<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1999 COMMISSION FILE NUMBER 1-6263
AAR CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 36-2334820
(State or Other Jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification No.)
ONE AAR PLACE, 1100 N. WOOD DALE ROAD, WOOD DALE, ILLINOIS 60191
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (630) 227-2000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes/X/ No/ /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
At July 31, 1999, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was approximately $531,655,581. The calculation of
such market value has been made for the purposes of this report only and should
not be considered as an admission or conclusion by the Registrant that any
person is in fact an affiliate of the Registrant.
On July 31, 1999, there were 27,401,304 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the Registrant's Annual Meeting
of Stockholders, to be held October 13,1999, is incorporated by reference in
Part III to the extent described therein.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.......................................................................... 2
Item 2. Properties........................................................................ 4
Item 3. Legal Proceedings................................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders............................... 5
Executive Officers of the Registrant.............................................. 5
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters........................................................................ 6
Item 6. Selected Financial Data........................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 8
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................ 14
Item 8. Financial Statements and Supplementary Data....................................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 40
Item 11. Executive Compensation............................................................ 40
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 40
Item 13. Certain Relationships and Related Transactions.................................... 40
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................. 41
SIGNATURES....................................................................................... 42
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS (IN THOUSANDS, EXCEPT PERCENTAGE AND EMPLOYEE DATA)
AAR CORP. and its subsidiaries are referred to herein collectively as
"AAR" or the "Company," unless the context indicates otherwise. The Company
was organized in 1955 as the successor to a business founded in 1951 and was
reincorporated in Delaware in 1966. The Company is a worldwide leader in
supplying aftermarket products and services to the global aviation/aerospace
industry.
Certain of the Company's aviation-related activities and products are
subject to licensing, certification and other requirements imposed by the
Federal Aviation Administration (FAA) and other regulatory agencies, both
domestic and foreign. The Company believes that it has all licenses and
certifications that are material to the conduct of its business.
The Company reports its activities in one business segment: Aviation
Services. Three classes of similar products and services are included within
this segment: (i) Aircraft and Engines, (ii) Airframe and Accessories and
(iii) Manufacturing.
The Company's Aircraft and Engines activities include (i) the purchase,
sale, and lease of new and used commercial jet aircraft, (ii) the purchase,
sale and lease of a wide variety of new, overhauled and repaired engines and
engine products for the aviation aftermarket, including a broad range of
spare engines and engine parts and other engine components and accessories,
and (iii) the overhaul, repair and exchange of a wide range of engine parts
and components and other engine support services for its commercial and
military customers. The Company also provides customized inventory supply and
management programs for engine parts and components in support of customer
maintenance activities. The Company has two FAA licensed repair stations in
the U.S. to perform engine component overhaul services which cover a broad
range of internal engine parts and components. The Company also provides
turbine engine overhaul and parts supply services to industrial gas and steam
turbine operators. The Company's primary sources of aviation products for its
Aircraft and Engine activities are domestic and foreign airlines, independent
aviation service companies, aircraft leasing companies and original equipment
manufacturers.
The Company's Airframe and Accessories activities consist of (i) the
purchase, sale and lease of new, overhauled and repaired airframe parts and
accessories for the aviation aftermarket, and (ii) a wide variety of airframe
and accessory parts and components overhaul, as well as repair and exchange
services for its commercial, military and general aviation customers. The
Company also provides customized inventory supply and management programs for
certain airframe parts and components in support of customer maintenance
activities. The Company's primary sources of airframe parts for its Airframe
and Accessories activities are domestic and foreign airlines, independent
aviation service companies and aircraft leasing companies. The Company is
also an authorized distributor for more than 200 leading aviation/aerospace
product manufacturers.
The Company's Airframe and Accessories overhaul and repair capabilities
include most commercial aircraft landing gear, a wide variety of avionics,
instruments, electrical, electronic, fuel, hydraulic and pneumatic components
and a broad range of internal airframe components. AAR also operates an
aircraft maintenance facility providing maintenance, modification, special
equipment installation, painting services and aircraft terminal services for
various models of commercial, military, regional, business and general
aviation aircraft. During fiscal 1999, the Company purchased the assets of
Tempco Hydraulics, Inc., a regional aircraft landing gear repair and overhaul
business. AAR's overhaul and repair of parts and components also support the
sale, lease and inventory management activities of the Company. AAR has eight
FAA-licensed repair stations in the U.S. and two in Europe to perform
airframe/component overhaul services.
2
<PAGE>
The Company's Manufacturing activities include (i) the design,
manufacture and installation of in-plane cargo loading and handling systems
for commercial and military aircraft and helicopters, (ii) the design and
manufacture of advanced composite materials for commercial, business and
military aircraft, (iii) the manufacture and repair of a wide array of
containers, pallets and shelters in support of military and humanitarian
rapid deployment activities, (iv) the design and manufacture of a line of
specialized protective transport cases that are used to transport sensitive
and calibrated tools and instruments, and a variety of vacuum storage
containers that protect machinery and equipment during long-term storage.
During fiscal 1999, the Company divested substantially all of its assets and
related liabilities of its floor maintenance products manufacturing
subsidiary.
The Company furnishes aviation products and services primarily through
its own employees. The principal customers for the Company's products and
services are domestic and foreign commercial airlines, regional/commuter
airlines, business aircraft operators, aviation original equipment
manufacturers, aircraft leasing companies, domestic and foreign military
organizations and independent aviation support companies. Sales of aviation
products and services to commercial airlines are generally affected by such
factors as the number, type and average age of aircraft in service, the
levels of aircraft utilization (e.g., frequency of schedules), the number of
airline operators and the level of sales of new and used aircraft.
The Company is a leading independent supplier of aviation products and
services to the highly competitive worldwide aviation/aerospace aftermarket.
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 the original equipment manufacturers, commercial airlines,
and other independent suppliers of parts and services. In certain of its
leasing and commercial jet aircraft trading activities, the Company faces
competition from financial institutions, syndicators, commercial and
specialized leasing companies and other entities that provide financing. 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.
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. 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.
At May 31, 1999, backlog believed to be firm was approximately $83,600
compared to $107,400 at May 31, 1998. An additional $8,100 of unfunded
government options on awarded contracts also existed at May 31, 1999. It is
expected that approximately $82,100 of the May 31, 1999 backlog will be
shipped in fiscal 2000.
3
<PAGE>
Sales to the U.S. Government, its agencies and its contractors were
approximately $98,954 (10.8 % of total net sales), $83,114 (10.6% of total
net sales) and $82,125 (13.9% of total net sales) in fiscal years 1999, 1998
and 1997, respectively. Because such sales are subject to competitive bidding
and government funding, no assurance can be given that such sales will
continue at levels previously experienced. The majority of the Company's
government contracts are for aviation products and services used for ongoing
routine military logistic support activities; unlike weapons systems and
other high-technology military requirements, these products and services are
less likely to be affected by reductions in defense spending. The Company's
contracts with the U.S. Government and its agencies are typically firm
agreements to provide aviation products and services at a fixed price and
have a term of one year or less, frequently subject to extension for one or
more additional periods of one year at the option of the government agency.
Although the Company's government contracts are subject to termination at the
election of the government, in the event of such a termination the Company
would be entitled to recover from the government all allowable costs incurred
by the Company through the date of termination.
At May 31, 1999, the Company employed approximately 2,900 persons
worldwide.
For additional information concerning the Company's business segment
activities, including classes of similar products and services, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." For information concerning export sales, see "Business Segment
Information" in Note 11 of Notes to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company's principal aircraft and engine sales and leasing
activities as well as engine and airframe components and aftermarket parts
distribution activities are conducted from one building, which is owned by
the Company, in Wood Dale, Illinois. In addition to warehouse space, the
facility includes executive and sales offices. The Company also owns and
operates one building in Elk Grove Village, Illinois for the purpose of the
distribution of new aviation parts. Warehouse facilities are leased in
Windsor Locks, Connecticut; Hamburg and Hannover, Germany; Nantgarw, Wales;
and Brussels, Belgium for the purpose of aviation parts distribution.
Aviation overhaul facilities are located in The Netherlands near
Schiphol International Airport in a building owned by the Company; Garden
City, New York in a building owned by the Company; Frankfort, New York
(subject to an industrial revenue bond to the Company until 2001, at which
time the Company expects to purchase the facility for nominal consideration);
Windsor, Connecticut in a building owned by the Company; Miami, Florida in
leased facilities; London, England in leased facilities, and Oklahoma City,
Oklahoma in facilities leased from airport authorities. The Company's
experience indicates that lease renewal is available on reasonable terms
consistent with its business needs.
The Company's principal manufacturing activities are conducted at owned
facilities in Clearwater, Florida (subject to an industrial revenue bond);
Port Jervis, New York; and Cadillac and Livonia, Michigan.
The Company believes that its owned and lease facilities are suitable
and adequate for its existing business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material, pending legal proceedings
(including any governmental or environmental proceedings) other than routine
litigation incidental to its existing business.
4
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
SUPPLEMENTAL INFORMATION:
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning each executive officer of the Company is set
forth below:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH THE COMPANY
- ---- --- ---------------------------------
<S> <C> <C>
David P. Storch 46 President and Chief Executive Officer; Director
Ira A. Eichner 68 Chairman of the Board; Director
Philip C. Slapke 46 Executive Vice President
Howard A. Pulsifer 56 Vice President; General Counsel; Secretary
Timothy J. Romenesko 42 Vice President and Chief Financial Officer
</TABLE>
MR. STORCH has been President of the Company since 1989 and Chief
Executive Officer since 1996. Previously, he was Chief Operating Officer from
1989 to 1996 and a Vice President of the Company from 1988 to 1989. Mr.
Storch joined the Company in 1979 and was President of a major subsidiary
from 1984 to 1988. Mr. Storch has been a director of the Company since 1989.
Mr. Storch is Mr. Eichner's son-in-law.
MR. EICHNER, the founder of the Company, has been Chairman of the Board
of the Company since 1973, and an executive officer and director since it was
founded in 1955. Mr. Eichner retired as an executive officer and active
employee of the Company on May 31, 1999, and is continuing as a director and
nonexecutive Chairman of the Board of the Company. Mr. Eichner was the
Company's Chief Executive Officer from 1955 until 1996. Mr. Eichner is Mr.
Storch's father-in-law.
At the July 1999 Board Meeting, the Board of Directors acknowledged
the extraordinary contributions to AAR of Ira A. Eichner as he relinquished
his role as an executive officer. As founder of the Company, Mr. Eichner's
vision, foresight and leadership has resulted in growing AAR into a billion
dollar New York Stock Exchange public company, recognized as the pre-eminent
product and services provider in the aviation industry. His energetic
dedication to the Company's success and to ensuring shareholder value has
been unparalleled for more than 48 years. He brought diversity to the
Company's capabilities and customer base through a series of strategic
acquisitions, creating balance and synergies between its trading, overhaul
and manufacturing businesses. He also set a standard of integrity, instilling
it into the Company's culture for all employees to emulate.
In addition to leading AAR through good times and more difficult
periods, achieving profitability every year since the Company's inception,
Mr. Eichner emphasized the importance to the Company's future of prudent
fiscal management and a strong balance sheet. He built an outstanding
management team, paying special attention to successful management planning
in order to provide for the Company's ongoing growth. The Board of Directors
feel most fortunate that, as a continuing director and nonexecutive Chairman
of the Board, Ira Eichner will give his guidance and counsel to the Company's
management, sharing his wealth of experience.
MR. SLAPKE was elected Executive Vice President of the Company in 1999.
From 1994 to 1999, he was a Vice President of the Company. He is also
President of a major subsidiary, a position he has held since 1989, and has
been with the Company in various positions since 1981.
MR. PULSIFER joined the Company as General Counsel in 1987 and has been
a Vice President since 1989 and Secretary since 1990. He was previously with
United Airlines, Inc. for 14 years, most recently as Senior Counsel.
MR. ROMENESKO has been a Vice President and Chief Financial Officer
since 1994. Previously he served as Controller of the Company from 1991 to
1995 and in various other positions since joining the Company in 1981.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION,
PERCENTAGE DATA AND NUMBER OF STOCKHOLDERS)
The Company's Common Stock is traded on the New York Stock Exchange and
the Chicago Stock Exchange. On June 30, 1999, there were approximately 11,000
holders of the Common Stock of the Company, including participants in
security position listings.
Certain of the Company's debt agreements contain provisions restricting
the payment of dividends or repurchase of its shares. See Note 2 of Notes to
Consolidated Financial Statements included herein. Under the most restrictive
of these provisions, the Company may not pay dividends (other than stock
dividends) or acquire its capital stock if, after giving effect to the
aggregate amounts paid on or after June 1, 1996, such amounts exceed the sum
of $25,000 plus 50% of Consolidated Net Income of the Company after June 1,
1996. At May 31, 1999, unrestricted consolidated retained earnings available
for payment of dividends and purchase of the Company's shares totaled
approximately $18,482. At June 1, 1999, unrestricted consolidated retained
earnings increased to $39,318, due to inclusion of 50% of Consolidated Net
Income of the Company for fiscal 1999.
The table below sets forth for each quarter of the fiscal year
indicated the reported high and low market prices of the Company's Common
Stock on the New York Stock Exchange and the quarterly dividends declared.
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
-------------------------------------- -------------------------------------
Per Common Share: Market Prices Quarterly Market Prices Quarterly
----------------------------- --------------------- ----------------------
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------- ---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
First......................... 29 15/16 22 1/8 $.085 25 5/8 20 1/2 $.080
Second........................ 25 3/8 17 3/4 .085 26 1/4 21 13/16 .080
Third......................... 25 3/8 15 .085 32 7/16 24 11/16 .085
Fourth........................ 21 9/16 15 3/8 .085 30 3/8 25 7/8 .085
----- -----
$.340 $.330
----- -----
----- -----
</TABLE>
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<TABLE>
<CAPTION>
For the Year Ended May 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales..................................... $918,036 $782,123 $589,328 $504,990 $451,395
Gross profit.................................. 173,259 148,406 108,541 90,765 77,871
Operating income.............................. 77,381 64,716 42,890 32,442 24,438
Interest expense.............................. 18,567 14,494 10,786 10,616 10,900
Income before provision
for income taxes.......................... 59,786 51,157 32,975 22,782 14,713
Net income.................................... 41,671 35,657 23,025 16,012 10,463
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Share data:(1)
Earnings per share - basic.................. $ 1.51 $ 1.29 $ .92 $ .67 $ .44
Earnings per share - diluted................ $ 1.49 $ 1.27 $ .91 $ .66 $ .44
Cash dividends per share.................... $ .34 $ .33 $ .32 $ .32 $ .32
Average common shares
outstanding - basic.................... 27,549 27,588 25,026(3) 23,967 23,898
Average common shares
outstanding - diluted.................. 28,006 28,174 25,399(3) 24,248 23,966
FINANCIAL POSITION
Working capital............................... $334,600 $319,252(2) $314,119(3) $258,627 $248,492
Total assets.................................. 726,630 670,559 529,584(3) 437,846 425,814
Short-term debt............................... 420 237(2) 1,474 1,474 1,632
Long-term debt................................ 180,939 177,509(2) 116,818 118,292 119,766
Total debt.................................... 181,359 177,746(2) 118,292 119,766 121,398
Stockholders' equity.......................... 326,035 300,850 269,259(3) 204,635 197,119
Number of shares outstanding at
end of year(1).............................. 27,381 27,717 27,306(3) 23,997 23,942
Book value per share of common
stock(1).................................. $ 11.91 $ 10.85 $ 9.86 $ 8.53 $ 8.23
</TABLE>
- -----------------
Notes:
(1) All share and per share information reflects the three-for-two stock split
on February 23, 1998.
(2) In December 1997, the Company sold $60,000 of unsecured 6.875% Notes due
December 15, 2007.
(3) In February 1997, the Company sold three million shares of its common
stock for $50,075, net of expenses.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
RESULTS OF OPERATIONS
The Company reports its activities in one business segment: Aviation
Services. The table below sets forth net sales for the Company's classes of
similar products and services within this segment for each of the last three
fiscal years ended May 31.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales:
Aircraft and Engines.......................... $416,196 $339,299 $263,074
Airframe and Accessories...................... 376,259 333,283 221,433
Manufacturing................................. 125,581 109,541 104,821
-------- -------- --------
$918,036 $782,123 $589,328
-------- -------- --------
-------- -------- --------
</TABLE>
THREE-YEAR NET SALES SUMMARY
Over the last three fiscal years, consolidated net sales increased as
the Company successfully pursued opportunities in the aviation/aerospace
market. The Company has broadened the range of products sold, created and
maintained long-term strategic supply relationships with customers, and
established industry-leading capabilities in inventory asset management
programs. The Company has developed a customized portfolio of value-added
products and services, such as Internet-based electronic commerce tools, to
take advantage of changing market dynamics. Net sales growth during the
three-year period also benefited from acquisitions of new-parts distribution
and aircraft composites manufacturing businesses, as well as an overall
growth in customer base. These factors, coupled with a sustained period of
economic growth and profitability in the worldwide aviation/aerospace market,
resulted in a net sales increase in all three of the Company's classes of
similar products and services over the last three fiscal years.
The Company believes that its established global market position, its
ability to respond to changes in the industry, including technological
changes, and its diverse customer base, position the Company to take
advantage of future opportunities in the aviation/aerospace market.*
* THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE IDENTIFIED WITH AN
ASTERISK (*). PLEASE SEE COMMENTS ON FORWARD-LOOKING STATEMENT RISK FACTORS
IN THE "FORWARD-LOOKING STATEMENTS" SECTION ON PAGE 12 .
8
<PAGE>
FISCAL 1999 COMPARED WITH FISCAL 1998
Consolidated net sales for fiscal 1999 increased 17.4% to $918.0
million from $782.1 million in fiscal 1998. This increase was attributable to
continued strong demand for the Company's broad range of products and
services and, among other things, full-year sales from businesses acquired in
fiscal 1998. Aircraft and Engines sales increased $76,897 or 22.7% resulting
from higher sales of engine parts, driven primarily from strength in
inventory management programs, and increased aircraft sales and leasing
revenues. These increases were partially offset by the impact of certain
engine parts sales which were recorded by Turbine Engine Asset Management
L.L.C. (an unconsolidated joint venture company) during fiscal 1999, but were
recorded by Aircraft and Engines during the first half of fiscal 1998.
Airframe and Accessories sales increased $42,976 or 12.9%, driven primarily
by the impact of full-year sales from the new-parts distribution companies
acquired during fiscal 1998, as well as increased demand for aircraft
maintenance and landing gear overhaul repair capabilities. Manufacturing
sales increased $16,040 or 14.6% due to increased sales of products
supporting the U.S.Government's rapid deployment program, the inclusion of
full-year sales from AAR Composites (acquired in fiscal 1998) and higher
sales of cargo handling systems. These gains were partially offset by the
unfavorable impact of the divestiture of the Company's floor maintenance
products manufacturing subsidiary in November 1998.
Consolidated gross profit increased $24,853 or 16.7% due to increased
consolidated net sales. The fiscal 1999 consolidated gross profit margin of
18.9% is slightly less than the consolidated gross profit margin of 19.0% of
the prior year. Consolidated operating income increased $12,665 or 19.6% over
the prior year on the strength of increased sales, partially offset by
increased selling, general and administrative expenses. Selling, general and
administrative expenses were lower as a percentage of consolidated net sales;
however, total expenses increased due to the impact from companies acquired
during fiscal 1998, as well as increased marketing support and information
technology costs, which include Year 2000 compliance costs. Interest expense
increased $4,073 or 28.1% over the prior year primarily due to the full-year
effect of the $60 million of unsecured 6.875% Notes issued in December 1997.
Consolidated net income increased $6,014 or 16.9% over the prior year as
a result of the above-noted factors.
9
<PAGE>
FISCAL 1998 COMPARED WITH FISCAL 1997
Consolidated net sales increased $192,795 or 32.7% over the prior
fiscal year, reflecting strong demand for the Company's broad range of
products and services and the effect of acquisitions during fiscal 1998.
Acquisitions, net of prior year dispositions, contributed $77,234 to the
sales increase over the prior year. Aircraft and Engines sales increased
$76,225 or 29.0%, resulting from higher sales in its engine and engine parts
businesses, as well as increased aircraft sales. Airframe and Accessories
sales increased $111,850 or 50.5%, driven primarily by sales from the
new-parts distribution companies, which were acquired in fiscal 1998, and
increased demand for the Company's aircraft maintenance and aircraft
component overhaul and repair capabilities. Sales in Manufacturing increased
$4,720 or 4.5%, reflecting increased cargo loading and handling system sales
and the inclusion of sales from ATR (AAR Composites), which was acquired in
October 1997, partially offset by lower sales from products supporting the
U.S. Government's rapid deployment program.
Consolidated gross profit increased $39,865 or 36.7%, due to increased
consolidated net sales and an increase in the consolidated gross profit
margin to 19.0% from 18.4% in the prior year. The increase in the
consolidated gross profit margin during fiscal 1998 reflected the favorable
mix of inventories sold and improved margins in certain manufactured products.
Consolidated operating income increased $21,826 or 50.9% over the prior
fiscal year as a result of the increase in net sales and the higher gross
profit margin, partially offset by increased selling, general and
administrative expenses. Selling, general and administrative expenses were
lower as a percentage of consolidated net sales; however, total expenses
increased principally due to the inclusion of recently acquired companies and
increased personnel costs. Interest expense increased $3,708 or 34.4% over
the prior year, principally due to the impact of the Company's sale of $60
million of unsecured 6.875% Notes in December 1997.
Consolidated net income increased $12,632 or 54.9% over the prior year
as a result of the factors previously discussed.
FISCAL 1997 COMPARED WITH FISCAL 1996
The Company's operating results showed improvement over the prior
fiscal year as it experienced higher demand for its products and services in
a strong aviation/aerospace market. Consolidated net sales increased $84,338
or 16.7% over the prior fiscal year reflecting higher sales in the Company's
Aircraft and Engines and Airframe and Accessories activities. Consolidated
operating income increased $10,448 or 32.2% over the prior year due to
increased consolidated net sales and a higher consolidated gross profit
margin, partially offset by higher selling, general and administrative costs.
Net income increased $7,013 or 43.8%, due to increased consolidated net sales
and gross profit margin.
Aircraft and Engines sales increased $80,845 or 44.4% over the prior
year due to growth in sales of engine parts and engine and aircraft sales and
leasing products. Increased volume through the Company's long-term inventory
management programs contributed to the sales increase in engine parts.
Airframe and Accessories sales increased $18,550 or 9.1%, reflecting
increased demand for certain aircraft and aircraft component repair and
maintenance services and higher airframe parts sales. Sales in Manufacturing
declined $15,057 or 12.6%, resulting from lower demand for products
supporting the U.S. Government's rapid deployment program.
Consolidated gross profit increased $17,776 or 19.6%, due to increased
consolidated net sales and an increase in the consolidated gross profit
margin to 18.4% from 18.0% in the prior year. The increase in the
consolidated gross profit margin during fiscal 1997 was attributable to the
favorable mix of products and services sold through Aircraft and Engines and
Airframe and Accessories activities, partially offset by lower margins on
certain manufactured products due to lower sales volume.
10
<PAGE>
Consolidated operating income increased $10,448 or 32.2% over the prior
year as a result of the increase in consolidated net sales and the higher
consolidated gross profit margin, partially offset by higher selling, general
and administrative costs. The increase in selling, general and administrative
costs was driven by increased personnel and marketing support costs.
Consolidated net income increased $7,013 or 43.8% over the prior year
as a result of the factors discussed above.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1999, the Company's liquidity and capital resources included
cash and cash equivalents of $8,250 and working capital of $334,600. At May
31, 1999, the Company's long-term debt-to-capitalization ratio was 35.7%,
compared to 37.1% at May 31, 1998. The Company continues to maintain its
external sources of financing with $178,800 of unused available bank lines
and a shelf registration statement on file with the Securities and Exchange
Commission under which up to $200 million of common stock, preferred stock or
medium- or long-term debt securities may be issued or sold subject to market
conditions.
During fiscal 1999, the Company generated $28,525 of cash from
operations compared to $22,823 and $9,531 during fiscal 1998 and 1997,
respectively. This was principally attributable to increased net income and
improved working capital management.
During fiscal 1999, the Company's investing activities used $22,893 of
cash primarily composed of $36,131 of property, plant and equipment
expenditures reflecting the Company's continued investment in new information
technology systems and facility expansions; a $6,000 payment made for the
Tempco acquisition, which was acquired in October 1998; and a final payment
of $9,175 for the acquisition of AVSCO, which was acquired in December 1997,
offset by proceeds from the sale of equipment on long-term lease and cash
received from the divestiture of the Company's floor maintenance products
manufacturing subsidiary of $11,685.
During fiscal 1999, the Company's financing activities used $14,602 of
cash, reflecting primarily the payment of cash dividends of $9,375 and the
purchase of $7,558 of the Company's stock, offset by proceeds of an
industrial revenue bond of $2,300.
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.*
A summary of key indicators of financial condition and lines of credit
follows:
<TABLE>
<CAPTION>
MAY 31,
------------------------
DESCRIPTION 1999 1998
----------- ---------- ----------
<S> <C> <C>
Working capital............................................... $334,600 $319,252
Current ratio................................................. 2.9:1 3.1:1
Bank credit lines:
Borrowings outstanding..................................... $ -- $ --
Available but unused lines................................. 178,800 190,970
-------- --------
Total credit lines............................................ $178,800 $190,970
-------- --------
-------- --------
Long-term debt, less current maturities....................... $180,939 $177,509
Ratio of long-term debt to capitalization..................... 35.7% 37.1%
</TABLE>
12
<PAGE>
YEAR 2000
During fiscal 1997, the Company initiated a comprehensive information
technology systems review which resulted in a formal plan to replace and
enhance certain of the Company's business application systems to meet current
operational requirements and provide for future expansion. These replacement
systems are Year 2000 compliant and include new information technology
systems in the Company's new-parts distribution business, all of the
Company's manufacturing facilities and three of the Company's overhaul
facilities.
During the third quarter of fiscal 1999, the Company successfully
completed the implementation of the replacement systems at its manufacturing
facilities. During March 1999, the Company successfully completed the
implementation of the replacement system in its new-parts distribution
business. The capital outlay associated with the successful implementation of
the replacement systems in the manufacturing and new-parts distribution
businesses was $8,700, of which $7,600 was paid during the twelve-month
period ended May 31, 1999.
The Company has expanded and modified its plans to replace the existing
systems at its overhaul facilities to include, among other things, purchasing
new hardware, upgrading the main existing operating system and converting the
existing business application to ensure Year 2000 compliance. The Company
believes that the cost of the new hardware and the cost to upgrade the
existing operating system to provide for Year 2000 compliance for the
overhaul businesses' current systems will be approximately $1,000.*
Additional enhancements, which include the implementation of the new systems,
may continue into the Year 2000, although the Company anticipates that the
business applications supporting the three overhaul facilities will be Year
2000 compliant by October 1999.*
In addition to the above, the Company has conducted an extensive Year
2000 compliance review of its internal systems which are not being replaced.
Based on this study and program testing, the Company believes that the
business applications supporting the Company's trading businesses and certain
other overhaul businesses are Year 2000 compliant.* In addition, the Company
believes that its existing major financial applications are Year 2000
compliant, although the Company is in the process of upgrading its major
financial applications to the most recent version.*
In addition to the cost of the business application systems being
implemented or enhanced to meet operational requirements, the Company expects
to incur other Year 2000 compliance costs unrelated to the replacement
systems referenced above. The Company has numerous local-area networks,
wide-area networks, servers, voice mail systems and other technical support
systems (the "sub-systems"). The Company has completed an inventory of the
sub-systems, as well as the compliance status of the sub-systems, and
believes that approximately 95% of the sub-systems are Year 2000 compliant.*
The Company expects the remaining sub-systems will be Year 2000 compliant by
September 30, 1999 at a cost of less than $100.*
- -----------------
* See "Forward Looking Statements" section of this item.
13
<PAGE>
YEAR 2000 (CONTINUED)
As part of its continuing review, the Company has communicated with its
material vendors, customers and suppliers regarding their Year 2000
compliance. While the Company is aggressively addressing the Year 2000 issue
internally, the compliance status of third parties with which the Company has
material relationships is presently unknown and the failure of third parties
to be compliant could potentially have an adverse effect on the Company's
operations.* The Company believes that the Year 2000 compliance failure of a
significant third-party supplier or customer is the most reasonably likely
worst case scenario for a Year 2000 failure.* As compliance risks become
known for significant third parties, contingency plans will be developed
accordingly.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and Results
of Operations contains certain statements relating to future results, which
are forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995 and are identified by an
asterisk(*). These forward-looking statements are based on beliefs of Company
management, as well as assumptions and estimates based on information
currently available to the Company, and are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated, depending on a variety of factors,
including: integration of acquisitions; marketplace competition;
implementation of Year 2000 compliant information technology systems and
system enhancements; unidentified Year 2000 problems; failure of a
third-party supplier, service provider or customer to be Year 2000 compliant;
economic and aviation/aerospace market stability and Company profitability.
Should one or more of these risks or uncertainties materialize adversely, or
should underlying assumptions or estimates prove incorrect, actual results
may vary materially from those described.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is limited to fluctuating
interest rates under its unsecured bank credit agreements, and foreign
exchange rates. During fiscal 1999 and 1998, the Company did not utilize
derivative financial instruments to offset these risks.
At May 31, 1999, $65,300 was available under credit lines with domestic
banks, $110,000 was available under revolving credit and term loan agreements
with domestic banks, and $3,500 was available under credit agreements with
foreign banks (credit facilities). Interest on amounts borrowed under the
credit facilities is based on an overnight bid rate. While the Company
utilized these credit facilities during fiscal 1999, as of May 31, 1999,
there was no outstanding balance. A hypothetical 10 percent increase to the
average interest rate under the credit facilities would not have had a
material impact on the results of operations for the Company during fiscal
1999.
Revenues and expenses of the Company's foreign operations in The
Netherlands are translated at average exchange rates during the year and
balance sheet accounts are translated at year-end exchange rates. Balance
sheet translation adjustments are excluded from the results of operations and
are recorded in stockholders' equity as a component of accumulated other
comprehensive income (loss). A hypothetical 10 percent devaluation of foreign
currencies against the U.S. dollar would not have a material impact on the
financial position or results of operations of the Company.
- -----------------
* See "Forward Looking Statements" section of this item.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year
period ended May 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
June 23, 1999
15
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(000S OMITTED EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................................ $918,036 $782,123 $589,328
-------- -------- --------
Costs and operating expenses:
Cost of sales.................................................. 744,777 633,717 480,787
Selling, general and administrative............................ 95,878 83,690 65,651
-------- -------- --------
840,655 717,407 546,438
-------- -------- --------
Operating income..................................................... 77,381 64,716 42,890
Interest expense..................................................... (18,567) (14,494) (10,786)
Interest income...................................................... 972 935 871
-------- -------- --------
Income before provision for income taxes............................. 59,786 51,157 32,975
Provision for income taxes........................................... 18,115 15,500 9,950
-------- -------- --------
Net income........................................................... $ 41,671 $ 35,657 $ 23,025
-------- -------- --------
-------- -------- --------
Earnings per share of common stock - basic........................... $ 1.51 $ 1.29 $ .92
-------- -------- --------
-------- -------- --------
Earnings per share of common stock - diluted......................... $ 1.49 $ 1.27 $ .91
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1999 1998
---------- ----------
(000S OMITTED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................................. $ 8,250 $ 17,222
Accounts receivable........................................................................ 164,302 163,359
Inventories................................................................................ 270,654 229,930
Equipment on or available for short-term leases............................................ 33,845 33,495
Deferred tax assets, deposits and other.................................................... 31,135 24,394
-------- --------
Total current assets.......................................................................... 508,186 468,400
-------- --------
Property, plant and equipment, at cost:
Land....................................................................................... 6,331 6,181
Buildings and improvements................................................................. 66,123 57,388
Equipment, furniture and fixtures.......................................................... 111,718 92,142
-------- --------
184,172 155,711
Accumulated depreciation...................................................................... (80,160) (72,806)
-------- --------
104,012 82,905
-------- --------
Other assets:
Investment in leveraged leases............................................................. 34,053 36,533
Equipment on long-term leases.............................................................. -- 24,611
Cost in excess of underlying net assets of acquired companies, net......................... 40,093 26,565
Other...................................................................................... 40,286 31,545
-------- --------
114,432 119,254
-------- --------
$726,630 $670,559
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
17
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MAY 31,
----------------------------
1999 1998
---------- ----------
(000S OMITTED)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt................................................. $ 420 $ 237
Accounts and trade notes payable..................................................... 129,703 112,980
Accrued liabilities.................................................................. 36,803 29,614
Accrued taxes on income.............................................................. 6,660 6,317
-------- --------
Total current liabilities............................................................... 173,586 149,148
-------- --------
Long-term debt, less current maturities................................................. 180,939 177,509
Deferred tax liabilities................................................................ 44,870 36,850
Other liabilities....................................................................... -- 1,699
Retirement benefit obligation .......................................................... 1,200 4,503
-------- --------
227,009 220,561
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares; none issued
Common stock, $1.00 par value, authorized 80,000 shares; issued
28,998 and 28,832, respectively.................................................. . 28,998 28,832
Capital surplus...................................................................... 144,095 140,898
Retained earnings.................................................................... 184,529 152,233
Treasury stock, 1,617 and 1,128 shares at cost, respectively......................... (25,463) (16,470)
Accumulated other comprehensive income (loss) -
cumulative translation adjustments................................................. (6,124) (4,643)
-------- --------
326,035 300,850
-------- --------
$726,630 $670,559
-------- --------
-------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
18
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MAY 31, 1999
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER
---------------- --------------- CAPITAL RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) INCOME (LOSS)
------ ------ ------ ------ ------- -------- ------------- -------------
(000S OMITTED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 31, 1996 ..................... 16,404 $16,404 406 $ (5,285) $ 83,975 $110,645 $(1,104)
Net income ............................... -- -- -- -- -- 23,025 -- $23,025
Cash dividends ........................... -- -- -- -- -- (7,976) -- --
Issuance of common stock ................. 2,000 2,000 -- -- 48,075 -- -- --
Treasury stock ........................... -- -- 322 (8,080) -- -- -- --
Exercise of stock options and
stock awards ........................... 528 528 -- -- 8,966 -- -- --
Adjustment for net translation loss ...... (1,914) (1,914)
-------
Comprehensive income for fiscal 1997 .... -- -- -- -- -- -- -- $21,111
------ ------- ----- -------- -------- -------- ------- -------
Balance, May 31, 1997 ..................... 18,932 $18,932 728 $(13,365) $141,016 $125,694 $(3,018) --
Net income ............................... -- -- -- -- -- 35,657 -- $35,657
Cash dividends ........................... -- -- -- -- -- (9,118) -- --
Issuance of common stock ................. -- -- (93) 1,699 1,158 --
Treasury stock ........................... -- -- 126 (4,804) -- -- -- --
Three-for-two stock split ................ 9,589 9,589 367 -- (9,589)
Exercise of stock options and
stock awards ........................... 311 311 -- -- 8,313
Adjustment for net translation loss ...... -- -- -- -- -- -- (1,625) (1,625)
-------
Comprehensive income for fiscal 1998 ..... $34,032
------ ------- ----- -------- -------- -------- ------- -------
Balance, May 31, 1998 ..................... 28,832 $28,832 1,128 $(16,470) $140,898 $152,233 $(4,643)
Net income ............................... -- -- -- -- -- 41,671 -- $41,671
Cash dividends ........................... -- -- -- -- -- (9,375) -- --
Treasury stock ........................... -- -- 489 (8,993) -- -- -- --
Exercise of stock options and
stock awards ........................... 166 166 -- -- 3,197 -- -- --
Adjustment for net translation loss ...... -- -- -- -- -- -- (1,481) (1,481)
-------
Comprehensive income for fiscal 1999 .... $40,190
------ ------- ----- -------- -------- -------- ------- -------
Balance, May 31, 1999 ..................... 28,998 $28,998 1,617 $(25,463) $144,095 $184,529 $(6,124)
------ ------- ----- -------- -------- -------- ------- -------
------ ------- ----- -------- -------- -------- ------- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
19
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------------
1999 1998 1997
---- ---- ----
(000S OMITTED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................. $ 41,671 $ 35,657 $ 23,025
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization..................................... 17,063 14,283 12,287
Deferred taxes.................................................... 10,970 3,780 (80)
Change in certain assets and liabilities:
Accounts receivable............................................ (6,991) (14,922) (16,333)
Inventories.................................................... (46,212) (34,706) (35,930)
Equipment on or available for short-term leases................ 3,214 6,664 (3,808)
Accounts and trade notes payable............................... 24,659 2,730 25,637
Accrued liabilities and taxes on income........................ (3,933) 16,936 5,935
Other.......................................................... (11,916) (7,599) (1,202)
-------- -------- --------
Net cash provided from operating activities......................... 28,525 22,823 9,531
-------- -------- --------
Cash flows from investing activities:
Property, plant and equipment expenditures, net........................ (36,131) (17,495) (30,292)
Acquisitions, less cash acquired....................................... (15,175) (28,148) --
Proceeds from sale of business......................................... 11,685 -- --
Investment in equipment on long-term leases and leveraged leases....... 23,369 (33,538) 3,299
Notes receivable and other............................................. (6,641) (19,948) (4,975)
-------- -------- --------
Net cash used in investing activities............................... (22,893) (99,129) (31,968)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term notes payable...................... -- 59,347 --
Change in borrowings................................................... 2,053 (10,170) (1,474)
Cash dividends......................................................... (9,375) (9,118) (7,976)
Purchases of treasury stock............................................ (7,558) -- (1,165)
Proceeds from exercise of stock options and other...................... 278 1,642 1,191
Proceeds from common stock offering.................................... -- -- 50,075
-------- -------- --------
Net cash provided from (used in) financing activities............... (14,602) 41,701 40,651
-------- -------- --------
Effect of exchange rate changes on cash................................... (2) 122 (115)
-------- -------- --------
Increase (decrease) in cash and cash equivalents.......................... (8,972) (34,483) 18,099
Cash and cash equivalents, beginning of year.............................. 17,222 51,705 33,606
-------- -------- --------
Cash and cash equivalents, end of year.................................... $ 8,250 $ 17,222 $ 51,705
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
20
<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. (the Company) supplies a variety of products and services to
the worldwide aviation/aerospace industry. 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 agencies 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.
The Company conducts portions of its business through joint venture
investments accounted for under the equity method. These equity affiliates
are primarily engaged in the distribution of certain engine parts and
aircraft rotable spares to worldwide aviation customers. The financial
position and results of operations for the joint ventures during fiscal 1999
and 1998 are not material.
REVENUE RECOGNITION
Sales and related cost of sales are recognized primarily upon shipment
of products and performance of services. Lease revenue is recognized as
earned.
NEW ACCOUNTING STANDARDS
FASB Statement of Financial Accounting Standards (SFAS) No. 130
"Reporting Comprehensive Income" is effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company adopted the provisions of
SFAS No. 130 in fiscal 1999.
21
<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 (CONTINUED)
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 establishes standards for public companies to report financial
and descriptive information about reportable operating segments in annual
financial statements and interim financial reports issued to stockholders.
The Company operates in one segment: Aviation Services. The Company's
determination of its reportable segment is based on the commonalities among
the products and services within its Aviation Services segment, and is
consistent with the manner in which the Company's management reviews and
evaluates operating performance.
SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits" is effective for fiscal years beginning after
December 15, 1997. SFAS No. 132 revises disclosures for pension and other
postretirement plans, but does not change the measurement or recognition of
liabilities or expense related to pension or other postretirement plans. The
Company adopted the provisions of SFAS No. 132 in fiscal 1999.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accounts (ACSEC) issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." In April 1998, the ACSEC issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities." The adoption of SOP 98-1 and
SOP 98-5 did not have a material effect on the Company's financial position
or results of operations during fiscal 1999.
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" is effective for fiscal years beginning after June 15, 2000. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and for certain hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company
is evaluating the new Statement's provisions to determine the impact, if any,
and will adopt SFAS No. 133 in its first quarter of fiscal 2002.
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, 1999 and 1998, cash
equivalents of approximately $116 and $177, respectively, 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, 1999 and 1998, respectively.
TRANSFER OF FINANCIAL ASSETS
During fiscal 1998, the Company adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", which requires the Company to recognize the financial and
servicing assets it controls and the liabilities it has incurred, and to
derecognize financial assets when control has been surrendered.
During fiscal 1999, the Company amended its agreement to sell, on a
revolving basis, an interest in a defined pool of trade accounts receivable.
Among the terms amended, the amount of accounts receivable which could be
sold under the program was reduced from $50 million to $35 million. The
Company, as agent for the purchaser of the accounts receivable, retains
collection and administrative responsibilities for the participating
interests of accounts receivable. Accounts receivable sold under this
arrangement were $25,300 and $0 at May 31, 1999 and 1998, respectively.
22
<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)
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 a component of
accumulated other comprehensive income (loss).
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 trade
receivables. While the Company's trade receivables are diverse based on the
number of entities and geographic regions, the majority are in the
aviation/aerospace 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, and/or 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 consolidated financial
statements at fair value because of the short-term maturity of these
instruments. The carrying value of noncurrent notes receivable and long-term
debt bearing a variable interest rate approximates fair market value.
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.
The following is a summary of inventories:
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
1999 1998
--------------- ------------
<S> <C> <C>
Raw materials and parts............................................. $ 50,352 $ 46,573
Work-in-process..................................................... 12,733 15,787
Purchased aircraft, parts, engines and components
held for sale..................................................... 207,569 166,140
Finished goods...................................................... -- 1,430
-------- --------
$270,654 $229,930
-------- --------
-------- --------
</TABLE>
23
<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 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 less than
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 customers' immediate short-term
requirements. The leases are renewable with fixed terms, which generally vary
from one to twelve months. Equipment on long-term lease consists of aircraft
and engines on lease to customers with a lease term greater than twelve
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 and capitalized software. Leasehold improvements are
amortized over the shorter of 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 are 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 financed
by third parties 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 acquired companies is
being amortized over a period of forty years. The increase in cost in excess
of underlying net assets of acquired companies at May 31, 1999 is
attributable to the Company's acquisition of Tempco during fiscal 1999, as
well as final purchase price adjustments related to acquisitions made during
fiscal 1998. Amortization expense was $802, $565 and $223 in fiscal 1999,
1998 and 1997, respectively. Accumulated amortization is $4,975 and $4,173 at
May 31, 1999 and 1998, respectively. The Company evaluates the existence of
impairment on the basis of whether the cost in excess of underlying net
assets of acquired companies is fully recoverable from projected,
undiscounted net cash flows.
24
<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)
INCOME TAXES
Income taxes are determined in accordance with SFAS No. 109.
The benefits of investment tax credits are recognized for financial
reporting purposes under the deferral method of accounting for leveraged
leases. The investment tax credits are recognized in the year earned for
income tax purposes.
STATEMENTS OF CASH FLOWS
Supplemental information on cash flows follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid............................................. $18,800 $11,600 $10,500
Income taxes paid......................................... 4,400 6,200 8,600
Income tax refunds and interest received.................. 900 6,000 500
</TABLE>
USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
RECLASSIFICATION
Certain amounts in the prior years' consolidated financial statements
have been reclassified to conform to the current year's presentation.
25
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
2. FINANCING ARRANGEMENTS
Term loans consisted of:
<TABLE>
<CAPTION>
MAY 31,
-----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current maturities of long-term debt.......................... $ 420 $ 237 $ 1,474
----- ----- -------
----- ----- -------
</TABLE>
Short-term borrowing activity was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Maximum amount borrowed..................................... $92,300 $59,200 $25,300
Average daily borrowings.................................... 45,455 20,689 3,624
Average interest rate during the year....................... 5.4% 6.0% 5.8%
------- ------- -------
</TABLE>
At May 31, 1999, aggregate unsecured bank credit arrangements were
$178,800. Of this amount, $65,300 was available under credit lines with
domestic banks, $110,000 was available under revolving credit and term loan
agreements with domestic banks and $3,500 was available under credit
agreements with foreign banks. All domestic and foreign credit lines were
unused at May 31, 1999. 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 $110,000 (available through
February 9, 2002) 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, 1999. 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.
26
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
2. FINANCING ARRANGEMENTS -- (CONTINUED)
Long-term debt was as follows:
<TABLE>
MAY 31,
--------------------------
1999 1998
---------- ----------
<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
Notes payable due December 15, 2007 with interest of 6.875%
payable semi-annually on June 15 and December 15............................... 60,000 60,000
Industrial revenue bonds due in quarterly installments to 2011 with weighted
average interest of approximately 3.45% at May 31, 1999 (secured by trust
indentures on property, plant and equipment)................................... 2,358 2,543
Industrial revenue bonds due in installments to 2002 with
weighted average interest of approximately 6.62% at May 31, 1999 (secured by
trust indentures on property, plant and equipment)............................. 141 203
Industrial revenue bonds due in monthly installments to 2019 with interest of
5.65% (secured by trust indentures on property, plant and
equipment)..................................................................... 2,235 --
Note payable due in annual installments to October 2003 with
interest of 6.5%............................................................... 1,625 --
-------- --------
181,359 177,746
Current maturities.............................................................. (420) (237)
-------- --------
$180,939 $177,509
-------- --------
-------- --------
</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, 1999,
unrestricted consolidated retained earnings available for payment of
dividends and purchase of the Company's shares was approximately $18,482.
Effective June 1, 1999, unrestricted consolidated retained earnings increased
to $39,318 due to inclusion of 50% of the consolidated net income of the
Company for fiscal 1999. The aggregate amount of long-term debt maturing
during each of the next five fiscal years is $521 in 2000, $524 in 2001,
$65,499 in 2002, $475 in 2003 and $51,479 in 2004. The Company's long-term
debt was estimated to have a fair value of approximately $185,639 at May 31,
1999 and was based on estimates using discounted future cash flows at an
assumed rate for borrowings currently prevailing in the marketplace for
similar instruments.
27
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES
The provision for income taxes included the following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
------------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Current
Federal.............................................. $ 6,045 $ 9,950 $ 8,605
Foreign............................................. -- 720 535
State............................................... 1,100 1,050 890
------- ------- -------
$ 7,145 $11,720 $10,030
Deferred................................................. 10,970 3,780 (80)
------- ------- -------
$18,115 $15,500 $ 9,950
------- ------- -------
------- ------- -------
</TABLE>
The deferred tax provisions result primarily from differences between
financial reporting and tax income arising from depreciation and leveraged
leases.
Deferred tax liabilities and assets result primarily from the
differences in the timing of the recognition for transactions between
financial reporting and income tax purposes and consist of the following
components:
<TABLE>
<CAPTION>
MAY 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation............................................... $16,920 $ 9,770
Leveraged leases........................................... 27,440 26,980
Other...................................................... 620 300
------- -------
Total deferred tax liabilities............................. $44,980 $37,050
------- -------
------- -------
Deferred tax assets-current:
Inventory costs............................................ $ 3,090 $ 5,420
Employee benefits.......................................... 2,410 2,540
Doubtful account allowance................................. -- 130
Other...................................................... 390 750
------- -------
Total deferred tax assets-current.......................... $ 5,890 $ 8,840
------- -------
Deferred tax assets-noncurrent:
Postretirement benefits.................................... $ 110 $ 200
------- -------
Total deferred tax assets-noncurrent....................... 110 200
------- -------
Total deferred tax assets.................................. $ 6,000 $ 9,040
------- -------
------- -------
Net deferred tax liabilities................................... $38,980 $28,010
------- -------
------- -------
</TABLE>
28
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES -- (CONTINUED)
The Company has determined that the realization of deferred tax assets
is more likely than not, and 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. Federal statutory income tax rate of 35% for fiscal 1999,
1998 and 1997, for the following reasons:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Provision for income taxes at the Federal statutory rate................ $20,925 $17,905 $11,540
Tax benefits on exempt earnings from export sales..................... (3,690) (3,100) (2,000)
State income taxes, net of Federal benefit and refunds................ 900 900 800
Amortization of goodwill.............................................. 280 200 80
Differences between foreign tax rates and the U.S. Federal
statutory rate...................................................... -- (200) (200)
Other, net............................................................ (300) (205) (270)
------- ------- -------
Provision for income taxes as reported.................................. $18,115 $15,500 $ 9,950
------- ------- -------
------- ------- -------
Effective income tax rate................................................ 30.3% 30.3% 30.2%
------- ------- -------
------- ------- -------
</TABLE>
4. COMMON STOCK AND STOCK OPTION PLANS
The Company has established stock option plans for officers and key
employees of the Company. Stock option awards typically expire ten years from
the date of grant or earlier upon termination of employment, become
excercisable in five equal increments on successive grant anniversary dates
at the New York Stock Exchange closing stock price on the date of grant and
are accompanied by reload features and, for certain individuals, stock rights
exercisable in the event of a change in control of the Company.
The Company accounts for these plans under APB No. 25, under which no
compensation cost has been recognized. Proforma information regarding net
income and earnings per share is required by SFAS No. 123 and has been
determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123. The fair value of each option
grant, including reloads, is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
STOCK OPTIONS GRANTED
IN FISCAL YEAR
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate.................................................... 5.74% 5.97% 6.40%
Expected volatility of common stock........................................ 31.6% 25.5% 24.0%
Dividend yield............................................................. 1.8% 2.0% 2.4%
Expected option term in years.............................................. 4.0 4.0 3.6
</TABLE>
The fair value weighted average per share of stock options granted during
fiscal years 1999, 1998 and 1997 was $5.20, $5.04 and $4.57, respectively.
Had compensation cost for stock options awarded under the plans been
determined in accordance with SFAS No. 123, the Company's net income and
earnings per share would have been changed to the following proforma amounts:
29
<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)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net income: As reported $41,671 $35,657 $23,025
Proforma 40,403 34,478 22,158
Earnings per share - basic: As reported 1.51 1.29 .92
Proforma 1.47 1.25 .89
Earnings per share - diluted: As reported 1.49 1.27 .91
Proforma 1.44 1.22 .87
</TABLE>
A summary of changes in stock options granted to officers, key
employees and non-employee directors under stock option plans for the three
years ended May 31, 1999 follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------------- ------------------
<S> <C> <C>
Outstanding, May 31, 1996 (745 exercisable).......................... 1,711 $ 9.45
Granted........................................................ 935 15.50
Exercised...................................................... (624) 8.79
Surrendered/expired/cancelled.................................. (44) 11.19
-----
Outstanding, May 31, 1997 (664 exercisable).......................... 1,978 $12.48
Granted........................................................ 891 23.57
Exercised...................................................... (339) 11.32
Surrendered/expired/cancelled.................................. (46) 16.17
-----
Outstanding, May 31, 1998 (785 exercisable).......................... 2,484 $16.54
Granted........................................................ 827 19.41
Exercised...................................................... (71) 11.95
Surrendered/expired/cancelled.................................. (64) 18.53
-----
Outstanding, May 31, 1999 (1,148 exercisable)........................ 3,176 $17.36
-----
-----
</TABLE>
The following table provides additional information regarding options
outstanding as of May 31,1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
OPTION EXERCISE OPTIONS REMAINING CONTRACTUAL OPTIONS EXERCISE PRICE OF
PRICE RANGE OUTSTANDING LIFE OF OPTIONS (YEARS) EXERCISABLE OPTIONS EXERCISABLE
--------------------- ------------- ----------------------- ----------------- --------------------
<S> <C> <C> <C> <C>
$ 6.13 - 12.25 727 5.1 517 $ 9.55
$12.26 - 18.38 1,332 7.7 402 15.33
$18.39 - 24.50 1,033 8.3 155 22.39
$24.51 - 30.63 84 5.6 74 27.05
------ -----
3,176 7.3 1,148 $14.43
------ -----
------ -----
</TABLE>
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 vesting
period. The expense relating to outstanding restricted stock awards was
$1,667, $1,400 and $1,054 in fiscal 1999, 1998 and 1997, respectively.
30
<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 AAR CORP. Employee Stock Purchase Plan is open to employees of the
Company (other than officers, directors or participants in other stock option
plans of the Company) and permits employees to purchase common stock in
periodic offerings by payroll deductions.
The numbers of options and awards outstanding and available for grant
or issuance for each of the Company's stock plans are as follows:
<TABLE>
<CAPTION>
MAY 31, 1999
-----------------------------------------
OUTSTANDING AVAILABLE TOTAL
--------------- ------------- ---------
<S> <C> <C> <C>
Stock Benefit Plan (officers, directors and key
employees)...................................................... 3,544 1,107 4,651
Employee Stock Purchase Plan........................................ 67 115 182
</TABLE>
Pursuant to a shareholder rights plan adopted in 1997, each outstanding
share of the Company's common stock carries with it a Right to purchase one
and one half additional shares at a price of $83.33 per share (adjusted to
reflect the February 23, 1998 stock split and subject to further antidilution
adjustments). The Rights become exercisable (and separate from the shares)
when certain specified events occur, including the acquisition of 15% or more
of the common stock by a person or group (an "Acquiring Person") or the
commencement of a tender or exchange offer for 15% or more of the common
stock.
In the event that an Acquiring Person acquires 15% 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 $83.33 per share, (or the then-current exercise price) shares of
the Company's common stock having a market value of $166.66 (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, replace the common stock purchase rights which were
initially distributed to the Company's shareholders in 1987 and which expired
by their own terms on August 6, 1997. The Rights will expire on August 6,
2007, 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 1,500 shares (adjusted for the three-for-two stock split) of
the Company's common stock on the open market or through privately negotiated
transactions. As of May 31, 1999, the Company had purchased 1,083 shares of
its common stock on the open market under this program at an average price of
$12.46 per share.
31
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
5. EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding during the year. Diluted earnings
per share is based on the weighted average number of common shares
outstanding during the year plus, when their effect is dilutive, common stock
equivalents consisting of shares subject to stock options. The following
table provides a reconciliation of the computations of basic and diluted
earnings per share information for each of the years in the three-year period
ended May 31, 1999.
<TABLE>
<CAPTION>
MAY 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
BASIC EPS
Net income ........................................................ $41,671 $35,657 $23,025
Average common shares outstanding ................................. 27,549 27,588 25,026
Earnings per share-basic .......................................... $ 1.51 $ 1.29 $ 0.92
------- ------- -------
------- ------- -------
DILUTED EPS
Net Income ........................................................ $41,671 $35,657 $23,025
Average common shares outstanding ................................. 27,549 27,588 25,026
Additional shares due to hypothetical
exercise of stock options ....................................... 457 586 373
Earnings per share-diluted ........................................ $ 1.49 $ 1.27 $ 0.91
------- ------- -------
------- ------- -------
</TABLE>
In January 1998, the Board of Directors declared a three-for-two stock
split which was effected in the form of a stock dividend on February 23, 1998
to shareholders of record February 2, 1998, and a quarterly cash dividend of
8.5 cents per share on the increased shares, which effectively increased the
cash dividend payment by 6.25%. Prior year earnings per share amounts have
been restated to reflect the three-for-two stock split.
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.
DEFINED BENEFIT PLANS
The pension plans for domestic, salaried employees have benefit
formulas primarily based 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" and SFAS No. 132 "Employer's Disclosures about
Pension and Other Postretirement Benefits" for all pension and postretirement
plans.
32
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
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, including the
change in plan assets, and the amount recognized in the Company's
Consolidated Balance Sheets.
<TABLE>
<CAPTION>
MAY 31
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year........................ $46,384 $38,340
Service cost................................................... 2,315 1,643
Interest cost.................................................. 3,334 3,011
Plan participants' contributions............................... 171 170
Net actuarial (gain)loss....................................... (25) 4,852
Benefits paid.................................................. (1,850) (1,632)
Other.......................................................... (175) --
------- -------
Benefit obligation at end of year.................................. 50,154 46,384
------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year................ 42,286 35,452
Actual return on plan assets.................................. 2,725 5,324
Employer contributions........................................ 764 2,972
Plan participants' contributions.............................. 171 170
Benefits paid................................................. (1,850) (1,632)
------- -------
Fair value of plan assets at end of year........................... 44,096 42,286
------- -------
Funded status................................................. (6,058) (4,098)
Unrecognized actuarial losses................................. 6,904 6,807
Unrecognized prior service cost............................... 966 1,103
Unrecognized transitional obligation.......................... 521 618
------- -------
Prepaid pension costs.............................................. $ 2,333 $ 4,430
------- -------
------- -------
</TABLE>
33
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
The projected benefit obligation for domestic plans is determined using
an assumed weighted average discount rate of 7.5% for fiscal 1999 and 1998,
and an assumed average compensation increase of 5.0%. The expected long-term
rate of return on assets is 10.0% for fiscal 1999 and 1998. The unrecognized
actuarial losses, 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 5.5% for fiscal 1999 and
1998, and an assumed average compensation increase of 2.0% for the first two
years and 4.0% thereafter. The expected long-term rate of return on assets is
6.5% for fiscal 1999 and 1998.
Pension expense charged to results of operations includes the following
components:
<TABLE>
<CAPTION>
MAY 31
----------------------------------
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Service cost .................................................... $ 2,315 $ 1,643 $ 1,455
Interest cost ................................................... 3,334 3,011 2,785
Expected return on plan assets .................................. (3,560) (3,165) (2,904)
Amortization of prior service cost .............................. 138 138 138
Recognized net actuarial loss ................................... 412 173 181
Transitional obligation ......................................... 92 93 92
------- ------- -------
$ 2,731 $ 1,893 $ 1,747
------- ------- -------
------- ------- -------
</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 on a pro-rata
basis in Company contributions during the first three years of employment.
Expense charged to results of operations was $1,491, $1,174 and $930 in
fiscal 1999, 1998 and 1997, 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 paid quarterly in cash 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.
34
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
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 $1,162, $1,231 and $970
in fiscal 1999, 1998 and 1997, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health and life insurance benefits for certain
eligible employees and retirees under a variety of plans. Generally these
benefits are contributory with retiree contributions adjusted annually. The
postretirement plans are unfunded and the Company has the right to modify or
terminate any of these plans in the future, in certain cases, subject to
union bargaining agreements. 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.
Postretirement benefit cost for the years ended May 31, 1999, 1998 and
1997 included the following components:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost ........................................................ $-- $-- $--
Interest cost ....................................................... 96 89 85
--- --- ---
$96 $89 $85
--- --- ---
--- --- ---
The funded status of the plans at May 31, 1999 and 1998 was as follows:
1999 1998
------ ------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at beginning of year ......................... $1,354 $1,138
Interest cost .................................................... 96 89
Benefits paid .................................................... (240) (216)
Unrecognized actuarial loss ...................................... 108 214
Plan participants' contributions ................................. 145 129
------ ------
Benefit obligation at end of year ................................... 1,463 1,354
------ ------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ................... -- --
Company contributions ............................................ 95 87
Benefits paid .................................................... (240) (216)
Plan participants' contributions ................................. 145 129
------ ------
Fair value of plan assets at end of year ............................ -- --
------ ------
</TABLE>
35
<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 (CONTINUED)
<TABLE>
<S> <C> <C>
Funded status ............................................................... $(1,463) $(1,354)
Unrecognized actuarial (gains)losses ........................................ 53 (72)
Unrecognized prior service cost ............................................. 210 226
------- -------
Accrued postretirement costs .................................................. $(1,200) $(1,200)
------- -------
------- -------
</TABLE>
The assumed discount rate used to measure the accumulated
postretirement benefit obligation was 7.5% at May 31, 1999 and 1998. The
assumed rate of future increases in healthcare costs was 7.5% and 8.1% in
fiscal 1999 and 1998, respectively, declining to 5.25% by the year 2004 and
remaining at that rate thereafter. A one percent increase in the assumed
healthcare cost trend rate would increase the accumulated postretirement
benefit obligation by approximately $43 as of May 31, 1999 and would not
result in a significant change to the annual postretirement benefit expense.
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 $9,843, $6,991 and $6,660 in fiscal 1999, 1998 and 1997, respectively.
Future minimum payments under leases with initial or remaining terms of
one year or more at May 31, 1999 were $11,222 for fiscal 2000, $3,526 for
fiscal 2001, $2,836 for fiscal 2002, $1,925 for fiscal 2003 and $2,298 for
fiscal 2004 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 or other
business requirements. The total of these instruments outstanding at May 31,
1999 was approximately $22,700.
The Company is involved in various claims and legal actions, including
environmental matters, 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 or results of operations.
36
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
8. INVESTMENT IN LEVERAGED LEASES
From time to time, the Company acquires aircraft under lease that
qualify for leveraged lease accounting treatment. Typically, these are
long-term leases of late-model aircraft operated by major carriers where the
Company is an equity participant of at least twenty percent and there is a
third-party provider of nonrecourse debt of the remaining equipment cost.
During the lease term the Company is required, in accordance with SFAS
No. 13, to adjust the elements of the investment in leveraged leases to
reflect changes in important economic assumptions, such as the renegotiating
of the interest rate on the nonrecourse debt or changes in income tax rates.
In addition, the Company may sell options or other rights to the residual
proceeds over the book value at the end of the lease term.
The Company's net investment in leveraged leases is comprised of the
following elements:
<TABLE>
<CAPTION> FOR THE YEAR ENDED
MAY 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Rentals receivable (net of principal and interest on
the nonrecourse debt)..................................... $ 15,681 $ 25,889
Estimated residual value of leased assets.................... 32,952 33,952
Unearned and deferred income................................. (14,580) (23,308)
-------- --------
34,053 36,533
Deferred taxes............................................... (27,440) (26,980)
-------- --------
Net investment in leveraged leases........................... $ 6,613 $ 9,553
-------- --------
-------- --------
</TABLE>
Pretax income from leveraged leases was $702, $1,329 and $0 in fiscal
1999, 1998 and1997, respectively.
9. OTHER NONCURRENT ASSETS
At May 31, 1999 and 1998, other noncurrent assets consisted of the
following:
<TABLE>
<CAPTION>
MAY 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Investment in joint ventures................................. $18,509 $13,805
Notes receivable............................................. 7,130 3,676
Prepaid pension costs........................................ 2,333 4,430
Cash surrender value of life insurance....................... 1,884 986
Debt issuance costs.......................................... 1,028 1,296
Other........................................................ 9,402 7,352
------- -------
$40,286 $31,545
------- -------
------- -------
</TABLE>
37
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
10. ACQUISITIONS
On October 19, 1998, the Company acquired substantially all of the
assets and assumed certain liabilities of Tempco Hydraulics Inc. (Tempco), a
regional aircraft landing gear repair and overhaul business. The purchase
price of approximately $7.5 million was paid with a combination of cash and a
note. The transaction was recorded under the purchase method of accounting.
The Company has included in its consolidated financial statements the results
of operations of Tempco since the date of acquisition.
On December 31, 1997, the Company acquired substantially all of the
assets and assumed certain liabilities of AVSCO Aviation Service Corporation
(AVSCO), a distributor of factory-new parts and accessories to the
commercial, regional/commuter and general aviation markets. The purchase
price of approximately $18.4 million was paid with a combination of cash and
a note and the transaction was recorded under the purchase method of
accounting. The Company has included in its consolidated financial statements
the results of operations of AVSCO since the date of acquisition.
On October 24, 1997, the Company purchased the stock of ATR
International, Inc. (ATR), a company which engineers and manufactures
composite parts and structures for the aviation/aerospace industry. The
Company acquired ATR for approximately $19 million cash and the transaction
was recorded under the purchase method of accounting. The Company has
included in its consolidated financial statements the results of operations
of ATR since the date of acquisition.
On June 2, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Cooper Aviation Industries, Inc. (Cooper),
a distributor of factory-new aviation parts and accessories to the
commercial, regional/commuter and general aviation markets. The purchase
price was paid by issuing 140 thousand common shares (adjusted for the
three-for-two stock split) and was recorded under the purchase method of
accounting. In addition, the Company assumed short-term debt which was paid
off by the Company during the first quarter of fiscal 1998. The Company has
included in its consolidated financial statements the results of operations
of Cooper since the date of acquisition.
The historical operating results of the acquisitions for the periods
preceding the acquisitions are not material when compared to the operating
results of the Company.
11. BUSINESS SEGMENT INFORMATION
The carrying value of long-lived assets in Company facilities located
in foreign countries, and sales from these facilities in total, are not
material to the consolidated financial statements.
Export sales from the Company's U.S. operations to unaffiliated
customers, the majority of which are located in Europe, the Middle East,
Canada, Mexico, South America and Asia (including sales through foreign sales
offices of domestic subsidiaries), were approximately $209,712 (22.8% of
total net sales), $202,481 (25.9% of total net sales) and $204,808 (34.8% of
total net sales) in fiscal 1999, 1998 and 1997, respectively.
Sales to the U.S. Government, its agencies and its contractors were
approximately $98,954 (10.8% of total net sales), $83,114 (10.6% of total net
sales) and $82,125 (13.9% of total net sales) in fiscal 1999, 1998 and 1997,
respectively. Sales to the Company's largest customer were approximately
$135,100 (14.7% of total net sales) during fiscal 1999.
38
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
12. SELECTED QUARTERLY DATA (UNAUDITED)
The unaudited selected quarterly data for fiscal years ended May 31,
1999 and 1998 are as follows.
<TABLE>
<CAPTION>
FISCAL 1999
-----------
DILUTED EARNINGS
QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE
- ------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
First.............................. $215,898 $ 41,049 $ 9,623 $ .34
Second............................. 228,798 42,740 10,035 .36
Third ............................ 227,699 42,706 10,278 .37
Fourth............................. 245,641 46,764 11,735 .42
-------- -------- -------- ------
$918,036 $173,259 $ 41,671 $ 1.49
-------- -------- -------- ------
-------- -------- -------- ------
FISCAL 1998
-----------
DILUTED EARNINGS
QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE
- ------- --------- ------------ ---------- ---------
First............................. $170,906 $ 31,928 $ 7,310 $ .26
Second............................ 180,156 34,055 8,411 .30
Third............................. 208,492 38,915 9,314 .33
Fourth............................ 222,569 43,508 10,622 .37
$782,123 $148,406 $ 35,657 $ 1.27
-------- -------- -------- ------
-------- -------- -------- ------
</TABLE>
13. ALLOWANCES FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year................................................. $ 3,157 $ 1,965 $ 2,490
Provision charged to operations.......................................... 2,902 1,261 500
Reserves acquired........................................................ -- 1,679 --
Deductions for accounts written off, net of recoveries................... (1,229) (1,748) (1,025)
------- ------- -------
Balance, end of year....................................................... $ 4,830 $ 3,157 $1,965
------- ------- -------
------- ------- -------
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item regarding the Directors of the
Company is incorporated by reference to the information contained under the
caption "Board of Directors" in the Company's definitive proxy statement for
the 1999 Annual Meeting of Stockholders.
The information required by this item regarding the Executive Officers
of the Company appears under the caption "Executive Officers of the
Registrant" in Part I above.
The information required by this item regarding the compliance with
Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") is
incorporated by reference to the information contained under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement for the 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information contained under the captions "Executive Compensation and
Other Information" (but excluding the following sections thereof,
"Compensation Committee's Report on Executive Compensation" and "Stockholder
Return Performance Graphs"); "Employment and Other Agreements" and
"Directors' Compensation" in the Company's definitive proxy statement for the
1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information contained under the caption "Security Ownership of Management
and Others" in the Company's definitive proxy statement for the 1999 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information contained under the caption "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement for the
1999 Annual Meeting of Stockholders.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
<TABLE>
PAGE
<S> <C>
Independent Auditors' Report, KPMG LLP................................................................... 15
Financial Statements -- AAR CORP. and Subsidiaries:
Consolidated statements of income for the three years ended May 31, 1999.............................. 16
Consolidated balance sheets as of May 31, 1999 and 1998............................................... 17-18
Consolidated statements of stockholders' equity for the three years ended May 31, 1999................ 19
Consolidated statements of cash flows for the three years ended May 31, 1999.......................... 20
Notes to consolidated financial statements............................................................ 21-39
Selected quarterly data (unaudited) for the years ended May 31, 1999 and 1998
(Note 12 to consolidated financial statements)..................................................... 39
Financial data schedule for the twelve-month period ended May 31, 1999............................ See Exhibit Index
</TABLE>
EXHIBITS
The Exhibits filed as a part of this report are set forth in the
Exhibit Index contained elsewhere herein. Each of the material contracts
identified as Exhibits 10.1 through 10.10 is a management contract or
compensatory plan or arrangement.
REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three-month period
ended May 31, 1999.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AAR CORP.
(Registrant)
Date: August 18, 1999
BY: /s/ DAVID P. STORCH
--------------------------------
David P. Storch
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ IRA A. EICHNER CHAIRMAN OF THE BOARD
-----------------------------------------------
Ira A. Eichner DIRECTOR
/s/ DAVID P. STORCH PRESIDENT AND CHIEF EXECUTIVE
-----------------------------------------------
David P. Storch OFFICER; DIRECTOR (PRINCIPAL
EXECUTIVE OFFICER)
/s/ TIMOTHY J. ROMENESKO VICE PRESIDENT AND CHIEF FINANCIAL
-----------------------------------------------
Timothy J. Romenesko OFFICER (PRINCIPAL FINANCIAL OFFICER)
/S/ MICHAEL J. SHARP VICE PRESIDENT - CONTROLLER (PRINCIPAL
-----------------------------------------------
Michael J. Sharp ACCOUNTING OFFICER)
/s/ A. ROBERT ABBOUD DIRECTOR
-----------------------------------------------
A. Robert Abboud
/s/ HOWARD B. BERNICK DIRECTOR
-----------------------------------------------
Howard B. Bernick August 18, 1999
/s/ EDGAR D. JANNOTTA DIRECTOR
-----------------------------------------------
Edgar D. Jannotta
/s/ ROBERT D. JUDSON DIRECTOR
-----------------------------------------------
Robert D. Judson
/s/ ERWIN E. SCHULZE DIRECTOR
-----------------------------------------------
Erwin E. Schulze
/s/ JOEL D. SPUNGIN DIRECTOR
-----------------------------------------------
Joel D. Spungin
/s/ LEE B. STERN DIRECTOR
-----------------------------------------------
Lee B. Stern
/s/ RICHARD D. TABERY DIRECTOR
-----------------------------------------------
Richard D. Tabery
</TABLE>
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
INDEX EXHIBITS
----- --------
<S> <C> <C>
3. Articles of Incorporation 3.1 Restated Certificate of Incorporation;
and By-Laws 1 Amendments thereto dated November 3,
1987(2), October 19, 1988(2) and
October 16, 1989 (included in the
Restated Certificate of Incorporation
filed herewith).
3.2 By-Laws, as amended(2) Amendment
thereto dated April 12, 1994(12),
January 13, 1997(22), and July 16,
1992 (included in the Amended
By-Laws filed herewith).
4. Instruments defining 4.1 Restated Certificate of Incorporation
the rights of security and Amendments (see Exhibit 3.1).
holders
4.2 By-Laws, as amended (See Exhibit 3.2).
4.3 Credit Agreement dated September 9,
1996, between the Registrant and
the Bank of America, Illinois.(15)
4.4 Rights Agreement between the
Registrant and the First National
Bank of Chicago dated July 8,
1997.(17)
4.5 Indenture dated October 15, 1989
between the Registrant and U.S.
Bank Trust National Association
(formerly known as First Trust,
National Association, as successor
in interest to Continental Bank,
National Association) as Trustee,
relating to debt securities; (5)
First Supplemental Indenture
thereto dated August 26, 1991;(6)
Second Supplemental Indenture
thereto dated December 10, 1997.(18)
4.6 Officers' certificates relating to
debt securities dated October 24,
1989(10) and October 12, 1993.(10)
4.7 Second Amended and Restated Credit
Agreement dated February 10, 1998,
between the Registrant and The First
National Bank of Chicago.(19)
4.8 Credit Agreement dated November 1,
1997 between the Registrant and The
Northern Trust Company.(20)
Pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K, the Registrant is not
filing certain documents. The
Registrant agrees to furnish a copy of
each such document upon the request of
the Commission.
10. Material Contracts 10.1 AAR CORP. Stock Benefit Plan,11
Amendments thereto dated July 29,
1996, January 2, 1997,(15) May 6,
1997,(2)1 and March 20, 1998.(19)
10.2 Death Benefit Agreement dated
August 24, 1984 between the
Registrant and Ira A. Eichner;(8)
Amendments thereto dated August 12,
1988(4), May 25, 1990 and October
9, 1996 (filed herewith
respectively); and his agreement to
terminate such Death Benefit
Agreement dated May 30, 1999 (filed
herewith).
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
INDEX EXHIBITS
----- --------
<S> <C> <C>
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, 16 July 13, 1994,(16)
October 9, 1996(21) and October 31,
1997.(21)
10.4 Trust Agreement dated August 12,
1988 between the Registrant and Ira A.
Eichner(4) and amendments thereto dated
May 25, 1990(16), February 4,
1994(12), October 9, 1996 and May 31,
1999 (filed herewith respectively).
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(16),
January 1, 1996(16) and June 1,
1996.(16)
10.7 Employment agreement dated June 1,
1994 between the Registrant and
David P. Storch;(14) Amendment thereto
dated October 9, 1996,(15) May 29,
1997(21) and July 14, 1997.(21)
10.8 Amended and Restated Severance
and Change in Control agreement dated
April 8, 1997 between the Registrant
and Philip C. Slapke.(21)
10.9 Amended and Restated Severance
and Change in Control agreement dated
April 8, 1997 between the Registrant
and Howard A. Pulsifer.(21)
10.10 Amended and Restated Severance
and Change in Control agreement dated
April 8, 1997 between the Registrant
and Timothy J. Romenesko.(21)
21. Subsidiaries of 21.1 Subsidiaries of AAR CORP. (filed
the Registrant herewith).
23. Consents of experts 23.1 Consent of KPMG LLP (filed herewith).
and counsel
27. Financial Data 27.1 Financial Data Schedule for the
Schedule Registrant's fiscal year ended
May 31, 1999.
</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.
44
<PAGE>
6 Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form S-3 filed August 27, 1991.
7 Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended November 30, 1991
8 Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1985.
9 Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1992.
10 Incorporated by reference to Exhibits to the Registrant's Current
Reports on Form 8-K dated October 24, 1989 and October 12, 1993,
respectively.
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 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 Quarterly
Report on Form 10-Q for the quarter ended November 30, 1996.
16 Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1996.
17 Incorporated by reference to Exhibits to the Registrant's Current
Report on Form 8-K dated August 4, 1997.
18 Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-3 filed December 10, 1997.
19 Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended February 28, 1998.
20 Incorporated by reference to Exhibits to the Registrant's
Registration Statement on Form S-3 filed May 15, 1998.
21 Incorporated by reference to Exhibits to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended November 30, 1997.
22 Incorporated by reference to Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended May 31, 1998.
45
<PAGE>
COMPOSITE OF
RESTATED CERTIFICATE OF INCORPORATION
OF
AAR CORP.
It is hereby certified that:
1. (a) The present name of the corporation (hereinafter called the
"Corporation") is AAR CORP.
(b) The name under which the Corporation was originally incorporated
is Allen Aircraft Radio, Inc.; and the date of filing the original certificate
of incorporation of the Corporation with the Secretary of State of Delaware is
April 11, 1966.
2. The provisions of the certificate of incorporation of the Corporation
as heretofore amended or supplemented, are hereby restated and integrated into
the single instrument which is hereinafter set forth, and which is entitled
Restated Certificate of Incorporation of AAR CORP. The Restated Certificate of
Incorporation of AAR CORP. only restates and integrates and does not further
amend the provisions of the Corporation's certificate of incorporation as
theretofore amended or supplemented, and there is no discrepancy between those
provisions and the provisions of the Restated Certificate of Incorporation of
AAR CORP.
3. The Board of Directors of the Corporation has duly adopted this
Restated Certificate of Incorporation pursuant to the provisions of Section 245
of the General Corporation Law of the State of Delaware in the form set forth as
follows:
Restated Certificate of Incorporation
of
AAR CORP.
FIRST: The name of the corporation (hereinafter called the
Corporation) is:
AAR CORP.
SECOND: The respective names of the County and of the City within
the County in which the registered office of the Corporation is to be located in
the State of Delaware are the County of Kent and the City of Dover. The name of
the registered agent of the Corporation is The Prentice-Hall Corporation System,
Inc. The street and
<PAGE>
number of said registered office and the address by street
and number of said registered agent is 229 South State Street, Dover, Delaware.
THIRD: The nature of the business of the Corporation and the
objects or purposes to be transacted, promoted or carried on by it are as
follows:
To acquire, buy, sell, import, export, invent, devise, design,
manufacture, make, contract with others for the manufacture of,
construct, assemble, service, salvage, overhaul, renovate, recondition,
remodel, alter, repair, refinish, recover, develop, use, own, operate,
charter, lease as lessor and lessee, license the use of as licensor and
licensee, acquire, receive, assign, transfer and grant options,
franchises, and rights in respect of, maintain, exchange, distribute and
generally deal in and with, at wholesale and retail and as principal,
agent, broker, factor, jobber, distributor, and in any other lawful
capacity, civilian and military aircraft and spacecraft of any and all
kinds, including vertical and short take-off and landing aircraft and
experimental models and engines, fuselages, motors, parts, accessories,
radios, communication and navigational aids, supplies, appliances,
devices, apparatus, fixtures, specialties, appurtenances, sundries and
equipment for aircraft of any and all kinds.
To maintain and operate plants, laboratories and establishments for
testing, developing and improving the design and construction of any and
all kinds of aircraft and aircraft engines, propellers, equipment,
instruments and accessories, and any and all kinds of devices,
appliances, apparatus and mechanisms used or useful in connection with
aerial navigation or transportation, or in aid thereof; to discover and
apply new or improved technical principles relating thereto, and
generally, to conduct, carry on, and engage in any and all kinds of
research and experimental work in or in connection with, any and all
branches of the art or science of aeronautics and of aerodynamics and of
any and all related arts or sciences; to give, hold, maintain, carry on,
manage, and participate in exhibitions and compositions of any and all
kinds useful or proper for increasing and developing interest in
aeronautics or disseminating information with respect thereto.
To own, design, erect, build, construct, license the use of as
licensor and licensee, lease as lessor and lessee, buy, or otherwise
acquire, sell, charter, exchange, transfer, assign, convey, or otherwise
dispose of, equip, maintain, use, operate, or otherwise manage,
aircraft, airports, aircraft landing fields, seadromes, terminals,
stations, depots, docks, land and sea lighthouses, landing buoys,
mooring facilities, shops, buildings, factories, hangars, garages,
shipyards, wharves, warehouses, and all other structures and air and
water navigation facilities, ratio and all other types and kinds of
communications systems, and any and all
2
<PAGE>
facilities, equipment and appurtenances incidental, necessary, useful,
auxiliary to, or convenient for, the business and operations conducted,
engaged in, and carried on by the corporation.
To acquire by purchase, exchange, concession, easement, contract,
lease or otherwise, to hold, own, use, control, manage, improve,
maintain and develop, to mortgage, pledge, grant, sell, convey,
exchange, assign, divide, lease, sublease, or otherwise encumber and
dispose of, and to deal and trade in, real estate improved or
unimproved, lands, leaseholds, options, concessions, easements,
tenements, hereditaments and interests in real, mixed, and personal
property, of every kind and description wheresoever situated, and any
and all rights therein.
To manufacture, process, purchase, sell and generally to trade and
deal in and with goods, wares and merchandise of every kind, nature and
description, and to engage and participate in any mercantile, industrial
or trading business of any kind or character whatsoever.
To apply for, register, obtain, purchase, lease, take licenses in
respect of or otherwise acquire, and to hold, own, use, operate,
develop, enjoy, turn to account, grant licenses and immunities in
respect of, manufacture under and to introduce, sell, assign, mortgage,
pledge or otherwise dispose of, and, in any manner deal with and
contract with reference to:
(a) inventions, devices, formulae, processes and any
improvements and modifications thereof;
(b) letters patent, patent rights, patented processes,
copyrights, designs, and similar rights, trademarks, trade
symbols and other indications of origin and ownership granted by
or recognized under the laws of the United States of America or
of any state or subdivision thereof, or of any foreign country or
subdivision thereof, and all rights connected therewith or
appertaining thereunto;
(c) franchises, licenses, grants and concessions.
To purchase or otherwise acquire, and to hold, mortgage,
pledge, sell, exchange or otherwise dispose of, securities (which
term, for the purpose of this Article THIRD, includes, without
limitation of the generality thereof, any shares of stock, bonds,
debentures, notes, mortgages, or other obligations, and any
certificates, receipts or other instruments representing rights
to receive, purchase or
3
<PAGE>
subscribe for the same, or representing any other rights or
interests therein or in any property or assets) created or issued
by any persons, firms, associations, corporations, or governments
or subdivisions thereof; to make payment therefor in any lawful
manner; and to exercise, as owner or holder of any securities, any
and all rights, powers and privileges in respect thereof.
To make, enter into, perform and carry out contracts of every
kind and description with any person, firm, association,
corporation or government or subdivision thereof; to enter into
general partnerships, limited partnerships (whether the corporation
be a limited or general partner), joint ventures, syndicates,
pools, associations and other arrangements for carrying on of one
or more of the purposes set forth in this Certificate of
Incorporation, jointly or in common with others.
To acquire by purchase, exchange or otherwise, all, or any
part of, or any interest in, the properties, assets, business and
good will of any one or more persons firms, associations or
corporations heretofore or hereafter engaged in any business for
which a corporation may now or hereafter be organized under the
laws of the State of Delaware; to pay for the same in cash,
property or its own or other securities; to hold, operate,
reorganize, liquidate, sell or in any manner dispose of the whole
or any part thereof; and in connection therewith, to assume or
guarantee performance of any liabilities, obligations or contracts
of such persons, firms, associations or corporations, and to
conduct the whole or any part of any business thus acquired.
To lend its uninvested funds from time to time to such extent,
to such persons, firms, associations, corporations, governments or
subdivisions thereof, and on such terms and on such security, if
any, as the Board of Directors of the corporation may determine.
To endorse or guarantee the payment of principal, interest or
dividends upon, and to guarantee the performance of sinking fund or
other obligations of, any securities, and to guarantee in any way
permitted by law the performance of any of the contracts or other
undertakings in which the corporation may otherwise be or become
interested, of any person firm, association, corporation,
government or subdivision thereof, or of any other combination,
organization or entity whatsoever.
4
<PAGE>
To borrow money for any of the purposes of the corporation,
from time to time, and without limit as to amount; from time to
time to issue and sell its own securities in such amounts, on such
terms and conditions, for such purposes and for such prices, now or
hereafter permitted by the laws of the State of Delaware and by
this Certificate of Incorporation, as the Board of Directors of the
Corporation may determine; and to secure such securities by
mortgage upon, or the pledge of, or the conveyance or assignment in
trust of, the whole or any part of the properties, assets, business
and good will of the corporation, then owned or thereafter acquired.
To draw, make, accept, endorse, discount, execute, and issue
promissory notes, drafts, bills of exchange, warrants, bonds,
debentures, and other negotiable or transferable instruments and
evidences of indebtedness whether secured by mortgage or otherwise,
as well as to secure the same by mortgage or otherwise, so far as
may be permitted by the laws of the State of Delaware.
To purchase, hold, cancel, reissue, sell, exchange, transfer
or otherwise deal in its own securities from time to time to such
an extent and in such manner and upon such terms as the Board of
Directors of the Corporation shall determine; provided that the
Corporation shall not use its funds or property for the purchase of
its own shares of capital stock when such use would cause any
impairment of its capital, except to the extent permitted by law;
and provided further that shares of its own capital stock belonging
to the corporation shall not be voted upon directly or indirectly.
To organize or cause to be organized under the laws of the
State of Delaware, or of any other State of the United States of
America, or of the District of Columbia, or of any territory,
dependency, colony or possession of the United States of America,
or of any foreign country, a corporation or corporations for the
purpose of transacting, promoting or carrying on any or all of the
objects or purposes for which corporations may be organized, and to
dissolve, wind up, liquidate, merge or consolidate any such
corporation or corporations or to cause the same to be dissolved,
wound up, liquidated, merged or consolidated.
To conduct its business in any and all of its branches and
maintain offices both within and without the State of Delaware, in
any and all States of the United States of America, in the District
of Columbia, in any or all territories, dependencies, colonies or
possessions of the United States of America, and in foreign
countries.
5
<PAGE>
To carry out all or any part of the foregoing objects and
purposes in any and all parts of the world and to conduct business
in all or any of its branches as principal, factor, agent,
contractor or otherwise, either alone or through or in conjunction
with any corporation, associations, partnerships, firms, trustees,
syndicates, individuals, organizations and other entities located
in or organized under the laws of any part of the world, either
directly or indirectly as a member of any partnership, general or
limited, and, in carrying out, conducting or performing its
business and attaining or furthering any of its objects and
purposes, to maintain offices, branches and agencies in any part of
the world, to make and perform any contracts and to do any acts and
things, and to carry on any business, and to exercise any powers
suitable, convenient or proper for the accomplishment of any of the
objects and purposes herein specified or which at any time may
appear conducive to or expedient for the accomplishment of any of
such objects and purposes and which might be engaged in or carried
on by a corporation formed under the General Corporation Law and to
have and exercise all of the powers conferred by the laws of the
State of Delaware upon corporations formed under the General
Corporation Law.
The foregoing provisions of this Article THIRD shall be construed both
as purposes and powers and each as an independent purpose and power. The
foregoing enumeration of specific purposes and powers shall not be held to
limit or restrict in any manner the purposes and powers of the Corporation,
and the purposes and powers herein specified shall, except when otherwise
provided in this Article THIRD, be in no wise limited or restricted by
reference to, or inference from, the terms of any provision of this or any
other Article of this Certificate of Incorporation; provided, that the
Corporation shall not carry on any business or exercise any power in the
State of Delaware or in any state, territory, or country which under the laws
thereof the Corporation may not lawfully carry on or exercise.
FOURTH: The total number of shares which the Corporation shall have
authority to issue is Eighty Million Two Hundred Fifty Thousand (80,250,000),
of which Two Hundred Fifty Thousand (250,000) shares of the par value of
$1.00 per share shall be Preferred Stock and Eighty Million (80,000,000)
shares of the par value of $1.00 per share shall be Common Stock. Any and
all such shares issued, and for which the full consideration has been paid or
delivered, shall be deemed fully paid shares and the holder of such shares
shall not be liable for any further call, assessment or any other payment
thereon.
The Preferred Stock shall be issued from time to time in one or more
series with such distinctive serial designations and (a) may have such voting
powers, full or limited, or may be without voting powers; (b) may be subject
to redemption at
6
<PAGE>
such time or times and at such price or prices; (c) may be entitled to
receive dividends (which may be cumulative or noncumulative) at such rate or
rates, on such conditions, and at such times, and payable in preference to,
or in such relation to, the dividends payable on any other class or classes
of stock; (d) may be entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Corporation; (e) may be made
convertible into, or exchangeable for, shares of any other class or classes
of stock of the Corporation at such price or prices or at such rates of
exchange and with such adjustments; and (f) shall have such other preferences
and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, all as shall hereafter
be stated and expressed in the resolution or resolutions providing for the
issuance of such Preferred Stock from time to time adopted by the Board of
Directors pursuant to authority so to do which is hereby vested in the Board.
No holder of any of the shares of the stock of the corporation, whether
now or hereafter authorized and issued, shall be entitled as of preemptive
right to purchase or subscribe for (1) any unissued stock of any class, or
(2) any additional shares of any class to be issued by reason of any increase
of the authorized capital stock of the corporation of any class, or (3)
bonds, certificates of indebtedness, debentures or other securities
convertible into stock of the corporation, or carrying any right to purchase
stock of any class, and any such unissued stock or such additional authorized
issue of any stock or of other securities convertible into stock, or carrying
any right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such persons, firms, corporations or
associations and upon such terms as may be deemed advisable by the Board of
Directors in the exercise of its discretion.
Each share of Common Stock shall entitle the holder thereof to one vote,
in person or by proxy, at any and all meetings of the stockholders of the
Corporation, on all propositions before such meetings and cumulative voting
shall not apply in the election of directors.
FIFTH: The minimum amount of capital with which the corporation will
commence business is One Thousand Dollars.
SIXTH: The names and places of residence of each of the incorporators
are as follows:
<TABLE>
<CAPTION>
Name Place of Residence
---- ------------------
<S> <C>
R. G. Dickerson Dover, Delaware
J. A. Kent Dover, Delaware
Z. A. Pool, III Dover, Delaware
</TABLE>
SEVENTH: The corporation is to have perpetual existence.
7
<PAGE>
EIGHTH: The private property of the stockholders of the corporation
shall not be subject to the payment of corporate debts to any extent whatever.
NINTH: For the management of the business and for the conduct of
the affairs of the corporation, and in further definition, limitation and
regulation of the powers of the corporation and of its directors and
stockholders, it is further provided:
1. In no event shall the number of directors be less than the
minimum number prescribed by law. The election of directors need not be by
ballot. Directors need not be stockholders.
2. In furtherance and not in limitation of the powers conferred by
the laws of the State of Delaware, the Board of Directors is expressly
authorized and empowered:
(a) To make, alter, amend, and repeal by-laws.
(b) Subject to the applicable provisions of the by-laws then in
effect, to determine, from time to time, whether and to what extent
and at what times and places and under what conditions and regulations
the accounts and books of the corporation, or any of them, shall be
open to the inspection of the stockholders, and no stockholder shall
have any right to inspect any account or book or document of the
corporation, except as conferred by the laws of the State of Delaware,
unless and until authorized so to do by resolution of the Board of
Directors or of the stockholders of the corporation.
(c) Without the assent or vote of the stockholders, to authorize
and issue obligations of the corporation, secured or unsecured, to
include therein such provisions as to redeemability, convertibility or
otherwise, as the Board of Directors, in its sole discretion, may
determine, and to authorize the mortgaging or pledging, as security
therefor, of any property of the corporation, real or personal,
including after-acquired property.
(d) To establish bonus, profit sharing or other types of incentive
or compensation plans for the employee (including officers and
directors) of the corporation and to fix the amount of profits to be
distributed or shared and to determine the persons to participate in any
such plans and the amounts of their respective participations.
In addition to the powers and authorities hereinbefore or by statute
expressly conferred upon it, the Board of Directors may exercise all such powers
and do all such acts and things as may be exercised or done by the corporation,
subject, nevertheless, to the provisions of the laws of the State of Delaware,
of the Certificate of Incorporation and of the by-laws of the corporation.
8
<PAGE>
3. Any officer elected or appointed by the Board of Directors may be
removed at any time in such manner as shall be provided in the by-laws of
the Corporation.
4. In the absence of fraud, no contract or other transaction between
this corporation and any other corporation or any partnership or
association shall be affected or invalidated by the fact that any director
or officer of this corporation is pecuniarily or otherwise interested in or
is a director, member or officer of such other corporation or of such firm,
association or partnership or is a party to or is pecuniarily or otherwise
interested in such contract or other transaction or in any way connected
with any person or persons, firm, associations partnership or corporation
pecuniarily or otherwise interested therein, provided such interest is
either known or made known to the other directors; any director may be
counted in determining the existence of a quorum at any meeting of the
Board of Directors of this corporation for the purpose of authorizing any
such contract or transaction, and may vote thereat to authorize any such
contract or transaction with like force and effect as if he were not so
interested, or were not an officer, director, member, or partner of such
other firm, corporation, association or partnership.
5. Any contract, act or transaction of the corporation or of the
directors may be ratified by a vote of a majority of the shares having
voting powers at any meeting of stockholders, or at any special meeting
called for such purpose, and such ratification shall, so far as permitted
by law and by this Certificate of Incorporation, be as valid and as binding
as though ratified by every stockholder of the corporation.
TENTH: The business and affairs of this corporation shall be
managed by or under the direction of the Board of Directors. Subject to the
other provisions of this Article TENTH, the Board of Directors shall determine
the rights, powers, duties, rules and procedures that shall affect the power of
the Board of Directors to manage and direct the business and affairs of this
Corporation.
The Board of Directors shall consist of between three and fifteen
directors, with the exact number of directors to be fixed from time to time by
the Board of Directors pursuant to a resolution adopted by a majority of the
Board of Directors then in office. The directors shall be divided into three
classes, each to consist, as nearly as may be possible, of one-third of the
total number of authorized directors fixed by the Board of Directors. At each
annual meeting following the initial classification and election, which occurred
in 1970 pursuant to Article III, Section 1 of this corporation's by-laws, the
directors chosen to succeed those directors whose terms then expire shall be
identified as being of the same class as the directors they succeed and shall be
elected for a term expiring at the third succeeding annual meeting of
stockholders or thereafter when their respective successors in each case are
elected and qualified, subject to prior death, resignation, retirement,
disqualification, or removal for cause. If
9
<PAGE>
the number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in each
class a nearly as possible, but in no case will a decrease in the number of
directors shorten the term of any incumbent director.
Any one or more directors may be removed from office at a meeting of
stockholders called expressly for that purpose but only for cause and only by
the affirmative vote of holders of at least 80% of the total voting power of all
shares then entitled to vote for the election of directors, considered for
purposes of this article TENTH as one class. A director whose removal is
proposed shall receive reasonable notice and have a reasonable opportunity to
present reasons for his or her retention.
Any vacancy occurring on the Board of Directors, including any vacancy
resulting from an increase in the number of directors, may be filled only by a
majority of the members of the Board of Directors then in office, although less
than a quorum, or by a sole remaining director. Any director so chosen shall
hold office for a term that coincides with the remaining term of the class to
which he or she has been elected.
The by-laws of this Corporation may be amended, altered or repealed
and new by-laws not inconsistent with any provision of the certificate of
incorporation may be made (1) by the affirmative vote of a majority of the
members of the Board of Directors then in office, or (2) by the affirmative
vote of the holders of at least 80% of the total voting power of all shares
of stock of this Corporation entitled to vote in the election of directors,
considered for purposes of this Article TENTH as one class.
The provisions set forth in this Article TENTH may not be amended,
altered or repealed in any respect, unless such action is approved by the
affirmative vote of the holders of at least 80% of the total voting power of all
shares of stock of this Corporation entitled to vote in the election of
directors, considered for purposes of this Article TENTH as one class. The
voting requirements contained in this Article TENTH shall be in addition to the
voting requirements imposed by law or by any other provisions of this
certificate of incorporation.
ELEVENTH: No action shall be taken by the stockholders of this
Corporation except at an annual or special meeting of stockholders, and
stockholders may not act by written consent. Special meetings of stockholders
may be called only by the Chairman of the Board or a majority of the Board of
Directors then in office.
The provisions set forth in this Article ELEVENTH may not be amended,
altered or repealed in any respect, unless such action is approved by the
affirmative vote of the holders of at least 80% of the total voting power of all
shares of stock of this Corporation entitled to vote in the election of
directors, considered for purposes of this Article ELEVENTH as one class. The
voting requirements contained in this Article ELEVENTH shall be in addition to
the voting requirements imposed by law or by any other provisions of this
certificate of incorporation.
10
<PAGE>
TWELFTH: A. In addition to any affirmative vote which may be
otherwise required, and except as otherwise expressly provided in this Article
TWELFTH, any Business Transaction shall require the affirmative vote of holders
of at least that number of the voting shares which equals the sum of (i) the
number of Voting Shares beneficially owned by all Related Parties that have an
interest in the Business Transaction, plus (ii) 80% of the remaining number of
Voting Shares that are not beneficially owned by all such Related Parties.
B. The provisions of this Article TWELFTH shall not be applicable to
any Business Transaction if:
1. The Business Transaction was approved by a majority of the Board
of Directors prior to the acquisition of 10% or more of the Voting Shares
by any
Related Party that has an interest in the Business Transaction; or
2. A majority of those members of the Board of Directors who are
not themselves Related Party Directors has approved the Business
Transaction.
C. For purposes of this Article TWELFTH:
1. "Business Transaction" shall mean:
(a) any merger or consolidation of this corporation or any
Subsidiary
with or into any Related Party or any Associate of a Related Party;
(b) any sale, lease, exchange, mortgage, pledge, transfer, or
other disposition (in one or a series of transactions) of all or any
Substantial Part of the consolidated assets of this Corporation to or
with any Related Party or any Associate of a Related Party;
(c) any issuance, sale, exchange, transfer, or other disposition
by this Corporation or any Subsidiary (in one or a series of related
transactions) of any securities of this Corporation or any Subsidiary
to or with any Related Party or any Associate of a Related Party;
(d) any spin-off, split-up, reclassification of securities
(including any reverse stock split), recapitalization,
reorganization, liquidation, dissolution, merger, or consolidation of
this Corporation with any Subsidiary, or any other transaction
(whether or not to or with or otherwise involving a Related Party)
which has the effect, directly or indirectly, of increasing the
proportionate interest of any Related Party or any Associate of a
Related Party in the equity securities or assets of this Corporation
or any Subsidiary; or
11
<PAGE>
(e) adoption of any plan or proposal with respect to any of the
foregoing.
2. A "person" shall include any individual, firm, corporation,
partnership, group, trust, or other entity, organization, or association.
3. "Related Party" shall mean any person (other than this Corporation or
a Subsidiary) who or which is the beneficial owner, directly or indirectly, of
10% or more of the Voting Shares: (a) in connection with determining the
required vote by stockholders on any Business Transaction, as of any of the
following dates: the record date for the determination of stockholders entitled
to notice of or to vote on such Business Transaction or immediately prior to the
consummation of any such transaction or the adoption of any plan or proposal
with respect thereto; (b) in connection with determining the required vote by
stockholders on any amendment, alteration or repeal of this Article TWELFTH
pursuant to clauses (i) and (ii) of paragraph E, as of the record date for the
determination of stockholders entitled to notice and to vote on such amendment,
alteration or repeal; and (c) in connection with determining a "Related Party
Director" in respect of any approval by the Board of Directors of the amendment,
alteration or repeal of this article TWELFTH pursuant to paragraph E or in
respect of any determination made by the Board of Directors pursuant to
paragraph D, as of the date at which the vote on such recommendation or
determination is being taken, or as close as is reasonably practicable to such
date.
4. A person shall be the "beneficial owner" of any Voting Shares as
determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1Section
34 as in effect on July 26, 1983; provided, however, that a person shall, in any
event, also be the beneficial owner of any Voting Shares:
(a) which such person, or any of such person's Associates,
beneficially owns, directly or indirectly;
(b) which such person or any of such person's Associates, directly or
indirectly, (i) has the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement, or understanding; or upon the exercise of conversion rights,
exchange rights, warrants, or options; or pursuant to the power to revoke a
trust, discretionary account, or other arrangement; or otherwise; or (ii)
has or shares the power, or has the right to acquire the exclusive or
shared power, to vote pursuant to any agreement, arrangement, relationship,
or understanding; or pursuant to the power to revoke a trust, discretionary
account, or other arrangement; or otherwise; and
(c) which are beneficially owned, directly or indirectly, by any other
person with whom or which such first-mentioned person or any of its
Associates has any
12
<PAGE>
agreement, arrangement, or understanding, or is acting in concert, with
respect to acquiring, holding, voting, or disposing of any Voting Shares.
5. An "Associate" of a specified person is (a) a person that, directly
or indirectly (i) controls, or is controlled by, or is under common control
with, the specified person, (ii) is the beneficial owner of 10% or more of
any class of equity securities of the specified person, or (iii) has 10% or
more of any class of its equity securities beneficially owned, directly or
indirectly, by the specified person; (b) any person (other than this
Corporation or a Subsidiary) of which the specified person is an officer,
director, or other official and any officer, director, partner, or other
official of the specified person; (c) any trust or estate in which the
specified person serves as trustee or in a similar fiduciary capacity, or any
trustee or similar fiduciary of the specified person; and (d) any relative or
spouse of the specified person, or any relative of such spouse, who has the
same house as the specified person or is an officer or director of any person
(other than this Corporation or a Subsidiary), directly or indirectly,
controlling or controlled by the specified person.
6. "Related Party Director" shall mean each director of this Corporation
who (a) is a Related Party or an Associate of a Related Party; (b) has an
Associate who is a Related Party or an Associate of a Related Party; (c) was
nominated or proposed to be elected as a director of this Corporation by a
Related Party or an Associate of a Related Party; or (d) is, or has been
nominated or proposed to be elected as, an officer, director or employee of a
Related Party or of an Associate of a Related Party.
7. "Subsidiary" shall mean any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by this Corporation;
provided, however, that for the purposes of paragraph C.3, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by this Corporation.
8. "Substantial Part" of the consolidated assets of this Corporation
shall mean Assets of this Corporation and/or any Subsidiary having a book value
(determined in accordance with generally accepted accounting principles) in
excess of 10% of the book value (determined in accordance with generally
accepted accounting principles) of the total consolidated assets of this
Corporation, at the end of its most recent quarterly fiscal period ending prior
to the time of the determination is made.
9. "Voting Shares" shall mean the outstanding shares of all classes of
stock of this Corporation entitled to vote for the election of directors,
considered for purposes of this Article TWELFTH as one class. "Voting Shares"
shall include shares deemed owned through application of paragraph C.4 but shall
not include any other Voting Shares which may be issuable pursuant to any
agreement, or upon exercise of conversion rights, warrants or options, or
otherwise.
13
<PAGE>
D. On the basis of information known to them, a majority of those
members of the Board of Directors who are not themselves Related Party Directors
shall have the power and duty to make all determinations to be made under this
Article TWELFTH, including whether (a) a transaction is a Business Transaction;
(b) a person is a Related Party; (c) a person is an Associate of another person;
(d) a Related Party or any Associate of a Related Party has an interest in a
Business Transaction; (e) the assets subject to any Business Transaction
constitute a Substantial Part of the consolidated assets of this Corporation;
(f) a transaction has the effect of increasing the proportionate interest of any
Related Party or any Associate of a Related Party in the equity securities or
assets of this Corporation or any Subsidiary; or (g) a person has an agreement,
arrangement, relationship, or understanding, or is acting in concert, with
another as to the matters referred to in paragraph C.4. Any such determination
shall be conclusive and binding for all purposes of this Article TWELFTH.
E. In addition to any affirmative vote which may be otherwise
required, any amendment, alteration, or repeal of this Article TWELFTH shall
require the affirmative vote of the holders of at least that number of the
Voting Shares which equals the sum of (i) the number of Voting Shares
beneficially owned by any Related Party, plus (ii) 80% of the remaining number
of Voting Shares that are not beneficially owned by any Related Party; provided
that this paragraph E shall not apply to, and such vote shall not be required
for, any amendment, alteration or repeal approved by at least 80% of those
members of the Board of Directors who are not themselves Related Party
Directors.
F. Nothing contained in this Article TWELFTH shall be construed to
relieve any Related Party from any fiduciary obligation imposed by law.
THIRTEENTH: From time to time, any of the provisions of this
certificate of incorporation may be amended, altered or repealed, and other
provisions authorized by this certificate of incorporation and by the laws of
the State of Delaware at the time in force may be added or inserted in the
manner and at the time prescribed by this certificate of incorporation and by
said laws. All rights at any time conferred upon the stockholders of this
Corporation by this certificate of incorporation are granted subject to the
provisions of this Article THIRTEENTH. Notwithstanding the foregoing, the
provisions set forth in Articles TENTH, ELEVENTH and TWELFTH may not be amended,
altered or repealed in any respect unless such amendment, alteration or repeal
is approved as specified in each such respective Article.
FOURTEENTH: No person who was or is a director of this Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
breach of the duty of loyalty to the Corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law; (iii) under Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law
14
<PAGE>
is amended after the effective date of this Article to further eliminate or
limit, or to authorize further elimination or limitation of, the personal
liability of directors for breach of fiduciary duty as a director, then the
personal liability of a director to this Corporation or its stockholders shall
be eliminated or limited to the full extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect the elimination or
limitation of the personal liability of a director for any act or omission
occurring prior to the effective date of such repeal or modification. This
provision shall not eliminate or limit the liability of a director for any act
or omission occurring prior to the effective date of this Article.
FIFTEENTH: A. The Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was or has agreed to become a director or
officer of the Corporation, or is or was serving or has agreed to serve at the
request of the Corporation as a director or officer (or, while serving as a
director or officer of the Corporation, as an employee, agent or fiduciary) of
another corporation, partnership, joint venture, trust or other enterprise, or
with respect to any employee benefit plan (or its participants or
beneficiaries), or by reason of any action alleged to have been taken or omitted
by such person in any such capacity, against costs, charges and other expenses
(including attorneys' fees) ("Expenses"), judgments, fines, taxes, penalties
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding and any appeal thereof if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding and any appeal
thereof by judgment, order, settlement, conviction, or plea of nolo contendere
or its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
B. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was or has agreed to become a
director or officer of the Corporation, or is or was serving or has agreed to
serve at the request of the Corporation as a director or officer (or, while
serving as a director or officer of the Corporation, as an employee, agent or
fiduciary) of another corporation, partnership, joint venture, trust or other
enterprise, or with respect to any employee benefit plan (or its participants or
beneficiaries), or by reason of any action alleged to have been taken or omitted
by such person in any such capacity against Expenses actually and
15
<PAGE>
reasonably incurred by him in connection with the investigation, defense or
settlement of such action or suit and any appeal thereof if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity f or such Expenses which the Court
of Chancery of Delaware or such other court shall deem proper.
C. Notwithstanding any other provision of this Article FIFTEENTH,
the Corporation shall indemnify and make advancement of Expenses to any person
referred to in paragraph A or B of this Article FIFTEENTH to the full extent
permitted under the laws of Delaware and any other applicable laws, as they now
exist or as they may be amended in the future.
D. To the extent that any person referred to in paragraph A or B of
this Article FIFTEENTH has been successful on the merits or otherwise,
including, without limitation, the dismissal of an action without prejudice, in
defense of any action, suit or proceeding and any appeal thereof referred to
therein or in defense of any claim, issue or matter therein, he shall be
indemnified against Expenses actually and reasonably incurred by him in
connection therewith.
E. Any indemnification under paragraph A, B, C or D of this Article
FIFTEENTH (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of any
person referred to in paragraph A or B of this Article FIFTEENTH is proper in
the circumstances because he has met the applicable standard of conduct set
forth in paragraph A or B of this Article FIFTEENTH. Such determination shall be
made (1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or (3)
by the stockholders.
F. Expenses incurred by any person referred to in paragraph A or B
of this Article FIFTEENTH in defending a civil or criminal action, suit or
proceeding and any appeal thereof shall be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding and any appeal thereof
upon receipt by the Corporation of an undertaking by or on behalf of such person
to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation.
G. The determination of the entitlement of any person to
indemnification under paragraph A, B, C or D of this Article FIFTEENTH or to
advancement of Expenses under paragraph F of this Article FIFTEENTH shall be
made
16
<PAGE>
promptly, and in any event within sixty (60) days after the Corporation has
received a written request for payment from or on behalf of a director or
officer and payment of amounts due under such paragraphs shall be made
immediately after such determination. If payment in full has not been made
within sixty (60) days, the right to indemnification or advancement of Expenses
provided by this Article. FIFTEENTH shall be enforceable by or on behalf of any
person referred to in paragraph A or B of this Article FIFTEENTH in any court of
competent jurisdiction. In addition to the other amounts due under this Article
FIFTEENTH, Expenses incurred by or on behalf of any person referred to in
paragraph A or B of this Article FIFTEENTH in successfully establishing his
right to indemnification or advancement of Expenses, in whole or in part, in any
such action (or settlement thereof) shall be paid by the Corporation.
H. The indemnification and advancement of Expenses provided by this
Article FIFTEENTH (1) shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of Expenses may be entitled under
any law (common or statutory), by-law, agreement, vote of stockholders or
disinterested directors or otherwise, and (2) shall continue as to a person
referred to in paragraph A or B of this Article FIFTEENTH and shall inure to the
benefit of the heirs, executors and administrators of such a person.
I. All rights to indemnification and advancement of Expenses
provided by this Article FIFTEENTH shall be deemed to be a contract between the
Corporation and each person referred to in paragraph A or B of this Article
FIFTEENTH at any time while this Article FIFTEENTH is in effect. Any repeal or
modification of this Article FIFTEENTH or any repeal or modification of the
relevant provisions of the Delaware General Corporation Law or any other
applicable law shall not in any way diminish any rights to indemnification of or
advance payments of Expenses to such person or the obligation of the
Corporation.
J. The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was or has agreed to become a
director or officer of the Corporation or is or was serving or has agreed to
serve at the request of the Corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, trust or other
enterprise or with respect to any employee benefit plan (or its participants or
beneficiaries), against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability.
K. The Board of Directors may, by resolution, extend the
indemnification and advancement of Expenses provisions of this Article FIFTEENTH
to any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was or has agreed to become an employee,
17
<PAGE>
agent or fiduciary of the Corporation, or is or was serving or has agreed to
serve at the request of the Corporation as an employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise or
with respect to any employee benefit plan (or its participants or
beneficiaries) of the Corporation or any such other enterprise, or by reason
of any action alleged to have been taken or omitted by such person in any
such capacity.
L. For purposes of this Article FIFTEENTH, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or fiduciaries so that any person who is or was or has agreed to become a
director, officer, employee, agent or fiduciary of such constituent corporation,
or is or was serving or has agreed to serve at the request of such constituent
corporation as a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article FIFTEENTH with respect
to the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
M. The invalidity or unenforceability of any provision of this
Article FIFTEENTH shall not affect the validity or enforceability of the
remaining provisions of this Article FIFTEENTH.
Signed and attested to on January 9, 1985.
---------------------------------
President
ATTEST:
- --------------------------------
Secretary
(CORPORATE SEAL)
18
<PAGE>
Exhibit 3.2
AMENDED BY-LAWS*
OF
AAR CORP.
A Delaware Corporation
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office shall be at
229 South State Street, in the City of Dover, County of Kent, State of Delaware,
and the name of the resident agent in charge thereof is THE PRENTICE-HALL
CORPORATION SYSTEM, INC.
SECTION 2. OTHER OFFICES. The corporation may also have an
office or offices at such other place or places, within or without the State of
Delaware, as the Board of Directors may from time to time designate or the
business of the corporation require.
ARTICLE II
STOCKHOLDERS' MEETINGS
SECTION 1. TIME. The annual meeting of the stock-
holders of the corporation for the election of directors and the transaction of
such other business as may properly come before such meeting shall be held each
year on the second Wednesday in October at three o'clock P.M. (Chicago time), or
if said day be a legal holiday, then on the next succeeding day not a legal
holiday, or shall be held on such other time and date as shall be determined by
the Board of Directors. A special meeting of the stockholders
*as of January 13, 1997
<PAGE>
shall be held on the date and at the time fixed by those persons authorized by
the Certificate of Incorporation to call such meeting.
SECTION 2. PLACE. Annual meetings and special meetings shall
be held at such place, within or without the State of Delaware, as the directors
may, from time to time, fix. Whenever the directors shall fail to fix such
place, the meeting shall be held at the registered office of the corporation in
the State of Delaware.
SECTION 3. CALL. Annual meetings may be called by the
directors or by any officer instructed by the directors to call the meeting.
SECTION 4. NOTICE OR WAIVER OF NOTICE. Written notice of all
meetings shall be given, stating the place, date and hour of the meeting. The
notice of an annual meeting shall state that the meeting is called for the
election of directors and for the transaction of other business which may
properly come before the meeting, and shall (if any other action which could be
taken at a special meeting is to be taken at such annual meeting), state the
purpose or purposes. The notice of a special meeting shall in all instances
state the purpose or purposes for which the meeting is called. If any action is
proposed to be taken which would, if taken, entitle stockholders to receive
payment for their shares of stock, the notice shall include a statement of that
purpose and to that effect. Except as otherwise provided by the General
2
<PAGE>
Corporation Law, a copy of the notice of any meeting shall be given, personally
or by mail, not less than ten days nor more than sixty days before the date of
the meeting, unless the lapse of the prescribed period of time shall have been
waived, and directed to each stockholder at his record address or at such other
address which he may have furnished by request in writing to the Secretary of
the corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid, in the United States mail. If a meeting is adjourned to
another time, not more than thirty days hence, and/or to another place, and if
an announcement of the adjourned time and/or place is made at the meeting, it
shall not be necessary to give notice of the adjourned meeting unless the
directors, after adjournment, fix a new record date for the adjourned meeting.
Notice need not be given to any stockholder who submits a written waiver of
notice by him before or after the time stated therein. Attendance of a person at
a meeting of stockholders shall constitute a waiver of notice of such meeting,
except when the stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice.
SECTION 5. STOCKHOLDER LIST. The officer who has charge of the
stock ledger of the corporation shall prepare and
3
<PAGE>
make, at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list required by this section or the books of the
corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 6. CONDUCT OF MEETING. Meetings of the stock-
holders shall be presided over by one of the following officers in the order of
seniority and if present and acting -- the Chairman of the Board, if any, the
Vice-Chairman of the Board, if any, the President, Executive Vice President, a
Vice President, or, if none of the foregoing is in office and present and
acting, by a chairman to be chosen by the stockholders. The person presiding
over the
4
<PAGE>
meeting shall have authority to prescribe the agenda for the meeting
and to control the length and order of discussion. The Secretary of the
corporation, or in his absence, an Assistant Secretary, shall act as Secretary
of every meeting, but if neither the Secretary nor an Assistant Secretary is
present, the Chairman of the meeting shall appoint a secretary of the meeting.
SECTION 7. PROXY REPRESENTATION. Every stockholder may
authorize another person or persons to act for him by proxy in all matters in
which a stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and as long
as, it is coupled with an interest sufficient in law to support an irrevocable
power. A power may be made irrevocable regardless of whether the interest with
which it is coupled is an interest in the stock itself or an interest in the
corporation generally.
SECTION 8. INSPECTORS AND JUDGES. The directors, in advance of
any meeting, may, but need not, appoint one or more inspectors of election or
judges of the vote, as the case may be, to act at the meeting or any adjournment
thereof. If an inspector or inspectors or judge or judges are not appointed, the
person
5
<PAGE>
presiding at the meeting may, but need not, appoint one or more inspectors or
judges. In case any person who may be appointed as an inspector or judge fails
to appear or act, the vacancy may be filled by appointment made by the
directors in advance of the meeting or at the meeting by the person presiding
thereat. Each inspector or judge, if any, before entering upon the discharge of
his duties, shall take and sign an oath faithfully to execute the duties of
inspector or judges at such meeting with strict impartiality and according to
the best of his ability. The inspectors or judges, if any, shall determine the
shares of stock represented at the meeting, the validity and effect of proxies,
and shall receive votes, ballots or consents, hear and determine all challenges
and questions arising in connection with the right to vote, count and tabulate
all votes, ballots or consents, determine the results, and do such acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the person presiding at the meeting, the inspector or inspectors or
judge or judges, if any, shall make a report in writing of any challenge,
question or matter determined by him or them and execute a certificate of any
fact found by him or them.
SECTION 9. QUORUM. The holders of a majority of the
outstanding shares of stock present or represented by proxy at any such meeting
of stockholders shall constitute a quorum at such meeting for the transaction of
any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
6
<PAGE>
SECTION 10. VOTING. Each share of stock shall entitle the
holder thereof to one vote. In the election of directors, a plurality of the
votes cast shall elect. Any other action shall be authorized by a majority of
the votes cast except where the General Corporation Law prescribes a different
percentage of votes and/or a different exercise of voting power. In determining
whether a proposal has been approved, shares abstaining or not voting but
otherwise present at the meeting will not be counted as having been voted on the
proposal. All elections of directors shall be written ballots. Voting by ballot
shall not be required for any other corporate action except as otherwise
provided by the General Corporation Law.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND QUORUM. a. The Board of Directors shall
consist of between three and fifteen directors, with the exact number of
directors to be fixed from time to time by the Board of Directors pursuant to a
resolution adopted by a majority of the Board of Directors then in office.
b. A majority of the members of the Board of Directors acting at a
meeting duly assembled, shall constitute a quorum for the transaction of
business; provided, however, that, whenever the corporation is permitted by law
to have only one director, then, and, in that event only, one director shall
constitute a quorum.
7
<PAGE>
If at any meeting of the Board of Directors there shall be less than a quorum
present, a majority of those present may adjourn the meeting, without further
notice from time to time until a quorum shall have been obtained. Except as
otherwise provided by law, by the Certificate of Incorporation, or these
by-laws, the act of the directors at a meeting at which a quorum is present
shall be the act of the Board. Member or members of the Board of Directors
shall be deemed present at a meeting if such person or persons are
participating in the meeting by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
SECTION 2. MEETINGS. Meetings of the Board of Directors shall
be held at such place within or outside the State of Delaware as may from time
to time be fixed by resolution of the Board of Directors, or as may be specified
in the notice of the meeting. Regular meetings of the Board of Directors shall
be held at such times as may from time to time be fixed by resolution of the
Board of Directors, and special meetings may be held at any time upon the call
of the Chairman of the Board or, in the absence of the Chairman of the Board,
the President or any Vice President or the Secretary or any two directors by
oral, telegraphic or written notice duly served on or sent or mailed to each
director not less than two days before such meeting. A meeting of the Board of
Directors may be held without notice immediately after the annual meeting of
stockholders. Notice need not be given of
8
<PAGE>
regular meetings of the Board of Directors. The notice of any meeting need not
specify the purpose of the meeting. Any requirement of furnishing a notice shall
be waived by any director who signs a written waiver of such notice before or
after the time stated therein. Further, the attendance of a director at any
meeting shall constitute a waiver of notice of such meeting, except where a
director attends a meeting for the purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
SECTION 3. COMMITTEES. a. The Board of Directors shall appoint
from among its members the following committees: audit, compensation, nominating
and executive. These committees shall consist of such number, shall have such
powers and duties, and the members thereof shall otherwise serve as shall from
time to time be prescribed by the Board of Directors.
b. The Board of Directors may, in its discretion, by the affirmative
vote of a majority of the whole Board of Directors, appoint other committees
which shall have and may exercise such powers and duties as shall be conferred
or authorized by the resolutions appointing them.
c. A majority of any committee appointed pursuant to the provisions of
a. and b. above, if such committee be composed of more than two members, may
determine its action and fix the time and place of its meetings unless the Board
of Directors shall otherwise provide. The Board of Directors shall have power at
any
9
<PAGE>
time to fill vacancies in, to change the membership of, or to discharge any
such committee.
d. Any and all actions by any committee shall be reported to the Board
of Directors at the board meeting succeeding such action.
SECTION 4. DIVIDENDS. Subject always to the provisions of the
law and the Certificate of Incorporation, the Board of Directors shall have full
power to determine whether any, and if any, what part of any, funds legally
available for the payment of dividends shall be declared in dividends and paid
to stockholders; the division of the whole or any part of such funds of the
corporation shall rest wholly within the lawful discretion of the Board of
Directors, and it shall not be required at any time, against such discretion, to
divide or pay any part of such funds among or to the stockholders as dividends
or otherwise; and the Board of Directors may fix a sum which may be set aside or
reserved over and above the capital paid in of the corporation as working
capital for the corporation or as a reserve for any proper purpose, and from
time to time may increase, diminish, and vary the same in its absolute judgment
and discretion.
SECTION 5. INTENTIONALLY OMITTED.
SECTION 6. INFORMAL ACTION. Any action required or permitted
to be taken at any meeting of the Board of Directors or any committee thereof
may be taken without a meeting if all members of the board or committee, as the
case may be, consent thereto in
10
<PAGE>
writing and the writing or writings are filed with the minutes or proceedings
of the board or committee.
ARTICLE IV
OFFICERS
SECTION 1. NUMBER. The Board of Directors, as soon as may be
after the election thereof held in each year, shall elect a Chairman of the
Board, President, Secretary, Chief Financial Officer, and Treasurer, and from
time to time may appoint a Vice Chairman of the Board, one or more Vice
Presidents and such Assistant Secretaries, Assistant Treasurers and such other
officers, agents and employees as it may deem proper. Any two offices may be
held by the same person. More than two offices other than the offices of
Chairman of the Board or President and Secretary may be held by the same person.
The Chairman, the Vice Chairman and the President may, but need not, be chosen
from among the directors. The Treasurer shall report to the Chief Financial
Officer if not also elected to the position of Chief Financial Officer.
SECTION 2. TERM AND REMOVAL. The term of office of all
officers shall be one year and until their respective successors are elected and
qualify, but any officer may be removed from office, either with or without
cause, at any time by the affirmative vote of a majority of the members of the
Board of Directors then in office. A vacancy in any office arising from any
11
<PAGE>
cause may be filled for the unexpired portion of the term by the Board of
Directors.
SECTION 3. POWERS AND DUTIES. The Chairman of the Board shall
preside at all meetings of the Board of Directors, shall have such powers and
perform such duties as are assigned to him by these by-laws, and shall have such
other powers and perform such other duties as generally pertains to his office.
In the absence or disability of the Chairman of the Board, the Vice Chairman of
the Board, if one has been appointed, shall assume the duties, powers and
position of the said Chairman. The President shall be the Chief Executive
Officer of the corporation and, in the absence or disability of the Chairman of
the Board and the Vice Chairman of the Board, if the latter has been appointed,
the President shall assume the duties, powers and position of the said Chairman.
The remaining officers of the corporation shall each have such powers and duties
as generally pertain to their respective offices, as well as such powers and
duties as from time to time may be conferred by the Board of Directors. The Vice
President or Vice Presidents, the Assistant Secretary or Assistant Secretaries
and the Assistant Treasurer or Assistant Treasurers shall, in the order of their
respective seniorities, in the absence or disability of the President, Secretary
or Treasurer, respectively, perform the duties of such officer and shall
generally assist the President, Secretary or Treasurer, respectively; provided,
however, and notwithstanding anything
12
<PAGE>
hereinabove to the contrary, that if the Board of Directors designates a Vice
President as an Executive Vice President, he shall perform the duties of the
President in his absence or disability, regardless of the order of seniority of
said Executive Vice President to the other Vice Presidents.
SECTION 4. VOTING CORPORATION'S SECURITIES. Unless otherwise
ordered by the Board of Directors, the Chairman of the Board, or in the event of
his inability to act, the President, or in the event of his inability to act,
the Vice President designated by the Board of Directors to act in the absence of
the President, shall have full power and authority on behalf of the corporation
to attend and to act and to vote at any meetings of security holders of
corporations in which the corporation may hold securities, and at such meetings
shall possess and may exercise any and all rights and powers incident to the
ownership of such securities, and which as the owner thereof the corporation
might have possessed and exercised, if present. The Board of Directors, by
resolution from time to time, may confer like powers upon any other person or
persons.
ARTICLE V
CERTIFICATES OF STOCK
SECTION 1. FORM AND TRANSFERS. The interest of each
stockholder of the corporation shall be evidenced by certificates for shares of
stock, certifying the number of shares represented
13
<PAGE>
thereby and in such form not inconsistent with the Certificate of Incorporation
as the Board of Directors may from time to time prescribe.
Upon compliance with any provisions restricting the transferability of
shares that may be set forth in the Certificate of Incorporation, these by-laws,
or any written agreement in respect thereof, transfers of shares of the capital
stock of the corporation shall be made only on the books of the corporation by
the registered holder thereof, or by his attorney thereunto authorized by power
of attorney duly executed and filed with the Secretary of the corporation, or
with a transfer clerk or a transfer agent appointed as in Section 4 of this
Article provided, and on surrender of the certificate or certificates for such
shares properly endorsed and the payment of all taxes thereon. The person in
whose name shares of stock stand on the books of the corporation shall be deemed
the owner thereof for all purposes as regards the corporation; provided that
whenever any transfer of shares shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary of the corporation, shall be so
expressed in the entry of transfer. The Board may, from time to time, make such
additional rules and regulations as it may deem expedient, not inconsistent with
these by-laws, concerning the issue, transfer, and registration of certificates
for shares of the capital stock of the corporation.
14
<PAGE>
The certificates of stock shall be signed by or in the name of the
company by the Chairman or Vice Chairman of the Board of Directors, or the
President or a Vice President, and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer, certifying the number of shares owned
by such named holder, and sealed with the seal of the corporation. Such seal may
be a facsimile, engraved or printed. Any of or all the signatures on the
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the company with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
SECTION 2. RECORD DATE FOR STOCKHOLDERS. For the purpose of
determining the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to or dissent
from any corporate action in writing without a meeting, or for the purpose of
determining stockholders entitled to receive payment of any dividend or other
distribution or the allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion, or exchange of stock, or for the purpose
of any other lawful action, the directors may fix, in advance, a date as the
record date for any such determination of stockholders. Such date shall not be
15
<PAGE>
more than sixty days nor less than ten days before the date of such meting, nor
more than sixty days prior to any other action. If no record date is fixed: (1)
the record date for the determination of stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which the meeting is held; (2) the record date for
determining stockholders entitled to express consent to corporate action in
writing without a meeting when no prior action by the Board of Directors is
necessary, shall be the day on which the first written consent is expressed; and
(3) the record date for determining stockholders for any other purpose shall be
the close of business on the day on which the Board of Directors adopts the
resolution relating thereto. When a determination of stockholders of record
entitled to notice of or to vote at any meeting of stockholders has been made as
provided in this paragraph, such determination shall apply to any adjournment
thereof; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 3. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES.
No certificates for shares of stock in the corporation shall be issued in place
of any certificate alleged to have been lost, destroyed or stolen, except on
production of such evidence of such loss, destruction or theft and on delivery
to the corporation, if the Board of Directors shall so require, of a bond of
indemnity in such amount (not exceeding twice the value of the
16
<PAGE>
shares represented by such certificate), upon such terms and secured by such
surety as the Board of Directors may in its discretion require.
SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of
Directors may appoint one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates of stock to bear
the signature or signatures of any of them.
SECTION 5. EXAMINATION OF BOOKS BY STOCKHOLDERS. The Board
shall have power to determine, from time to time, whether and to what extent and
at what times and places and under what conditions and regulations the accounts
and books and documents of the corporation, or any of them, shall be open to the
inspection of the stockholders; and no stockholder shall have any right to
inspect any account or book or document of the corporation.
ARTICLE VI
FISCAL YEAR
The fiscal year of the corporation shall begin on the first
day of June in each year and shall end on the last day of May next following,
unless otherwise determined by the Board of Directors.
17
<PAGE>
ARTICLE VII
CORPORATE SEAL
The corporate seal of the corporation shall be in such form as
the Board of Directors shall prescribe.
ARTICLE VIII
AMENDMENTS
The by-laws of this corporation may be amended, altered or
repealed and new by-laws not inconsistent with any provision of the Certificate
of Incorporation, as amended, may be made (i) by the affirmative vote of a
majority of the members of the Board of Directors then in office, or (ii) by the
affirmative vote of the holders of at least 80% of the total voting power of all
shares of stock of this corporation entitled to vote in the election of
directors, considered for purposes of this Article VIII as one class.
artsbylw\aar.bl
July 30, 1999 - 8:31PM
18
<PAGE>
Exhibit 10.2
AMENDMENT NO. 2 TO
RESTATED AND AMENDED
DEATH BENEFIT AGREEMENT DATED AUGUST 24, 1984
BY AND BETWEEN AAR CORP. AND IRA A. EICHNER
THIS AMENDMENT NO. 2 made this 25th day of May, 1990 by and between
AAR CORP., a Delaware corporation (the "Company") and Ira A. Eichner
("Eichner").
WHEREAS, the Company and Eichner entered into the Restated and
Amended Death Benefit Agreement dated August 24, 1984 (the "Death Benefit
Agreement"); and
WHEREAS, the Company and Eichner heretofore amended the Death
Benefit Agreement and now desire to further amend the Death Benefit Agreement
as herein set forth to reflect a certain mutually agreed upon change to the
terms and conditions thereof;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the Company and Eichner do hereby covenant and
agree that the third sentence of subparagraph (d) of paragraph 2 of the
Death Benefit Agreement shall read as follows:
"During, or as soon as practicable after the end of, each calendar
year ending after the date of death of Eichner, the Company shall
pay to his designated beneficiary a bonus in cash equal to the
aggregate of (1) the federal, state and local income taxes, if any,
incurred by his designated beneficiary as a result of income
generated by the Trust and (2) the federal, state and local income
taxes incurred by his designated beneficiary as a result of such
bonus."
IN WITNESS WHEREOF, the Company has caused this Amendment No. 2 to
be executed, and Eichner has hereunto set his hand, on the date first set
forth above.
AAR CORP.
By: /s/ David P. Storch
---------------------------------
David P. Storch
/s/ Ira A. Eichner
------------------------------------
IRA A. EICHNER
<PAGE>
AMENDMENT NO. 3 TO
RESTATED AND AMENDED
DEATH BENEFIT AGREEMENT DATED AUGUST 24, 1984
BY AND BETWEEN AAR CORP. AND IRA A. EICHNER
This AMENDMENT NO. 3 made this 9th day of October, 1996 by and between
AAR CORP., a Delaware corporation (the "Company") and Ira A. Eichner
("Eichner").
WHEREAS, the Company and Eichner entered into the Restated and Amended
Death Benefit Agreement dated August 24, 1984 (the "Death Benefit Agreement");
and
WHEREAS, the Company and Eichner further amended the Death Benefit
Agreement by amendments dated August 12, 1988 and May 25, 1990; and
WHEREAS, the Company and Eichner desire to further amend the Death
Benefit Agreement as hereinafter set forth to reflect certain mutually agreed
upon changes to the terms and conditions thereof;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the Company and Eichner do hereby covenant and agree as
follows:
1. Clause (i) of subparagraph (e) of paragraph 2 of the Death Benefit
Agreement is amended to read as follows:
"(i) `Income Tax Offset' with respect to any annual death
benefit payment made to Eichner's designated beneficiary
from the Trust shall mean an assumed aggregate federal,
state and local income tax rate for such year of 31.87%."
2. The following is added to paragraph 13 of the Death Benefit
Agreement:
<PAGE>
In addition to the Trust referred to in the preceding provisions of this
paragraph, the Company shall also enter into a trust agreement with a bank or
trust company (with a combined capital and surplus in excess of $100 million
dollars) located in the continental United States as trustee, whereby the
Company shall agree to establish and contribute to a trust ("Trust No. 2") for
the purpose of accumulating additional assets to assist it in fulfilling its
obligations to Eichner and his designated beneficiary hereunder. The Company
shall make an aggregate contribution to Trust No. 2 in calendar year 1996 in the
amount of $1,652,000 which may be used by the trustee of Trust No. 2, to the
extent necessary, to provide the death benefit payable to Eichner's designated
beneficiary hereunder and other benefits payable under Eichner's Restated and
Amended Employment Agreement dated August 1, 1985. From time to time, the
Company shall make additional contributions to Trust No. 2 as shall be necessary
to provide the death benefit payable to Eichner's designated beneficiary
hereunder. At the time set forth in Trust No. 2, the trustee thereof shall
transfer all of the assets of Trust No. 2 to the trustee of the Trust referred
to in the preceding provisions of this paragraph and thereafter Trust No. 2
shall terminate. Each contribution to Trust No.2 to be made by the Company
pursuant to this paragraph 13 shall be in an amount or amounts determined by the
independent actuary, or firm of independent actuaries, regularly
2
<PAGE>
employed to provide actuarial services to the Company.
IN WITNESS WHEREOF, the Company has caused this Amendment No. 3 to be
executed in its name by its duly authorized officer, and Eichner has hereunto
set his hand, on this 31st day of October, 1996.
AAR CORP.
By: /s/ Howard A. Pulsifer
----------------------------------------
Howard A. Pulsifer, Vice President
/s/ Ira A. Eichner
-------------------------------------------
Ira A. Eichner
3
<PAGE>
[AAR CORP. LOGO LETTERHEAD]
May 27, 1999
Mr. Ira A. Eichner
301 Polmer Park
Palm Beach, FL 33480
RE: Agreement to Terminate Restated and Amended
Death Benefit Agreement dated October 24, 1984
(AAR Contract No. 00319) by and between AAR CORP.
and Ira A. Eichner ("Agreement")
Dear Mr. Eichner:
Please refer to the above referenced Agreement between you and AAR CORP. Section
5 thereof provides for termination of the Agreement upon mutual agreement
between the parties.
This letter will evidence the parties' mutual desire, understanding an agreement
that the subject contract be terminated effective as of May 31, 1999, it being
agreed that provisions regarding notice in such contract, if any, are hereby
waived by the parties hereto.
Please confirm your acknowledgement and agreement to the foregoing termination
by signing a copy hereof in the space provided below and returning it to the
undersigned. The other original is for your file.
Sincerely,
AAR CORP.
/s/ Howard A. Pulsifer
- --------------------------------------
Howard A. Pulsifer
Vice President, General
Counsel & Secretary
HAP:jk
Read, acknowledged and agreed
to this 30 day of May, 1999:
/s/ Ira A. Eichner
- ------------------------------------
Ira A. Eichner
<PAGE>
Exhibit 10.4
AMENDMENT III TO TRUST AGREEMENT
DATED AUGUST 12, 1988, BY AND AMONG AAR CORP.,
THE NORTHERN TRUST COMPANY AND IRA A.. EICHNER
WHEREAS, AAR CORP., The Northern Trust Company and Ira A. Eichner (the
"Parties") entered into a trust agreement dated August 12,1988 (the "Trust
Agreement"); and
WHEREAS, the Trust Agreement was amended by Amendment I thereto dated
May 25,1990 and Amendment II thereto dated February 4,1994; and
WHEREAS, the Parties reserve the right to amend the Trust Agreement and
now deem it appropriate to further amend the Trust Agreement in certain
respects;
NOW THEREFORE, the following paragraph is added at the end of
Section 2.2 to read as follows:
The Trustee also shall accept a transfer of assets from the trustee
of a trust agreement dated October 17, 1996 by and among AAR CORP.,
The Northern Trust Company and Ira A. Eichner ("Trust No. 2")
consisting of contributions made by the Company to the trustee of
Trust No. 2 to assist the Company in fulfilling its obligations
under the Agreements, and earnings thereon. Such amount shall be
transferred to the Trustee from the trustee of Trust No. 2 as soon
as practicable after the Transfer Date described in Trust No. 2,
and such amount when received by the Trustee hereunder shall be
treated in the same manner as contributions made by the Company to
the Trust pursuant to the provisions of Section 2.1 above and this
Section 2.2.
IN WITNESS WHEREOF, the Parties have caused this Amendment III to the
Trust Agreement to be executed as of the 9th day of October, 1996.
AAR CORP.
By: /s/ Howard A. Pulsifer
----------------------------------------
Howard A. Pulsifer, Vice President
THE NORTHERN TRUST COMPANY
By: /s/ Eva Bernacki Vice President
----------------------------------------
/s/ Ira A. Eichner
-------------------------------------
Ira A. Eichner
<PAGE>
AMENDMENT IV TO TRUST AGREEMENT
DATED AUGUST 12, 1988, BY AND AMONG AAR CORP.,
THE NORTHERN TRUST COMPANY AND IRA A. EICHNER
WHEREAS, AAR CORP., The Northern Trust Company and Ira A. Eichner (the
"Parties") entered into a trust agreement dated August 12,1988 (the "Trust
Agreement"); and
WHEREAS, the Trust Agreement was amended by Amendment I thereto dated
May 25,1990, Amendment II thereto dated February 4,1994, and Amendment III
thereto dated October 9, 1996; and
WHEREAS, the Parties reserved the right to amend the Trust Agreement
and now deem it appropriate to further amend the Trust Agreement in certain
respects;
NOW THEREFORE, Section 3.1 is hereby amended to read as follows:
"3.1 The Company will serve as the benefits determiner
("Benefits Determiner") to determine the manner and the amount of
payments to be made to Eichner or, in the event of Eichner's death to
his Beneficiary, under the Agreements until such time as a successor
Benefits Determiner is retained by the Trustee as provided for below;
provided, however, the Company will use a nationally recognized U.S.
firm providing actuarial and benefit consulting services in the United
States to provide actuarial services in connection with determination
of benefits hereunder and to review and confirm final calculations for
accuracy. Upon Eichner's written request made at any time after the
commencement of Retirement Benefits under the agreements, the Trustee
shall retain a successor Benefits Determiner and so notify the Company,
provided that any successor Benefits Determiner shall be (i) jointly
selected by the Trustee and Eichner (or Eichner's Beneficiary in the
event of Eichner's death), (ii) a nationally recognized firm providing
actuarial and benefit consulting services primarily in the United
States, and (iii) independent of, and not providing services to, the
Company or Eichner (or his Beneficiary). The Trustee shall from time to
time, upon the direction of the Benefits Determiner, make distributions
or payments out of the Trust Fund to Eichner or, in the event of his
death, to his Beneficiary, in cash or in property in such manner and
amounts as the Benefits Determiner deems necessary to satisfy the
Company's obligation to provide the Benefits under the Agreements. The
Company, or if the Company fails to do so within ten days after the
receipt of a written request from the Trustee, Eichner (or Eichner's
Beneficiary in the event of Eichner's death) shall provide the Benefits
Determiner
<PAGE>
with sufficient information to determine the Benefits payable under the
Agreements."
IN WITNESS WHEREOF, the Parties have caused this Amendment IV to the
Trust Agreement to be executed as of the 30 day of May, 1999.
AAR CORP.
By: /s/ Howard A. Pulsifer
---------------------------------------
Howard A. Pulsifer, Vice President
THE NORTHERN TRUST COMPANY
By:
---------------------------------------
/s/ Ira C. Eichner
-------------------------------------
Ira A. Eichner
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF AAR CORP. (1)
<TABLE>
<CAPTION>
STATE OF
NAME OF CORPORATION INCORPORATION
-------------------- --------------
<S> <C>
AAR Aircraft Services, Inc. (2)................................ Oklahoma
AAR Airframe & Accessories Group, Inc. (3)..................... Illinois
AAR Allen Services, Inc. (4)................................... Illinois
AAR Aircraft & Engine Group, Inc. (5).......................... Illinois
AAR Engine Services, Inc. (6).................................. Illinois
AAR Financial Services Corp.................................... Illinois
AAR International, Inc. (7).................................... Illinois
AAR Manufacturing Group, Inc. (8).............................. Illinois
</TABLE>
- ---------------------
(1) Subsidiaries required to be listed pursuant to Regulation S-K Item
601(b)(21).
(2) Formerly know as AAR Aircraft Group, Inc.
(3) Also does business under the names AAR Allen Aircraft, AAR Distribution,
AAR Expendables, and AAR Defense Systems. Formerly known as AAR Allen
Group, Inc.
(4) Also does business under the names AAR Landing Gear, AAR Component
Services, and Mars Aircraft Radio.
(5) Also does business under the names AAR Aircraft Turbine Center, AAR
Aircraft Sales and Leasing, and AAR Engine Sales & Leasing. Formerly
known as AAR Engine Group, Inc.
(6) Also does business under the name AAR Engine Component Services and AAR
Energy Services.
(7) Also does business under the names AAR Distribution, AAR Aircraft
Component Services, AAR Engine Group International, and AAR Allen Group
International.
(8) Also does business under the names AAR Cargo Systems, AAR Cadillac
Manufacturing, AAR Composites, AAR Craig Systems, and AAR Skydyne. AAR
Manufacturing Group, Inc. was formerly known as AAR Brooks & Perkins
Corp.
<PAGE>
EXHIBIT 23.1
CONSENT OF KPMG LLP
The Board of Directors
AAR CORP.:
We consent to the incorporation by reference in Registration Statements Nos.
33-19767, 333-71067, 333-44693, 333-38671, 33-26783, 33-38042, 33-43839,
33-58456, 333-56023, 33-57753, 333-15327, 333-22175, 333-26093, 333-00205 and
002-002-95635 on Form S-8 and in Registration Statement No. 333-52853 on Form
S-3 of AAR CORP. of our report dated June 23, 1999 relating to the
consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 1999
and 1998 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, 1999, which report appears in the May 31, 1999 annual report on Form
10-K of AAR CORP.
KPMG LLP
Chicago, Illinois
August 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MAY 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 8,250
<SECURITIES> 0
<RECEIVABLES> 169,132
<ALLOWANCES> 4,830
<INVENTORY> 270,654
<CURRENT-ASSETS> 508,186
<PP&E> 184,172
<DEPRECIATION> 80,160
<TOTAL-ASSETS> 726,630
<CURRENT-LIABILITIES> 173,586
<BONDS> 180,939
0
0
<COMMON> 28,998
<OTHER-SE> 297,037
<TOTAL-LIABILITY-AND-EQUITY> 726,630
<SALES> 918,036
<TOTAL-REVENUES> 918,036
<CGS> 744,777
<TOTAL-COSTS> 840,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,902<F1>
<INTEREST-EXPENSE> 17,595<F2>
<INCOME-PRETAX> 59,786
<INCOME-TAX> 18,115
<INCOME-CONTINUING> 41,671
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,671
<EPS-BASIC> 1.51
<EPS-DILUTED> 1.49
<FN>
<F1>Provision for doubtful accounts is included in Total Costs and Expenses.
<F2>Interest expense is presented net of $972 of interest income.
</FN>
</TABLE>
