<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
AAR CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 36-2334820
(State or other jurisdiction (I.R.S. Employer
of Identification Number)
incorporation or organization)
</TABLE>
ONE AAR PLACE
1100 N. WOOD DALE ROAD
WOOD DALE, ILLINOIS 60191
(630) 227-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
HOWARD A. PULSIFER, ESQ.
ONE AAR PLACE
1100 N. WOOD DALE ROAD
WOOD DALE, ILLINOIS 60191
(630) 227-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------
COPIES TO:
STUART L. GOODMAN, ESQ. MITCHELL L. HOLLINS, ESQ.
SCHIFF HARDIN & WAITE SONNENSCHEIN NATH & ROSENTHAL
7200 SEARS TOWER 8000 SEARS TOWER
CHICAGO, ILLINOIS 60606 CHICAGO, ILLINOIS 60606
(312) 258-5500 (312) 876-8144
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) SECURITY(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $1.00 per share(3)..... 2,300,000 shares $28.75 $66,125,000 $20,037.88
</TABLE>
(1) Includes up to 300,000 shares which the Underwriters have the right to
purchase to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(c) on the basis of the price per share of
the Common Stock as traded on the New York Stock Exchange on January 10,
1997.
(3) Each share of Common Stock includes one related Common Stock Purchase Right.
The Common Stock Purchase Rights currently are not evidenced by separate
certificates and may not be transferred except upon transfer of the related
shares of Common Stock. The value attributable to the Common Stock Purchase
Rights is reflected in the market price of the Common Stock of the
Registrant.
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 13, 1997
2,000,000 SHARES
[LOGO]
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
------------------
All of the shares of Common Stock offered hereby are being sold by AAR CORP.
The last reported sale price of the Common Stock, which is listed under the
symbol "AIR", on the New York Stock Exchange, on January 7, 1997 was $28.75 per
share. See "Price Range of Common Stock".
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(3)........................................ $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting".
(2) Before deducting estimated expenses of $375,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 300,000 shares of Common Stock at the initial public
offering price per share, less the underwriting discount, solely to cover
over-allotments, if any. If such option is exercised in full, the total
initial public offering price, underwriting discount and proceeds to Company
will be $ , $ and $ , respectively. See "Underwriting".
------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in New York, New York, on or about
, 1997 against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. WILLIAM BLAIR & COMPANY
------------
The date of this Prospectus is , 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------
AVAILABLE INFORMATION
AAR CORP. ("AAR" or the "Company") is subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, or its Regional Offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site
on the World Wide Web that contains reports, proxy and other information
regarding issuers that file electronically with the Commission. The address of
such site is "http://www.sec.gov." In addition, reports, proxy statements and
other information can also be inspected at the offices of the New York Stock
Exchange (the "NYSE") at 20 Broad Street, New York, New York 10005, on which the
Company's common stock (the "Common Stock") is listed.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is hereby made
to the Registration Statement including the exhibits filed as a part thereof and
otherwise incorporated therein. Statements made in this Prospectus as to the
contents of any documents referred to are not necessarily complete, and in each
instance reference is made to such exhibit for a more complete description and
each statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended May 31,
1996 filed with the Commission (File No. 1-6263) pursuant to the Exchange Act,
the Company's Quarterly Reports on Form 10-Q for the quarters ended August 31,
1996 and November 30, 1996 and the descriptions of the Common Stock and the
Company's Common Stock Purchase Rights included in the Company's Registration
Statements on Form 8-A filed July 29, 1987, and October 20, 1987 and filed with
the Commission pursuant to Section 12(d) of the Exchange Act, including any
amendments or reports filed for the purpose of updating such descriptions, are
incorporated herein by reference.
All other documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the shares offered hereby shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated herein by reference, or
contained in this Prospectus, shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus has been delivered, upon written or oral request of such person, a
copy (without exhibits other than exhibits specifically incorporated by
reference) of any or all documents incorporated by reference into this
Prospectus. Requests for such copies should be directed to AAR CORP., One AAR
Place, 1100 N. Wood Dale Road, Wood Dale, Illinois 60191; telephone number (630)
227-2000.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND SHOULD BE READ IN
CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS
PROSPECTUS OR INCORPORATED HEREIN BY REFERENCE. UNLESS INDICATED OTHERWISE, THE
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS'
OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "UNDERWRITING."
THE COMPANY
AAR is a worldwide leader in supplying aftermarket parts and services to the
global aerospace/ aviation industry. The Company provides aircraft and engine
components, maintenance services and Company-manufactured products to customers
in all segments of this industry, including the world's largest commercial
airlines and air cargo operators, original equipment manufacturers, domestic and
foreign military and government agencies, aircraft leasing companies and
maintenance service providers. AAR believes that it is the only company in the
aviation aftermarket industry to offer this combination of trading, overhaul and
manufacturing capabilities.
The Company's trading activities include the purchase, sale, exchange and
lease of a wide variety of new, overhauled and repaired products for the
aviation aftermarket. These activities also include the Company's inventory
management programs, which allow airlines and other service providers such as
General Electric Company's Aircraft Engine Services Division, Lufthansa German
Airlines, Sabena Belgian World Airlines, Greenwich Air Services and Northwest
Airlines to obtain replacement parts and overhaul services for aircraft engine
and airframe components on a just-in-time basis without having to incur the cost
of purchasing, storing and maintaining the necessary supporting inventory. In
addition to providing maintenance and repair services in support of its trading
activities, the Company performs a wide range of these services for its
aerospace/aviation customers as part of its overhaul activities. AAR has five
Federal Aviation Authority ("FAA") licensed repair stations in the U.S., two in
Europe and one in the Far East to perform component overhaul services. The
Company also manufactures and repairs a wide array of containers, pallets and
shelters in support of military and humanitarian rapid deployment activities.
The Company's manufacturing activities also include the design, manufacture and
installation of in-plane cargo loading and handling systems for commercial and
military aircraft and helicopters and other, non-aviation products.
The Company believes that its businesses have benefited from a number of
favorable developments in the current aerospace/aviation industry environment.
Demand for the Company's trading and overhaul businesses is driven primarily by
flying activity. Increasing worldwide demand for passenger, freight and military
air service has led to an increase in the number of aircraft in service and the
number of hours flown. The Boeing Company's 1996 Current Market Outlook (the
"Boeing Outlook") reports that worldwide available seat miles ("ASMs"), a
measure of passenger flying activity, reached almost 2.1 trillion in 1995, an
all-time high. The Boeing Outlook estimates that worldwide ASMs will increase at
a compound annual rate of 5.7% through 2005, with international ASMs growing at
a faster rate than U.S. domestic ASMs; freight air traffic, as measured by
available ton miles ("ATMs"), is expected to grow at a compound annual rate of
6.7%.
In addition to this increased aviation activity, many air carriers, in an
effort to improve the efficiency and profitability of their operations, are: (i)
outsourcing more functions, such as repair and maintenance, in order to reduce
costs and improve turnaround times; (ii) decreasing the number of vendors from
which they purchase parts and services, in order to develop closer supplier
relationships, improve quality oversight and meet stringent regulatory
requirements; (iii) relying on the sophisticated management information systems
of their suppliers to enhance traceability of parts; and (iv) reducing capital
costs by reducing or eliminating their spare parts inventories. Moreover,
increased demand for cargo and small package delivery services has resulted in
an increase in the number of aircraft converted from passenger to all-cargo
configurations. Lastly, the increased emphasis of the U.S. military on rapid
deployment capabilities has resulted in increased demand for the Company's
manufactured products.
3
<PAGE>
The Company's business strategy to address these developments is to maintain
a leadership position in its primary markets and to generate profitable growth
by developing its product and service offerings to leverage its competitive
strengths. Key components of this strategy include: expanding its inventory
management programs; extending its overhaul capabilities to a broader range of
components; increasing its aircraft and engine trading and leasing activities;
continuing its significant international presence; and developing manufactured
products to complement its current offerings. The competitive strengths that the
Company believes will allow it to realize its objectives include:
BROAD ARRAY OF PRODUCTS AND SERVICES. AAR sells, leases, exchanges and
services a broad array of aircraft and engine components for virtually all
aircraft. These products include spare engines, instruments, avionics,
hydraulics and pneumatic systems, landing gear, flight control surfaces, and
other components and accessories, as well as entire commercial jet aircraft.
The Company believes that this breadth of products and services gives it a
competitive advantage in winning business from new customers and affords an
opportunity to expand its business with existing customers. It also
positions AAR to respond to its customers' desire to focus on a select group
of suppliers to control costs, increase quality and enhance timeliness of
delivery.
UNIQUE COMBINATION OF TRADING AND TECHNICAL CAPABILITIES. AAR's unique
combination of trading expertise and technical overhaul capabilities has
allowed it to respond to its customers' needs with inventory management
programs that combine both skills. These programs offer a cost-effective,
value-added opportunity for the Company's customers to reduce their
operating costs and decrease their capital requirements, while providing the
Company with significant growth opportunities.
INNOVATIVE TECHNICAL PRODUCT AND SERVICE DEVELOPMENT SKILLS. The Company
believes that one of its principal strengths is its ability to provide
innovative and prompt solutions to meet individual customers' needs in many
niche markets. These innovations include the design and manufacture of
customized cargo loading systems and rapid deployment products for the U.S.
military and the development of on-site overhaul services for airline
industry customers.
DIVERSE CUSTOMER BASE. The Company serves a broad base of over 5,000
domestic and international customers representing all segments of the
worldwide aerospace/aviation industry, as well as select industrial markets.
Aerospace/aviation industry customers other than inventory management
program customers and the U.S. Government include Air France, American
Airlines, British Airways, McDonnell-Douglas, Reno Air and United Air Lines.
The long-term relationships that the Company has developed with many of
these customers provide an ongoing base of business and an excellent source
of new business opportunities.
STRONG GLOBAL PRESENCE. AAR has over 30 facilities (including sales
offices) dedicated to its trading, overhaul and manufacturing activities in
ten countries across North America, Europe and Asia. This worldwide presence
positions the Company to respond to the needs of its customers around the
world. AAR's international presence also allows it to participate in the
growth of foreign aviation markets.
FINANCIAL STRENGTH. Management believes that the Company's financial
strength is a key advantage relative to its smaller competitors. AAR's
liquidity and access to capital enable the Company to respond quickly and
commit its resources when opportunities arise to acquire inventory, engines
and aircraft on advantageous terms.
REPUTATION AS A RELIABLE, HIGH-QUALITY SUPPLIER. The Company has been
providing aviation products and services for 45 years, and believes it has
gained a reputation as a reliable and high-quality supplier. Of its
approximately 2,200 employees, AAR employs approximately 275 persons
4
<PAGE>
whose duties include the inspection, tracking, investigation and
documentation preparation activities that enable AAR to comply with
regulatory requirements and the Company's and its customers' high quality
standards.
STRONG MANAGEMENT TEAM. The Company's strong management team includes
AAR-developed managers and personnel formerly with airlines, original
equipment manufacturers and other independent suppliers. The Company
believes that this management team has a depth of industry knowledge and
experience across technical, marketing and financial functions that permits
it to develop and manage complex programs for its airline industry
customers.
The principal executive offices of the Company are located at One AAR Place,
1100 N. Wood Dale Road, Wood Dale, Illinois 60191; telephone number (630)
227-2000.
THE OFFERING
<TABLE>
<CAPTION>
Common Stock offered........................................ 2,000,000 shares
<S> <C>
Common Stock to be outstanding after the offering (1)....... 18,135,542 shares
Use of proceeds............................................. General corporate
purposes,which may include the
expansion of its trading,
overhaul and manufacturing
activities, either by internal
growth or through acquisition.
New York Stock Exchange symbol.............................. AIR
</TABLE>
- ------------
(1) Represents the number of shares of Common Stock outstanding as of December
31, 1996 plus the number of shares offered hereby and is exclusive of up to
300,000 shares subject to the over-allotment option granted by the Company
to the Underwriters. See "Underwriting."
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Set forth below is summary consolidated financial information of the Company
for the periods and as of the date indicated. This information should be read in
conjunction with the Company's Consolidated Financial Statements and the related
notes thereto included elsewhere in this Prospectus, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and other
information set forth herein.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
FOR THE YEAR ENDED MAY 31, NOVEMBER 30,
-------------------------------------------------------------------- ------------------------
1996 1995 1994 1993 1992 1996 1995
----------- ----------- ----------- -------------- ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales................... $ 504,990 $ 451,395 $ 407,754 $ 382,780 $ 422,657 $ 271,712 $ 230,854
Gross Profit................ 90,765 77,871 71,910 68,436 83,440 49,412 42,459
Operating Income............ 32,442 24,438 21,824 5,343(1) 20,730(2) 19,006 14,562
Interest Expense............ 10,616 10,900 9,564 8,107 8,356 5,194 5,285
Income (Loss) Before
Provision (Benefit) for
Income Taxes............... 22,782 14,713 13,684 (1,917)(1) 13,620(2) 14,321 9,862
Net Income.................. 16,012 10,463 9,494 283(1) 10,020(2) 9,992 6,917
Net Income Per Share........ 1.00 0.66 0.60 0.02(1) 0.63(2) 0.62 0.43
Average Common Shares
Outstanding................ 15,978 15,932 15,904 15,855 15,895 16,027 15,957
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
-------------------------
AS
ACTUAL ADJUSTED(3)
----------- ------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working Capital....................................................................... $ 259,743 $ 313,849
Total Assets.......................................................................... 468,550 522,656
Long-term Debt, Including Current Maturities.......................................... 119,013 119,013
Stockholders' Equity.................................................................. 212,313 266,419
</TABLE>
- ------------
(1) Fiscal 1993 includes noncash special charges of $11,000 ($7,200 after tax)
primarily related to the write-down of certain inventories to reflect the
impact of market conditions and a reduction in income tax expense of $1,200.
(2) Fiscal 1992 includes special charges of $5,800 ($3,800 after tax) related to
the Company's restructuring of its Oklahoma City maintenance subsidiary and
a reduction in income tax expense of $700.
(3) Gives effect to the net proceeds from the sale of shares offered hereby. The
net proceeds will be added to working capital pending their use. See "Use of
Proceeds" and "Capitalization."
6
<PAGE>
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the shares of
Common Stock offered hereby for general corporate purposes, which may include
the expansion of its trading, overhaul and manufacturing activities, either by
internal growth or through acquisition. Pending application for the foregoing
purposes, the net proceeds will be invested in short-term securities.
DIVIDEND POLICY
The Company has paid quarterly cash dividends on its Common Stock in each
fiscal year since 1973. Since 1990, the quarterly cash dividend has been $0.12
per share. The Board of Directors of the Company currently intends to continue
its present policy of declaring regular dividends. The amount of future
dividends will depend on general business conditions encountered by the Company,
earnings, financial condition and capital requirements of the Company and such
other factors as the Board of Directors may deem relevant.
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 in this Prospectus. 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, 1995 exceed the sum of (i)
$20,000,000 plus (ii) 50% of consolidated net income of the Company after June
1, 1994. At November 30, 1996, unrestricted consolidated retained earnings
available for payment of dividends and purchase of the Company's shares totaled
approximately $19,314,000.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed on the NYSE under the symbol "AIR." The
following table sets forth for the periods indicated the high and low intra-day
prices for the Common Stock, as reported on the NYSE:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal 1997:
Third Quarter (through January 10,
1997)............................... $30 1/2 $26 5/8
Second Quarter........................ 31 1/4 21
First Quarter......................... 22 1/4 17 3/4
Fiscal 1996:
Fourth Quarter........................ 23 5/8 19 1/2
Third Quarter......................... 22 18 1/2
Second Quarter........................ 19 16 3/4
First Quarter......................... 17 7/8 14 7/8
Fiscal 1995:
Fourth Quarter........................ 15 1/4 12 1/8
Third Quarter......................... 14 1/8 12 1/2
Second Quarter........................ 13 1/2 12
First Quarter......................... 15 1/8 13 3/8
Fiscal 1994:
Fourth Quarter........................ 17 3/8 14 3/8
Third Quarter......................... 16 5/8 13 1/2
Second Quarter........................ 14 1/4 12 5/8
First Quarter......................... 14 1/8 12 5/8
</TABLE>
7
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at November 30, 1996 and as adjusted for the application of the net
proceeds from the sale of 2,000,000 shares of Common Stock by the Company at an
estimated price of $28.75 per share. The information set forth below should be
read in conjunction with the Consolidated Financial Statements and related notes
thereto and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
-------------------------
ACTUAL AS ADJUSTED
----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term Debt, Including Current Maturities of Long-term Debt........................ $ 1,507 $ 1,507
Long-term Debt, Less Current Maturities:
Industrial Revenue Bonds Due Through 2002 (6.0%)..................................... 173 173
Notes Due November 1, 2001 (9.5%).................................................... 65,000 65,000
Notes Due October 15, 2003 (7.25%)................................................... 50,000 50,000
Installment Note Due June, 1999 (5.0%)............................................... 2,333 2,333
----------- ------------
Total Long-term Debt............................................................... 117,506 117,506
Stockholders' Equity:
Preferred Stock, $1.00 par value, authorized 250,000 shares;
none issued........................................................................ -- --
Common Stock, $1.00 par value, authorized 80,000,000 shares; 16,770,000 issued
(18,770,000 as adjusted)........................................................... 16,770 18,770
Capital Surplus...................................................................... 90,552 142,658
Retained Earnings...................................................................... 116,783 116,783
Treasury Stock, at Cost (639,000 shares)............................................... (10,846) (10,846)
Cumulative Translation Adjustments..................................................... (946) (946)
----------- ------------
Total Stockholders' Equity......................................................... 212,313 266,419
----------- ------------
Total Capitalization............................................................... $ 329,819 $ 383,925
----------- ------------
----------- ------------
</TABLE>
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the fiscal
years ended May 31, 1992 through 1996 and as of the end of each such fiscal year
are derived from the Consolidated Financial Statements of the Company and should
be read in conjunction with such Consolidated Financial Statements and the
related notes thereto included elsewhere in this Prospectus, "Management's
Discussion and Analysis of Financial Condition and Results of Operation" and
other information set forth herein. The selected consolidated financial data for
the six-month periods ended November 30, 1996 and 1995 are unaudited and, in the
opinion of management, include all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of such data. The selected
consolidated financial data for the six-month periods ended November 30, 1996
and 1995 are not necessarily indicative of the results of operations for the
full fiscal year.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED MAY 31, ENDED NOVEMBER 30,
----------------------------------------------------- --------------------
1996 1995 1994 1993 1992 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales........................... $ 504,990 $ 451,395 $ 407,754 $ 382,780 $ 422,657 $ 271,712 $ 230,854
Cost of Sales....................... 414,225 373,524 335,844 314,344 339,217 222,300 188,395
--------- --------- --------- --------- --------- --------- ---------
Gross Profit........................ 90,765 77,871 71,910 68,436 83,440 49,412 42,459
Selling, General and
Administrative.................... 58,323 53,433 50,086 52,093 56,910 30,406 27,897
Special Charges..................... -- -- -- 11,000 5,800 -- --
--------- --------- --------- --------- --------- --------- ---------
Operating Income.................... 32,442 24,438 21,824 5,343 20,730 19,006 14,562
Interest Expense.................... (10,616) (10,900) (9,564) (8,107) (8,356) (5,194) (5,285)
Interest Income..................... 956 1,175 1,424 847 1,246 509 585
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before Provision
(Benefit) for Income Taxes........ 22,782 14,713 13,684 (1,917) 13,620 14,321 9,862
Provision (Benefit) for Income
Taxes............................. 6,770 4,250 4,200 (2,200) 3,600 4,329 2,945
--------- --------- --------- --------- --------- --------- ---------
Income Before Cumulative Effect of
Changes in Accounting Principles.. 16,012 10,463 9,484 283 10,020 9,992 6,917
Cumulative Effect of Accounting
Changes, Net of Tax............... -- -- 10 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net Income.......................... $ 16,012 $ 10,463 $ 9,494 $ 283 $ 10,020 $ 9,992 $ 6,917
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Per Share Data:
Net Income.......................... $ 1.00 $ 0.66 $ 0.60 $ 0.02 $ 0.63 $ 0.62 $ 0.43
Cash Dividends...................... $ 0.48 $ 0.48 $ 0.48 $ 0.48 $ 0.48 $ 0.24 $ 0.24
Average Common Shares Outstanding... 15,978 15,932 15,904 15,855 15,895 16,027 15,957
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1996
FOR THE YEAR ENDED MAY 31, ---------------------
------------------------------------------------ AS
1996 1995 1994 1993 1992 ACTUAL ADJUSTED(1)
-------- -------- -------- -------- -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(AT PERIOD END):
Working Capital........................................... $258,627 $248,492 $240,009(2) $193,399 $197,246 $259,743 $313,849
Total Assets.............................................. 437,846 425,814 411,016(3) 365,151 395,351 468,550 522,656
Short-term Debt........................................... 1,474 1,632 568(2) 25,025 25,005 1,507 1,507
Long-term Debt............................................ 118,292 119,766 115,729(2) 66,298 67,323 117,506 117,506
Total Debt................................................ 119,766 121,398 116,297(2) 91,323 92,328 119,013 119,013
Stockholders' Equity...................................... 204,635 197,119 189,488 189,216 196,737 212,313 266,419
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED MAY 31, ENDED NOVEMBER 30,
---------------------------------------------- --------------------
1996 1995 1994 1993 1992 1996 1995
-------- -------- -------- ------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Current Ratio(4)........................................... 4.3:1 4.4:1 4.5:1 3.7:1 3.1:1 3.8:1 4.8:1
Return on Sales............................................ 3.2% 2.3% 2.3% 0.1% 2.4% 3.7% 3.0%
Gross Profit Margin........................................ 18.0% 17.3% 17.6% 17.9% 19.7% 18.2% 18.4%
Return on Average Invested Capital......................... 7.1% 5.6% 5.1% 1.3% 5.2% 8.1% 6.4%
Return on Average Equity................................... 8.2% 5.4% 5.0% 0.1% 5.1% 9.6% 7.0%
Ratio of Total Debt to Capitalization(4)................... 37.1% 38.3% 38.1%(2) 35.7% 35.0% 36.1% 37.8%
Sales Per Employee (in 000s)............................... $ 244 $ 236 $ 227 $ 220 $ 215 $ 250(5) $ 229(5)
</TABLE>
- ---------------
(1) Gives effect to the net proceeds from the sale of shares offered hereby. The
net proceeds will be added to working capital pending their use. See "Use of
Proceeds" and "Capitalization."
(2) In October 1993, the Company sold $50,000 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.
(3) Reflects reclassification of $6,610 of non-current deferred tax assets
against non-current deferred tax liabilities to conform to the fiscal 1995
presentation.
(4) At period end.
(5) Period information is annualized based on six month data.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
RESULTS OF OPERATIONS
The following table presents statements of income data expressed as a
percentage of net sales for each of the last three fiscal years ended May 31 and
for the six-month periods ended November 30, 1996 and 1995.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED NOVEMBER 30,
FOR THE YEAR ENDED MAY 31,
------------------------------------- ------------------------
1996 1995 1994 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales............................................. 82.0 82.7 82.4 81.8 81.6
----- ----- ----- ----- -----
Gross Profit.............................................. 18.0 17.3 17.6 18.2 18.4
Selling, General and Administrative....................... 11.6 11.8 12.3 11.2 12.1
Operating Income.......................................... 6.4 5.4 5.3 7.0 6.3
Interest Expense.......................................... (2.1) (2.4) (2.3) (1.9) (2.3)
Interest Income........................................... 0.2 0.2 0.3 0.2 0.3
----- ----- ----- ----- -----
Income Before Income Taxes................................ 4.5 3.2 3.3 5.3 4.3
Provision for Income Taxes................................ 1.3 0.9 1.0 1.6 1.3
----- ----- ----- ----- -----
Net Income................................................ 3.2% 2.3% 2.3% 3.7% 3.0%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
The Company reports its activities in one business segment: Aviation
Services. The following table sets forth net sales for the Company's classes of
similar products and services within the Company's Aviation Services business
segment.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED MAY 31, ENDED NOVEMBER 30,
------------------------------------- ------------------------
1996 1995 1994 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales:
Trading......................................... $ 259,702 $ 236,723 $ 208,561 $ 156,030 $ 110,365
Overhaul........................................ 133,587 108,737 102,972 68,091 66,978
Manufacturing................................... 111,701 105,935 96,221 47,591 53,511
----------- ----------- ----------- ----------- -----------
$ 504,990 $ 451,395 $ 407,754 $ 271,712 $ 230,854
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Sales from trading activities result from the sale, exchange and lease of a
wide variety of new, overhauled and repaired products for the aviation
aftermarket, including products provided under inventory management programs.
Sales from overhaul activities result from components and labor used in
providing repairs and maintenance services for a wide variety of aircraft and
engine components, performed primarily at the Company's repair stations. Sales
from manufacturing activities result from the sale of pallets, containers and
shelters in support of military and humanitarian rapid deployment activities,
in-plane cargo loading and handling systems, and self-propelled floor sweeping
and scrubbing vehicles.
Cost of sales is principally comprised of the cost of new or overhauled
products supporting trading and overhaul activities, direct labor, cost of raw
material supporting manufacturing activities, and fixed and variable overhead,
such as depreciation, insurance and indirect labor. Selling, general and
administrative expenses are primarily variable in nature and include salaries,
wages and related benefits, travel, advertising, professional fees and
depreciation. The Company's effective tax rate was 29.7%, 28.9% and
11
<PAGE>
30.7% in fiscal 1996, 1995 and 1994, respectively. These effective income tax
rates are lower than the statutory rate primarily as a result of tax incentives
on export sales.
During the last three-and-one-half fiscal years, the Company has benefited
from a period of relatively strong general economic conditions and improving
conditions in the aerospace/aviation industry cycle. The financial condition of
airlines continues to improve after an extended period of operating losses
during the early 1990s. These losses were due in part to an extended period of
overcapacity, high outlays for new aircraft and an economic recession. During
this period, airlines reduced flying, which impacted the demand and pricing for
AAR's parts and services.
During the current cycle, neither airline demand nor airline expansion plans
have been as robust as in prior cycles; consequently, the Company believes the
next downturn will be less severe than in the past. Currently, airlines continue
to experience increased fleet utilization and higher revenue passenger and
freight miles which are contributing to improved operating earnings. Airlines'
operating earnings are also being positively affected by their aggressive
initiatives to control costs through restructuring operations, exiting
unprofitable routes and outsourcing certain support activities, such as spare
parts provisioning and aircraft and engine component overhaul and repair. The
emergence of start-up airlines in niche markets during the beginning of this
period also contributed to the demand for the Company's products and services,
since new airlines typically lack extensive maintenance capabilities and are
therefore more dependent on third party providers than established carriers.
Supplies of surplus aircraft and parts inventories that increased during the
industry downturn in the early 1990s are now being absorbed at a faster rate due
to increased aircraft utilization and conversion of aircraft to alternate uses,
such as cargo capabilities.
In fiscal 1996 and 1995, the Company benefited from the aggressive pursuit
of market opportunities in the improving aerospace/aviation industry. The
Company's trading sales of airframe and large component parts increased, as did
sales from inventory management programs and inventory provisioning for air
carriers. Sales of certain airframe and large airframe component overhaul
services, as well as commercial cargo systems, were also higher in fiscal 1996
and 1995.
The U.S. military continues to downsize as a result of government budget
cuts. While this downsizing adversely affected the aerospace/aviation industry
generally, the military continues to need products to support ongoing rapid
deployment requirements and services to replace those previously performed
within the military. The Company's response to these changes has resulted in
increased sales of manufactured products. The Company's sales of overhaul
services also benefited from government outsourcing of certain activities
previously performed within the military.
SIX MONTHS ENDED NOVEMBER 30, 1996 COMPARED WITH SIX MONTHS ENDED NOVEMBER 30,
1995
Consolidated net sales for the first half of fiscal 1997 increased $40,858
or 17.7% over the prior year period, reflecting overall increased demand for the
Company's trading and overhaul products and services. Trading sales increased
$45,665 or 41.4% over the first half of fiscal 1996 due to increased aircraft,
airframe and large component part sales, as well as sales from both existing and
recently implemented inventory management programs. Overhaul sales increased
$1,113 or 1.7%, reflecting increased airframe component overhaul services.
Manufacturing sales were $5,920 or 11.1% below the prior year period, reflecting
lower sales of the Company's products supporting the U.S. Government's rapid
deployment program and lower sales of its cargo loading and handling systems.
Consolidated gross profit increased $6,953 or 16.4% over the six month
period in the prior year due to increased consolidated net sales, partially
offset by a decline in the consolidated gross profit margin to 18.2% from 18.4%
in the prior year period. The lower consolidated gross profit margin was due
primarily to the mix of inventories sold during the first quarter of fiscal
1997. Consolidated operating income increased $4,444 or 30.5% over the same
six-month period in the prior year, and the Company's operating income margin
increased to 7.0% compared to the prior year period's margin of 6.3% as a
12
<PAGE>
result of increased net sales, partially offset by higher selling, general and
administrative expenses from higher personnel and marketing support costs.
Consolidated net income increased $3,075 or 44.5% primarily as a result of
the factors discussed above.
FISCAL 1996 COMPARED WITH FISCAL 1995
The Company's operating results continued to improve in fiscal 1996 as it
took advantage of business opportunities available in the improved
aerospace/aviation marketplace and as the Company successfully implemented
certain strategic marketing initiatives. Consolidated net sales for fiscal 1996
increased $53,595 or 11.9% over the prior fiscal year due to increased sales
across all classes of similar products and services. Consolidated operating
income increased $8,004 or 32.8% over the prior year due to increased
consolidated net sales and a higher consolidated gross profit margin partially
offset by increased selling, general and administrative costs. Net income
increased $5,549 or 53.0% over the prior year primarily due to increased
consolidated net sales and gross profit margin.
Trading sales increased $22,979 or 9.7% over the prior year as a result of
increased sales of aircraft, airframe and large component parts, which included
sales from inventory management programs and inventory provisioning for air
carriers. Overhaul sales increased $24,850 or 22.9% primarily as a result of
airframe maintenance and airframe and engine component services.
Consolidated gross profit increased $12,894 or 16.6% over the prior fiscal
year due to increased consolidated net sales and an improved gross profit margin
of 18.0% versus the prior year's 17.3% margin. The margin on principal trading
and overhaul products and services improved over the prior year as a result of
favorable product mix and improved pricing of certain products and services. The
margin on manufactured products declined slightly as a result of the mix of
products and product repair services supporting rapid deployment requirements
partially offset by aircraft cargo systems and floor maintenance equipment.
Consolidated operating income increased $8,004 or 32.8% over the prior year
as a result of increased consolidated net sales and gross profit margin
partially offset by increased total selling, general and administrative costs.
While selling, general and administrative costs declined as a percentage of
sales, the total costs increased over the prior year as a result of increased
personnel costs, increased marketing support programs and costs to enhance
information technology systems.
Consolidated net income increased $5,549 or 53.0% over the prior fiscal year
primarily as a result of the increased consolidated net sales and improved
consolidated gross profit margin. Net income also increased by a reduction in
interest expense resulting from substantially lower short-term borrowings during
the current year partially offset by a small increase in the Company's current
year effective tax rate.
FISCAL 1995 COMPARED WITH FISCAL 1994
The Company's operating results continued to improve in fiscal 1995 building
on improvements in the prior year. Consolidated net sales for fiscal 1995
increased $43,641 or 10.7% over the prior fiscal year primarily due to increased
sales of major products within each of the classes of similar products and
services. Operating income increased $2,614 or 11.9% over the prior year due to
increased consolidated net sales partially offset by a slightly lower
consolidated gross profit margin and increased total selling, general and
administrative costs. Net income increased $969 or 10.2% primarily due to
increased consolidated net sales partially offset by the factors described above
and increased interest expense on additional borrowings and higher interest
rates, primarily resulting from the sale of $50,000 of 10 year, 7.25% notes in
October 1993.
Trading sales increased $28,162 or 13.5% primarily as a result of increased
sales of airframe and large component parts as well as sales resulting from
inventory management programs and inventory provisioning of start-up airlines.
Overhaul sales increased $5,765 or 5.6% primarily as a result of increased
airframe and airframe component overhaul services partially offset by reduced
sales of large
13
<PAGE>
component overhaul services. Manufacturing sales increased $9,714 or 10.1%
primarily due to the sale of manufactured commercial cargo systems, products and
product repairs supporting the U.S. Government's rapid deployment program and
floor maintenance products.
Consolidated gross profit increased $5,961 or 8.3% over the prior fiscal
year due to increased consolidated net sales, although the consolidated gross
profit margin of 17.3% was lower than the prior year's 17.6% gross profit
margin. However, the prior fiscal year included $700 from a reduction in the
interest rate on a nonrecourse leveraged lease obligation and $1,300 from
leveraged lease repricing required to adjust for tax rate differentials. The
margin on manufactured products and principal trading products increased year
over year. Overhaul margins declined over the prior year primarily as a result
of changes in the mix of labor and parts provided in overhaul services and
highly competitive pricing on overhaul business.
Consolidated operating income increased $2,614 or 11.9% over the prior year
due to increased consolidated net sales partially offset by the consolidated
margin decline described above and increased selling, general and administrative
costs which declined as a percentage of net sales.
Consolidated net income increased $969 or 10.2% over the prior year due to
the increased consolidated net sales partially offset by the factors described
above and increased interest expense.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1996, the Company had liquidity and capital resources
adequate for its needs, including cash of $19,574 and working capital of
$259,743. The Company continues to maintain its available external sources of
financing from $136,977 of unused available bank lines and a shelf registration
statement on file with the Commission under which up to an additional $85,000 of
medium-or long-term debt securities may be sold subject to market conditions.
During fiscal 1995 and 1996, as well as for the six-month period ended
November 30, 1996, the Company financed its operations primarily through
internally-generated funds. Cash generated from operations was $15,255 and
$24,760 for fiscal years 1995 and 1996, respectively, and $11,113 for the
six-month period ended November 30, 1996. The increase in cash generated from
operations was primarily attributable to the increase in net income and
effective working capital management.
Investing activities during fiscal years 1996 and 1995 primarily related to
the purchase of property, plant and equipment at the Company's existing
facilities. For the six-month period ended November 30, 1996, the Company's
investing activities consumed $20,688 of cash. Of this amount, $18,993 related
to property, plant and equipment additions, of which $13,700 was for the
acquisition and refurbishment of an operating facility, which can accommodate
the growth of the Company's principal trading operating units and at the same
time permit the Company to consolidate and replace certain facilities currently
operated by the Company. Upon the sale of the facilities owned by the Company
vacated as a result of the relocation to the new building, the proceeds will be
added to cash and cash equivalents.
Financing activities during fiscal 1995 and 1996 and for the six months
ended November 30, 1996, primarily related to the payment of cash dividends.
During fiscal 1995, cash from financing activities increased from the proceeds
of the issuance of long-term notes payable of $6,186 related to the acquisition
of inventory in conjunction with an inventory management program.
The Company believes that its cash and cash equivalents and available
sources of capital will continue to provide the Company with the ability to meet
its ongoing working capital requirements, make anticipated capital expenditures,
meet contractual commitments and pay dividends.
EFFECTS OF INFLATION
The Company believes that results of operations for the periods reported
were not materially affected by inflation.
14
<PAGE>
BUSINESS
GENERAL
AAR is a worldwide leader in supplying aftermarket parts and services to the
global aerospace/ aviation industry. The Company provides aircraft and engine
components, maintenance services and Company-manufactured products to customers
in all segments of this industry, including the world's largest commercial
airlines and air cargo operators, original equipment manufacturers, domestic and
foreign military and government agencies, aircraft leasing companies and
maintenance service providers. AAR believes that it is the only company in the
aviation aftermarket industry to offer this combination of trading, overhaul and
manufacturing capabilities.
MARKETS AND INDUSTRY OVERVIEW
The Company sells its products into a variety of aerospace/aviation and
industrial markets, the most significant of which is the worldwide commercial
aviation maintenance market. The Company also purchases, sells and leases entire
aircraft and aircraft engines to the commercial airline industry. Other markets
served by the Company include the maintenance and spare parts markets for
military, regional, business and general aviation aircraft and for industrial
gas and steam turbine installations and the market for air cargo loading and
transport products. The Company also provides other products for a variety of
niche industrial markets.
Based on worldwide commercial aviation industry statistics, the Company
believes that the world's commercial airlines spend approximately $25 billion
annually for the maintenance of their aircraft. The Boeing Outlook estimates
that approximately $10 billion of this total represents the annual sale of
aircraft spare parts in support of maintenance activities, leaving approximately
$15 billion as the labor and management portion of the annual maintenance
expenditures. Currently, a large majority of the spare parts market is comprised
of direct sales by original equipment manufacturers. AAR is a leading
independent supplier to this market and also participates in the labor portion
of the commercial airline maintenance market, especially through the repair and
overhaul of components that it sells.
The growth of the worldwide aircraft maintenance market is greatly affected
by worldwide aviation activity. As worldwide demand for air transportation
services for business and leisure travel and cargo and package delivery has
grown, and as governments have increased their reliance on air transport in
their military activities, the number of aircraft flying and the number of
annual hours flown have grown accordingly. As a result of this increased
activity, the demand for aircraft and engine parts and overhaul services has
grown. The Boeing Outlook reports that worldwide commercial air transportation
grew at a compound annual rate of approximately 5.0% over the past 10 years, as
measured by ASMs, and predicts that it will grow at a compound annual rate of
5.7% through 2005. The Boeing Outlook also estimates that the worldwide air
cargo industry grew at a compound annual rate of approximately 6.0%, as measured
by ATMs, and projects that air cargo traffic will increase over the next 10
years at a compound annual rate of 6.7%. These rates of growth are significantly
higher than the compound annual rate of growth of the worldwide economy, which
the Boeing Outlook estimates at approximately 3.4%. One result of this increased
flying activity has been the return to active service of a number of aircraft
that had been placed in storage in the early 1990s and were available for use as
a source of parts. Industry sources report that the number of serviceable
aircraft in storage dropped from a peak of 1,100 in 1993 to 730 at the end of
1995, a decrease of over 30.0%. The Boeing Outlook projects an increase in the
world passenger and cargo jet airline fleet from 11,066 at the end of 1995 to
over 23,000 in 2015. Factors that have contributed to these growth rates include
world population growth, the generally improving worldwide economy and the
overall increasing level of discretionary spending, expanding world trade, and
the expansion of air travel into underdeveloped countries where air transport
services were previously unavailable.
15
<PAGE>
The overall growth of the worldwide air transportation industry over the
past 10 years has not been accompanied by consistent earnings growth for the
world's airlines over the same period. Unprecedented financial losses in 1990
through 1993 led a number of air carriers to review their internal cost
structures to identify potential savings. These reviews have resulted in several
industry developments that the Company believes are favorable to its long-term
prospects. These developments include a greater willingness by airlines to
outsource certain functions historically performed internally, such as spare
parts provisioning and aircraft and engine component overhaul and repair, in
order to take advantage of lower cost structures enjoyed by specialized outside
contractors. Airlines also have enacted programs to consolidate the number of
outside vendors in order to promote long-term relationships and to facilitate
the carrier's oversight of the quality standards maintained by those vendors. A
third development is that airlines have sought new ways to free up capital to
purchase the new equipment they expect to need for anticipated growth. Finally,
in the midst of this increased financial scrutiny, regulatory agencies have
increased their surveillance of airline maintenance practices to seek to insure
that the carriers' increased cost consciousness does not compromise flight
safety standards.
AAR has responded to these developments and to the needs of its customers by
expanding the products and services it offers and by designing customized
programs for individual customers. For example, AAR created the inventory
management programs discussed below in response to the desire of airlines and
other maintenance providers to reduce the amount of their capital committed to
acquiring and carrying spare parts inventories, which the Canaan Group, an
aerospace/aviation industry consultant, estimated at approximately $45 billion
in 1995. In addition to providing cost efficiencies to the customer, the
inventory management programs take advantage of AAR's quality control systems,
the breadth of its capabilities, its FAA certifications and its financial
strength.
AAR's business also has been affected positively by reductions in the number
of U.S. military personnel and installations. The closure of a number of
permanent bases around the world has resulted in the military's greater reliance
on its rapid deployment programs to respond to military and humanitarian events
around the world. These programs, which rely heavily on air transport for the
quick deployment of personnel and materiel, have created a strong demand for the
Company's pallets, containers and shelters. The planned base closures and
realignment of responsibilities, and the reductions in personnel they entail,
are also likely to result in the military's outsourcing of support activities
previously performed internally, which would present the Company with additional
opportunities for maintenance service and spare parts sales.
BUSINESS STRATEGY
The Company's business strategy to address the developments discussed above
is to maintain a leadership position in its primary markets and to generate
profitable growth by developing its product and service offerings to leverage
its competitive strengths. Key components of this strategy include: expanding
its inventory management programs; extending its overhaul capabilities to a
broader range of components; increasing its aircraft and engine trading and
leasing activities; continuing its significant international presence; and
developing manufactured products to complement its current offerings. The
competitive strengths that the Company believes will allow it to realize its
objectives include:
BROAD ARRAY OF PRODUCTS AND SERVICES. AAR sells, leases, exchanges and
services a broad array of aircraft and engine components for virtually all
aircraft. These products include spare engines, instruments, avionics,
hydraulics and pneumatic systems, landing gear, flight control surfaces, and
other components and accessories, as well as entire commercial jet aircraft.
The Company believes that this breadth of products and services gives it a
competitive advantage in winning business from new customers and affords an
opportunity to expand its business with existing customers. It also
positions AAR to respond to its customers' desire to focus on a select group
of suppliers to control costs, increase quality and enhance timeliness of
delivery.
16
<PAGE>
UNIQUE COMBINATION OF TRADING AND TECHNICAL CAPABILITIES. AAR's unique
combination of trading expertise and technical overhaul capabilities has
allowed it to respond to its customers' needs with inventory management
programs that combine both skills. These programs offer a cost-effective,
value-added opportunity for the Company's customers to reduce their
operating costs and decrease their capital requirements, while providing the
Company with significant growth opportunities.
INNOVATIVE TECHNICAL PRODUCT AND SERVICE DEVELOPMENT SKILLS. The Company
believes that one of its principal strengths is its ability to provide
innovative and prompt solutions to meet individual customers' needs in many
niche markets. These innovations include the design and manufacture of
customized cargo loading systems and rapid deployment products for the U.S.
military and the development of on-site overhaul services for airline
industry customers.
DIVERSE CUSTOMER BASE. The Company serves a broad base of over 5,000
domestic and international customers representing all segments of the
worldwide aerospace/aviation industry, as well as select industrial markets.
Aerospace/aviation industry customers other than inventory management
program customers and the U.S. Government include Air France, American
Airlines, British Airways, McDonnell-Douglas, Reno Air and United Air Lines.
The long-term relationships that the Company has developed with many of
these customers provide an ongoing base of business and an excellent source
of new business opportunities.
STRONG GLOBAL PRESENCE. AAR has over 30 facilities (including sales
offices) dedicated to its trading, overhaul and manufacturing activities in
ten countries across North America, Europe and Asia. This worldwide presence
positions the Company to respond to the needs of its customers around the
world. AAR's international presence also allows it to participate in the
growth of foreign aviation markets.
FINANCIAL STRENGTH. Management believes that the Company's financial
strength is a key advantage relative to its smaller competitors. AAR's
liquidity and access to capital enable the Company to respond quickly and
commit its resources when opportunities arise to acquire inventory, engines
and aircraft on advantageous terms.
REPUTATION AS A RELIABLE, HIGH-QUALITY SUPPLIER. The Company has been
providing aviation products and services for 45 years, and believes it has
gained a reputation as a reliable and high-quality supplier. Of its
approximately 2,200 employees, AAR employs approximately 275 persons whose
duties include the inspection, tracking, investigation and documentation
preparation activities that enable AAR to comply with regulatorly
requirements and the Company's and its customers' high quality standards.
STRONG MANAGEMENT TEAM. The Company's strong management team includes
AAR-developed managers and personnel formerly with airlines, original
equipment manufacturers and other independent suppliers. The Company
believes that this management team has a depth of industry knowledge and
experience across technical, marketing and financial functions that permits
it to develop and manage complex programs for its airline industry
customers.
TRADING
The Company's trading activities include the purchase, sale, exchange and
lease of a wide variety of new, overhauled and repaired products for the
aviation aftermarket, including a broad range of engine and aircraft parts,
spare engines, instruments, avionics, hydraulics and pneumatic systems, landing
gear, flight control surfaces, and other components and accessories, as well as
entire commercial jet aircraft. These products are comprised of new and used
parts and components purchased from
17
<PAGE>
manufacturers and others, as well as components and parts that the Company has
overhauled or repaired.
The Company maintains trading sales offices throughout the world, which
enable it to respond to its customers' worldwide needs on a timely basis, but
also to locate and procure products on advantageous terms in anticipation of
those needs. The Company's knowledge of the global market for aviation products
and its ability to respond immediately to purchasing opportunities as they arise
are crucial elements of its trading activities.
The primary sources of aviation products for the Company's trading
activities are domestic and foreign airlines, airframe, engine and other
original equipment manufacturers and aircraft leasing companies. The supply of
parts and components for AAR's aftermarket sales is affected by the availability
of excess inventories, which typically become available for purchase as a result
of new aircraft or engine purchases, or the modification of existing aircraft or
engines, by a commercial airline, which reduces the airline's need for spares
supporting the aircraft or engines that have been replaced or modified.
Aftermarket supply is also affected by the availability of new parts from
original equipment manufacturers and the availability of older, surplus aircraft
or aircraft engines that can be purchased for the value of the major parts and
components.
The Company is at the forefront of the industry in providing aircraft and
aircraft engine component inventory management programs to airlines and aircraft
maintenance facilities. These programs, which draw on the Company's capabilities
in sourcing, repairing and managing large inventories of spare parts, allow
airlines and other service providers to obtain replacement parts and overhaul
services for aircraft engine and airframe components on a just-in-time basis
without having to incur the cost of purchasing, storing and maintaining the
necessary supporting inventory. The Company developed these programs in response
to the worldwide trend to outsource inventory provisioning and management. In so
doing, AAR has taken advantage of its knowledge and expertise in spare parts
provisioning and its technical skill in overhauling and repairing those parts
and related components, as well as its financial strength, quality control
systems and stability within the industry.
OVERHAUL
In addition to providing overhaul and repair services in support of its
inventory management programs, which are included in its trading activities, the
Company performs a wide range of repair and maintenance services for its
aerospace/aviation customers as part of its overhaul activities. As discussed
under "Government Regulation; Standards," overhaul activities are regulated by
domestic and foreign agencies. AAR has five FAA-repair stations in the U.S., two
in Europe and one in the Far East to perform component overhaul services. The
repair stations located outside the U.S. are also licensed by applicable foreign
agencies.
The Company's overhaul capabilities include most commercial aircraft landing
gear; a wide variety of avionic, instrument, electrical, electronic, fuel,
hydraulic and pneumatic components; and a broad range of internal engine
components. AAR believes that its landing gear overhaul capability and capacity
is among the most comprehensive in the world, and the Company has developed
specialized landing gear repair teams to provide on-site services for Boeing 767
landing gear wherever the aircraft is located. The Company also operates an
aircraft maintenance facility providing maintenance, modification, special
equipment installation, painting services and aircraft terminal services
(fueling and aircraft storage) for various models of commercial, military,
regional, business and general aviation aircraft.
The Company's overhaul operations support the Company's own trading
activities by repairing and overhauling parts for sale by the trading business,
including parts needed for its inventory management program customers. Where the
overhaul requirements of its trading business exceed the Company's current
capacity and capabilities, it subcontracts the work to other service providers.
AAR intends to develop internally or acquire additional component repair
capabilities to give it greater control over the
18
<PAGE>
delivery times and quality of its products, to enhance its ability to support
its inventory management programs and to reduce the amount of repair work that
the Company must subcontract to others.
AAR also provides overhaul and parts supply services to industrial gas and
steam turbine operators, including aero-derivative turbines and the heavier and
larger turbines used in industrial power generation applications. These services
include complete turbine rotor disassembly, repair and reassembly, the overhaul
of individual components including necessary coating services, on-site field
service work on the turbines, and the supply of replacement parts to the turbine
operators. Customers include domestic and foreign public utilities, independent
power producers, manufacturers of industrial turbine equipment and independent
service providers.
MANUFACTURING
The Company manufactures and repairs a wide array of containers, pallets and
shelters in support of military and humanitarian rapid deployment activities.
AAR makes over 35 models of containers to provide the military with better and
quicker access to tools, supplies or other items. The Company's mobile shelters,
some of which are pre-wired for electricity and telephone service and include
heating and air conditioning systems, are designed to be shipped in one of the
Company's containers and quickly assembled upon arrival into field offices and
temporary shelters for personnel and equipment. All of these products are
manufactured from lightweight, high-strength composite materials, some of which
incorporate AAR's proprietary technology, which comply with the weight,
strength, flammability and other technical requirements of AAR's customers. AAR
uses similar materials to manufacture a variety of flooring and panel products
for the aerospace/aviation and industrial markets.
The Company's manufacturing activities also include the design, manufacture
and installation of in-plane cargo loading and handling systems for commercial
and military aircraft and helicopters. These systems are manufactured under FAA
certificates held in some cases by AAR and in others by its customers. These
cargo loading systems incorporate AAR-developed proprietary designs to increase
cargo loading efficiency. Customers for the cargo loading systems include
aircraft manufacturers, such as Lockheed and Douglas Aircraft, and cargo
operators and maintenance and modification centers that convert older wide body
passenger aircraft, such as the Boeing 747, Douglas DC-10, Airbus A300 and A310
and Lockheed L-1011, into cargo aircraft. AAR was recently selected by Federal
Express Corporation to design and manufacture the cargo loading systems for its
new fleet of Airbus A310-200 aircraft.
AAR manufactures a line of specialized protective transport cases that are
used to transport sensitive and calibrated tools and instruments, and vacuum
storage containers that protect machinery and equipment during long-term
storage. AAR also designs and manufactures a complete line of self-propelled
floor sweepers and scrubbers for a variety of industrial and commercial uses,
which it sells under the PowerBoss-Registered Trademark- name. These products
include both ride-on and walk-behind lines, which may be powered by gasoline,
diesel fuel or battery.
GOVERNMENT CONTRACTS
Sales to the U.S. Government, its agencies and its contractors were
approximately $92,362,000 (18.3% of total net sales), $82,708,000 (18.3% of
total net sales) and $77,500,000 (19.0% of total net sales) in fiscal years
1996, 1995 and 1994, respectively. U.S. Government purchasers include numerous
national and local procurement offices for the armed forces, NASA, the FAA and
other agencies. Because government 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, and the Company believes that these
products and services are less likely to be affected by reductions in defense
spending than are weapons systems and other high-technology, high-cost military
projects. The Company's contracts with the U.S. Government and its agencies are
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<PAGE>
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 contracting
agency. Although these 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.
COMPETITION
The Company is a leading independent supplier of aviation services to the
highly competitive worldwide aviation aftermarket. In its trading and overhaul
activities, competition is based on quality, ability to provide a broad range of
products and services, speed of delivery and price. Competitors in the parts
supply business include, in addition to the original equipment manufacturers and
commercial airlines, The AGES Group, Banner Aerospace, Inc., Aviation Sales
Company and a number of smaller competitors throughout the world, but primarily
in the U.S. and Europe. In addition, there are numerous small brokers and
traders that generally sell from limited inventories and participate in niche
markets. In certain of its leasing and commercial jet aircraft trading
activities, the Company faces competition from financial institutions,
syndicators, commercial and specialized leasing companies, leasing affiliates of
aircraft and engine manufacturers, and other entities that provide financing.
AAR's competitive advantages in the parts aftermarket include its size,
longstanding market position, reputation for quality, breadth of overhaul
capabilities and product knowledge. In addition to requirements imposed by
government regulators, individual air carriers have established their own
standards of condition and traceability for parts that they purchase, and AAR
has developed a quality assurance program to insure that these customer-specific
requirements are met. AAR's internal overhaul capabilities allow the Company to
offer a broader array of products, and often to provide them in a more timely
fashion, than competitors that only sell products furnished by others.
AAR also competes with various repair and overhaul organizations, which
include the service arms of original equipment manufacturers, the maintenance
departments or divisions of large commercial airlines (some of which also offer
maintenance services to third parties), and independent organizations, such as
Chromalloy Gas Turbine Corp., UNC Inc. and the Aerospace division of The B.F.
Goodrich Company.
AAR's pallet, container and shelter manufacturing activities compete with
several modest sized private companies, and its cargo systems competitors
include a number of divisions of large corporations. The principal competitor of
AAR's PowerBoss in the industrial floor cleaning machine market is Tennant
Company.
Although certain of the Company's competitors have substantially greater
financial and other resources than the Company, the Company believes that it has
maintained a satisfactory competitive position through its responsiveness to
customer needs, its attention to quality and its unique combination of trading
expertise, technical capabilities and financial strength.
GOVERNMENT REGULATION; STANDARDS
The aerospace/aviation industry is highly regulated worldwide by the FAA,
the Joint Airworthiness Authority, a consortium of European regulatory
authorities (JAA), and various other foreign regulatory authorities. The FAA has
developed a Voluntary Industry Distribution Accreditation Program for sellers of
spare parts, under which AAR's trading businesses are accredited. The air
carriers that purchase spare parts from the Company are closely regulated, as
are the agencies (including the Company) that overhaul aircraft, aircraft
engines or components. AAR believes that its quality system is the most
comprehensive in the industry, and certain of its customers have adopted AAR's
system in their own operations. Of its approximately 2,200 employees, AAR
employs approximately 275 persons whose
20
<PAGE>
duties include the inspection, tracking, investigation and documentation
preparation activities that enable AAR to comply with its quality standards.
EMPLOYEES
At August 31, 1996, the Company employed approximately 2,200 persons
worldwide, approximately 18% of whom were covered by collective bargaining
agreements. The Company has not had a work stoppage for over ten years and
believes its employee relations are good.
PROPERTIES
The Company has over 30 facilities (including sales offices) dedicated to
its trading, overhaul and manufacturing activities in ten countries in North
America, Europe and Asia. In 1996, the Company purchased and refurbished a
245,000 square foot facility in Wood Dale, Illinois to allow it to consolidate
and replace several existing facilities and allow for future growth. The Company
expects to complete its relocation to the new facility in January, 1997. This
facility houses the Company's principal domestic trading and warehouse
operations and serves as the Company's worldwide corporate headquarters.
Additional warehouse facilities are leased in Hamburg and Hannover, Germany and
Nantgarw, Wales for aviation parts distribution.
21
<PAGE>
MANAGEMENT
Information concerning each director and executive officer of the Company is
set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Ira A. Eichner...................................... 65 Chairman of the Board
David P. Storch..................................... 44 Director, President and Chief Executive Officer
Howard A. Pulsifer.................................. 54 Vice President, General Counsel and Secretary
Timothy J. Romenesko................................ 39 Vice President, Chief Financial Officer and Treasurer
Phillip C. Slapke................................... 43 Vice President -- Engine Group
A. Robert Abboud.................................... 67 Director
Howard B. Bernick................................... 44 Director
Edgar D. Jannotta................................... 65 Director
Robert D. Judson.................................... 71 Director
Erwin E. Schulze.................................... 71 Director
Joel D. Spungin..................................... 59 Director
Lee B. Stern........................................ 70 Director
Richard D. Tabery................................... 68 Director
</TABLE>
Mr. Eichner, the founder of the Company, has been Chairman of the Board of
the Company since 1973 and a director since it was founded in 1955, and was the
Company's Chief Executive Officer from 1955 until October, 1996, when he retired
from that position. Mr. Eichner is Mr. Storch's father-in-law.
Mr. Storch was elected President of the Company in July, 1989 and Chief
Executive Officer in 1996. 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. Mr. Storch is Mr. Eichner's son-in-law.
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.
Mr. Romenesko was elected Vice President in January, 1994 and Chief
Financial Officer and Treasurer in December, 1994. He had served as Controller
of the Company from 1991 to 1995 and has been with the Company in various
positions since 1981.
Mr. Slapke was elected Vice President in July, 1994. He is also President of
a major subsidiary, a position he has held since July, 1989. He has been with
the Company in various positions since 1982.
Mr. Abboud has been a director of the Company since 1987. Mr. Abboud is the
President of A. Robert Abboud & Co., a private investment business. From April,
1988 to March, 1991, Mr. Abboud served as Chairman and Chief Executive Officer
of First City Bancorporation of Texas, Inc., a bank holding company, which in
November, 1992 consented to an involuntary bankruptcy petition. A plan of
reorganization was confirmed by the bankruptcy court in May, 1995 and was
completed in July, 1995. Mr. Abboud is also a member of the Board of Directors
of Inland Steel Company, Hartmarx Corporation and Alberto-Culver Company.
Mr. Bernick has been a director of the Company since 1994. Mr. Bernick is
the President and Chief Executive Officer of Alberto-Culver Company, a
manufacturer, marketer and distributor of personal care and household products.
From 1988 to November, 1994 he was the President and Chief Operating Officer of
Alberto-Culver Company. He is also a member of the Board of Directors of
Alberto-Culver Company.
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<PAGE>
Mr. Jannotta has been a director of the Company since 1964. Mr. Jannotta is
a Senior Director of William Blair & Company, L.L.C., a representative of the
Underwriters. From 1995 to 1996 he was a Senior Partner at William Blair &
Company, L.L.C., and from 1977 to 1995 he was Managing Partner of William Blair
& Company. He is also a member of the Board of Directors of Aon Corporation,
Bandag, Incorporated, Unicom Corporation, Molex Incorporated, New York Stock
Exchange, Inc., Oil-Dri Corporation of America and Safety-Kleen Corp.
Mr. Judson has been a director of the Company since 1979. Mr. Judson has
been a financial consultant since 1980, and prior to 1980 he was a Senior Vice
President of The First National Bank of Chicago.
Mr. Schulze has been a director of the Company since 1977. Mr. Schulze has
been the Chairman of the Chicago Stock Exchange (formerly Midwest Stock
Exchange) since April, 1990, and a private investor since January, 1991. From
1981 to 1991, he was Chairman, President and Chief Executive Officer of Ceco
Industries, Inc., a manufacturer of building products and provider of concrete
forming services for the construction industry. He is also a member of the Board
of Directors of The Interlake Corporation.
Mr. Spungin has been a director of the Company since 1992. Mr. Spungin is
the Managing Partner of DMS Enterprises, L.P., a consulting and management
advisory partnership. From 1988 to March, 1995, he was Chairman and Chief
Executive Officer of United Stationers Inc., and since 1994 he has been Chairman
Emeritus of United Stationers Inc. He is also a member of the Board of Directors
of United Stationers Inc., Selfix Inc. and Ball Horticultural Company.
Mr. Stern has been a director of the Company since 1982. Mr. Stern is the
President of LBS Co. and the Managing Partner of LBS Limited Partnership, a
member firm of the Chicago Board of Trade and Futures Commission Merchant. From
1967 to December, 1992, he was President and Chief Executive Officer of Lee B.
Stern & Company, Ltd., a Futures Commission Merchant. Mr. Stern has been a
member of the Chicago Board of Trade since 1949, a member of the Chicago
Mercantile Exchange since 1963 and an owner-director of the Chicago White Sox
since 1976. He is also a member of the Board of Directors of Anicom, Inc.
Mr. Tabery has been a director of the Company since 1989. Mr. Tabery is the
Chairman of HKS&A, Inc., an aviation consulting company and has been an aviation
business consultant since December, 1993. From June, 1988 to November, 1993 he
was Vice Chairman of the Company, and from 1957 to 1988, he held various
positions with United Airlines, Inc., most recently Senior Vice President -
Maintenance Operations.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 80,000,000 shares of
Common Stock, $1.00 par value per share, and 250,000 shares of preferred stock,
$1.00 par value per share.
COMMON STOCK
As of December 31, 1996, there were 16,135,542 shares of Common Stock
outstanding.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Holders of a majority of the shares of Common Stock entitled to vote in
any election of directors may elect all of the directors standing for election.
Holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities. Holders
of Common
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<PAGE>
Stock have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of Common Stock are fully paid and non-assessable.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock which the Company may designate and
issue in the future.
PREFERRED STOCK
The Company has authorized 250,000 shares of preferred stock, par value
$1.00 per share, with such preferences and voting rights as the Board of
Directors, without further approval by the stockholders, may determine by duly
adopted resolution. See "Certain Charter and By-Law Provisions." No shares of
preferred stock are currently outstanding.
CERTAIN CHARTER AND BY-LAW PROVISIONS
GENERAL. The Company has implemented certain measures designed to enhance
the Board of Directors' ability to protect stockholders against, among other
things, unsolicited attempts to acquire a significant interest in the Company or
to influence the Company's management (whether through open market purchases,
tender offers or otherwise) that do not offer an adequate price to all
stockholders or that the Board of Directors otherwise considers not in the best
interests of the Company and its stockholders.
Certain provisions in the Restated Certificate of Incorporation of the
Company may have a significant impact on the stockholders' ability to change the
composition of the incumbent Board of Directors or the ability of a substantial
holder of the Common Stock to acquire control of, or to remove, the incumbent
Board of Directors, and might discourage certain types of transactions that
involve an actual or threatened change of control of the Company.
The provisions of the Restated Certificate of Incorporation are intended to
encourage persons seeking to acquire control of the Company to initiate such an
acquisition through arm's-length negotiations with the Company's management and
Board of Directors. These provisions could have the effect of discouraging a
third party from making a tender offer to or otherwise attempting to obtain
control of the Company, even though such an attempt might be beneficial to the
Company and its stockholders. At the same time, these provisions help ensure
that the Board of Directors, if confronted by an unsolicited proposal from a
third party who has recently acquired a block of Common Stock, will have
sufficient time to review the proposal and alternatives to it and to seek better
proposals for its stockholders, employees, suppliers, customers and others.
These provisions are discussed below.
INDEMNIFICATION. Pursuant to the provisions of the Delaware General
Corporation Law (the "Delaware GCL"), the Company has adopted provisions in its
Restated Certificate of Incorporation which require the Company to indemnify its
officers and directors to the fullest extent permitted by law, and eliminate the
personal liability of its directors to the Company or its stockholders for
monetary damages for breach of their duty of due care except (i) for any breach
of the duty of loyalty; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violations of law; (iii) for liability
under Section 174 of the Delaware GCL (relating to certain unlawful dividends,
stock repurchases or stock redemptions); or (iv) for any transaction from which
the director derived any improper personal benefit. These provisions do not
eliminate a director's duty of care. Moreover, the provisions do not apply to
claims against a director for violation of certain laws, including Federal
securities laws. The Company believes that these provisions assist the Company
in attracting and retaining qualified individuals to serve as directors and
officers.
PREFERRED STOCK. The Company's Restated Certificate of Incorporation
includes a provision which allows the Board of Directors, without stockholder
approval, to issue up to 250,000 shares of preferred
24
<PAGE>
stock with voting, liquidation and conversion rights that could be superior to
and adversely affect the voting power of holders of Common Stock. The issuance
of preferred stock could have the effect of delaying, deferring or preventing a
change in control of the Company.
CLASSIFIED BOARD OF DIRECTORS. The Company's Restated Certificate of
Incorporation provides that the Board of Directors of the Company shall be
divided into three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
stockholders to change the composition of the Board of Directors in a relatively
short period of time.
VOTING RESTRICTION ON CERTAIN BUSINESS COMBINATIONS. An affirmative vote of
the holders of at least 80% of the outstanding shares of capital stock of the
Company entitled to vote generally in the election of directors is required with
respect to the adoption or approval of certain business combinations, including
mergers, consolidations, asset and securities sales, plans of liquidation or
dissolution and certain reclassifications, involving any related party (as
defined below).
A related party is defined in the Company's Restated Certificate of
Incorporation to mean the beneficial owner, directly or indirectly, of not less
than 10% of the voting stock of the Company.
The 80% affirmative voting requirement is not applicable to business
combinations approved by (i) a majority of the Board of Directors of the Company
prior to the acquisition by the related party of 10% of the then outstanding
voting stock or (ii) a majority of those members of the Board of Directors who
are not related party directors.
SPECIAL STOCKHOLDERS' MEETINGS. The Restated Certificate of Incorporation
and By-Laws allow only the Chairman of the Board of Directors or majority of the
Board of Directors then in office to call a special meeting of the stockholders.
NO ACTION BY STOCKHOLDER CONSENT. The Company's Restated Certificate of
Incorporation prohibits action that is required or permitted to be taken at any
annual or special meeting of stockholders of the Company from being taken by the
written consent of stockholders without a meeting.
SUPERMAJORITY VOTING. The classified Board, special meeting and stockholder
consent, as well as certain other provisions, of the Restated Certificate of
Incorporation may be altered, amended, or repealed only if the holders of 80% or
more of the outstanding shares of voting stock entitled to vote in the election
of directors vote in favor of such action. The By-laws of the Company may be
amended, altered, changed or replaced by the affirmative vote of the holders of
at least 80% or more of the outstanding shares of voting stock entitled to vote
in the election of directors or by a majority of Board of Directors then in
office.
DELAWARE ANTI-TAKEOVER LAW
The Company is a Delaware corporation that is subject to Section 203 of the
Delaware GCL ("Section 203"). Under Section 203 certain "business combinations"
between a Delaware corporation, whose stock generally is publicly traded or held
of record by more than 2,000 stockholders, and an "interested stockholder" are
prohibited for a three-year period following the date that such stockholder
became an interested stockholder, unless (i) the corporation has elected in its
certificate of incorporation not to be governed by Section 203 (the Company has
not made such election), (ii) the business combination was approved by the board
of directors of the corporation before the other party to the business
combination became an interested stockholder, (iii) upon consummation of the
transaction that made it an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan) or (iv)
the business combination is approved by the board of directors of the
corporation and ratified by two-thirds of the voting stock which the
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<PAGE>
interested stockholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors. The
term "business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an interested stockholder,
transactions with an interested stockholder involving the assets or stock of the
corporation or its majority-owned subsidiaries, and transactions which increase
an interested stockholder's percentage ownership of stock. The term "interested
stockholder" is defined generally as those stockholders who become beneficial
owners of 15% or more of a Delaware corporation's voting stock, together with
the affiliates or associates of that stockholder.
DESCRIPTION OF SHAREHOLDER PURCHASE RIGHTS
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 Common
Stock Purchase 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.
26
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters, for whom Goldman, Sachs & Co. and William Blair & Company,
L.L.C. are acting as representatives, has severally agreed to purchase from the
Company, the respective number of shares of Common Stock set forth opposite its
name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
- ------------------------------------------------------------------------------------------------- ---------------
<S> <C>
Goldman, Sachs & Co. ............................................................................
William Blair & Company, L.L.C...................................................................
---------------
Total.......................................................................................... 2,000,000
---------------
---------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share to certain
brokers and dealers. After the shares of Common Stock are released for sale to
the public, the offering price and other selling terms may from time to time be
varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 300,000
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the 2,000,000 shares of Common
Stock offered.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the date
of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of, or file a registration statement under the Securities Act with
respect to, any shares of Common Stock, any securities of the Company which are
substantially similar to the Common Stock or which are convertible into or
exchangeable for, or that represent the right to receive, Common Stock or
securities which are substantially similar to the shares of Common Stock (other
than pursuant to employee stock plans existing on the date of this Prospectus)
without the prior written consent of the representatives of the Underwriters,
except for the shares of Common Stock offered in connection with the offering
made hereby.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
Edgar D. Jannotta, a Senior Director of William Blair & Company, L.L.C.,
serves as a member of the Company's Board of Directors. William Blair & Company,
L.L.C. provides financial advisory services to the Company from time to time and
receives compensation therefor.
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<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock to be offered hereby will be
passed upon for the Company by Schiff Hardin & Waite, Chicago, Illinois. Certain
attorneys at Schiff Hardin & Waite who have performed services for the Company
own an aggregate of 580 shares of Common Stock. Certain legal matters relating
to the offering will be passed upon for the Underwriters by Sonnenschein Nath &
Rosenthal, Chicago, Illinois.
EXPERTS
The Consolidated Financial Statements of AAR CORP. as of May 31, 1996 and
1995, and for each of the years in the three-year period ended May 31, 1996,
included herein and elsewhere in the Registration Statement, have been included
herein in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, as indicated in their report appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
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<PAGE>
AAR CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR SIX-MONTH PERIODS ENDED NOVEMBER 30, 1996 AND 1995 IS
UNAUDITED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Income for the years ended May 31, 1996, 1995 and 1994 and the six months ended
November 30, 1996 and 1995............................................................................... F-3
Consolidated Balance Sheets at May 31, 1996 and 1995 and November 30, 1996................................. F-4
Consolidated Statements of Stockholders' Equity for the three years ended May 31, 1996..................... F-5
Consolidated Statements of Cash Flows for the years ended May 31, 1996, 1995 and 1994 and the six months
ended November 30, 1996 and 1995......................................................................... F-6
Notes to the Consolidated Financial Statements............................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 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"
and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" as of June 1, 1993.
KPMG Peat Marwick LLP
Chicago, Illinois
June 28, 1996
F-2
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
FOR THE YEAR ENDED MAY 31, NOVEMBER 30,
------------------------------- --------------------
1996 1995 1994 1996 1995
--------- --------- --------- --------- ---------
(000S OMITTED EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................................. $ 504,990 $ 451,395 $ 407,754 $ 271,712 $ 230,854
--------- --------- --------- --------- ---------
Costs and operating expenses:
Cost of sales........................................... 414,225 373,524 335,844 222,300 188,395
Selling, general and administrative..................... 58,323 53,433 50,086 30,406 27,897
--------- --------- --------- --------- ---------
472,548 426,957 385,930 252,706 216,292
--------- --------- --------- --------- ---------
Operating income.......................................... 32,442 24,438 21,824 19,006 14,562
Interest expense.......................................... (10,616) (10,900) (9,564) (5,194) (5,285)
Interest income........................................... 956 1,175 1,424 509 585
--------- --------- --------- --------- ---------
Income before provision for income taxes.................. 22,782 14,713 13,684 14,321 9,862
Provision for income taxes................................ 6,770 4,250 4,200 4,329 2,945
--------- --------- --------- --------- ---------
Income before cumulative effects of changes in
accounting principles................................... 16,012 10,463 9,484 9,992 6,917
Cumulative effects of changes in accounting
principles:
Income taxes........................................ -- -- 900 -- --
Postretirement health care benefits, net of tax..... -- -- (890) -- --
--------- --------- --------- --------- ---------
Net income................................................ $ 16,012 $ 10,463 $ 9,494 $ 9,992 $ 6,917
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share of common stock:
Income before cumulative effects of changes in
accounting principles................................. $ 1.00 $ .66 $ .60 $ .62 $ .43
Cumulative effects of changes in accounting
principles:
Income taxes.......................................... -- -- .06 -- --
Postretirement health care benefits, net of tax....... -- -- (.06) -- --
--------- --------- --------- --------- ---------
Net income................................................ $ 1.00 $ .66 $ .60 $ .62 $ .43
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
-------------------- --------------
1996 1995 1996
--------- --------- --------------
(000S OMITTED)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 33,606 $ 22,487 $ 19,574
Accounts receivable, less allowances of $2,490, $2,400 and $2,185,
respectively............................................................ 107,138 110,420 120,033
Inventories............................................................... 138,200 139,407 162,360
Equipment on or available for short-term lease............................ 36,884 30,921 28,952
Deferred tax assets, deposits and other................................... 22,184 18,397 22,645
--------- --------- --------------
Total current assets.................................................. 338,012 321,632 353,564
--------- --------- --------------
Property, plant and equipment, at cost:
Land...................................................................... 3,095 3,101 5,204
Buildings and improvements................................................ 36,748 36,227 49,161
Equipment, furniture and fixtures......................................... 89,647 88,872 86,475
--------- --------- --------------
129,490 128,200
Accumulated depreciation.................................................... (74,659) (71,604) (71,789)
--------- --------- --------------
54,831 56,596 69,051
--------- --------- --------------
Other assets:
Investment in leveraged leases............................................ 30,905 31,952 29,495
Cost in excess of underlying net assets
of acquired companies................................................... 5,842 6,101 5,774
Retirement benefits, notes receivable and other........................... 8,256 9,533 10,666
--------- --------- --------------
45,003 47,586 45,934
--------- --------- --------------
$ 437,846 $ 425,814 $ 468,550
--------- --------- --------------
--------- --------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt...................................... $ 1,474 $ 1,632 $ 1,507
Accounts payable.......................................................... 59,005 51,393 75,464
Accrued liabilities....................................................... 14,356 15,977 10,226
Accrued taxes on income................................................... 4,550 4,138 6,624
--------- --------- --------------
Total current liabilities............................................. 79,385 73,140 93,821
--------- --------- --------------
Long-term debt, less current maturities..................................... 118,292 119,766 117,506
Deferred tax liabilities.................................................... 30,680 30,660 30,158
Other liabilities, less discount of $1,102.................................. -- -- 9,898
Retirement benefit obligation and deferred credits.......................... 4,854 5,129 4,854
--------- --------- --------------
153,826 155,555 162,415
--------- --------- --------------
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued...... -- -- --
Common stock, $1.00 par value, authorized 80,000 shares; issued 16,404,
16,284 and 16,770 shares, respectively.................................. 16,404 16,284 16,770
Capital surplus........................................................... 83,975 82,132 90,552
Retained earnings......................................................... 110,645 102,309 116,783
Treasury stock, 406, 323 and 639 shares at cost, respectively............. (5,285) (3,733) (10,846)
Cumulative translation adjustments........................................ (1,104) 1,497 (946)
Minimum pension liability................................................. -- (1,370) --
--------- --------- --------------
204,635 197,119 212,313
--------- --------- --------------
$ 437,846 $ 425,814 $ 468,550
--------- --------- --------------
--------- --------- --------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MAY 31, 1996
<TABLE>
<CAPTION>
MINIMUM
COMMON STOCK TREASURY STOCK CUMULATIVE PENSION
----------------- --------------- CAPITAL RETAINED TRANSLATION LIABILITY
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS ADJUSTMENTS ADJUSTMENTS
------- -------- ---- --------- -------- ---------- ----------- -----------
(000S OMITTED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.................. -- -- -- -- -- -- -- (1,000)
------- -------- ---- --------- -------- ---------- ----------- -----------
Balance, May 31, 1994........................ 16,215 $16,215 309 $ (3,556) $81,296 $ 99,496 $ (2,963) $ (1,000)
Net income................................. -- -- -- -- -- 10,463 -- --
Cash dividends ($.48 per share)............ -- -- -- -- -- (7,650) -- --
Treasury stock purchased................... -- -- 14 (177) -- -- -- --
Exercise of stock options and stock
awards................................... 69 69 -- -- 836 -- -- --
Adjustment for net translation gain........ -- -- -- -- -- -- 4,460 --
Minimum pension liability.................. -- -- -- -- -- -- -- (370)
------- -------- ---- --------- -------- ---------- ----------- -----------
Balance, May 31, 1995........................ 16,284 $16,284 323 $ (3,733) $82,132 $ 102,309 $ 1,497 $ (1,370)
Net income................................. -- -- -- -- -- 16,012 -- --
Cash dividends ($.48 per share)............ -- -- -- -- -- (7,676) -- --
Treasury stock purchased................... -- -- 83 (1,552) -- -- -- --
Exercise of stock options and stock
awards................................... 120 120 -- -- 1,843 -- -- --
Adjustment for net translation loss........ -- -- -- -- -- -- (2,601) --
Minimum pension liability.................. -- -- -- -- -- -- -- 1,370
------- -------- ---- --------- -------- ---------- ----------- -----------
Balance, May 31, 1996........................ 16,404 $16,404 406 $ (5,285) $83,975 $ 110,645 $ (1,104) $ --
------- -------- ---- --------- -------- ---------- ----------- -----------
------- -------- ---- --------- -------- ---------- ----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEAR ENDED MAY 31, NOVEMBER 30,
---------------------------- ------------------
1996 1995 1994 1996 1995
-------- -------- -------- -------- --------
(000S OMITTED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 16,012 $ 10,463 $ 9,494 $ 9,992 $ 6,917
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization........................... 10,115 10,328 9,928 5,634 5,067
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, net.............................. 2,584 (23,375) (17,295) (12,878) 2,433
Inventories, net...................................... (124) 2,717 (11,022) (24,150) (2,285)
Equipment on or available for short-term lease........ (6,247) 4,410 8,404 7,943 (2,125)
Deferred tax assets, deposits and other............... (4,818) 9,790 (10,968) (526) (787)
Accounts payable...................................... 7,901 1,208 17,081 16,433 (4,137)
Accrued liabilities and taxes on income............... 1,859 2,375 3,077 (1,233) (631)
Deferred tax liabilities and other deferred credits... (2,522) (2,661) 25 -- --
Other liabilities..................................... -- -- -- 9,898 --
-------- -------- -------- -------- --------
Net cash provided from operating activities............... 24,760 15,255 6,697 11,113 4,452
-------- -------- -------- -------- --------
Cash flows from investing activities:
Property, plant and equipment expenditures, net............. (7,547) (9,073) (5,984) (18,993) (3,241)
Investment in leveraged leases.............................. 1,047 666 (391) 1,410 674
Notes receivable and other, net............................. 1,872 (939) (1,820) (3,105) 3,232
-------- -------- -------- -------- --------
Net cash provided from (used in) investing activities..... (4,628) (9,346) (8,195) (20,688) 665
-------- -------- -------- -------- --------
Cash flows from financing activities:
Gross proceeds from issuance of long-term notes payable..... -- 6,186 50,000 -- --
Repayment of bank loans with proceeds from issuance of long-
term notes payable........................................ -- -- (28,200) -- --
Change in other borrowings, net............................. (1,632) (1,085) 3,174 (753) (896)
Cash dividends.............................................. (7,676) (7,650) (7,635) (3,854) (3,830)
Purchases of treasury stock................................. (1,552) (177) (66) (5,561) (587)
Proceeds from exercise of stock options and other........... 1,963 905 134 5,629 441
-------- -------- -------- -------- --------
Net cash provided from (used in) financing activities..... (8,897) (1,821) 17,407 (4,539) (4,872)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash....................... (116) 325 (90) 82 228
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash equivalents.............. 11,119 4,413 15,819 (14,032) 473
Cash and cash equivalents, beginning of period................ 22,487 18,074 2,255 33,606 22,487
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period...................... $ 33,606 $ 22,487 $ 18,074 $ 19,574 $ 22,960
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
AAR CORP. supplies a variety of products and services to the
aerospace/aviation industry in the U.S. and abroad. Products and services are
sold primarily to commercial domestic and foreign airlines, business aircraft
operators, aviation original equipment manufacturers, aircraft leasing
companies, domestic and foreign military organizations and independent aviation
support companies.
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 $900 ($.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.
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 ($890 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
primarily represented health and life insurance benefits for certain current
employees and retirees.
In fiscal 1995 the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 112 "Employers' Accounting for Postemployment Benefits."
Prior years' results were not restated. This standard requires an accrual method
of recognizing the costs of providing postemployment benefits relating to
employee severance, disability, health and life insurance. Since the Company
either does not provide such benefits or accounted for those benefits provided
on an accrual basis, the cumulative after-tax charge of accruing the cost of
benefits under this statement was not significant to the results of operations
in fiscal 1995.
F-7
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of " in March 1995 and SFAS No. 123 "Accounting for Stock-Based Compensation" in
October 1995. The requirements of SFAS No. 121 are that a company review for
impairment long-lived assets and certain identifiable intangibles held or to be
disposed of by an entity when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable as defined by the
standard. Under SFAS No. 123, the Company is encouraged, but not required, to
adopt a fair value-based method of accounting for stock-based employee
compensation plans. This method measures compensation cost based on the fair
value of the stock-based award and recognizes that cost over the employee's
service period. Entities may elect to adopt the method recommended under this
standard or to continue to account for these types of compensation plans under
the current accounting standard, APB No. 25 "Accounting for Stock Issued to
Employees" with additional disclosures. The Company is required to adopt these
new standards in its fiscal year ending May 31, 1997 and does not expect the
adoption of these statements to have a material impact on the Company's
financial condition and results of operations.
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, 1996 and 1995, cash
equivalents of approximately $25,504 and $19,129, respectively, 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, 1996 and 1995, respectively.
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 and certain domestic
subsidiaries transacting business in currencies other than the Company's
functional currency are translated at year-end or historical 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 U.S. 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, 1996 and during fiscal 1996 and 1995 there were no
forward exchange contracts or options outstanding. Foreign and certain domestic
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 $239, $45, and $(32) for
fiscal 1996, 1995 and 1994, 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
F-8
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
exchange contracts previously discussed 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 ongoing 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,
obligation guarantees from financial institutions, or sells its receivables,
usually on a nonrecourse basis, 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 and
cash equivalents, accounts receivable, short-term borrowings, accounts payable
and accrued liabilities are reflected in the financial statements at fair value
because of the short-term maturity of these instruments. Noncurrent 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.
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
judgment 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, average cost 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. 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, NOVEMBER 30,
------------------------ --------------
1996 1995 1996
----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials and parts............................. $ 33,978 $ 29,590 $ 34,063
Work-in-process..................................... 12,179 11,891 14,495
Purchased aircraft, parts, engines and components
held for sale..................................... 90,438 98,254 112,461
Finished goods...................................... 1,605 1,734 1,341
----------- ----------- --------------
138,200 141,469 162,360
Progress billings on long-term contracts and
programs.......................................... -- (2,062) --
----------- ----------- --------------
$ 138,200 $ 139,407 $ 162,360
----------- ----------- --------------
----------- ----------- --------------
</TABLE>
F-9
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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
computed on a straight-line method over the estimated service life of the
equipment and maintenance costs are expensed as incurred. The balance sheet
classification is based on the lease term with fixed term leases under twelve
months classified as short-term and all others 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.
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 nonpayment 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 $230 in fiscal 1996 and
1995 and $240 in fiscal 1994. Accumulated amortization is $3,385, $3,155 and
$2,950 at May 31, 1996, 1995 and 1994, 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 $8,000 and $15,200 at May 31, 1996
and 1995, 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 U.S., 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.
F-10
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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 SIX MONTHS
ENDED
FOR THE YEAR ENDED MAY 31, NOVEMBER 30,
------------------------------- --------------------
1996 1995 1994 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest paid.......................... $ 10,500 $ 10,700 $ 8,800 $ 5,150 $ 5,200
Income taxes paid...................... 5,300 3,900 3,300 2,525 2,600
Income tax refunds and interest
received............................. 900 330 500 125 70
</TABLE>
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the fiscal 1995 and 1994
financial statements to conform to the fiscal 1996 presentation.
2. FINANCING ARRANGEMENTS
Bank loans consisted of:
<TABLE>
<CAPTION>
MAY 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Unsecured bank loans..................................... $ -- $ -- $ --
Current maturities of long-term debt..................... 1,474 1,632 568
------- ------- -------
$ 1,474 $ 1,632 $ 568
------- ------- -------
------- ------- -------
</TABLE>
Short-term borrowing activity was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Maximum amount borrowed.................................... $ 4,900 $21,200 $33,500
Average daily borrowings................................... 437 7,553 12,300
Average interest rate during the year...................... 5.5% 6.2% 3.7%
------- ------- -------
------- ------- -------
</TABLE>
F-11
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
2. FINANCING ARRANGEMENTS -- (CONTINUED)
At May 31, 1996, aggregate unsecured bank credit arrangements were $132,977.
Of this amount, $66,000 was available under credit lines with domestic banks,
$60,000 was available under revolving credit and term loan agreements with
domestic banks and $6,977 was available under credit agreements with foreign
banks. All domestic and foreign credit lines were unused at May 31, 1996. 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.
The Company may borrow a maximum of $60,000 ($30,000 available through
August 31, 1996 and an additional $30,000 available through October 15, 1996)
under revolving credit and term loan agreements with domestic banks. Revolving
credit borrowings may, at the 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, 1996. 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,
-------------------
1996 1995
-------- --------
<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 50,000
Installment note due June, 1999 bearing interest at 5% per annum,
compounded monthly, payable in equal monthly payments of
principal and interest......................................... 4,383 5,669
Industrial revenue bonds due in installments to 2002 with
weighted average interest of approximately 7.86% at May 31,
1996 (secured by trust indentures on property, plant and
equipment)..................................................... 383 729
-------- --------
119,766 121,398
Current maturities............................................... (1,474) (1,632)
-------- --------
$118,292 $119,766
-------- --------
-------- --------
</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, 1996, unrestricted
consolidated retained earnings available for payment of dividends and purchase
of the Company's shares was approximately $15,772. Effective June 1, 1996,
unrestricted consolidated retained earnings increased to $23,778 due to
inclusion of 50% of the consolidated net income of the Company for fiscal 1996.
F-12
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
2. FINANCING ARRANGEMENTS -- (CONTINUED)
The aggregate amount of long-term debt maturing during each of the next five
fiscal years is $1,474 in 1997, $1,474 in 1998, $1,545 in 1999, $184 in 2000 and
$57 in 2001. The fair value of the Company's long-term debt approximates
carrying value.
3. INCOME TAXES
The provision for income taxes included the following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Current
Federal............................................ $ 4,215 $ 2,255 $ 100
Foreign............................................ 895 625 530
State, net of refunds.............................. 800 780 470
------- ------- -------
$ 5,910 $ 3,660 $ 1,100
------- ------- -------
Deferred............................................. 860 590 3,100
------- ------- -------
$ 6,770 $ 4,250 $ 4,200
------- ------- -------
------- ------- -------
</TABLE>
The deferred tax provisions result primarily from differences between book
and tax income arising from depreciation and leveraged leases. Refundable income
taxes included within Deferred tax assets, 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 to prior years.
Interest income relating to refundable income taxes was $371 and $576 for fiscal
1995 and 1994, respectively.
F-13
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES -- (CONTINUED)
Deferred tax liabilities and assets result primarily from the differences in
the timing of the recognition for transactions between book and income tax
purposes and consist of the following components:
<TABLE>
<CAPTION>
MAY 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation......................................................... $ 7,390 $ 8,500
Leveraged leases..................................................... 25,060 27,590
Other................................................................ 950 910
-------- --------
Total deferred tax liabilities....................................... $ 33,400 $ 37,000
-------- --------
-------- --------
Deferred tax assets-current:
Inventory costs...................................................... $ 5,080 $ 5,680
Employee benefits.................................................... 190 420
Doubtful account allowance........................................... 620 800
Other................................................................ 480 310
-------- --------
Total deferred tax assets-current.................................... $ 6,370 $ 7,210
-------- --------
Deferred tax assets-noncurrent:
Postretirement benefits.............................................. $ 560 $ 1,120
Restructuring expenses............................................... -- 640
Alternative minimum tax credits...................................... 2,160 4,580
-------- --------
Total deferred tax assets-noncurrent................................. 2,720 6,340
-------- --------
Total deferred tax assets............................................ $ 9,090 $ 13,550
-------- --------
-------- --------
</TABLE>
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 U.S. statutory Federal income tax rate of 35% for fiscal 1996 and 34% for
fiscal 1995 and 1994 for the following reasons:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
Provision for income taxes at the Federal statutory rate............ $ 7,970 $ 5,000 $ 4,660
Tax benefits on exempt earnings from export sales................. (1,600) (1,350) (930)
State income taxes, net of Federal benefit and refunds............ 520 330 250
Amortization of goodwill.......................................... 90 90 100
Differences between foreign tax rates and the U.S. Federal
statutory rate.................................................. 100 330 80
Other, net........................................................ (310) (150) 40
------- ------- --------
Provision for income taxes as reported.............................. $ 6,770 $ 4,250 $ 4,200
------- ------- --------
------- ------- --------
Effective income tax rate........................................... 29.7% 28.9% 30.7%
------- ------- --------
------- ------- --------
</TABLE>
F-14
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES -- (CONTINUED)
Pretax income from foreign subsidiaries was approximately $2,100, $600 and
$1,300 at May 31, 1996, 1995 and 1994, respectively. Total foreign income taxes
provided were in excess of total local statutory rates in fiscal 1995 and 1994
due to net operating losses of certain subsidiaries not deductible for tax
purposes.
4. COMMON STOCK AND STOCK OPTION PLANS
A summary of changes in stock options granted to officers, key employees and
nonemployee directors under stock option plans for the three years ended May 31,
1996 follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ----------------
<S> <C> <C>
Outstanding, May 31, 1993 (184 exercisable)......................... 644 $10.00 to $35.13
Granted............................................................. 161 13.25 to 15.00
Exercised........................................................... (3) 10.00 to 13.63
Surrendered/expired/cancelled....................................... (71) 10.00 to 17.88
Outstanding, May 31, 1994 (236 exercisable)......................... 731 10.00 to 35.13
Granted............................................................. 250 12.63 to 13.75
Exercised........................................................... (11) 10.00 to 12.13
Surrendered/expired/cancelled....................................... (38) 10.00 to 24.88
Outstanding, May 31, 1995 (362 exercisable)......................... 932 10.00 to 35.13
Granted............................................................. 293 16.88 to 23.13
Exercised........................................................... (50) 10.00 to 15.00
Surrendered/expired/cancelled....................................... (41) 10.00 to 17.50
Outstanding, May 31, 1996 (496 exercisable)......................... 1,134 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 $516, $266 and $538 in fiscal 1996,
1995 and 1994, respectively.
The AAR CORP. Employee Stock Purchase Plan is open to all employees of the
Company (other than officers, directors or participants in other stock option
plans of the Company) with 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 or 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.
F-15
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
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, 1996
---------------------------------------
OUTSTANDING AVAILABLE TOTAL
------------- ------------- ---------
<S> <C> <C> <C>
Stock Benefit Plan (officers, directors and key employees)........... 1,275 99 1,374
Employee Stock Purchase Plan......................................... 15 118 133
</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 shares of the Company's Common Stock on the open market or
through privately negotiated transactions. As of May 31, 1996 the Company had
purchased 406 shares of Common Stock on the open market under this program at an
average price of $13.00 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.
F-16
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
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 and nondomestic pension plans.
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 U.S. Government obligations.
Certain foreign operations of domestic 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
domestic plans. It is the policy of these subsidiaries to fund at least the
minimum amounts required by local law and regulation.
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,
1996 MAY 31, 1995
-------- ------------------
ASSETS BENEFITS ASSETS
EXCEED EXCEED EXCEED
BENEFITS ASSETS BENEFITS
-------- -------- --------
<S> <C> <C> <C>
Actuarial present value of benefit
obligation:
Vested benefit obligation................ $(30,572) $(22,080) $ (5,135)
Nonvested benefit obligation............. (1,283 ) (740) (20)
-------- -------- --------
Accumulated benefit obligation............... (31,855 ) (22,820) (5,155)
Effect of projected salary increases on the
benefit obligation......................... (4,071 ) (1,735) (1,385)
-------- -------- --------
Projected benefit obligation................. (35,926 ) (24,555) (6,540)
Plans' assets at fair value.................. 33,277 20,805 6,425
-------- -------- --------
Projected benefit obligation in excess of
plans' assets.............................. (2,649 ) (3,750) (115)
Unrecognized net loss........................ 5,340 2,225 670
Unrecognized prior service cost.............. 1,391 1,320 --
Unrecognized transition obligation........... 833 710 245
-------- -------- --------
Prepaid pension costs........................ $ 4,915 $ 505 $ 800
-------- -------- --------
-------- -------- --------
</TABLE>
The projected benefit obligation for domestic plans is determined using an
assumed weighted average discount rate of 8.25% and 8.5% for fiscal 1996 and
1995, respectively, and an assumed average compensation increase of 3.0% in the
first two years and 5.0% thereafter. The expected long-term rate of return on
assets is 10.0% for fiscal 1996 and 1995. Unrecognized net loss, prior service
cost and transition obligation are amortized on a straight-line basis over the
estimated average future service period.
The projected benefit obligation for nondomestic plans is determined using
an assumed weighted average discount rate of 6.5% and 7.5% for fiscal 1996 and
1995, respectively, and an assumed average
F-17
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
compensation increase of 2.0% for the first five years and 4.0% thereafter. The
expected long-term rate of return on assets is 6.5% for fiscal 1996 and 1995.
The provisions of SFAS No. 87 "Employers' Accounting for Pensions" require
recognition in the balance sheet of an additional minimum liability, an equity
reduction and related intangible assets for pension plans with accumulated
benefits in excess of plan assets. At May 31, 1995 the Company had a minimum
pension liability of $3,765 reported within Retirement benefit obligation and
deferred credits in the Consolidated Balance Sheets with $1,370 charged to
Stockholders' equity in accordance with the provisions of SFAS No. 87. During
fiscal 1996, the Company's funding of the domestic plans eliminated the charge
to Stockholders' equity.
Pension expense charged to results of operations includes the following
components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Service costs for benefits earned during fiscal year........ $ 1,169 $ 1,255 $ 1,305
Interest cost on projected benefit obligation............... 2,587 2,440 2,265
Actual investment return on plan assets..................... (2,618) (2,225) (1,400)
Net amortization and deferral............................... 224 60 (480)
------- ------- -------
Pension expense for Company plans........................... 1,362 1,530 1,690
Pension expense for the multi-employer plan................. -- -- 10
------- ------- -------
Total pension expense....................................... $ 1,362 $ 1,530 $ 1,700
------- ------- -------
------- ------- -------
</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 15.0% of their pretax compensation, subject to
applicable regulatory limits. The Company may make matching contributions up to
6.0% of compensation. Participants vest immediately in Company contributions.
Expense charged to results of operations was $815, $830 and $800 in fiscal 1996,
1995 and 1994, respectively.
DIRECTOR, EXECUTIVE AND KEY EMPLOYEE RETIREMENT BENEFIT AND PROFIT SHARING
PLANS
The Company provides its outside directors with benefits 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
25.0% 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
Company also provides supplemental retirement and profit sharing benefits for
current and former executives and key employees to supplement benefits provided
by the Company's other benefit plans. The plans are not fully funded and may
require funding in the event of a change in control of the Company as determined
by the Company's Board of Directors. Expense charged to results of operations
for these plans was $555, $585 and $545 in fiscal 1996, 1995 and 1994,
respectively.
F-18
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
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. In fiscal 1995 the Company completed termination of postretirement
healthcare and life insurance benefits attributable to future services of
collective bargaining and other domestic employees. The Company recognized an
after tax gain of $250 from the reduction in the accumulated postretirement
benefit obligation related to this termination of benefits.
Postretirement benefit cost for the years ended May 31, 1996, 1995 and 1994
included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost................................................... $ -- $ 4 $ 30
Interest cost.................................................. 65 70 98
--------- --------- ---------
$ 65 $ 74 $ 128
--------- --------- ---------
--------- --------- ---------
</TABLE>
The funded status of the plans at May 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Current retirees....................................................... $ 728 $ 716
Current employees -- fully eligible.................................... 352 101
--------- ---------
1,080 817
Plans' assets at fair value.............................................. -- --
--------- ---------
Accumulated postretirement benefit obligation in excess of plans'
assets................................................................. 1,080 817
Unrecognized prior service cost, transition obligation and net
(loss)/gain............................................................ (10) 156
--------- ---------
Accrued postretirement benefit cost in the Consolidated Balance Sheets... $ 1,070 $ 973
--------- ---------
--------- ---------
</TABLE>
The assumed discount rates used to measure the accumulated postretirement
benefit obligation were 8.25% and 8.5% at May 31, 1996 and 1995, respectively.
The assumed rate of future increases in health care costs was 10.1% in fiscal
1996 and 1995, declining to 6.0% by the year 2003 and remaining at that rate
thereafter. A one percent increase in the assumed health care cost trend rate
would increase the accumulated postretirement benefit obligation by
approximately $26 as of May 31, 1996 and would not result in a significant
change to the annual postretirement benefit expense.
F-19
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
7. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements that
expire at various dates through 2011. Rental expense under these leases was
$6,828, $6,545 and $4,840 in fiscal 1996, 1995 and 1994, respectively.
Future minimum payments under leases with initial or remaining terms of one
year or more at May 31, 1996 were $4,745 for fiscal 1997, $4,268 for fiscal
1998, $3,775 for fiscal 1999, $3,253 for fiscal 2000 and $1,925 for fiscal 2001
and thereafter.
The Company routinely issues letters of credit, performance bonds or credit
guarantees in the ordinary course of its business. These instruments are
typically issued in conjunction with insurance, contracts, sales of secured
accounts receivables or other business requirements. The total of these
instruments outstanding at May 31, 1996 was approximately $25,800.
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.
8. 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 5 to 8 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 the lease,
Federal income tax deductions exceeded the lease rental income. In the later
years of the lease, rental income will exceed the deductions. In fiscal 1994,
the Company's Investment in leveraged leases was repriced approximately $2,000
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 was received
in the form of a $2,000 note, bearing interest at 9.9%, due in March 2001 and
was included with Retirement benefits, notes receivable and other on the
Consolidated Balance Sheets. During fiscal 1996, the note was sold at
approximately the outstanding principal and accrued interest receivable balance.
F-20
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
8. AIRCRAFT LEASING ACTIVITIES -- (CONTINUED)
The condensed operating results and balance sheet financial information for
aircraft leasing activities were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY
31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Operating Results:
Revenues.................................................... $ -- $ -- $ 2,195
Net income (loss)........................................... (43) (126) 1,132
Balance Sheet:
Total assets................................................ 31,600 37,500 39,700
Stockholders' equity........................................ 24,180 24,223 24,349
</TABLE>
The Company's net investment in leveraged leases is comprised of the
following elements:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MAY 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Rentals receivable (net of principal and interest on the nonrecourse
debt).................................................................... $ 14,545 $ 15,592
Estimated residual value of leased assets................................. 23,950 23,950
Unearned and deferred income.............................................. (7,590) (7,590)
-------- --------
Investment in leveraged leases.......................................... 30,905 31,952
Deferred taxes............................................................ (25,060) (27,590)
-------- --------
Net investment in leveraged leases........................................ $ 5,845 $ 4,362
-------- --------
-------- --------
</TABLE>
Pretax income from leveraged leases was $0 in fiscal 1996 and 1995 and
$1,955 in fiscal 1994. The tax effect from leveraged leases was $0 in fiscal
1996 and 1995 and $823 in fiscal 1994.
9. BUSINESS SEGMENT INFORMATION
The Company operates primarily in the aerospace/aviation industry and
reports its activities in one primary business segment, Aviation Services.
Export sales from the Company's U.S. operations to unaffiliated customers,
the majority located in Europe, the Middle East, Asia, Canada, Mexico and South
America (including sales through foreign sales offices of domestic
subsidiaries), were approximately $148,503 (29.4% of total net sales), $144,056
(31.9% of total net sales) and $112,275 (27.5% of total net sales) in fiscal
1996, 1995 and 1994, respectively.
Sales to the U.S. Government, its agencies and its contractors were
approximately $92,362 (18.3% of total net sales), $82,708 (18.3% of total net
sales) and $77,500 (19.0% of total net sales) in fiscal 1996, 1995 and 1994,
respectively.
F-21
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
10. SELECTED QUARTERLY DATA (UNAUDITED)
The unaudited selected quarterly data for fiscal years ended May 31, 1996
and 1995 are as follows.
FISCAL 1996
<TABLE>
<CAPTION>
NET INCOME
QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE
- ----------------------------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
First.............................. $ 109,593 $ 20,497 $ 3,226 $ .20
Second............................. 121,261 21,963 3,691 .23
Third.............................. 136,065 22,463 4,089 .26
Fourth............................. 138,071 25,842 5,006 .31
--------- ------------ ---------- -----
$ 504,990 $ 90,765 $16,012 $1.00
--------- ------------ ---------- -----
--------- ------------ ---------- -----
</TABLE>
FISCAL 1995
<TABLE>
<CAPTION>
NET INCOME
QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE
- ----------------------------------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
First.............................. $ 97,191 $ 16,814 $ 2,005 $ .13
Second............................. 99,384 17,997 2,067 .13
Third.............................. 125,232 20,437 2,876 .18
Fourth............................. 129,588 22,623 3,515 .22
--------- ------------ ---------- -----
$ 451,395 $ 77,871 $10,463 $ .66
--------- ------------ ---------- -----
--------- ------------ ---------- -----
</TABLE>
11. ALLOWANCES AND RESERVES
ALLOWANCES FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
---------------------------
1996 1995 1994
------ ------ -------
<S> <C> <C> <C>
Balance, beginning of year................................................ $2,400 $2,000 $ 2,000
Provision charged to operations......................................... 900 895 600
Deductions for accounts written off, net of recoveries.................. (810) (495) (600)
------ ------ -------
Balance, end of year...................................................... $2,490 $2,400 $ 2,000
------ ------ -------
------ ------ -------
</TABLE>
INVENTORY VALUATION RESERVES
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year................................................ $ 6,329 $ 8,916 $14,000
Provision charged to operations......................................... 5,325 2,909 3,104
Inventory written off and loss from disposal, net of recoveries......... (6,126) (5,496) (8,188)
-------- ------- -------
Balance, end of year...................................................... $ 5,528 $ 6,329 $ 8,916
-------- ------- -------
-------- ------- -------
</TABLE>
The inventory valuation reserve principally represents allowances for
obsolete inventory as well as reserves to reduce the cost of certain surplus
inventory to its net realizable value. The reserve applies to inventory
supporting the Company's trading, overhaul and manufacturing activities.
F-22
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
12. INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying interim consolidated financial statements for the six
months ended November 30, 1996 and 1995 include the accounts of the Company and
its subsidiaries after elimination of intercompany accounts and transactions.
These statements have been prepared by the Company without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC"). To
prepare the financial statements in conformity with generally accepted
accounting principles, management has made a number of estimates and assumptions
relating to the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities. Actual results could differ from those
estimates. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations of the SEC.
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.............................. 2
Incorporation of Certain Documents by Reference.... 2
Prospectus Summary................................. 3
Use of Proceeds.................................... 7
Dividend Policy.................................... 7
Price Range of Common Stock........................ 7
Capitalization..................................... 8
Selected Consolidated Financial Data............... 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 11
Business........................................... 15
Properties......................................... 21
Management......................................... 22
Description of Capital Stock....................... 23
Description of Shareholder Purchase
Rights............................................ 26
Underwriting....................................... 27
Legal Matters...................................... 28
Experts............................................ 28
Index to Consolidated Financial Statements......... F-1
</TABLE>
2,000,000 SHARES
AAR CORP.
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
WILLIAM BLAIR & COMPANY
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the issuance and distribution of the Common
Stock being registered, other than underwriting discounts and commissions, are
estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee..................... $ 20,038*
NASD filing fee......................................................... 7,112*
New York Stock Exchange listing fee..................................... 8,050*
Accountants fees and expenses........................................... 75,000
Legal fees and expenses................................................. 125,000
Blue sky fees and expenses.............................................. 5,000
Printing expenses....................................................... 125,000
Transfer agent fees and expenses........................................ 4,000
Miscellaneous........................................................... 5,800
-----------
Total................................................................. $ 375,000
-----------
-----------
</TABLE>
- ------------
*Actual. All other expenses are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Fourteenth of the Registrant's Restated Certificate of Incorporation
provides that no director of the Registrant shall have personal liability to the
Registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director, but this provision does not eliminate or limit the liability of a
director (a) for any breach of the director's duty of loyalty to the Registrant
or its stockholders, (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (c) under section
174 of the General Corporation Law of the State of Delaware (the "GCL") or (d)
for any transaction from which the director derived an improper personal
benefit.
Reference is made to Section 145 of the GCL, which provides for
indemnification of directors and officers in certain circumstances. Article
Fifteenth of the Registrant's Restated Certificate of Incorporation provides for
indemnification of the Registrant's officers and directors (and those serving in
such capacity with another corporation at the request of the Registrant) to the
fullest extent provided by the GCL and other applicable laws as currently in
effect and as they may be amended in the future.
The Registrant has directors' and officers' liability insurance which
provides, subject to certain policy limits, deductible amounts and exclusions,
coverage for all persons who have been, are or may in the future be, directors
or officers of the Registrant against amounts which such persons must pay
resulting from claims made against them by reason of their being such directors
or officers during the policy period for certain breaches of duty, omissions or
other acts done or wrongfully attempted or alleged.
The Registrant has entered into Indemnification Agreements with each of its
directors and executive officers containing, among other things, provisions
similar to those in the Registrant's Restated Certificate of Incorporation,
including provisions requiring indemnification to the full extent permitted by
the GCL and the prompt advancement of expenses under certain circumstances. In
addition, the Indemnification Agreements required the Registrant to maintain
directors' and officers' liability insurance at specified levels, subject to
certain exceptions, and, if such coverage is not maintained, to indemnify the
directors and executive officers to the full extent of such coverage.
Section 8 of the Underwriting Agreement filed as Exhibit 1.1 hereto provides
for the indemnification of directors and officers of the Registrant by the
Underwriters under certain circumstances.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The Exhibits filed herewith are set forth on the Exhibit Index filed as part
of this Registration Statement.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes;
(a) That for purposes of determining any liability under the securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities and Exchange Act of 1934
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(b) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(c) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Village of Elk Grove Village, State of Illinois, on the 13th
day of January, 1997.
AAR CORP.
(REGISTRANT)
By /s/ DAVID P. STORCH
-----------------------------------------
David P. Storch
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both, of AAR CORP., a Delaware corporation, hereby
constitutes and appoints David P. Storch and Howard A. Pulsifer, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments and including any filings pursuant to Rule 462(b) under the
Securities Act of 1933, as amended) to this Registration Statement, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite, necessary or advisable to be
done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ IRA A. EICHNER
- ------------------------------ Chairman of the Board and January 13, 1997
Ira A. Eichner Founder, Director
President and Chief
/s/ DAVID P. STORCH Executive Officer;
- ------------------------------ Director (Principal January 13, 1997
David P. Storch Executive Officer)
Vice President, Chief
/s/ TIMOTHY J. ROMENESKO Financial Officer and
- ------------------------------ Treasurer (Principal January 13, 1997
Timothy J. Romenesko Financial and Accounting
Officer)
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ A. ROBERT ABBOUD
- ------------------------------ Director January 13, 1997
A. Robert Abboud
/s/ HOWARD B. BERNICK
- ------------------------------ Director January 13, 1997
Howard B. Bernick
/s/ EDGAR D. JANNOTTA
- ------------------------------ Director January 13, 1997
Edgar D. Jannotta
/s/ ROBERT D. JUDSON
- ------------------------------ Director January 13, 1997
Robert D. Judson
/s/ ERWIN E. SCHULZE
- ------------------------------ Director January 13, 1997
Erwin E. Schulze
/s/ JOEL D. SPUNGIN
- ------------------------------ Director January 13, 1997
Joel D. Spungin
/s/ LEE B. STERN
- ------------------------------ Director January 13, 1997
Lee B. Stern
/s/ RICHARD D. TABERY
- ------------------------------ Director January 13, 1997
Richard D. Tabery
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
INDEX EXHIBITS
----------------------------- --------------------------------------------------------------------
<S> <C> <C> <C>
1. Underwriting agreement 1.1 Proposed form of Underwriting Agreement.
3. Articles of Incorporation and 3.1 Restated Certificate of Incorporation;(1) Amendments thereto dated
By-Laws November 3, 1987(2) and October 19, 1988.(2)
3.2 By-Laws as amended.(2) Amendment thereto dated April 12, 1994.(12)
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.(12)
4.3 Credit Agreement dated September 9, 1996 between the Registrant and
Bank of America, Illinois.(16)
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, N.A. (now known as Bank of America, Illinois), as
Trustee, relating to debt securities;(5) First Supplemental
Indenture thereto dated August 26, 1991.(6)
4.6 Officers' certificates relating to debt securities dated October 24,
1989(10) and October 12, 1993.(10)
4.7 Credit Agreement dated October 7, 1996 between the Registrant and
The First National Bank of Chicago as Agent.(16)
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.
5. Opinion regarding legality 5.1 Opinion of Schiff Hardin & Waite.
10. Material Contracts 10.1 AAR CORP. Stock Benefit Plan(11) and amendments thereto dated July
29, 1996 and January 2, 1997.(16)
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) Amendments
thereto dated August 12, 1988,(4) May 25, 1990(15) and July 13,
1994.(15)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C> <C> <C>
10.4 Trust Agreement dated August 12, 1988 between the Registrant and Ira
A. Eichner(4) and amendments thereto dated May 25, 1990(15) and
February 4, 1994.(12)
10.5 AAR CORP. Directors' Retirement Plan, dated April 14, 1992.(9)
10.6 AAR CORP. Supplemental Key Employee Retirement Plan, dated July 13,
1994(13), amended June 1, 1995,(15) January 1, 1996(15) and June 1,
1996.(15)
10.7 Employment agreement dated June 1, 1994 between the Registrant and
David P. Storch(14) and amendment thereto dated October 9, 1996.(16)
10.8 Severance and Change in Control Agreement dated February 24, 1995
between the Registrant and Phillip C. Slapke.(14)
10.9 Severance and Change in Control Agreement dated February 24, 1995
between the Registrant and Howard A. Pulsifer.(14)
10.10 Severance and Change in Control Agreement dated February 24, 1995
between the Registrant and Timothy J. Romenesko.(14)
21. Subsidiaries of the 21.1 Subsidiaries of AAR CORP.(15)
Registrant
23. Consents of experts and 23.1 Consent of Schiff Hardin & Waite (included in its opinion filed as
counsel Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
24. Power of attorney 24.1 Powers of attorney are granted by the persons executing this
Registration Statement as set forth on the signature page.
</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 the Registrant's Registration
Statement on Form S-3 filed August 27, 1991.
II-6
<PAGE>
(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.
(12) Incorporated by reference to Exhibits to the Registrant's Annual Report
on Form 10-K for the fiscal year ended May 31, 1994.
(13) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended November 30, 1994.
(14) Incorporated by reference to Exhibits to the Registrant's Annual Report
on Form 10-K for the fiscal year ended May 31, 1995.
(15) Incorporated by reference to Exhibits to the Registrant's Annual Report
on Form 10-K for the fiscal year ended May 31, 1996.
(16) Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended November 30, 1996.
II-7
<PAGE>
AAR CORP.
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
UNDERWRITING AGREEMENT
__________, 1997
Goldman, Sachs & Co.
William Blair & Company, L.L.C.
As representatives ("Representatives")
of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
AAR Corp., a Delaware corporation (the "Company"), proposes, subject to the
terms and conditions stated herein, to issue and sell to the Underwriters named
in Schedule I hereto (the "Underwriters") an aggregate of 2,000,000 shares (the
"Firm Shares") and, at the election of the Underwriters, up to 300,000
additional shares (the "Optional Shares") of Common Stock, par value $1.00
("Stock"), of the Company (the Firm Shares and the Optional Shares that the
Underwriters elect to purchase pursuant to Section 2 hereof being collectively
called the "Shares").
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(a) A registration statement on Form S-3 (File No. 333-______) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto but including
all documents incorporated by reference in the prospectus contained therein, to
you for each of the other Underwriters, have been declared effective by the
Commission in such form (other than a registration statement, if any, increasing
the size of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Act"), which became effective upon filing), no other document with respect to
the Initial Registration Statement or document incorporated by reference therein
has heretofore been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has been
<PAGE>
issued and no proceeding for that purpose has been initiated or, to the
Company's knowledge, threatened by the Commission (any preliminary prospectus
included in the Initial Registration Statement or filed with the Commission
pursuant to Rule 424(a) of the rules and regulations of the Commission under the
Act is hereinafter called a "Preliminary Prospectus"; the various parts of the
Initial Registration Statement and the Rule 462(b) Registration Statement, if
any, including all exhibits thereto and including (i) the information contained
in the form of final prospectus filed with the Commission pursuant to Rule
424(b) under the Act in accordance with Section 5(a) hereof and deemed by virtue
of Rule 430A under the Act to be part of the Initial Registration Statement at
the time it was declared effective and (ii) the documents incorporated by
reference in the prospectus contained in the Initial Registration Statement at
the time such part of the registration statement became effective, each as
amended at the time such part of the registration statement became effective or
such part of the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the "Registration
Statement"; such final prospectus, in the form first filed pursuant to Rule
424(b) under the Act, is hereinafter called the "Prospectus"; any reference
herein to any Preliminary Prospectus or the Prospectus shall be deemed to refer
to and include the documents incorporated by reference therein pursuant to Item
12 of Form S-3 under the Act, as of the date of such Preliminary Prospectus or
Prospectus, as the case may be; any reference to any amendment or supplement to
any Preliminary Prospectus or the Prospectus shall be deemed to refer to and
include any documents filed after the date of such Preliminary Prospectus or
Prospectus, as the case may be, under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and incorporated by reference in such Preliminary
Prospectus or Prospectus, as the case may be; and any reference to any amendment
to the Registration Statement shall be deemed to refer to and include any annual
report of the Company filed pursuant to Section 13(a) or 15(d) of the Exchange
Act after the effective date of the Initial Registration Statement that is
incorporated by reference in the Registration Statement;
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; PROVIDED, HOWEVER, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The documents incorporated by reference in the Prospectus, when they
became effective or were filed with the Commission, as the case may be,
conformed in all material respects to the requirements of the Act or the
Exchange Act, as applicable, and the rules and regulations of the Commission
thereunder, and none of such documents contained an untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading; and any further
documents so filed and incorporated by reference in the Prospectus or any
further amendment or supplement thereto, when such documents become effective or
are filed with the Commission, as the case may be, will conform in all material
respects to the requirements of the Act or the Exchange Act, as applicable, and
the rules and regulations of the Commission thereunder and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with information
furnished in writing to the Company by an Underwriter through Goldman, Sachs &
Co. expressly for use therein;
2
<PAGE>
(d) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein; there is no material document of a character required to be described
in the Registration Statement or the Prospectus or to be filed as an exhibit to
the Registration Statement which is not described or filed as required;
(e) Neither the Company nor any of its subsidiaries (as defined in Section
14) has sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any material loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been any change in the capital stock or long-term debt of the Company or any
of its subsidiaries, the Company and its subsidiaries have not incurred any
material liabilities or obligations, direct or contingent, nor entered into any
material transactions not in the ordinary course of business and there has not
been any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the Company
and its subsidiaries considered as a whole, otherwise than as set forth or
contemplated in the Prospectus;
(f) The Company and its subsidiaries have good and marketable title in fee
simple to all real property owned by them, free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries;
(g) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any business so
as to require such qualification, or is subject to no material liability or
disability by reason of the failure to be so qualified in any such jurisdiction;
(h) The Company has an authorized and outstanding capitalization as set
forth in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly
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authorized and issued, are fully paid and non-assessable and conform to the
description of the Stock contained in the Prospectus; and all of the issued
shares of capital stock of each subsidiary of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable and are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(i) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus; the Company has not
agreed, orally or in writing, to issue or sell any shares of its capital stock
to any person, other than pursuant to this Agreement or as set forth in the
Prospectus;
(j) This Agreement has been duly authorized, executed and delivered by the
Company. The issue and sale of the Shares by the Company and the compliance by
the Company with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or its subsidiaries or
any statute or any order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of its subsidiaries or any
of their properties or affect the ability of the Underwriters to receive good
and valid title to the Shares being sold hereunder; and no consent, approval,
authorization, order, registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the Shares or
the consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(k) Neither the Company nor any of its subsidiaries is in violation of its
Certificate of Incorporation or By-laws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or any of
its properties may be bound;
(l) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock and under the caption "Underwriting", insofar as they
purport to describe the provisions of the documents referred to therein, are
accurate and complete in all respects;
(m) Neither the Company nor any of its subsidiaries has taken or will
take, direct or indirectly, any action designed to, or that might reasonably be
expected to, cause or result in the stabilization or manipulation in the price
of the Stock;
(n) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, taking into account the likelihood of the outcome, the
damages or other relief sought and other relevant factors, would individually or
in the aggregate reasonably be expected to have a material adverse effect on the
current or future consolidated financial position, stockholders' equity or
results of operations of the Company and its
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subsidiaries; to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;
(o) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company" or an entity "controlled" by
an "investment company", as such terms are defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act");
(p) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba within the
meaning of Section 517.075, Florida Statutes;
(q) To the knowledge of the Company, KPMG Peat Marwick LLP, who have
certified certain financial statements of the Company and its subsidiaries are
independent public accountants as required by the Act and the rules and
regulations of the Commission thereunder; and
(r) Other than as set forth in the Prospectus, (A) the Company and its
subsidiaries are in compliance in all respects with applicable federal, state,
local and foreign laws and regulations relating to the protection of human
health and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants, except where the failure to be in compliance would
not have a material adverse effect on the current or future consolidated
financial position, stockholders' equity or results of operations of the Company
and its subsidiaries taken as a whole; and (B) the properties used, owned,
managed or controlled by the Company and its subsidiaries are free from
contamination of hazardous materials including contamination of the associated
soil, ground water or surface water, except where such contamination would not
have a material adverse effect on the current or future consolidated financial
position, stockholders equity or results of operations of the Company and its
subsidiaries taken as a whole.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $_______________, the number of Shares set forth
opposite the name of such Underwriter in Schedule I hereto and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Shares as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the purchase price per share set forth
in clause (a) of this Section 2, that portion of the number of Optional Shares
as to which such election shall have been exercised (to be adjusted by you so as
to eliminate fractional shares) determined by multiplying such number of
Optional Shares by a fraction, the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 300,000 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
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3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co., through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by certified or official bank
check or checks, payable to the order of the Company in Federal (same day)
funds. The Company will cause the certificates representing the Shares to be
made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery (as defined below) with respect thereto at the office of
DTC or its designated custodian (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m.,
New York City time, on ______________, 1997 or such other time and date as
Goldman, Sachs & Co. and the Company may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York time, on the date specified
by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co. of
the Underwriters' election to purchase such Optional Shares, or such other time
and date as Goldman, Sachs & Co. and the Company may agree upon in writing.
Such time and date for delivery of the Firm Shares is herein called the "First
Time of Delivery", such time and date for delivery of the Optional Shares, if
not the First Time of Delivery, is herein called the "Second Time of Delivery",
and each such time and date for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7(k) hereof, will be delivered at the offices of
Sonnenschein Nath & Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
4:00 p.m., New York City time, on the New York Business Day next preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's
close of business on the second business day following the execution and
delivery of this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Act; to make no further amendment or any
supplement to the Registration Statement or Prospectus prior to the last Time of
Delivery which shall be disapproved by you promptly after reasonable notice
thereof; to advise you, promptly after it receives notice thereof, of the time
when any amendment to the Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish you with copies thereof; to file promptly all reports and
any definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus and for so long as the
delivery of a prospectus is required in connection with the offering or sale of
the Shares; to advise you, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction,
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of the initiation or threatening of any proceeding for any such purpose, or of
any request by the Commission for the amending or supplementing of the
Registration Statement or Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or suspending
the use of any Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the withdrawal of such
order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities laws of
such jurisdictions as you may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such jurisdictions for
as long as may be necessary to complete the distribution of the Shares, provided
that in connection therewith the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process in any
jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business Day
next succeeding the date of this Agreement and from time to time, to furnish the
Underwriters with copies of the Prospectus in New York City in such quantities
as you may reasonably request, and, if the delivery of a prospectus is required
at any time prior to the expiration of nine months after the time of issue of
the Prospectus in connection with the offering or sale of the Shares and if at
such time any event shall have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were made
when such Prospectus is delivered, not misleading, or, if for any other reason
it shall be necessary during such period to amend or supplement the Prospectus
or to file under the Exchange Act any document incorporated by reference in the
Prospectus in order to comply with the Act or the Exchange Act, to notify you
and upon your request to file such document and to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many copies as you
may from time to time reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or omission or
effect such compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine months
or more after the time of issue of the Prospectus, upon your request but at the
expense of such Underwriter, to prepare and deliver to such Underwriter as many
copies as you may request of an amended or supplemented Prospectus complying
with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the effective
date of the Registration Statement (as defined in Rule 158(c) under the Act), an
earnings statement of the Company and its subsidiaries (which need not be
audited) complying with Section 11(a) of the Act and the rules and regulations
thereunder (including, at the option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to and
including the date 90 days after the date of the Prospectus, not to (i) offer,
sell, contract to sell or otherwise dispose of, except as provided hereunder any
securities of the Company that are substantially similar to the Shares,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock or any such
substantially similar securities (other than pursuant to employee stock option
plans existing on the date of this Agreement or up to 500,000 shares in
connection with the acquisition of other businesses by the Company) or (ii) file
any registration statement under the Act with respect to Stock, securities
convertible into or exchangeable for Stock, rights or warrants to acquire Stock,
or any other securities substantially similar to Stock (other than with respect
to the aforementioned employee stock plans and acquisitions), in each case
without the prior written consent of the Representatives;
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(f) To furnish to its stockholders as soon as practicable after the end of
each fiscal year an annual report (including a balance sheet and statements of
income, stockholders' equity and cash flows of the Company and its consolidated
subsidiaries certified by independent public accountants) and make available to
its stockholders, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter ending
after the effective date of the Registration Statement), consolidated summary
financial information of the Company and its subsidiaries for such quarter in
reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the Company is listed; and (ii)
such additional information concerning the business and financial condition of
the Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under the
caption "Use of Proceeds";
(i) To use its best efforts to list, subject to notice of issuance, the
Shares on the New York Stock Exchange (the "Exchange"); and
(j) If the Company elects to rely upon Rule 462(b), the Company shall file
a Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) by 10:00 p.m., Washington, D.C. time, on the date of this Agreement, and
the Company shall at the time of filing either pay to the Commission the filing
fee for the Rule 462(b) Registration Statement or give irrevocable instructions
for the payment of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey
(iv) all fees and expenses in connection with listing the Shares on the
Exchange; (v) the filing fees incident to, and the fees and disbursements of
counsel for the Underwriters in connection with, securing any required review by
the National Association of Securities Dealers, Inc. of the terms of the sale of
the Shares; (vi) the cost of preparing stock certificates; (vii) the cost and
charges of any transfer agent or registrar; and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood, however,
that, except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, stock transfer taxes on resale of any of the Shares by them, and
any advertising expenses connected with any offers they may make.
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7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by the
rules and regulations under the Act and in accordance with Section 5(a) hereof;
if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 p.m., Washington,
D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been
issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; and all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction;
(b) Sonnenschein Nath & Rosenthal, counsel for the Underwriters, shall
have furnished to you such opinion or opinions, dated such Time of Delivery,
substantially in the form of Annex I hereto, with respect to the incorporation
of the Company, the validity of the Shares being delivered at such Time of
Delivery, the Registration Statement, the Prospectus and such other related
matters as you may reasonably request, and such counsel shall have received such
papers and information as they may reasonably request to enable them to pass
upon such matters;
(c) (i) Schiff Hardin & Waite, counsel for the Company, shall have
furnished to you their written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, substantially in the form of Annex II hereto, to
the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties and
conduct its business as described in the Prospectus;
(ii) The Company has an authorized and outstanding capitalization as
set forth in the Prospectus, and all of the issued shares of capital
stock of the Company (including the Shares being delivered at such Time
of Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform to the description
of the Stock contained in the Prospectus;
(iii) This Agreement has been duly authorized, executed and delivered
by the Company;
(iv) The issue and sale of the Shares being delivered at such Time
of Delivery by the Company and the compliance by the Company with all
of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument filed as an exhibit to any of the
Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
or other Exchange Act filings, nor will such action result in any
violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties;
(v) No consent, approval, authorization, order, filing,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by
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this Agreement, except the registration under the Act of the Shares, and
such consents, approvals, authorizations, filings, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(vi) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock and under the caption "Underwriting",
insofar as they purport to describe the provisions of the documents
referred to therein, are accurate and complete in all material respects;
(vii) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act;
(viii) The documents incorporated by reference in the Prospectus or
any further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion),
when they became effective or were filed with the Commission, as the
case may be, complied as to form in all material respects with the
requirements of the Act or the Exchange Act, as applicable, and the
rules and regulations of the Commission thereunder; and
(ix) The Registration Statement and the Prospectus and any
amendments and supplements thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Act and the rules and regulations thereunder; although they do not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the
Prospectus, except for those referred to in the opinion in subsection
(vi) of this Section 7(c)(i), they have no reason to believe that, as
of its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein, as
to which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectus or any
amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained
an untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as of
such Time of Delivery, either the Registration Statement or the
Prospectus or any amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial statements
and related schedules therein, as to which such counsel need express no
opinion)contains an untrue statement of a material fact or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
and they do not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a
character required to be filed as an exhibit to the Registration
Statement or required to be incorporated by reference into the
Prospectus or required to be described in the Registration Statement
or the Prospectus which are not filed or incorporated by reference or
described as required.
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(ii) Howard A. Pulsifer, Esq., General Counsel of the Company, shall
have furnished to you his written opinion, dated such Time of Delivery, in
form and substance satisfactory to you, substantially in the form of Annex
III hereto, to the effect that:
(i) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification or is subject
to no material liability or disability by reason of the failure to be so
qualified in any such jurisdiction (such counsel being entitled to rely
in respect of the opinion in this clause upon opinions of local counsel
and in respect of matters of fact upon certificates of officers of the
Company, provided that such counsel shall state that they believe that
both you and they are justified in relying upon such opinions and
certificates);
(ii) Each subsidiary of the Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, with corporate power and authority
to own its properties and conduct its business as described in the
Prospectus; and all of the issued shares of capital stock of each such
subsidiary have been duly and validly authorized and issued, are fully
paid and non-assessable, and are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or claims
(such counsel being entitled to rely in respect of the opinion in this
clause upon opinions of local counsel and in respect to matters of fact
upon certificates of officers of the Company or its subsidiaries,
provided that such counsel shall state that they believe that both you
and they are justified in relying upon such opinions and certificates);
(iii) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a party or of
which any property of the Company or any of its subsidiaries is the
subject which, taking into account the likelihood of the outcome, the
damages or other relief sought and other relevant factors, would
individually or in the aggregate reasonably be expected to have a
material adverse effect on the current or future consolidated financial
position, stockholders' equity or results of operations of the Company
and its subsidiaries; and, to the best of such counsel's knowledge, no
such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(iv) The documents incorporated by reference in the Prospectus or
any further amendment or supplement thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no
opinion), when they became effective or were filed with the Commission,
as the case may be, complied as to form in all material respects with
the requirements of the Act or the Exchange Act, as applicable, and
the rules and regulations of the Commission thereunder; and he has no
reason to believe that any of such documents, when such documents
became effective or were so filed, as the case may be, contained, in
the case of a registration statement which became effective under the
Act, an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or, in the case of other documents
which were filed under the Exchange Act with the Commission, an untrue
statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such documents were so
filed, not misleading, it being understood that such counsel need
express no opinion as to the financial statements or other financial
information included in any of the documents mentioned in this Clause
and that such
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counsel may state that they have not independently verified factual
statements in any such documents; and
(v) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such
Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of
the Act and the rules and regulations thereunder; although they do not
assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement or the
Prospectus, except for those referred to in the opinion in subsection
(vi) of Section 7(c)(i) hereof, they have no reason to believe that, as
of its effective date, the Registration Statement or any amendment
thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules therein, as to which
such counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
that, as of its date, the Prospectus or any amendment or supplement
thereto made by the Company prior to such Time of Delivery (other than
the financial statements and related schedules therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading or that, as of such Time of Delivery, either
the Registration Statement or the Prospectus or any amendment or
supplement thereto made by the Company prior to such Time of Delivery
(other than the financial statements and related schedules therein, as
to which such counsel need express no opinion) contains an untrue
statement of a material fact or omits to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and he does not know of any
amendment to the Registration Statement required to be filed or of any
contracts or other documents of a character required to be filed as an
exhibit to the Registration Statement or required to be incorporated by
reference into the Prospectus or required to be described in the
Registration Statement or the Prospectus which are not filed or
incorporated by reference or described as required.
(d) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to the
date of this Agreement and also at each Time of Delivery, KPMG Peat Marwick LLP
shall have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex IV hereto;
(e)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included or
incorporated by reference in the Prospectus any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus, and
(ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries, the Company and its
subsidiaries shall not have incurred any material liabilities or obligations,
direct or contingent, or entered into any material transactions not in the
ordinary course of business, or there shall not have occurred any change, or any
development involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company and its subsidiaries considered as a whole, otherwise than as set
forth or contemplated in the Prospectus, the effect of
12
<PAGE>
which, in any such case described in Clause (i) or (ii), is in the judgment of
the Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
being delivered at such Time of Delivery on the terms and in the manner
contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have occurred in
the rating accorded the Company's debt securities by any "nationally recognized
statistical rating organization", as that term is defined by the Commission for
purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall
have publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's debt securities;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the Exchange; (ii) a suspension or material limitation in trading
in the Company's securities on the Exchange; (iii) a general moratorium on
commercial banking activities declared by either Federal, New York or Illinois
authorities; or (iv) the outbreak or escalation of hostilities involving the
United States or the declaration by the United States of a national emergency or
war, if the effect of any such event specified in this Clause (iv) in the
judgment of the Representatives makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the Prospectus;
(h) The Shares to be sold at such Time of Delivery shall have been duly
listed, subject to notice of issuance, on the Exchange;
(i) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from the executive officers and directors of the Company,
substantially to the effect set forth in Subsection 5(e) hereof in form and
substance satisfactory to you;
(j) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York Business
Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to you at
such Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this Section
and as to such other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment
13
<PAGE>
or supplement in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Goldman, Sachs & Co.
expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or threatened
action or claim in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not
14
<PAGE>
only such relative benefits but also the relative fault of the Company on the
one hand and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions (before
deducting expenses) received by the Underwriters, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
reasonably satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company
that you have so arranged for the purchase of such Shares, or the Company
notifies you that it has so arranged for the purchase of such Shares, you or the
Company shall have the right to postpone such Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The
15
<PAGE>
term "Underwriter" as used in this Agreement shall include any person
substituted under this Section with like effect as if such person had originally
been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
Anything herein to the contrary notwithstanding, the indemnity agreement of
the Company in subsection (a) of Section 8 hereof, the representations and
warranties in subsections (b), (c) and (d) of Section 1 hereof and any
representation or warranty as to the accuracy of the Registration Statement or
the Prospectus contained in any certificate furnished by the Company pursuant to
Section 7 hereof, insofar as they may constitute a basis for indemnification for
liabilities (other than payment by the Company of expenses incurred or paid in
the successful defense of any action, suit or proceeding) arising under the Act,
shall not extend to the extent of any interest therein of a controlling person
or partner of an Underwriter who is a director, officer or controlling person of
the Company when the Registration Statement has become effective, except in each
case to the extent that an interest of such character shall have been determined
by a court of appropriate jurisdiction as not against public policy as expressed
in the Act. Unless in the opinion of counsel for the Company the matter has
been settled by controlling precedent, the Company will, if a claim for such
indemnification is asserted, submit to a court of appropriate jurisdiction the
question of whether such interest is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if
16
<PAGE>
for any other reason, any Shares are not delivered by or on behalf of the
Company as provided herein, the Company will reimburse the Underwriters through
you for all out-of-pocket expenses approved in writing by you, including fees
and disbursements of counsel, reasonably incurred by the Underwriters in making
preparations for the purchase, sale and delivery of the Shares not so delivered,
but the Company shall then be under no further liability to any Underwriter
except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. All references herein to a "subsidiary" of a corporation shall mean
each corporation, limited liability company, partnership or other entity in
which such corporation beneficially owns, directly or indirectly, capital stock
or other equity interests representing in the aggregate 50% or more of the total
combined voting power of such entity.
15. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
16. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
17. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
17
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us five counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
AAR CORP.
By:
------------------------------
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
William Blair & Company, L.L.C.
By:
-------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
2125296.03
18
<PAGE>
SCHEDULE I
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- --------------- --------------
Goldman, Sachs & Co . . . . . . . . .
William Blair & Company, L.L.C. . . .
------------ ------------
Total. . . . . . . . . . . . 2,000,000 300,000
------------ ------------
------------ ------------
19
<PAGE>
ANNEX IV
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included or incorporated by reference in the Registration Statement or the
Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Act or the Exchange Act, as applicable, and
the related published rules and regulations thereunder; and, if applicable,
they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the consolidated
interim financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards established by
the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the Prospectus and/or
included in the Company's quarterly report on Form 10-Q incorporated by
reference into the Prospectus and, on the basis of specified procedures
including inquiries of officials of the Company who have responsibility for
financial and accounting matters regarding whether the unaudited condensed
consolidated financial statements referred to in paragraph (vi)(A)(i) below
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Exchange Act and the related published
rules and regulations, nothing came to their attention that caused them to
believe that the unaudited condensed consolidated financial statements do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the related
published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus and
included or incorporated by reference in Item 6 of the Company's Annual
Report on Form 10-K for the most recent fiscal year agrees with the
corresponding amounts (after restatement where applicable) in the audited
consolidated financial statements for such five fiscal years which were
included or incorporated by reference in the Company's Annual Reports on
Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
<PAGE>
(vi) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included or incorporated by reference in the
Prospectus, inquiries of officials of the Company and its subsidiaries
responsible for financial and accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited condensed consolidated statements of
income, consolidated balance sheets and consolidated statements of
cash flows included in the Prospectus and/or included or
incorporated by reference in the Company's Quarterly Reports on Form
10-Q incorporated by reference in the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Exchange Act and the related published rules and
regulations, or (ii) any material modifications should be made to
the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus or included in the Company's
Quarterly Reports on Form 10-Q incorporated by reference in the
Prospectus, for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which
such data and items were derived, and any such unaudited data and
items were not determined on a basis substantially consistent with
the basis for the corresponding amounts in the audited consolidated
financial statements included or incorporated by reference in the
Company's Annual Report on Form 10-K for the most recent fiscal
year;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived the unaudited
condensed financial statements referred to in Clause (A) and any
unaudited income statement data and balance sheet items included in
the Prospectus and referred to in Clause (B) were not determined on
a basis substantially consistent with the basis for the audited
financial statements included or incorporated by reference in the
Company's Annual Report on Form 10-K for the most recent fiscal
year;
(D) any unaudited pro forma consolidated condensed financial
statements included or incorporated by reference in the Prospectus
do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the published
rules and regulations thereunder or the pro forma adjustments have
not been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise
of options and stock appreciation rights, upon earn-outs of
performance shares and upon conversions of convertible securities,
in each case which were outstanding on the date of the latest
balance
IV-2
<PAGE>
sheet included or incorporated by reference in the Prospectus) or
any increase in the consolidated long-term debt of the Company and
its subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the
latest balance sheet included or incorporated by reference in the
Prospectus, except in each case for changes, increases or decreases
which the Prospectus discloses have occurred or may occur or which
are described in such letter; and
(F) for the period from the date of the latest financial
statements included or incorporated by reference in the Prospectus
to the specified date referred to in Clause (E) there were any
decreases in consolidated net revenues or operating profit or the
total or per share amounts of consolidated net income or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in
each case for increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and
(vii) In addition to the examination referred to in their report(s)
included or incorporated by reference in the Prospectus and the limited
procedures, inspection of minute books, inquiries and other procedures
referred to in paragraphs (iii) and (vi) above, they have carried out
certain specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the Prospectus (excluding
documents incorporated by reference) or in Part II of, or in exhibits and
schedules to, the Registration Statement specified by the Representatives
or in documents incorporated by reference in the Prospectus specified by
the Representatives, and have compared certain of such amounts, percentages
and financial information with the accounting records of the Company and
its subsidiaries and have found them to be in agreement.
2125296.03
IV-3
<PAGE>
[Letterhead of Schiff Hardin & Waite]
EXHIBIT 5.1
Robert J. Minkus
(312) 258-5584
January 13, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-1004
RE: AAR CORP. REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We are acting as counsel to AAR CORP., a Delaware corporation (the
"Company"), in connection with the offering for sale by the Company of up to
2,300,000 authorized but unissued shares of Common Stock of the Company,
$1.00 par value (the "Shares"), all as described in the Company's
Registration Statement on Form S-3 submitted to the Securities and
Exchange Commission on January 13, 1997. In that connection, we have
examined such corporate records, certificates and other documents, and have
made such other factual and legal investigations, as we have deemed necessary
or appropriate to enable us to render the opinion contained herein.
Based upon the foregoing, it is our opinion that the Shares have been
duly and validly authorized and, when issued against payment therefor as
contemplated in the Registration Statement, will be legally issued, fully paid
and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Registration Statement.
Very truly yours,
SCHIFF HARDIN & WAITE
By: /s/ Robert J. Minkus
------------------------------------
Robert J. Minkus
<PAGE>
[Letterhead of KPMG Peat Marwick LLP]
EXHIBIT 23.2
The Board of Directors
AAR CORP.:
We consent to the use of our report dated June 28, 1996, relating to the
consolidated financial statements of AAR CORP. as of May 31, 1996 and 1995, and
for each of the years in the three-year period ended May 31, 1996 included
herein and to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 13, 1997
