was lower than the amount computed using the
statutory Federal income tax rate due to tax benefits generated from export
sales and an income tax expense reduction of $700,000. The income tax expense
reductions were for income tax liabilities recorded in prior years, but no
longer required due to the conclusion by the Internal Revenue Service of its
examination of the Company's Federal income tax returns for prior years.
Fourth quarter fiscal 1993 sales decreased $8,009,000 or 7% as compared to
the same quarter of the prior year; however, net income increased $300,000.
Sales and earnings continued to be impacted by adverse market conditions. The
fourth quarter fiscal 1993 operating results improved from the third quarter
fiscal 1993 as the result of a 22% increase in consolidated sales and lower
operating costs. Fiscal 1992's fourth quarter operating results included
restructuring expenses of $5,800,000, or $3,800,000 after tax, related to the
Oklahoma City maintenance facility.
FISCAL 1992
Consolidated net sales decreased $43,885,000 or 9% primarily as a result of
a cessation of shipments of manufactured logistics support products for the
Allied Coalition in the Persian Gulf conflict and reduced sales at the Company's
Oklahoma City maintenance facility amounting to $53,000,000 in the prior year.
These reductions were partially mitigated by increases in certain trading and
overhaul activities stemming from the provisioning of transitioned aircraft,
maintenance part activities, and component overhaul activities, despite the
difficult economic environment and airline customer's curtailment of
nonessential spending.
10
<PAGE>
Consolidated operating income decreased $9,671,000 primarily due to the
reductions in consolidated net sales described above and restructuring expenses
of $5,800,000 recorded for restructuring and reduction in size of the Company's
Oklahoma City maintenance facility. The reduction in the overhaul subsidiary
resulted from continued operating losses being experienced by an industry-wide
overcapacity for certain maintenance services, which led to facility and
workforce underutilization.
Consolidated net income decreased $4,781,000 as a result of the events
impacting consolidated net sales and the restructuring expenses previously
described. The impact of these events were moderated by interest expense savings
attributed to a decline in short-term interest rates and a lower provision for
income taxes resulting from tax benefits generated from export sales and a
reduction of previously recorded tax liabilities no longer required due to the
conclusion by the Internal Revenue Service of its examination of previous years
Federal income tax returns of the Company.
FINANCIAL CONDITION
AT MAY 31, 1994 COMPARED WITH MAY 31, 1993
In fiscal 1994, the Company's primary sources of liquidity were the proceeds
of $50,000,000 from the issuance of 7.25% unsecured ten-year notes in October,
1993 and cash provided from operations of $6,697,000. The proceeds from the
issuance of the notes were used to repay all outstanding short-term bank debt,
thus making available to the Company the full amount of its credit lines and
borrowing facilities. The balance of the note proceeds were used for working
capital requirements, primarily inventory and accounts receivable. Net cash
provided from operating activities decreased $10,109,000 in fiscal 1994 from the
prior year as a result of new inventory investments to support government
contracts and deposits made on purchases of inventory (see note 7 in Notes to
Consolidated Financial Statements) to support new inventory provisioning
contracts entered into during fiscal 1994. Cash provided in excess of these
requirements was used primarily for capital expenditures and to pay dividends.
The Company's financial condition remains solid. The Company improved its
current ratio and working capital position during the year in spite of operating
in an aerospace/aviation industry that continued to be financially troubled
although improving. The Company's improved financial condition and available
sources of financing, including its unused bank credit lines and facilities
amounting to $132,500,000, will enable the Company to meet its anticipated
working capital requirements and pursue advantageous business opportunities.
A summary of key indicators of financial condition and lines of credit
follows:
<TABLE>
<CAPTION>
MAY 31,
------------------
DESCRIPTION 1994 1993
- - ------------------------------------------------------------ -------- --------
<S> <C> <C>
(000'S OMITTED)
Working capital............................................. $240,009 $193,399
Current ratio............................................... 4.5:1 3.7:1
Bank credit lines:
Borrowings outstanding.................................... $ -- $ 24,000
Available but unused lines................................ 132,500 103,700
-------- --------
Total credit lines.............................. $132,500 $127,700
-------- --------
-------- --------
Long-term debt, less current maturities..................... $115,729 $ 66,298
Ratio of long-term debt to capitalization................... 37.9% 25.9%
</TABLE>
11
<PAGE>
The Company has a shelf registration statement on file with the Securities
and Exchange Commission for $85,000,000 of medium or long-term debt securities,
which it may issue at its discretion and subject to market conditions.
EFFECTS OF INFLATION
The Company believes that results of operations for the periods reported
were not materially affected by inflation.
12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF AAR CORP.:
We have audited the accompanying consolidated balance sheets of AAR CORP.
and subsidiaries as of May 31, 1994 and 1993 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the years
in the three-year period ended May 31, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AAR CORP.
and subsidiaries as of May 31, 1994 and 1993 and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXES, as of June 1, 1993. As discussed in Notes 1 and 6 to the
consolidated financial statements, the Company also adopted the provisions of
the Financial Accounting Standards Board's SFAS No. 106, EMPLOYERS' ACCOUNTING
FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, as of June 1, 1993.
KPMG Peat Marwick LLP
Chicago, Illinois
July 1, 1994
13
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1994 1993 1992
-------- -------- --------
(000'S OMITTED EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net sales.......................................................... $407,754 $382,780 $422,657
-------- -------- --------
Costs and operating expenses:
Cost of sales.................................................... 335,844 314,344 339,217
Selling, general and administrative.............................. 50,086 52,093 56,910
Restructuring expenses (Note 11)................................. -- 11,000 5,800
-------- -------- --------
385,930 377,437 401,927
-------- -------- --------
Operating income................................................... 21,824 5,343 20,730
Interest expense (Note 2).......................................... (9,564) (8,107) (8,356)
Interest income (Note 3)........................................... 1,424 847 1,246
-------- -------- --------
Income (loss) before provision (benefit) for income taxes.......... 13,684 (1,917) 13,620
Provision (benefit) for income taxes (Notes 1 and 3)............... 4,200 (2,200) 3,600
-------- -------- --------
Income before cumulative effects of changes in
accounting principles............................................ 9,484 283 10,020
Cumulative effects of changes in accounting
principles:
Income taxes................................................. 900 -- --
Postretirement health care benefits, net of tax.............. (890) -- --
-------- -------- --------
Net income......................................................... $ 9,494 $ 283 $ 10,020
-------- -------- --------
-------- -------- --------
Net income per share of common stock (Note 5):
Income before cumulative effects of changes in accounting
principles..................................................... $ .60 $ .02 $ .63
Cumulative effects of changes in accounting
principles:
Income taxes................................................. .06 -- --
Postretirement health care benefits, net of tax.............. (.06) -- --
-------- -------- --------
Net income......................................................... $ .60 $ .02 $ .63
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
14
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
($000'S OMITTED)
<TABLE>
<CAPTION>
MAY 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1)................................................ $ 18,074 $ 2,255
Accounts receivable, less allowances of $2,000
at each date (Note 13).......................................................... 85,947 68,849
Inventories (Notes 1 and 13)...................................................... 146,039 139,432
Equipment on or available for short-term lease (Note 1)........................... 28,881 33,104
Prepaid income taxes, deposits and other (Notes 1, 3 and 7)....................... 28,782 21,396
-------- --------
Total current assets.................................................... 307,723 265,036
-------- --------
Property, plant and equipment, at cost (Notes 1 and 9):
Land.............................................................................. 3,088 3,088
Buildings and improvements........................................................ 34,477 33,910
Equipment, furniture and fixtures................................................. 84,536 81,587
-------- --------
122,101 118,585
Accumulated depreciation (Note 10)................................................ (67,318) (62,533)
-------- --------
54,783 56,052
-------- --------
Other assets:
Investment in leveraged leases (Notes 1 and 12)................................... 32,618 30,210
Cost in excess of underlying net assets
of acquired companies (Note 1).................................................. 6,313 6,571
Prepaid income taxes, retirement benefits, notes receivable and other (Notes 3, 6
and 12)......................................................................... 16,189 7,282
-------- --------
55,120 44,063
-------- --------
$417,626 $365,151
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(000'S OMITTED)
<TABLE>
<CAPTION>
MAY 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
Current liabilities:
Bank loans and current maturities of long-term debt (Note 2)...................... $ 568 $ 25,025
Accounts payable.................................................................. 49,599 32,525
Accrued liabilities............................................................... 13,312 11,693
Accrued taxes on income (Notes 1 and 3)........................................... 4,235 2,394
-------- --------
Total current liabilities............................................... 67,714 71,637
-------- --------
Long-term debt, less current maturities (Note 2).................................... 115,729 66,298
Deferred income taxes (Notes 1, 3 and 12)........................................... 39,000 38,000
Retirement benefit obligation and other deferred credits (Note 6)................... 5,695 --
-------- --------
160,424 104,298
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued.............. -- --
Common stock, $1.00 par value, authorized 80,000 shares; issued 16,215 and 16,205
shares at respective dates (Note 4)............................................. 16,215 16,205
Capital surplus................................................................... 81,296 81,172
Retained earnings (Note 2)........................................................ 99,496 97,637
Treasury stock, 309 and 304 shares at respective dates, at cost (Note 4).......... (3,556) (3,490)
Cumulative translation adjustments (Note 1)....................................... (2,963) (2,308)
Minimum pension liability (Note 6)................................................ (1,000) --
-------- --------
189,488 189,216
-------- --------
$417,626 $365,151
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MAY 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK INVESTMENT CUMULATIVE
----------------- --------------- CAPITAL RETAINED VALUATION TRANSLATION
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS ALLOWANCE ADJUSTMENTS
------- -------- ---- --------- -------- ---------- ---------- -----------
(NOTE 4) (NOTE 4) (NOTE 2) (NOTE 1)
(000'S OMITTED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1991........................ 16,097 $16,097 206 $ (2,326) $80,194 $ 102,579 $ (664) $ (2,102)
Net income................................. -- -- -- -- -- 10,020 -- --
Cash dividends ($.48 per share)............ -- -- -- -- -- (7,631) -- --
Adjustment for net translation loss........ -- -- -- -- -- -- -- (192)
Stock awards and employee stock
purchases................................ 8 8 -- -- 90 -- -- --
Reclassification of allowance.............. -- -- -- -- -- -- 664 --
------- -------- ---- --------- -------- ---------- ---------- -----------
Balance, May 31, 1992........................ 16,105 $16,105 206 $ (2,326) $80,284 $ 104,968 $ -- $ (2,294)
Net income................................. -- -- -- -- -- 283 -- --
Cash dividends ($.48 per share)............ -- -- -- -- -- (7,614) -- --
Treasury stock purchased................... -- -- 98 (1,164) -- -- -- --
Adjustment for net translation loss........ -- -- -- -- -- -- -- (14)
Exercise of stock options, stock awards and
employee stock purchases................. 100 100 -- -- 888 -- -- --
------- -------- ---- --------- -------- ---------- ---------- -----------
Balance, May 31, 1993........................ 16,205 $16,205 304 $ (3,490) $81,172 $ 97,637 $ -- $ (2,308)
Net income................................. -- -- -- -- -- 9,494 -- --
Cash dividends ($.48 per
share)................................... -- -- -- -- -- (7,635) -- --
Treasury stock purchased................... -- -- 5 (66) -- -- -- --
Exercise of stock options
and stock awards......................... 10 10 -- -- 124 -- -- --
Adjustment for net translation
loss..................................... -- -- -- -- -- -- -- (655)
Minimum pension liability.................. -- -- -- -- -- -- -- --
------- -------- ---- --------- -------- ---------- ---------- -----------
Balance, May 31, 1994........................ 16,215 $16,215 309 $ (3,556) $81,296 $ 99,496 $-- $ (2,963)
------- -------- ---- --------- -------- ---------- ---------- -----------
------- -------- ---- --------- -------- ---------- ---------- -----------
<CAPTION>
MINIMUM
PENSION
LIABILITY
ADJUSTMENTS
-----------
(NOTE 6)
<S> <C>
Balance, May 31, 1991........................ $ --
Net income................................. --
Cash dividends ($.48 per share)............ --
Adjustment for net translation loss........ --
Stock awards and employee stock
purchases................................ --
Reclassification of allowance.............. --
-----------
Balance, May 31, 1992........................ $ --
Net income................................. --
Cash dividends ($.48 per share)............ --
Treasury stock purchased................... --
Adjustment for net translation loss........ --
Exercise of stock options, stock awards and
employee stock purchases................. --
-----------
Balance, May 31, 1993........................ $ --
Net income................................. --
Cash dividends ($.48 per
share)................................... --
Treasury stock purchased................... --
Exercise of stock options
and stock awards......................... --
Adjustment for net translation
loss..................................... --
Minimum pension liability.................. (1,000)
-----------
Balance, May 31, 1994........................ $ (1,000)
-----------
-----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
17
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1994 1993 1992
-------- -------- --------
(000'S OMITTED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 9,494 $ 283 $ 10,020
Adjustments to reconcile net income to net cash provided from operating
activities:
Depreciation and amortization........................................ 9,928 10,883 11,628
Restructuring expenses............................................... -- 11,000 5,800
Cumulative effect of changes in accounting principles:
Income tax benefit................................................. (900) -- --
Postretirement health care benefits expense........................ 890 -- --
Leveraged lease repricing............................................ (2,017) -- --
Change in certain assets and liabilities:
Accounts receivable................................................ (17,295) 20,910 (620)
Inventories........................................................ (6,841) (9,171) (6,432)
Equipment on or available for short-term lease..................... 4,223 2,273 (11,376)
Prepaid income taxes, deposits and other........................... (10,968) (435) (2,225)
Accounts payable................................................... 17,081 (10,876) 8,194
Accrued liabilities and taxes on income............................ 3,077 (7,061) (7,175)
Deferred income taxes and other deferred credits................... 25 (1,000) 1,000
-------- -------- --------
Net cash provided from operating activities............................ 6,697 16,806 8,814
-------- -------- --------
Cash flows from investing activities:
Property, plant and equipment expenditures, net.......................... (5,984) (8,918) (7,968)
Investment in leveraged leases........................................... (391) 589 805
Proceeds from sale of marketable securities.............................. -- 1,593 --
Notes receivable and other, net.......................................... (1,820) (1,281) (425)
-------- -------- --------
Net cash used in investing activities.................................. (8,195) (8,017) (7,588)
-------- -------- --------
Cash flows from financing activities:
Gross proceeds from issuance of long-term notes payable.................. 50,000 -- --
Repayment of bank loans with proceeds from issuance of long-term notes
payable................................................................ (28,200) -- --
Change in other borrowings, net.......................................... 3,174 (1,005) 6,873
Cash dividends........................................................... (7,635) (7,614) (7,631)
Purchases of treasury stock.............................................. (66) (1,164) --
Proceeds from exercise of stock options, employee stock purchases and
other.................................................................. 134 988 98
-------- -------- --------
Net cash provided from (used in) financing activities.................. 17,407 (8,795) (660)
-------- -------- --------
Effect of exchange rate changes on cash.................................... (90) 11 131
-------- -------- --------
Increase in cash and cash equivalents...................................... 15,819 5 697
Cash and cash equivalents, beginning of year............................... 2,255 2,250 1,553
-------- -------- --------
Cash and cash equivalents, end of year..................................... $ 18,074 $ 2,255 $ 2,250
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
18
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of intercompany accounts and
transactions.
REVENUE RECOGNITION
Sales and related cost of sales are recognized primarily upon shipment of
products and performance of services. Sales and related cost of sales on
long-term contracts are recognized as units are delivered, determined by the
percentage of completion method based on the relationship of costs incurred to
date to estimated total costs under the respective contracts. Lease revenue is
recognized as earned.
ACCOUNTING CHANGES
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Prior
years' results were not restated. The cumulative effect of the accounting change
was a tax benefit of $900,000 ($.06 per share) recorded in the three month
period ended August 31, 1993. The adoption of SFAS No. 109 changes the Company's
method of accounting for income taxes from the deferred method of Accounting
Principles Board Opinion ("APB") No. 11 to the asset and liability method of
accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using statutory tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates will be recognized in the consolidated results of operations for the
period in which the changes occurred. Pursuant to the deferred method under APB
No. 11, which was applied in 1993 and prior years, deferred income taxes are
recognized for income and expense items that are reported in different years for
financial reporting and income tax purposes using the tax rate applicable for
the year of calculation. Under the deferred method, deferred taxes are not
adjusted for subsequent changes in tax rates.
Effective June 1, 1993, the Company adopted SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Prior years'
results were not restated. SFAS No. 106 requires that the projected future cost
of nonpension postretirement benefits be recognized as an expense as employees
render services instead of when claims are incurred, as the Company had done in
the past. Upon adoption, the Company elected, as permitted under SFAS No. 106,
to record a one-time transition obligation of $1,350,000 ($890,000 after tax or
$.06 per share) which represents that portion of future retiree benefit costs
related to service already rendered by both active and retired employees up to
the date of adoption. The initial accumulated postretirement benefit obligation
of $1,350,000 primarily represented health and life insurance benefits for
certain current employees and retirees.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents. At May 31, 1994 cash equivalents of
approximately $5,717,000 held by the Company represent investments in funds
holding high-quality commercial paper, Eurodollars and U.S. government
agency-issued securities. The carrying amount of cash equivalents approximates
fair value at May 31, 1994.
19
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
MARKETABLE SECURITIES
The Company recorded net proceeds of $1,593,000 in fiscal 1993 from the sale
of marketable securities and included a $57,000 net loss in the consolidated
results of operations. Marketable securities were carried at the lower of
aggregate cost or market value.
FOREIGN CURRENCY
Gains and losses on foreign currency translation and foreign exchange
contracts are determined in accordance with the method of accounting prescribed
by SFAS No. 52. All balance sheet accounts of foreign subsidiaries are
translated at year-end exchange rates. Revenues and expenses are translated at
average exchange rates during the year. Translation adjustments are excluded
from the results of operations and are recorded in Stockholders' equity as
Cumulative translation adjustments.
The Company from time to time uses forward exchange contracts or options to
hedge its loss exposure from the translation of foreign subsidiaries results of
operations from functional currencies into United States dollars. Forward
exchange contracts or options losses are included in results of operations in
the period the loss is determinable. Gains are recorded when realized upon
contract settlement. At May 31, 1994 there were no forward exchange contracts or
options outstanding. Foreign subsidiaries incur transaction gains and losses
upon settlement of obligations in currencies other than their functional
currency. The aggregate net transaction gains (losses), including those related
to forward exchange contracts, reported in results of operations were $(32,000),
$(578,000) and $25,000 for fiscal 1994, 1993 and 1992, respectively.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF MARKET OR CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of market or credit risk consist principally of forward exchange contracts or
options and trade receivables. The forward exchange contracts discussed above
subject the Company to market risk from exchange rate movements. Accordingly,
the Company recognizes losses in the period such losses are determinable. While
the Company's trade receivables are diverse based on the number of entities and
geographic locations, the majority are concentrated in the aerospace/aviation
industry. The Company performs evaluations of customers' financial condition
prior to extending credit privileges and performs on-going credit evaluations of
payment experience, current financial condition, and risk analysis. The Company
typically requires collateral in the form of security interest in assets,
letters of credit, or obligation guarantees from financial institutions for
transactions other than normal trade terms.
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments. Cash,
accounts receivable, short-term borrowing, accounts payable and accrued
liabilities are reflected in the financial statements at fair value because of
the short-term maturity of these instruments. Marketable securities are recorded
in the financial statements at current market values. Non-current notes
receivable and long-term debt bearing a variable interest rate are reflected in
the financial statements at fair value. Those bearing a fixed interest rate have
fair values based on estimates using discounted future cash flows at an assumed
discount rate for borrowing currently prevailing in the marketplace for similar
instruments.
20
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgement and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
INVENTORIES
Inventories are priced at the lower of cost or market. Cost is determined by
either the specific identification or first-in, first-out method. Inventoried
costs relating to long-term contracts and programs are stated at the actual
production costs, including factory burden and initial tooling, incurred to
date, reduced by amounts identified with revenue recognized on units delivered.
The costs attributed to units delivered under long-term contracts and programs
are based on the estimated average cost of all units scheduled to be produced.
Progress billings under government contracts are based on an allowable
percentage of the cost of material received and labor and factory burden
incurred.
The following is a summary of inventories at:
<TABLE>
<CAPTION>
MAY 31,
------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
(000'S OMITTED)
Raw materials and parts............................. $ 25,349 $ 21,355 $ 29,069
Work-in-process..................................... 11,974 11,117 12,139
Purchased aircraft parts, engines and components
held for sale or exchange.......................... 106,529 105,200 95,459
Finished goods...................................... 2,189 1,785 1,549
-------- -------- --------
146,041 139,457 138,216
Progress billings on long-term contracts and
programs.......................................... (2) (25) (214)
-------- -------- --------
$146,039 $139,432 $138,002
-------- -------- --------
-------- -------- --------
</TABLE>
EQUIPMENT UNDER OPERATING LEASES
Lease revenue is recognized as earned. The cost of the asset under lease is
original purchase price plus overhaul costs. Depreciation of the cost is based
on the straight-line method over the lease term. Maintenance costs are expensed
as incurred. The assets are available for sale at the end of each lease term.
The balance sheet classification is based on the lease term. Leases with a fixed
term under twelve months are considered short-term and all others are classified
as long-term.
Equipment on short-term lease consists of aircraft engines and parts on or
available for lease to satisfy immediate short-term customer requirements. The
leases are renewable with fixed terms, which generally vary from one to six
months.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is computed on the straight-line method over useful lives of
10-40 years for buildings and improvements and 3-10 years for equipment,
furniture and fixtures. Leasehold improvements are amortized over the estimated
useful life or the term of the applicable lease.
21
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Repairs and maintenance expenditures are expensed as incurred. Upon sale or
disposal, cost and accumulated depreciation are removed from the accounts and
related gains and losses included in results of operations.
LEVERAGED LEASES
The Company acts as an equity participant in leveraged lease transactions.
The equipment cost in excess of equity contribution is furnished by third party
financing in the form of secured debt. Under the lease agreements, the third
parties have no recourse against the Company for non-payment of the obligations.
The third party debt is collateralized by the lessees' rental obligations and
the leased equipment. The Company has ownership rights to the leased assets and
is entitled to the investment tax credits, and benefits of tax deductions for
depreciation on the leased assets and for interest on the secured debt
financing.
COST IN EXCESS OF UNDERLYING NET ASSETS OF ACQUIRED COMPANIES
The cost in excess of underlying net assets of companies acquired is being
amortized over a period of forty years. Amortization was $240,000, $240,000 and
$228,000 in fiscal 1994, 1993 and 1992, respectively. Accumulated amortization
is $2,950,000, $2,710,000 and $2,470,000 at May 31, 1994, 1993 and 1992,
respectively.
INCOME TAXES
Income taxes are determined in accordance with the method of accounting
prescribed by SFAS No. 109.
Federal income taxes are not provided on the undistributed earnings of
certain foreign subsidiaries (approximately $14,600,000 and $13,300,000 at May
31, 1994 and 1993, respectively), as it is the Company's intention to reinvest a
portion of these earnings indefinitely in the foreign operations. From time to
time, as the earnings are treated as taxable in the United States, the related
tax expense would be offset substantially by foreign tax credits. Foreign income
taxes are provided at the local statutory rates and reflect estimated taxes
payable.
The benefits of investment tax credits are recognized for book purposes
under the deferral method of accounting for leveraged leases. The investment tax
credits are recognized in the year earned for income tax purposes.
STATEMENTS OF CASH FLOWS
Supplemental information on cash flows follows.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1994 1993 1992
------ ------ ------
(000'S OMITTED)
<S> <C> <C> <C>
Interest paid............................................... $8,800 $8,100 $8,600
Income taxes paid........................................... 3,300 5,400 6,300
Income tax refunds and interest received.................... 500 5,100 5,600
</TABLE>
BUSINESS SEGMENT INFORMATION
The Company operates primarily in the aerospace/aviation industry and
reports its activities in one business segment, Aviation Services.
22
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Export sales from the Company's United States operations to unaffiliated
customers, the majority located in Europe, Middle East, Asia, Canada and South
America (including sales through foreign sales offices of domestic
subsidiaries), were approximately $112,275,000 (27.5% of total net sales),
$110,597,000 (28.9% of total net sales) and $127,228,000 (30.1% of total net
sales) in fiscal 1994, 1993 and 1992, respectively.
Sales to the United States government and its agencies were approximately
$77,500,000 (19.0% of total net sales), $57,600,000 (15.0% of total net sales)
and $54,000,000 (12.8% of total net sales) in fiscal 1994, 1993 and 1992,
respectively.
RECLASSIFICATIONS
Certain reclassifications have been made in the fiscal 1993 and 1992
financial statements to conform to the fiscal 1994 presentation.
2. FINANCING ARRANGEMENTS
Bank loans and commercial paper consisted of:
<TABLE>
<CAPTION>
MAY 31,
---------------------------
1994 1993 1992
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Unsecured bank loans.................................... $ -- $24,000 $13,000
Commercial paper........................................ -- -- 11,000
Current maturities of long-term debt.................... 568 1,025 1,005
------- ------- -------
$ 568 $25,025 $25,005
------- ------- -------
------- ------- -------
</TABLE>
Short-term borrowing activity was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------
1994 1993 1992
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Maximum amount borrowed.................................. $33,500 $51,900 $45,800
Average daily borrowings................................. 12,300 39,100 29,300
Average interest rate during the year (computed based on
the prevailing interest rate during the period the
short-term debt was outstanding)....................... 3.7% 4.4% 6.0%
------- ------- -------
------- ------- -------
</TABLE>
At May 31, 1994, aggregate unsecured bank credit lines were $132,500,000. Of
this amount, $66,000,000 was available under credit lines with domestic banks,
$60,000,000 was available under revolving credit and term loan agreements with
domestic banks and $6,500,000 was available under credit agreements with foreign
banks. All domestic and foreign credit lines were unused at May 31, 1994. There
are no compensating balance requirements in connection with domestic or foreign
lines of credit. Borrowings under domestic bank lines bear interest at or below
the corporate base rate. Commercial paper is supported by all available domestic
bank lines.
The Company may borrow a maximum of $60,000,000 ($30,000,000 available
through October 15, 1996 and an additional $30,000,000 available through April
15, 1996) under revolving credit and term loan agreements with domestic banks.
Revolving credit borrowings may, at the
23
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FINANCING ARRANGEMENTS -- (CONTINUED)
Company's option, be converted to term loans payable in equal quarterly
installments over five years. Interest is based on corporate base rate or quoted
Eurodollar or multicurrency rates during the revolving credit period, and 1/2%
over corporate base rate or quoted Eurodollar rate thereafter. There were no
borrowings under these agreements outstanding at May 31, 1994. There are no
compensating balance requirements on any of the committed lines but the Company
is required to pay a commitment fee. There are no restrictions on the withdrawal
or use of these funds.
Long-term debt was as follows:
<TABLE>
<CAPTION>
MAY 31,
-----------------
1994 1993
------- -------
(000'S OMITTED)
<S> <C> <C>
Notes payable due November 1, 2001 with interest of 9.5% payable
semi-annually on May 1 and November 1.......................... $65,000 $65,000
Notes payable due October 15, 2003 with interest
of 7.25% payable semi-annually on April 15 and October 15..... 50,000 --
Industrial revenue bonds due in installments to 2002 with
weighted average interest of approximately 5.93% at May 31,
1994 (secured by trust indentures on property, plant and
equipment).................................................... 1,297 2,323
------- -------
116,297 67,323
Current maturities.............................................. (568) (1,025)
------- -------
$115,729 $66,298
------- -------
------- -------
</TABLE>
The Company is subject to a number of covenants under the revolving credit
and term loan agreements, including restrictions which relate to the payment of
cash dividends, maintenance of minimum net working capital and tangible net
worth levels, sales of assets, additional financing, purchase of the Company's
shares and other matters. The Company is in compliance with all restrictive
financial provisions of the agreements. At May 31, 1994, unrestricted
consolidated retained earnings available for payment of dividends and purchase
of the Company's shares was approximately $10,320,000. Effective June 1, 1994
unrestricted consolidated retained earnings increased to $15,067,000 due to the
inclusion of 50% of the consolidated net income of the Company for fiscal 1994.
The aggregate amount of long-term debt maturing during each of the next five
fiscal years is $568,000 in 1995, $347,000 in 1996, $124,000 in 1997, $57,000 in
1998, $57,000 in 1999.
The Company's long-term debt was estimated to have a fair value of
approximately $109,703,000 at May 31, 1994.
3. INCOME TAXES
The Company adopted SFAS No. 109 "Accounting for Income Taxes" effective
June 1, 1993. The prior periods were not restated. The effects of this
accounting change are discussed in note 1 of Notes to Consolidated Financial
Statements. The following disclosures are in accordance with SFAS No. 109
"Accounting for Income Taxes" which requires the asset and liability method of
accounting upon adoption.
24
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME TAXES -- (CONTINUED)
The provision (benefit) for income taxes included the following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------
1994 1993 1992
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Current
Federal.......................................... $ 100 $ (640) $ 4,460
Foreign.......................................... 530 670 940
State, net of refunds............................ 470 -- 900
------- ------- -------
1,100 30 6,300
------- ------- -------
Deferred
Federal.......................................... $ 2,850 $(2,050) $(2,480)
Foreign.......................................... -- -- --
State............................................ 250 (180) (220)
------- ------- -------
3,100 (2,230) (2,700)
------- ------- -------
$ 4,200 $(2,200) $ 3,600
------- ------- -------
------- ------- -------
</TABLE>
The deferred tax provisions for the fiscal years 1994, 1993 and 1992 result
primarily from differences between book and tax income arising from depreciation
and leveraged leases. Refundable income taxes included within Prepaid income
taxes, deposits and other, principally represent refunds of Federal income taxes
resulting from additional tax benefits generated from export sales and foreign
tax credits carried back against prior years. Interest income relating to
refundable income taxes was $576,000, $390,000 and $910,000 for fiscal 1994,
1993 and 1992, respectively.
The balance of deferred tax liabilities and assets arises from the
differences in the timing of the recognition for transactions between book and
income tax purposes and consists of the following components:
<TABLE>
<CAPTION>
MAY 31,
1994
-------
(000'S
OMITTED)
<S> <C>
Deferred tax liabilities:
Depreciation............................................................. $9,710
Leveraged leases......................................................... 28,560
Other.................................................................... 730
-------
Total deferred tax liabilities....................................... $39,000
-------
-------
Deferred tax assets-current:
Inventory costs.......................................................... $7,800
Employee benefits........................................................ 900
Doubtful account allowance............................................... 780
Other.................................................................... 50
-------
Total deferred tax assets-current.................................... 9,530
-------
Deferred tax assets-noncurrent:
Postretirement benefits.................................................. 1,050
Restructuring expenses................................................... 960
Alternative minimum tax credits.......................................... 4,540
Other.................................................................... 60
-------
Total deferred tax assets-noncurrent................................. 6,610
-------
Total deferred tax assets............................................ $16,140
-------
-------
</TABLE>
25
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME TAXES -- (CONTINUED)
The Company has determined, more likely than not, that a valuation allowance
is not required, based upon the Company's history of prior operating earnings,
its expectations for continued future earnings and the scheduled reversal of
deferred tax liabilities, primarily related to leveraged leases, which exceed
the amount of the deferred tax assets.
The provision for income taxes differs from the amount computed by applying
the United States statutory Federal income tax rate of 34.0% for fiscal 1994,
1993 and 1992 for the following reasons:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
--------------------------
1994 1993 1992
------- ------- ------
(000'S OMITTED)
<S> <C> <C> <C>
Provision (benefit) for income taxes at the Federal statutory rate... $4,660 $ (650) $4,630
Tax benefits on exempt earnings from export sales.................. (930) (770) (860)
State income taxes, net of Federal benefit and refunds............. 250 -- 600
Amortization of goodwill........................................... 100 120 120
Reduction of income tax liabilities................................ -- (1,200) (700)
Differences between foreign tax rates and the U.S. Federal
statutory rate................................................... 80 250 160
Other, net......................................................... 40 50 (350)
------- ------- ------
Provision (benefit) for income taxes as reported..................... $4,200 $(2,200) $3,600
------- ------- ------
------- ------- ------
Effective income tax rate............................................ 30.7% (114.8)% 26.4%
------- ------- ------
------- ------- ------
</TABLE>
The provision for income taxes was reduced by $1,200,000 and $700,000 in
fiscal 1993 and 1992, respectively, due to the reversal of tax liabilities
previously recorded but no longer required as the result of the resolution of
issues arising from the Internal Revenue Service's examination of the Federal
income tax returns for the fiscal years 1979 through 1989. The years are now
closed to assessments, therefore certain tax accruals previously provided are no
longer required.
The fiscal 1993 income tax benefit before the reversal of tax liabilities on
consolidated pre-tax income was higher than the statutory rate primarily as the
result of state income tax refunds received and the effect of tax benefits on
exempt earnings from export sales. Pretax income from foreign subsidiaries was
approximately $1,300,000, $1,200,000 and $2,300,000 at May 31, 1994, 1993 and
1992, respectively. Total foreign income taxes provided were in excess of total
local statutory rates in fiscal 1994, 1993 and 1992 due to net operating losses
of certain subsidiaries not deductible for tax purposes.
26
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. COMMON STOCK AND STOCK OPTION PLANS
A summary of changes in stock options granted to officers, key employees and
non-employee directors under stock option plans for the three years ended May
31, 1994 follows.
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding, May 31, 1991 (127,250 exercisable).............................. 445,890 $10.00 to $35.13
Granted.................................................................. 156,950 12.75 to 13.63
Exercised................................................................ -- --
Surrendered/expired/cancelled............................................ (19,600) 10.00 to 35.13
---------
Outstanding, May 31, 1992 (214,618 exercisable).............................. 583,240 $10.00 to $35.13
Granted.................................................................. 224,200 11.38 to 12.88
Exercised................................................................ (8,800) 10.00
Surrendered/expired/cancelled............................................ (154,385) 10.00 to 35.13
---------
Outstanding, May 31, 1993 (184,436 exercisable).............................. 644,255 $10.00 to $35.13
Granted.................................................................. 161,400 13.25 to 15.00
Exercised................................................................ (2,805) 10.00 to 13.63
Surrendered/expired/cancelled............................................ (71,400) 10.00 to 17.88
---------
Outstanding, May 31, 1994 (236,284 exercisable).............................. 731,450 $10.00 to $35.13
---------
---------
</TABLE>
The options are granted at prices equal to the closing market price on the
date of grant, become exercisable at such times as may be specified by the Board
of Directors or as otherwise provided by the applicable stock option plan, and
expire five to ten years from date of grant. Upon exercise of stock options, the
excess of the proceeds over par value, or cost in the case of treasury stock, is
credited to Capital surplus in the Consolidated Balance Sheets.
The AAR CORP. Stock Benefit Plan also provides for the grant of restricted
stock awards. Restrictions are released at the end of applicable restricted
periods. The number of shares and the restricted period, which varies from two
to ten years, are determined by the Compensation Committee of the Board of
Directors. The market value of the award on the date of grant is recorded as a
deferred expense, common stock and capital surplus. The deferred expense is
included in results of operations over the restricted term. The expense relating
to outstanding restricted stock awards was $538,000, $610,000 and $640,000 in
fiscal 1994, 1993 and 1992, respectively.
The AAR CORP. Employee Stock Purchase Plan is open to all employees of the
Company (other than officers, directors or participants in other option plans of
the Company) having six months of service. The plan permits employees to
purchase common stock in periodic offerings at the lesser of the fair market
value on date of offering and 85% of the fair market value on the date of
exercise. A participating employee pays for shares by payroll deduction over a
two-year period. Upon completion of the purchase, the excess of the proceeds
over the par value (or cost in the case of treasury stock) is credited to
capital surplus.
27
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
The number of options and awards outstanding and available for grant or
issuance for each of the Company's stock plans is as follows:
<TABLE>
<CAPTION>
MAY 31, 1994
----------------------------------------
OUTSTANDING AVAILABLE TOTAL
------------- ----------- ------------
<S> <C> <C> <C>
Stock Benefit Plan (Officers, Directors and key employees)... 769,788 261,577 1,031,365
Employee Stock Purchase Plan................................. -- 132,880 132,880
</TABLE>
Pursuant to a shareholder rights plan adopted in 1987 and amended in 1989,
each outstanding share of the Company's Common Stock carries with it a Right to
purchase one additional share at a price of $85 (subject to anti-dilution
adjustments). The Rights become exercisable (and separate from the shares) when
certain specified events occur, including the acquisition of 20% or more of the
common stock by a person or group (an "Acquiring Person") or the commencement of
a tender or exchange offer for 30% or more of the Common Stock.
In the event that an Acquiring Person acquires 20% or more of the Common
Stock, or if the Company is the surviving corporation in a merger involving an
Acquiring Person, or if the Acquiring Person engages in certain types of
self-dealing transactions, each Right entitles the holder to purchase for $85
(or the then current exercise price) shares of the Company's Common Stock having
a market value of $170 (or two times the exercise price), subject to certain
exceptions. Similarly, if the Company is acquired in a merger or other business
combination or 50% or more of its assets or earning power is sold, each Right
entitles the holder to purchase at the then current exercise price that number
of shares of Common Stock of the surviving corporation having a market value of
two times the exercise price. The Rights, which do not entitle the holder
thereof to vote or to receive dividends, expire on August 6, 1997 and may be
redeemed by the Company for $.01 per Right under certain circumstances.
On September 21, 1990, the Board of Directors authorized the Company to
purchase up to 1,000,000 shares of the Company's Common Stock on the open market
or through privately negotiated transactions. As of May 31, 1994 the Company had
purchased 308,927 shares of Common Stock on the open market under this program
at an average price of $11.51 per share.
5. NET INCOME PER SHARE OF COMMON STOCK
Primary net income per share is computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the year. Shares granted as restricted stock awards under The
AAR CORP. Stock Benefit Plan are considered outstanding from the date of grant.
Common Stock equivalents consist of the average number of shares issuable upon
the exercise of all dilutive employee stock options, less the common shares
which could have been purchased, at the average market price during each
quarter, with the assumed proceeds from the exercise of the options.
6. EMPLOYEE BENEFIT PLANS
The Company has defined contribution or defined benefit plans covering
substantially all full-time domestic employees and certain employees in the
Netherlands.
28
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
DEFINED BENEFIT PLANS
The pension plans for domestic salaried employees have benefit formulas
based primarily on years of service and compensation. The pension benefit for
hourly employees is generally based on a fixed amount per year of service. The
Company follows the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," for all domestic operations.
The Company's funding policy for domestic plans is to contribute annually,
at a minimum, an amount which is deductible for Federal income tax purposes and
that is sufficient to meet actuarially computed pension benefits. Contributions
are intended to provide for benefits attributed to service to date and for
benefits expected to be earned in the future. The assets of the pension plans
are invested primarily in mutual funds, common stocks, investment grade bonds
and United States government obligations.
Certain international subsidiaries also have pension plans. In most cases,
the plans are defined benefit in nature. Assets of the plans are comprised of
insurance contracts. Benefit formulas are similar to those used by U.S. plans.
It is the policy of these subsidiaries to fund at least the minimum amounts
required by local law and regulation. Effective June 1, 1993, all non-domestic
pension plans have adopted the provisions of SFAS No. 87.
The following table sets forth the plans' funded status and the amount
recognized in the Company's Consolidated Balance Sheets. The plans are grouped
according to the portion of the accumulated benefit obligation funded as
follows:
<TABLE>
<CAPTION>
MAY 31, JUNE 1,
MAY 31, 1994 1993 1993
------------------------ ----------- -----------
BENEFITS ASSETS BENEFITS ASSETS
EXCEED EXCEED EXCEED EXCEED
ASSETS BENEFITS ASSETS BENEFITS
----------- ----------- ----------- -----------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation................................ $ (21,500) $ (4,160) $ (19,725) $ (4,890)
Nonvested benefit obligation............................. (955) (15) (1,110) --
----------- ----------- ----------- -----------
Accumulated benefit obligation............................... (22,455) (4,175) (20,835) (4,890)
Effect of projected salary increases on the benefit
obligation................................................. (1,865) (1,120) (2,125) (450)
----------- ----------- ----------- -----------
Projected benefit obligation................................. (24,320) (5,295) (22,960) (5,340)
Plans' assets at fair value.................................. 20,030 4,420 18,825 5,090
----------- ----------- ----------- -----------
Plans' assets under projected benefit obligation............. (4,290) (875) (4,135) (250)
Unrecognized net loss........................................ 3,920 915 3,665 --
Unrecognized prior service cost.............................. 930 -- 1,020 --
Unrecognized transition obligation........................... 785 225 850 250
----------- ----------- ----------- -----------
Prepaid pension costs in the Consolidated Balance
Sheets................................................. $ 1,345 $ 265 $ 1,400 $ 0
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The projected benefit obligation for domestic plans is determined using an
assumed weighted average discount rate of 8.0% for fiscal 1994 and 1993,
respectively and an assumed average increase of 4.6% in compensation. The
expected long-term rate of return on assets is 10.0% for fiscal 1994 and 1993.
Unrecognized net loss, prior service cost and transition obligation are
amortized on a straight line basis over the estimated average future service
period.
29
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The projected benefit obligation for non-domestic plans are determined using
an assumed weighted average discount rate of 7.0% for fiscal 1994 and an assumed
average compensation increase of 2.0% for the first 5 years and 4.0%,
thereafter. The expected long-term rate of return on assets is 6.5% for fiscal
1994.
The provisions of SFAS No. 87 "Employers' Accounting for Pensions" require
recognition in the balance sheet of an additional minimum liability, equity and
related intangible assets for pension plans with accumulated benefits in excess
of plan assets. At May 31, 1994 the Company has a minimum pension liability of
$3,400,000 reported within Retirement benefit obligation in the Consolidated
Balance Sheet with $1,000,000 charged to Stockholders' equity in accordance with
the provisions of SFAS No. 87.
Pension expense charged to results of operations includes the following
components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
---------------------------
1994 1993 1992
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Service costs for benefits earned during fiscal year...... $ 1,305 $ 800 $ 800
Interest cost on projected benefit obligation............. 2,265 1,670 1,610
Actual investment return on plan assets................... (1,400) (1,850) (1,410)
Net amortization and deferral............................. (480) 290 190
------- ------- -------
Pension expense for Company plans..................... 1,690 910 1,190
Pension expense for the multi-employer plan........... 10 40 50
------- ------- -------
Total pension expense............................. $ 1,700 $ 950 $ 1,240
------- ------- -------
------- ------- -------
</TABLE>
DEFINED CONTRIBUTION PLAN
The defined contribution plan is a profit sharing plan which is intended to
qualify as a 401(k) plan under the Internal Revenue Code. Under the plan,
employees may contribute up to 15% of their pretax compensation, subject to
applicable regulatory limits. The Company may make matching contributions up to
6% of compensation. Participants vest immediately in Company contributions.
Expense charged to results of operations was $800,000, $430,000 and $860,000 in
fiscal 1994, 1993 and 1992, respectively.
LONG TERM PERFORMANCE INCENTIVE PLAN
The long term performance incentive plan is administered by the Compensation
Committee of the Board of Directors. The plan provides for incentive awards to
certain key employees designated by the Compensation Committee based on the long
term performance of the Company. No awards were earned under the Plan in fiscal
1994, 1993 nor 1992, therefore, no expense was charged to results of operations.
SUPPLEMENTAL RETIREMENT BENEFIT PLANS
Supplemental Retirement agreements provide benefits to certain current and
former key employees. During fiscal 1993 and 1992, $260,000 and $570,000 were
deposited into trust funds for payment of these benefits. The amounts are being
amortized over the remaining terms of employment. Expense charged to results of
operations was $470,000, $570,000 and $460,000 in fiscal 1994, 1993 and 1992,
respectively. The unamortized amount of $880,000 at May 31, 1994 is
30
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
reported with Prepaid income taxes, retirement benefits, notes receivable and
other in the Consolidated Balance Sheets. At May 31, 1994, the trust fund assets
were adequate to provide for the estimated retirement benefits.
BOARD OF DIRECTORS' RETIREMENT PLAN
The Company adopted a Directors' Retirement Plan for its outside directors
in April, 1992. The Plan provides for a benefit to outside directors upon
retirement on or after age 65 provided they have completed at least five years
of service as a director. Benefits are payable as a quarterly annuity in an
amount equal to 25% of the annual retainer fee payable by the Company to active
outside directors. Payment of benefits commences upon retirement and continues
for a period equal to the total number of years of the retired director's
service as a director to a maximum of ten years, or death, whichever occurs
first. The Directors' Retirement Plan is unfunded, with costs and obligations
recognized in accordance with SFAS No. 87. Expense charged to results of
operations was $75,000 and $120,000 in fiscal 1994 and 1993, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health and life insurance benefits for certain eligible
employees and retirees under a variety of plans. Generally these benefits are
contributory, with retiree contributions adjusted annually. The postretirement
plans are unfunded and the Company has the right to modify or terminate any of
these plans in the future, in certain cases subject to union bargaining
agreements.
Effective June 1, 1993, the Company adopted SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Prior to fiscal
year 1994, the Company recognized retiree health and life insurance expense when
benefits were paid. Prior years' results were not restated. Upon adoption, the
Company elected to record a one-time transition obligation of $1,350,000
($890,000 after tax) which represents that portion of future retiree benefit
costs related to service already rendered by both active and retired employees
up to the date of adoption.
Net periodic postretirement benefit cost for fiscal 1994 included the
following components:
<TABLE>
<S> <C>
Service cost............................................ $ 30,000
Interest cost........................................... 98,000
---------
$ 128,000
---------
---------
</TABLE>
31
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The funded status of the plans at May 31, 1994 were as follows:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Current retirees.................................... $ 906,000
Current employees -- fully eligible................. 129,000
Current employees -- not fully eligible............. 315,000
-----------
1,350,000
Plans' assets at fair value........................... --
-----------
Accumulated postretirement benefit obligation in
excess of plans' assets.............................. 1,350,000
Unrecognized prior service cost, transition obligation
and net loss/(gain).................................. --
-----------
Accrued postretirement benefit cost in the
consolidated balance sheet........................... $ 1,350,000
-----------
-----------
</TABLE>
The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 8.0%. The assumed rate of future increases in health care
costs was 10.0% in fiscal 1994, declining to 6.0% by the year 2004 and remaining
at that rate thereafter. A one percent increase in the assumed health care cost
trend rate would increase the accumulated postretirement obligation by
approximately $100,000 as of May 31, 1994 and would not result in a significant
change to the annual postretirement benefit expense.
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities under agreements that expire at
various dates through 2011. Rental expense under these leases was $4,840,000,
$5,320,000 and $4,850,000 in fiscal 1994, 1993 and 1992, respectively.
Future minimum payments under leases with initial or remaining terms of one
year or more at May 31, 1994 were $4,820,000 for fiscal 1995, $3,490,000 for
fiscal 1996, $3,310,000 for fiscal 1997, $2,850,000 for fiscal 1998 and
$10,310,000 for fiscal 1999 and thereafter.
The Company regularly places deposits with suppliers on short-term
commitments to purchase inventory. These conditional contractual commitments are
made in the ordinary course of business. At May 31, 1994 the Company had
$10,700,000 of deposits outstanding with suppliers.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial condition.
32
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SELECTED QUARTERLY DATA (UNAUDITED)
The unaudited selected quarterly data for fiscal years ended May 31, 1994
and 1993 are as follows.
FISCAL 1994
<TABLE>
<CAPTION>
NET INCOME
QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE
- - ------------------------------- --------- ------------ ---------- ------------
(000'S OMITTED EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
First.......................... $ 98,306 $ 18,044 $ 2,492 $ .16
Second......................... 93,185 16,624 2,378 .15
Third.......................... 96,199 17,680 2,212 .14
Fourth......................... 120,064 19,562 2,412 .15
--------- ------------ ---------- -----
$ 407,754 $ 71,910 $ 9,494 $ .60
--------- ------------ ---------- -----
--------- ------------ ---------- -----
</TABLE>
FISCAL 1993
<TABLE>
<CAPTION>
NET INCOME
NET GROSS NET INCOME (LOSS)
QUARTER SALES PROFIT (LOSS) PER SHARE
- - ------------------------------- -------- ----------- ---------- ------------
(000'S OMITTED EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
First.......................... $ 98,072 $19,101 $ 3,103 $ .20
Second......................... 101,930 17,317 1,575 .10
Third.......................... 82,337 14,745 (5,705) (.36)
Fourth......................... 100,441 17,273 1,310 .08
-------- ----------- ---------- ------
$382,780 $68,436 $ 283 $ .02
-------- ----------- ---------- ------
-------- ----------- ---------- ------
</TABLE>
In the third quarter of fiscal 1993, the Company recorded noncash
restructuring expenses of $11,000,000 (or $7,200,000 after-tax) primarily
related to the writedown of certain inventories to reflect the impact of market
conditions (See Note 11) and a reduction in income tax expense of $1,200,000
(See Note 3).
9. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
EQUIPMENT,
BUILDINGS FURNITURE
AND AND
LAND IMPROVEMENTS FIXTURES TOTAL
------ ------------ ---------- --------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Balance, May 31, 1991.................................... $2,374 $29,586 $72,242 $104,202
Additions, at cost..................................... 714 1,945 5,559 8,218
Retirements or sales................................... -- -- (432) (432)
Restructuring allowance (See Note 11).................. -- (750) (1,650) (2,400)
Translation adjustments................................ -- 371 541 912
------ ------------ ---------- --------
Balance, May 31, 1992.................................... 3,088 31,152 76,260 110,500
Additions, at cost..................................... -- 2,932 6,021 8,953
Retirements or sales................................... -- (131) (607) (738)
Translation adjustments................................ -- (43) (87) (130)
------ ------------ ---------- --------
Balance, May 31, 1993.................................... 3,088 33,910 81,587 118,585
Additions, at cost..................................... -- 749 5,664 6,413
Retirements or sales................................... -- (21) (2,434) (2,455)
Translation adjustments................................ -- (161) (281) (442)
------ ------------ ---------- --------
Balance, May 31, 1994.................................... $3,088 $34,477 $84,536 $122,101
------ ------------ ---------- --------
------ ------------ ---------- --------
</TABLE>
33
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
EQUIPMENT,
BUILDINGS & FURNITURE
IMPROVEMENTS & FIXTURES TOTAL
------------ ---------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Balance, May 31, 1991................................................ $ 9,750 $38,529 $48,279
Depreciation and amortization expense.............................. 1,347 6,586 7,933
Retirements or sales............................................... -- (182) (182)
Translation adjustments............................................ 155 351 506
------------ ---------- -------
Balance, May 31, 1992................................................ 11,252 45,284 56,536
Depreciation and amortization expense.............................. 1,448 5,220 6,668
Retirements or sales............................................... (131) (572) (703)
Translation adjustments............................................ 5 27 32
------------ ---------- -------
Balance, May 31, 1993................................................ 12,574 49,959 62,533
Depreciation and amortization expense.............................. 1,219 5,823 7,042
Retirements or sales............................................... (139) (1,887) (2,026)
Translation adjustments............................................ (69) (162) (231)
------------ ---------- -------
Balance, May 31, 1994................................................ $13,585 $53,733 $67,318
------------ ---------- -------
------------ ---------- -------
</TABLE>
11. RESTRUCTURING EXPENSES
The Company recorded noncash restructuring expenses of $11,000,000 for the
writedown of certain inventories and associated costs in fiscal 1993. The
inventories most affected were parts for older-model commercial aircraft,
certain manufactured products as well as material supporting original equipment
manufacturers. The writedown resulted from the Company's assessment of the
impact on inventories of the changes in the aviation/aerospace market and the
recessionary economic environment. The noncash restructuring expenses that
established inventory realization reserves (see note 13 in Notes to Consolidated
Financial Statements) had a remaining balance of approximately $4,488,000 at May
31, 1994. As the inventory for which the realization reserves were established
is disposed of, the realization reserve balance is to be correspondingly
reduced.
The Company recorded expenses of $5,800,000 in fiscal 1992 relating to the
restructuring of its Oklahoma City maintenance facility. The expenses included
the excess of net book over estimated recoverable value of idle leasehold
improvements and equipment, excess inventory and uncollectible accounts
receivable, as well as related personnel termination costs and other facility
reduction expenses. These expenses had been fully realized as of May 31, 1994.
12. AIRCRAFT LEASING ACTIVITIES
The Company is an owner participant in four leveraged lease agreements
entered into between March 1986 and May 1988. These agreements cover four narrow
body commercial aircraft and spare parts. The transactions involve aircraft
currently operated by major carriers. The remaining terms of the leases range
from 7 to 10 years. The Company's equity investment in these aircraft represents
approximately one third of the aggregate equipment cost. The remaining portion
of the equipment cost is financed by third-party nonrecourse debt.
The Company has ownership rights to the equipment subject to the right of
the lessees to exercise certain purchase, renewal and termination options. For
Federal income tax purposes, the Company receives investment tax credits and has
the benefit of tax deductions for depreciation on the aggregate equipment cost
and interest on the nonrecourse debt. During the early years of
34
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. AIRCRAFT LEASING ACTIVITIES -- (CONTINUED)
the lease Federal income tax deductions exceeded the lease rental income,
allowing excess deductions to be applied against the Company's other income. In
the later years of the lease, rental income exceeds the deductions and taxes
will be recorded in accordance with SFAS No. 109. Further, deferred taxes were
provided net of the Company's Alternative Minimum Tax (AMT) position. In fiscal
1994, the Company's Investment in leveraged leases was repriced approximately
$2,000,000 for the impact of an interest rate reduction on nonrecourse long-term
debt secured by aircraft under leveraged lease, the tax rate change under the
Omnibus Budget Reconciliation Act of 1993 and the Company's AMT position in
accordance with SFAS No. 13 "Accounting for Leases."
In August 1990, the Company sold a partial residual interest in a Boeing
737-300 aircraft currently subject to a leveraged lease. The lease term expires
in March 2001. The principal portion of the proceeds from this sale were
received in the form of a $2,000,000 note and are included with Prepaid income
taxes, retirement benefits, notes receivable and other on the Consolidated
Balance Sheets. This note has an interest rate of 9.9%. The note and accrued
interest of $3,600,000 are due in March 2001. The carrying amount of the note
receivable approximates its fair value at May 31, 1994.
The condensed operating results and balance sheet financial information for
aircraft leasing activities were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY
31,
-------------------------
1994 1993 1992
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Operating Results:
Revenues................................................... $ 2,195 $ 1,390 $ 2,740
Net income (loss).......................................... 1,132 (22) (11)
Balance Sheet:
Total assets............................................... 39,700 37,800 41,190
Stockholder's equity....................................... 24,349 23,217 23,239
</TABLE>
The Company's net investment in leveraged leases is composed of the
following elements:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MAY 31,
------------------
1994 1993
-------- --------
(000'S OMITTED)
<S> <C> <C>
Rentals receivable (net of principal and interest on the
nonrecourse debt)........................................... $ 16,258 $ 15,510
Estimated residual value of leased assets.................... 23,950 23,950
Unearned and deferred income................................. (7,590) (9,250)
-------- --------
Investment in leveraged leases............................. 32,618 30,210
Deferred taxes, net of AMT in fiscal 1993.................... (28,560) (28,310)
-------- --------
Net investment in leveraged leases......................... $ 4,058 $ 1,900
-------- --------
-------- --------
</TABLE>
Pretax income from leveraged leases was $1,955,000, $334,000 and $529,000 in
fiscal 1994, 1993 and 1992, respectively. The tax effect of pretax income from
leveraged leases was $823,000, $125,000 and $199,000 in fiscal 1994, 1993 and
1992, respectively.
35
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. ALLOWANCES AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY
31,
-----------------------
1994 1993 1992
------ ------ -------
(000'S OMITTED)
<S> <C> <C> <C>
Balance, beginning of year............................................... $2,000 $2,000 $ 2,000
Provision charged to operations........................................ 600 400 1,600
Deductions for accounts written off, net of recoveries................. (600) (400) (1,600)
------ ------ -------
Balance, end of year..................................................... $2,000 $2,000 $ 2,000
------ ------ -------
------ ------ -------
</TABLE>
INVENTORY REALIZATION RESERVES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
--------------------------
1994 1993 1992
-------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Balance, beginning of year........................................... $ 14,000 $ 6,000 $ 4,700
Provision charged to operations.................................... 3,104 12,300 3,300
Inventory written off and loss from disposal, net of recoveries.... (8,188) (4,300) (2,000)
-------- ------- -------
Balance, end of year................................................. $ 8,916 $14,000 $ 6,000
-------- ------- -------
-------- ------- -------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding the Directors of the Company
is incorporated by reference to the information contained under the caption
"Nominees and Continuing Directors" in the Company's definitive proxy statement
for the 1994 Annual Meeting of Stockholders to be filed pursuant to Regulation
14A.
The information required by this item regarding the Executive Officers of
the Company appears under the caption "Executive Officers of the Registrant" in
Part I above.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item regarding the compliance with Section
16(a) of the Securities Exchange Act of 1934 ("Exchange Act") is incorporated by
reference to the information contained under the caption "Compliance with
Section 16(a) of The Exchange Act" in the Company's definitive proxy statement
for the 1994 Annual Meeting of Stockholders to be filed pursuant to Regulation
14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information contained under the captions "Executive Compensation and Other
Information" (but excluding the following sections thereof, "Compensation
Committee's Report on Executive Compensation" and "Stockholder Return
Performance Graphs"); "Employment and Other Agreements" and "Director's
Compensation", in the Company's definitive proxy statement for the 1994 Annual
Meeting of Stockholders' to be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information contained under the caption "Security Ownership of Management and
Others" in the Company's definitive proxy statement for the 1994 Annual Meeting
of Stockholders' to be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained under the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1994 Annual
Meeting of Stockholders' to be filed pursuant to Regulation 14A.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants, KPMG Peat Marwick LLP........................................... 13
Financial Statements -- AAR CORP. and Subsidiaries:
Consolidated statements of income for the three years ended May 31, 1994................................ 14
Consolidated balance sheets as of May 31, 1994 and 1993................................................. 15-16
Consolidated statements of stockholders' equity for the three years ended May 31, 1994.................. 17
Consolidated statements of cash flows for the three years ended May 31, 1994............................ 18
Notes to consolidated financial statements.............................................................. 19-36
Selected quarterly data (unaudited) for the years ended May 31, 1994 and 1993 (Note 8 to Consolidated
Financial Statements).................................................................................. 33
</TABLE>
No financial data schedules are required to be filed.
EXHIBITS
The Exhibits filed as a part of this report are set forth on the Exhibit
Index contained elsewhere herein. Each of the material contracts identified as
Exhibits 10.1 through 10.5 is a management contract or compensatory arrangement.
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three month period ended
May 31, 1994.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AAR CORP.
(Registrant)
Date: August 24, 1994
By: /s/ IRA A. EICHNER
-----------------------------------
Ira A. Eichner
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- - --------------------------------- ------------------------- ----------------
/s/ IRA A. EICHNER CHAIRMAN OF THE BOARD AND
- - --------------------------------- CHIEF EXECUTIVE OFFICER;
Ira A. Eichner DIRECTOR (PRINCIPAL
EXECUTIVE OFFICER)
(PRINCIPAL FINANCIAL
OFFICER)
/s/ DAVID P. STORCH PRESIDENT AND CHIEF
- - --------------------------------- OPERATING OFFICER;
David P. Storch DIRECTOR
/s/ TIMOTHY J. ROMENESKO VICE PRESIDENT-CONTROLLER
- - --------------------------------- (PRINCIPAL ACCOUNTING
Timothy J. Romenesko OFFICER)
/s/ A. ROBERT ABBOUD DIRECTOR
- - ---------------------------------
A. Robert Abboud
/s/ EDGAR D. JANNOTTA DIRECTOR August 24, 1994
- - ---------------------------------
Edgar D. Jannotta
/s/ ROBERT D. JUDSON DIRECTOR
- - ---------------------------------
Robert D. Judson
/s/ ERWIN E. SCHULZE DIRECTOR
- - ---------------------------------
Erwin E. Schulze
/s/ JOEL D. SPUNGIN DIRECTOR
- - ---------------------------------
Joel D. Spungin
/s/ LEE B. STERN DIRECTOR
- - ---------------------------------
Lee B. Stern
/s/ RICHARD D. TABERY DIRECTOR
- - ---------------------------------
Richard D. Tabery
39
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
INDEX EXHIBITS
- - ------------------------------------ --------------------------------------------------------------------
<S> <C> <C>
3. Articles of Incorporation 3.1 Restated Certificate of Incorporation;1 Amendments thereto dated
and By-Laws November 3, 19872 and October 19, 1988.2
3.2 By-Laws, as amended.2 Amendment thereto dated April 12, 1994 (filed
herewith)
4. Instruments defining the 4.1 Restated Certificate of Incorporation and Amendments (see Exhibit
rights of security holders 3.1).
4.2 By-Laws, as amended (filed herewith).
4.3 Credit Agreement dated June 1, 1993 between the Registrant and
Continental Bank N.A.11 and amendment thereto dated May 16, 1994
(filed herewith).
4.4 Rights Agreement between the Registrant and the First National Bank
of Chicago;1 Amendment thereto dated July 18, 1989.2
4.5 Indenture dated October 15, 1989 between the Registrant and
Continental Bank, National Association, as Trustee, relating to debt
securities;5 First Supplemental Indenture thereto dated August 26,
1991.6
4.6 Officer's certificates dated October 24, 198910 and October 12,
1993.10
4.7 Credit Agreement dated October 15, 1991 between the Registrant and
The First National Bank of Chicago, as Agent7 and amendment thereto
dated March 31, 1994 (filed herewith).
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant
is not filing certain documents. The Registrant agrees to furnish a
copy of each such document upon the request of the Commission.
10. Material Contracts 10.1 AAR CORP. Stock Benefit Plan.11
10.2 Death Benefit Agreement dated August 24, 1984 between the Registrant
and Ira A. Eichner;8 Amendment thereto dated August 12, 1988.4
10.3 Further Restated and Amended Employment Agreement dated August 1,
1985 between the Registrant and Ira A. Eichner;3 Amendment thereto
dated August 12, 1988.4
10.4 Trust Agreement dated August 12, 1988 between the Registrant and Ira
A. Eichner4 and amendment thereto dated February 4, 1994 (filed
herewith).
10.5 AAR CORP. Directors' Retirement Plan, dated April 14, 1992.9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX EXHIBITS
- - ------------------------------------ --------------------------------------------------------------------
<S> <C> <C>
21. Subsidiaries of 21.1 Subsidiaries of AAR CORP. (filed herewith).
the Registrant
23. Consents of experts 23.1 Consent of Independent Public Accountants -- KPMG Peat Marwick
and counsel (filed herewith).
</TABLE>
- - ------------------------
Notes:
1 Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1987.
2 Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1989.
3 Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1986.
4 Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1988.
5 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the Quarter ended November 30, 1989.
6 Incorporated by reference to Exhibits to Registrant's Registration Statement
on Form S-3 filed August 27, 1991.
7 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1991.
8 Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1985.
9 Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1992.
10 Incorporated by reference to Exhibits to the Registrant's Current Reports on
Form 8-K dated October 24, 1989 and October 12, 1993.
11 Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1993.
<PAGE>
Exhibit 3.2
AMENDMENT TO
THE AAR CORP. BY-LAWS
WHEREAS, AAR CORP. (the "Company") has adopted a form of by-laws (the
"By-Laws") and reserves the right to amend the By-Laws; and
WHEREAS, the Company has amended the By-Laws from time to time in the
past, and now desires to amend the By-Laws further to provide that shares
abstaining on a vote not be counted as having voted;
NOW, THEREFORE, the By-laws are hereby amended effective April 12, 1994 in
the following respect:
Article II, Section 10 of the Amended By-Laws of AAR CORP. is hereby
amended to read as follows:
"SECTION 10. VOTING. Each share of stock shall
entitle the holder thereof to one vote. In the election of
directors, a plurality of the votes cast shall elect. Any other
action shall be authorized by a majority of the votes cast except
where the General Corporation Law prescribes a different percentage
of votes and/or a different exercise of voting power. In
determining whether a proposal has been approved, shares abstaining
or not voting but otherwise present at the meeting will not be
counted as having been voted on the proposal. All elections of
directors shall be written ballots. Voting by ballot shall not be
required for any other corporate action except as otherwise provided
by the General Corporation Law."
This Amendment has been executed by the Company by its duly authorized officer
effective as of April 12, 1994 and attested by its Secretary.
AAR CORP.
By
--------------------------
Ira A. Eichner,
Chairman of the Board
ATTEST:
- - -------------------------------
Howard A. Pulsifer, Secretary
<PAGE>
EXHIBIT 4.2
AMENDED BY-LAWS*
OF
AAR CORP.
A Delaware Corporation
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office shall be at
229 South State Street, in the City of Dover, County of Kent, State of Delaware,
and the name of the resident agent in charge thereof is THE PRENTICE-HALL
CORPORATION SYSTEM, INC.
SECTION 2. OTHER OFFICES. The corporation may also have an
office or offices at such other place or places, within or without the State of
Delaware, as the Board of Directors may from time to time designate or the
business of the corporation require.
ARTICLE II
STOCKHOLDERS' MEETINGS
SECTION 1. TIME. The annual meeting of the stock-
holders of the corporation for the election of directors and the transaction of
such other business as may properly come before such meeting shall be held each
year on the second Wednesday in October at three o'clock P.M. (Chicago time), or
if said day be a legal holiday, then on the next succeeding day not a legal
holiday, or shall be held on such other time and date as shall be determined by
the Board of Directors. A special meeting of the stockholders
*as of April 12, 1994
<PAGE>
shall be held on the date and at the time fixed by those persons authorized by
the Certificate of Incorporation to call such meeting.
SECTION 2. PLACE. Annual meetings and special meetings shall be
held at such place, within or without the State of Delaware, as the directors
may, from time to time, fix. Whenever the directors shall fail to fix such
place, the meeting shall be held at the registered office of the corporation in
the State of Delaware.
SECTION 3. CALL. Annual meetings may be called by the directors
or by any officer instructed by the directors to call the meeting.
SECTION 4. NOTICE OR WAIVER OF NOTICE. Written notice of all
meetings shall be given, stating the place, date and hour of the meeting. The
notice of an annual meeting shall state that the meeting is called for the
election of directors and for the transaction of other business which may
properly come before the meeting, and shall (if any other action which could be
taken at a special meeting is to be taken at such annual meeting), state the
purpose or purposes. The notice of a special meeting shall in all instances
state the purpose or purposes for which the meeting is called. If any action is
proposed to be taken which would, if taken, entitle stockholders to receive
payment for their shares of stock, the notice shall include a statement of that
purpose and to that effect. Except as otherwise provided by the General
Corporation Law, a copy of the notice of any meeting shall be
2
<PAGE>
given, personally or by mail, not less than ten days nor more than sixty days
before the date of the meeting, unless the lapse of the prescribed period of
time shall have been waived, and directed to each stockholder at his record
address or at such other address which he may have furnished by request in
writing to the Secretary of the corporation. Notice by mail shall be deemed to
be given when deposited, with postage thereon prepaid, in the United States
mail. If a meeting is adjourned to another time, not more than thirty days
hence, and/or to another place, and if an announcement of the adjourned time
and/or place is made at the meeting, it shall not be necessary to give notice of
the adjourned meeting unless the directors, after adjournment, fix a new record
date for the adjourned meeting. Notice need not be given to any stockholder who
submits a written waiver of notice by him before or after the time stated
therein. Attendance of a person at a meeting of stockholders shall constitute a
waiver of notice of such meeting, except when the stockholder attends a meeting
for the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders need be specified in any written
waiver of notice.
SECTION 5. STOCKHOLDER LIST. The officer who has charge of the
stock ledger of the corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged
3
<PAGE>
in alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list shall be
open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place where the meeting is to be held. The
list shall also be produced and kept at the time and place of the meeting during
the whole time thereof, and may be inspected by any stockholder who is present.
The stock ledger shall be the only evidence as to who are the stockholders
entitled to examine the stock ledger, the list required by this section or the
books of the corporation, or to vote in person or by proxy at any meeting of
stockholders.
SECTION 6. CONDUCT OF MEETING. Meetings of the stockholders shall
be presided over by one of the following officers in the order of seniority and
if present and acting -- the Chairman of the Board, if any, the Vice-Chairman of
the Board, if any, the President, Executive Vice President, a Vice President,
or, if none of the foregoing is in office and present and acting, by a chairman
to be chosen by the stockholders. The person presiding over the meeting shall
have authority to prescribe the agenda for the meeting and to control the length
and order of discussion. The Secretary of the corporation, or in his absence,
an Assistant
4
<PAGE>
Secretary, shall act as Secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present, the Chairman of the meeting shall appoint
a secretary of the meeting.
SECTION 7. PROXY REPRESENTATION. Every stockholder may authorize
another person or persons to act for him by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and as long
as, it is coupled with an interest sufficient in law to support an irrevocable
power. A power may be made irrevocable regardless of whether the interest with
which it is coupled is an interest in the stock itself or an interest in the
corporation generally.
SECTION 8. INSPECTORS AND JUDGES. The directors, in advance of
any meeting, may, but need not, appoint one or more inspectors of election or
judges of the vote, as the case may be, to act at the meeting or any adjournment
thereof. If an inspector or inspectors or judge or judges are not appointed,
the person presiding at the meeting may, but need not, appoint one or more
inspectors or judges. In case any person who may be appointed as an inspector
or judge fails to appear or act, the vacancy may be filled by appointment made
by the directors in advance of the
5
<PAGE>
meeting or at the meeting by the person presiding thereat. Each inspector or
judge, if any, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector or judges at such
meeting with strict impartiality and according to the best of his ability. The
inspectors or judges, if any, shall determine the shares of stock represented at
the meeting, the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the results, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the person
presiding at the meeting, the inspector or inspectors or judge or judges, if
any, shall make a report in writing of any challenge, question or matter
determined by him or them and execute a certificate of any fact found by him or
them.
SECTION 9. QUORUM. The holders of a majority of the outstanding
shares of stock present or represented by proxy at any such meeting of
stockholders shall constitute a quorum at such meeting for the transaction of
any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
SECTION 10. VOTING. Each share of stock shall entitle the holder
thereof to one vote. In the election of directors, a plurality of the votes
cast shall elect. Any other action shall be authorized by a majority of the
votes cast except where the General Corporation Law prescribes a different
percentage of votes and/or
6
<PAGE>
a different exercise of voting power. In determining whether a proposal has
been approved, shares abstaining or not voting but otherwise present at the
meeting will not be counted as having been voted on the proposal. All elections
of directors shall be written ballots. Voting by ballot shall not be required
for any other corporate action except as otherwise provided by the General
Corporation Law.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND QUORUM. a. The Board of Directors shall
consist of between three and fifteen directors, with the exact number of
directors to be fixed from time to time by the Board of Directors pursuant to a
resolution adopted by a majority of the Board of Directors then in office.
b. A majority of the members of the Board of Directors acting at a
meeting duly assembled, shall constitute a quorum for the transaction of
business; provided, however, that, whenever the corporation is permitted by law
to have only one director, then, and, in that event only, one director shall
constitute a quorum. If at any meeting of the Board of Directors there shall be
less than a quorum present, a majority of those present may adjourn the meeting,
without further notice from time to time until a quorum shall have been
obtained. Except as otherwise provided by law, by the Certificate of
Incorporation, or these by-laws, the act of the directors at a meeting at which
a quorum is present shall be the
7
<PAGE>
act of the Board. Member or members of the Board of Directors shall be deemed
present at a meeting if such person or persons are participating in the meeting
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
SECTION 2. MEETINGS. Meetings of the Board of Directors shall be
held at such place within or outside the State of Delaware as may from time to
time be fixed by resolution of the Board of Directors, or as may be specified in
the notice of the meeting. Regular meetings of the Board of Directors shall be
held at such times as may from time to time be fixed by resolution of the Board
of Directors, and special meetings may be held at any time upon the call of the
Chairman of the Board or, in the absence of the Chairman of the Board, the
President or any Vice President or the Secretary or any two directors by oral,
telegraphic or written notice duly served on or sent or mailed to each director
not less than two days before such meeting. A meeting of the Board of Directors
may be held without notice immediately after the annual meeting of
Notice need not be given of regular meetings of the Board of Directors. The
notice of any meeting need not specify the purpose of the meeting. Any
requirement of furnishing a notice shall be waived by any director who signs a
written waiver of such notice before or after the time stated therein. Further,
the attendance of a director at any meeting shall constitute a waiver of notice
of such meeting, except where a director attends a meeting for the purpose of
objecting, at the
8
<PAGE>
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
SECTION 3. COMMITTEES. a. The Board of Directors shall appoint
from among its members the following committees: audit, compensation,
nominating and executive. These committees shall consist of such number, shall
have such powers and duties, and the members thereof shall otherwise serve as
shall from time to time be prescribed by the Board of Directors.
b. The Board of Directors may, in its discretion, by the affirmative
vote of a majority of the whole Board of Directors, appoint other committees
which shall have and may exercise such powers and duties as shall be conferred
or authorized by the resolutions appointing them.
c. A majority of any committee appointed pursuant to the provisions of
a. and b. above, if such committee be composed of more than two members, may
determine its action and fix the time and place of its meetings unless the Board
of Directors shall otherwise provide. The Board of Directors shall have power
at any time to fill vacancies in, to change the membership of, or to discharge
any such committee.
d. Any and all actions by any committee shall be reported to the Board
of Directors at the board meeting succeeding such action.
SECTION 4. DIVIDENDS. Subject always to the provisions of the
law and the Certificate of Incorporation, the Board of Directors shall have full
power to determine whether any, and if any, what part of any, funds legally
available for the payment of
9
<PAGE>
dividends shall be declared in dividends and paid to stockholders; the division
of the whole or any part of such funds of the corporation shall rest wholly
within the lawful discretion of the Board of Directors, and it shall not be
required at any time, against such discretion, to divide or pay any part of such
funds among or to the stockholders as dividends or otherwise; and the Board of
Directors may fix a sum which may be set aside or reserved over and above the
capital paid in of the corporation as working capital for the corporation or as
a reserve for any proper purpose, and from time to time may increase, diminish,
and vary the same in its absolute judgment and discretion.
SECTION 5. INTENTIONALLY OMITTED.
SECTION 6. INFORMAL ACTION. Any action required or permitted to
be taken at any meeting of the Board of Directors or any committee thereof may
be taken without a meeting if all members of the board or committee, as the case
may be, consent thereto in writing and the writing or writings are filed with
the minutes or proceedings of the board or committee.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. The Board of Directors, as soon as may be
after the election thereof held in each year, shall elect a Chairman of the
Board, President, Secretary, Chief Financial Officer, and Treasurer, and from
time to time may appoint a Vice Chairman of the Board, one or more Vice
Presidents and such
10
<PAGE>
Assistant Secretaries, Assistant Treasurers and such other officers, agents and
employees as it may deem proper. Any two offices may be held by the same
person. More than two offices other than the offices of Chairman of the Board
or President and Secretary may be held by the same person. The Chairman, the
Vice Chairman and the President may, but need not, be chosen from among the
directors. The Treasurer shall report to the Chief Financial Officer if not
also elected to the position of Chief Financial Officer.
SECTION 2. TERM AND REMOVAL. The term of office of all officers
shall be one year and until their respective successors are elected and qualify,
but any officer may be removed from office, either with or without cause, at any
time by the affirmative vote of a majority of the members of the Board of
Directors then in office. A vacancy in any office arising from any cause may be
filled for the unexpired portion of the term by the Board of Directors.
SECTION 3. POWERS AND DUTIES. The Chairman of the Board shall be
the Chief Executive Officer of the corporation, shall preside at all meetings of
the Board of Directors, shall have such powers and perform such duties as are
assigned to him by these by-laws, and shall have such other powers and perform
such other duties as generally pertains to his office. In the absence or
disability of the Chairman of the Board, the Vice Chairman of the Board, if one
has been appointed, shall assume the duties, powers and position of the said
Chairman. The President shall be the
11
<PAGE>
Chief Operating Officer and, in the absence or disability of the Chairman of the
Board and the Vice Chairman of the Board, if the latter has been appointed, the
President shall assume the duties, powers and position of the said Chairman.
The remaining officers of the corporation shall each have such powers and duties
as generally pertain to their respective offices, as well as such powers and
duties as from time to time may be conferred by the Board of Directors. The
Vice President or Vice Presidents, the Assistant Secretary or Assistant
Secretaries and the Assistant Treasurer or Assistant Treasurers shall, in the
order of their respective seniorities, in the absence or disability of the
President, Secretary or Treasurer, respectively, perform the duties of such
officer and shall generally assist the President, Secretary or Treasurer,
respectively; provided, however, and notwithstanding anything hereinabove to the
contrary, that if the Board of Directors designates a Vice President as an
Executive Vice President, he shall perform the duties of the President in his
absence or disability, regardless of the order of seniority of said Executive
Vice President to the other Vice Presidents.
SECTION 4. VOTING CORPORATION'S SECURITIES. Unless otherwise
ordered by the Board of Directors, the Chairman of the Board, or in the event of
his inability to act, the President, or in the event of his inability to act,
the Vice President designated by the Board of Directors to act in the absence of
the President, shall have full power and authority on behalf of the corporation
to attend and to act and to vote at any meetings of security holders
12
<PAGE>
of corporations in which the corporation may hold securities, and at such
meetings shall possess and may exercise any and all rights and powers incident
to the ownership of such securities, and which as the owner thereof the
corporation might have possessed and exercised, if present. The Board of
Directors, by resolution from time to time, may confer like powers upon any
other person or persons.
ARTICLE V
CERTIFICATES OF STOCK
SECTION 1. FORM AND TRANSFERS. The interest of each stockholder
of the corporation shall be evidenced by certificates for shares of stock,
certifying the number of shares represented thereby and in such form not
inconsistent with the Certificate of Incorporation as the Board of Directors may
from time to time prescribe.
Upon compliance with any provisions restricting the transferability of
shares that may be set forth in the Certificate of Incorporation, these by-laws,
or any written agreement in respect thereof, transfers of shares of the capital
stock of the corporation shall be made only on the books of the corporation by
the registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary of the corporation, or
with a transfer clerk or a transfer agent appointed as in Section 4 of this
Article provided, and on surrender of the certificate or certificates for such
shares
13
<PAGE>
properly endorsed and the payment of all taxes thereon. The person in whose
name shares of stock stand on the books of the corporation shall be deemed the
owner thereof for all purposes as regards the corporation; provided that
whenever any transfer of shares shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary of the corporation, shall be so
expressed in the entry of transfer. The Board may, from time to time, make such
additional rules and regulations as it may deem expedient, not inconsistent with
these by-laws, concerning the issue, transfer, and registration of certificates
for shares of the capital stock of the corporation.
The certificates of stock shall be signed by or in the name of the company
by the Chairman or Vice Chairman of the Board of Directors, or the President or
a Vice President, and by the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer, certifying the number of shares owned by
such named holder, and sealed with the seal of the corporation. Such seal may
be a facsimile, engraved or printed. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the company with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
SECTION 2. RECORD DATE FOR STOCKHOLDERS. For the
14
<PAGE>
purpose of determining the stockholders entitled to notice of or to vote at any
meeting of stockholders or any adjournment thereof, or to express consent to or
dissent from any corporate action in writing without a meeting, or for the
purpose of determining stockholders entitled to receive payment of any dividend
or other distribution or the allotment of any rights, or entitled to exercise
any rights in respect of any change, conversion, or exchange of stock, or for
the purpose of any other lawful action, the directors may fix, in advance, a
date as the record date for any such determination of stockholders. Such date
shall not be more than sixty days nor less than ten days before the date of such
meting, nor more than sixty days prior to any other action. If no record date
is fixed: (1) the record date for the determination of stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which the meeting is held; (2) the
record date for determining stockholders entitled to express consent to
corporate action in writing without a meeting when no prior action by the Board
of Directors is necessary, shall be the day on which the first written consent
is expressed; and (3) the record date for determining stockholders for any other
purpose shall be the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. When a determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders has been made as provided in this paragraph, such determination
shall apply to any adjournment thereof; provided,
15
<PAGE>
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
SECTION 3. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. No
certificates for shares of stock in the corporation shall be issued in place of
any certificate alleged to have been lost, destroyed or stolen, except on
production of such evidence of such loss, destruction or theft and on delivery
to the corporation, if the Board of Directors shall so require, of a bond of
indemnity in such amount (not exceeding twice the value of the shares
represented by such certificate), upon such terms and secured by such surety as
the Board of Directors may in its discretion require.
SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of Directors
may appoint one or more transfer clerks or one or more transfer agents and one
or more registrars, and may require all certificates of stock to bear the
signature or signatures of any of them.
SECTION 5. EXAMINATION OF BOOKS BY STOCKHOLDERS. The Board shall
have power to determine, from time to time, whether and to what extent and at
what times and places and under what conditions and regulations the accounts and
books and documents of the corporation, or any of them, shall be open to the
inspection of the stockholders; and no stockholder shall have any right to
inspect any account or book or document of the corporation.
16
<PAGE>
ARTICLE VI
FISCAL YEAR
The fiscal year of the corporation shall begin on the first day of
June in each year and shall end on the last day of May next following, unless
otherwise determined by the Board of Directors.
ARTICLE VII
CORPORATE SEAL
The corporate seal of the corporation shall be in such form as the
Board of Directors shall prescribe.
ARTICLE VIII
AMENDMENTS
The by-laws of this corporation may be amended, altered or repealed
and new by-laws not inconsistent with any provision of the Certificate of
Incorporation, as amended, may be made (i) by the affirmative vote of a majority
of the members of the Board of Directors then in office, or (ii) by the
affirmative vote of the holders of at least 80% of the total voting power of all
shares of stock of this corporation entitled to vote in the election of
directors, considered for purposes of this Article VIII as one class.
17
<PAGE>
Exhibit 4.3
FIRST AMENDMENT DATED
AS OF MAY 16, 1994
TO CREDIT AGREEMENT
DATED AS OF JUNE 1, 1993
THIS AMENDMENT, dated as of May 16, 1994, is entered into among AAR CORP.,
a Delaware corporation (the "Borrower"), the financial institutions (the
"Lenders") signatory to the hereinafter defined Agreement, CONTINENTAL BANK,
N.A. ("Continental") as agent (the "Agent") for the Lenders.
RECITALS:
A. The Borrower, the Lenders and the Agent have entered into that
certain Credit Agreement dated as of June 1, 1993 (said Credit Agreement shall
hereinafter be referred to as the "Agreement"; the terms defined in the
Agreement and not otherwise defined herein shall be used herein as defined in
the Agreement).
B. The Borrower, the Lenders and the Agent wish to amend certain
provisions of the Agreement.
C. Therefore, the parties hereto agree as follows:
1. AMENDMENTS TO THE AGREEMENT.
1.1 ARTICLE I OF THE AGREEMENT. ARTICLE I of the Agreement is
amended by adding the following term and definition in proper alphabetical
sequence:
"Foreign Accounts" means Accounts, as defined in Section 6.13, with
respect to which the obligor is a Person which is (i) organized under the
laws of a jurisdiction other than the United States of America, any State
of the United States of America or the District of Columbia, in the case
of a Person which is not a natural person, or (ii) a citizen of a country
other than the United States of America, in the case of a natural person.
1.2 SECTION 5.9 OF THE AGREEMENT. Section 5.9 of the Agreement
is amended by deleting the amount "$5,000,000" in line 2 thereof and by
substituting the amount "$10,000,000" in its place.
1.3 SECTION 6.1 OF THE AGREEMENT. Section 6.1 of the Agreement
is amended by inserting the words "or Treasurer" after the phrase "the
Borrower's chief financial officer" wherever such phrase appears in clauses
(ii), (iii), (iv), (v) and (vii).
<PAGE>
1.4 SECTION 6.13 OF THE AGREEMENT. Section 6.13(c) of the
Agreement is amended to read in its entirety as follows:
(c) The Borrower or any Subsidiary may sell or otherwise dispose of
its Foreign Accounts to any Person for the purpose of collection, provided
that the aggregate face amount of all such Foreign Accounts so transferred
by the Borrower and its Subsidiaries during any fiscal year of the
Borrower shall not exceed an amount equal to 15% of the gross Accounts of
the Borrower and its Subsidiaries as of the last day of the Borrower's
immediately preceding fiscal year and determined from the Borrower's
consolidated balance sheet delivered pursuant to Section 6.1(i).
1.5 SECTION 6.22 OF THE AGREEMENT. Section 6.22 of the Agreement
is amended by deleting the amount "$160,000,000" and by substituting the amount
"$155,000,000" in its place.
1.6 SECTION 7.11 OF THE AGREEMENT. Section 7.11 of the Agreement
is amended by deleting the amount "$5,000,000" in line 2 thereof and by
substituting the amount "$10,000,000" in its place.
2. WARRANTIES. To induce the Lenders to enter into this Amendment, the
Borrower warrants that:
2.1 AUTHORIZATION. The Borrower is duly authorized to execute
and deliver this Amendment and is and will continue to be duly authorized to
borrow monies under the Agreement, as amended hereby, and to perform its
obligations under the Agreement, as amended hereby.
2.2 NO CONFLICTS. The execution and delivery of this Amendment
and the performance by the Borrower of its obligations under the Agreement, as
amended hereby, do not and will not conflict with any provision of law or of the
charter or by-laws of the Borrower or of any agreement binding upon the
Borrower.
2.3 VALIDITY AND BINDING EFFECT. The Agreement, as amended
hereby, is a legal, valid and binding obligation of the Borrower, enforceable
against the Borrower in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency or other similar laws of general
application affecting the enforcement of creditors' rights or by general
principles of equity limiting the availability of equitable remedies.
3. CONDITIONS PRECEDENT TO AMENDMENTS. The amendments contemplated by
Section 1 hereof are subject to the satisfaction of each of the following
conditions precedent:
Page 2
<PAGE>
3.1 DOCUMENTATION. The Borrower shall have delivered to the
Agent all of the following, each duly executed and dated the date hereof, in
form and substance satisfactory to the Agent:
(a) CERTIFICATE. A certificate of the president, chief financial
officer or Treasurer of the Borrower as to the matters set out in Sections 3.2
and 3.3 hereof.
(b) OTHER. Such other documents as the Agent may reasonably
request.
3.2 NO DEFAULT. As of the date hereof, no Event of Default or
Unmatured Event of Default shall have occurred and be continuing.
3.3 WARRANTIES. As of the date hereof, the warranties in Section
5 of the Agreement and in Section 2 of this Amendment shall be true and correct
as though made on such date, except for such changes as are specifically
permitted under the Agreement.
4. GENERAL
4.1 EXPENSES. The Borrower agrees to pay the Agent, upon demand
for all reasonable expenses, including reasonable attorneys' and legal
assistants' fees incurred by the Agent in connection with the preparation,
negotiation and execution of this Amendment, and any document required to be
furnished therewith.
4.2 LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS.
4.3 SUCCESSORS. This Amendment shall be binding upon the
Borrower, the Agent and the Lenders and their respective successors and assigns,
and shall inure to the benefit of the Borrower, the Agent and the Lenders and
their successors and assigns.
4.4 CONFIRMATION OF THE AGREEMENT. Except as amended hereby, the
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects.
4.5 REFERENCES TO THE AGREEMENT. Each reference in the Agreement
to "this Agreement," "hereunder," "hereof," or words of like import, and each
reference to the Agreement in any and all instruments or documents provided for
in the Agreement or delivered or to be delivered thereunder or in connection
therewith, shall, except where the context otherwise requires, be deemed a
reference to the Agreement, as amended hereby.
Page 3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered at Chicago, Illinois by their respective officers
thereunto duly authorized as of the date first written above.
AAR CORP.
By:
--------------------------------
Title:
------------------------------
CONTINENTAL BANK N.A., as a Lender
and as Agent
By:
--------------------------------
Title:
------------------------------
<PAGE>
Exhibit 4.7
AMENDMENT NO. 1
AMENDMENT NO. 1 dated as of March 31, 1994 (this "Amendment") to the
Credit Agreement dated as of October 15, 1991 (the "Credit Agreement") among AAR
CORP., a Delaware corporation, the lenders listed on the signature pages of this
Amendment and The First National lender of Chicago, as agent for such lenders.
The parties hereto wish to amend the Credit Agreement in certain respects
and accordingly hereby agree as follows:
1. DEFINITIONS. Unless the context otherwise requires, all terms used
herein which are defined in the Credit Agreement shall have the meanings
assigned to them therein.
2. AMENDMENT. Effective upon the satisfaction of the conditions
precedent set forth in Section 4 of this Amendment, the Credit Agreement shall
be amended as follows:
(a) Section 5.9 of the Credit Agreement shall be amended by deleting the
dollar figure "$5,000,000" in the two places where it appears therein and
substituting in lieu thereof the dollar figure "$10,000,000".
(b) Section 6.1 of the Credit Agreement shall be amended by deleting
each reference to "chief financial officer" contained therein and
substituting in lieu thereof the phrase "chief financial officer or
Treasurer".
(c) Section 6.13 of the Credit Agreement shall be amended by restating
clause (c) of said Section 6.13 as follows:
"(c) the Borrower or any Subsidiary may sell or otherwise
dispose of its Accounts to any Person; PROVIDED that (i) each such
disposition shall be without any recourse (either direct or
contingent) to the Borrower or any Subsidiary, (ii) the Borrower and
its Subsidiaries shall be in compliance with Section 6.12 upon
giving effect thereto and (iii) the aggregate face amount of all
such Accounts so transferred by the Borrower and its Subsidiaries
during any fiscal year of the Borrower shall not exceed an amount
equal to 15% of the gross Accounts of the Borrower and its
Subsidiaries as of the last day of the Borrower's immediately
preceding fiscal year and determined from the Borrower's
consolidated balance sheet delivered pursuant to Section 6.1(i)."
(d) Section 6.22 of the Credit Agreement shall be amended by deleting
the dollar figure "$160,000,000" where it appears therein and substituting
in lieu thereof the dollar figure "$155,000,000".
<PAGE>
(e) Section 7.11 of the Credit Agreement shall be amended by deleting
the dollar figure "$5,000,000" in the two places where it appears therein
and substituting in lieu thereof the dollar figure "$10,000,000".
3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby confirms,
reaffirms and restates as of the date hereof the representations and warranties
set forth in Article V of the Credit Agreement, provided that such
representations and warranties shall be and hereby are amended as follows: each
reference therein to "this Agreement", including, without limitation, such a
reference included in the term "Loan Documents", shall be deemed to be a
collective reference to the Credit Agreement, this Amendment and the Credit
Agreement as amended by this Amendment. A Default under and as defined in the
Credit Agreement as amended by this Amendment shall be deemed to have occurred
if any representation or warranty made pursuant to the foregoing sentence of
this Section 3 shall be materially false as of the date on which made.
4. CONDITIONS PRECEDENT. This Amendment and the amendment to the
Credit Agreement provided for herein shall become effective as of the date
hereof when this Amendment shall have been duly executed and delivered by the
Agent and the Borrower on one counterpart and Lenders constituting the Required
Lenders shall have signed a counterpart or counterparts hereof and notified the
Agent by telex or telephone that such action has been taken and that such
executed counterpart or counterparts will be mailed or otherwise delivered to
the Agent.
5. EFFECT ON THE EXISTING AGREEMENT. Except as expressly amended
hereby, all of the representations, warranties, terms, covenants and conditions
of the Credit Agreement and the other Loan Documents (a) shall remain unaltered,
(b) shall continue to be, and shall remain, in full force and effect in
accordance with their respective terms, and (c) are hereby ratified and
confirmed in all respects. Upon the effectiveness of this Amendment, all
references in the Credit Agreement (including references in the Credit Agreement
as amended by this Amendment) to "this Agreement" (and all indirect references
such as "hereby", "herein", "hereof" and "hereunder") shall be deemed to be
references to the Credit Agreement as amended by this Amendment.
6. EXPENSES. The Borrower shall reimburse the Agent for any and all
reasonable costs, internal charges and out-of-pocket expenses (including
attorneys' fees and time charges of attorneys for the Agent, which attorneys may
be employees of the Agent) paid or incurred by the Agent in connection with the
preparation, review, execution and delivery of this Amendment.
7. ENTIRE AGREEMENT. This Amendment, the Credit Agreement as amended
by this Amendment and the other Loan Documents embody the entire agreement and
understanding between the parties hereto and supersede any and all prior
agreements and understandings between the parties hereto relating to the subject
matter hereof.
Page 2
<PAGE>
8. GOVERNING LAW. This Amendment shall be construed in accordance
with the internal laws (and not the law of conflicts) of the State of Illinois,
but giving effect to federal laws applicable to a national banking association
located in the State of Illinois.
9. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Amendment by signing any such
counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
AAR CORP.
By:
------------------------------
Title:
-----------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By:
------------------------------
Title:
-----------------------------
Page 3
<PAGE>
Exhibit 10.4
AMENDMENT II TO TRUST AGREEMENT DATED AUGUST 12, 1988
BY AND AMONG AAR CORP., THE NORTHERN TRUST COMPANY
AND IRA A. EICHNER
-----------------------------------------------------
WHEREAS, AAR CORP., The Northern Trust Company and Ira A. Eichner (the
"Parties") entered into a trust agreement dated August 12, 1988 (the "Trust
Agreement"); and
WHEREAS, the Trust Agreement was amended by Amendment I thereto dated
May 25, 1990; and
WHEREAS, the Parties reserved the right to amend the Trust Agreement and
now deem it appropriate to further amend the Trust Agreement in certain
respects;
NOW, THEREFORE, the last sentence of Section 10.2 of the Trust Agreement
is amended, effective as of the date hereof, to read as follows:
Upon termination of the Trust, all assets remaining in the Trust
Fund shall be distributed to the Beneficiary designated by Eichner in his
last will and testament, or in accordance with a written instrument last
delivered to the Trustee prior to the date of his death. If no such
designation is made, or if all designated Beneficiaries predecease
Eichner, upon termination of the Trust all assets remaining in the Trust
fund shall be distributed as follows:
(a) to Eichner's widow, if living; or if not,
(b) to Eichner's lawful descendants PER STIRPES, then
living, or if none,
(c) to the duly appointed legal representatives of Eichner's
estate; or
(d) if there shall be no such legal representative
<PAGE>
duly appointed and qualified within six months of the date of death
of Eichner, then to such persons, as at the date of his death, would
be entitled to share in the distribution of his personal estate
under the provisions of the Illinois statute then in force governing
the descent of intestate property, in the proportions specified in
such statute.
IN WITNESS WHEREOF, the Parties have caused this Amendment II to the
Trust Agreement to be executed as of the day of , 1994.
ATTEST: AAR CORP.
- - ---------------------------- ---------------------------------
ATTEST: THE NORTHERN TRUST COMPANY
- - ---------------------------- ---------------------------------
---------------------------------
Ira A. Eichner
2
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF AAR CORP. (1)
STATE OF
NAME OF CORPORATION INCORPORATION
------------------- -------------
AAR Allen Airmotive, Inc. ................. Illinois
AAR Aviation Services, Inc. (2) ........... New York
AAR Aviation Trading, Inc. (3) ............ Illinois
AAR Financial Services Corp. .............. Illinois
AAR Hardware Corp. (4) .................... Illinois
AAR Manufacturing, Inc. (5) ............... Illinois
AAR Oklahoma, Inc. (6) .................... Oklahoma
AAR PowerBoss, Inc. (7) ................... Illinois
- - -----------
(1) Subsidiaries required to be listed pursuant to Regulation S-K Item
601(b)(21).
(2) Also does business under the name of AAR Engine Component Services, AAR
Landing Gear Center, AAR Technical Service Center, AAR Technical Service
Center - Midwest and Mars Aircraft Radio.
(3) Also does business under the names AAR Aircraft Turbine Center, AAR Allen
Aircraft, AAR Defense Systems and AAR Expendables.
(4) Also does business under the name AAR Hardware.
(5) Also does business under the names AAR Advanced Structures, AAR Cadillac
Manufacturing, AAR Handling Systems, AAR Skydyne and Aeronetics. AAR
Manufacturing, Inc. was formerly known as AAR Brooks & Perkins Corp.
(6) Also does business under the names Warsaw Aircraft Parts and AAR Southern
Star.
(7) Also does business under the name AAR PowerBoss.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
AAR CORP:
We consent to the incorporation by reference in Registration Statement Nos.
33-19767, 33-26783, 33-38042, 33-43839, and 33-58456 on Form S-8 and in
Registration Statement Nos., 33-30222 and 33-42326 on Form S-3 of AAR CORP. of
our report dated July 1, 1994, relating to the consolidated balance sheets of
AAR CORP, and subsidiaries as of May 31, 1994 and 1993 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended May 31, 1994, which report appears
in the May 31, 1994 annual report on Form 10-K of AAR CORP.
KPMG Peat Marwick LLP
Chicago, Illinois
August 24, 1994
