<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, 2000 COMMISSION FILE NUMBER 1-6263
AAR CORP.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 36-2334820
(State or Other Jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
ONE AAR PLACE, 1100 N. WOOD DALE ROAD, WOOD DALE, ILLINOIS 60191
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (630) 227-2000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
</TABLE>
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, 2000, the aggregate market value of the Registrant's voting
stock held by nonaffiliates was approximately $287,579,232 (based upon the
closing price of the Common Stock at July 31, 2000 as reported on the New York
Stock Exchange). 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, 2000, there were 26,856,636 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 11, 2000, 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......... 4
Supplemental Item -- Executive Officers of the Registrant... 5
PART II
Item 5. Market for 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...................................................... 12
Item 8. Financial Statements and Supplementary Data................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 37
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 38
Item 11. Executive Compensation...................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 38
Item 13. Certain Relationships and Related Transactions.............. 38
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................. 39
SIGNATURES....................................................................... 40
</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 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) the overhaul, repair and
exchange of a wide variety of airframe and accessory parts and components 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, aircraft leasing companies and original equipment manufacturers. The
Company is also an authorized distributor for more than 150 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. AAR's overhaul and repair of parts and components also support the
sale, lease and inventory management activities of the Company. AAR has nine
FAA-licensed repair stations in the U.S. and two in Europe to perform
airframe/component overhaul services.
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,
2
<PAGE>
(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.
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.
Competition in the worldwide aviation/aerospace aftermarket 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, 2000, backlog believed to be firm was approximately $84,800
compared to $83,600 at May 31, 1999. An additional $4,100 of unfunded government
options on awarded contracts also existed at May 31, 2000. It is expected that
approximately $84,600 of the May 31, 2000 backlog will be shipped in fiscal
2001.
Sales to the U.S. Government, its agencies and its contractors were
approximately $132,048 (12.9% of total sales), $98,954 (9.4% of total sales) and
$83,114 (9.7% of total sales) in fiscal years 2000, 1999, and 1998,
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, 2000, the Company employed approximately 2,900 persons worldwide.
3
<PAGE>
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, sales and administrative 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 Petropolis, Brazil;
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; Roswell, New Mexico 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.
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.
4
<PAGE>
SUPPLEMENTAL ITEM:
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.............................. 47 President and Chief Executive Officer; Director
Philip C. Slapke............................. 47 Executive Vice President
Howard A. Pulsifer........................... 57 Vice President; General Counsel; Secretary
Timothy J. Romenesko......................... 43 Vice President and Chief Financial Officer
Michael J. Sharp............................. 38 Vice President and Controller; Chief Accounting 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 Ira A.
Eichner's son-in-law. Mr. Eichner is Chairman of the Board and a Director of the
Company.
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 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.
Mr. Sharp has been Vice President and Controller, Chief Accounting Officer
since 1999. Previously he served as Controller of the Company from 1996 to 1999.
Prior to joining the Company he was with Kraft Foods from 1994 to 1996, and with
KPMG LLP from 1984 to 1994, most recently as audit senior manager.
5
<PAGE>
PART II
ITEM 5. MARKET FOR 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, 2000, 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, 1995, such amounts exceed the sum of $20,000 plus 50%
of Consolidated Net Income of the Company after June 1, 1994. At May 31, 2000
unrestricted consolidated retained earnings available for payment of dividends
and purchase of the Company's shares totaled approximately $19,504. At June 1,
2000, unrestricted consolidated retained earnings increased to $37,086, due to
inclusion of 50% of Consolidated Net Income of the Company for fiscal 2000.
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 2000 FISCAL 1999
--------------------------------------- ---------------------------------------
PER COMMON SHARE MARKET PRICES MARKET PRICES
------------------------ --------------------------- QUARTERLY --------------------------- QUARTERLY
QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
------- ---- --- --------- ---- --- ---------
<S> <C> <C> <C> <C> <C> <C>
First................. 23 1/4 18 3/8 $.085 29 15/16 22 1/8 $.085
Second................ 21 15/16 15 15/16 .085 25 3/8 17 3/4 .085
Third................. 26 7/8 15 13/16 .085 25 3/8 15 .085
Fourth................ 23 5/8 13 7/8 .085 21 9/16 15 3/8 .085
----- -----
$.340 $.340
===== =====
</TABLE>
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
---------------------------------------
Sales................................ $ 957,525 $ 918,036 $782,123 $589,328 $504,990
Pass through sales(1)................ 66,808 132,572 74,514 44,225 44,977
Total sales.......................... 1,024,333 1,050,608 856,637 633,553 549,967
Gross profit......................... 172,853 173,259 148,406 108,541 90,765
Operating income..................... 70,658 77,381 64,716 42,890 32,442
Interest expense..................... 23,431 18,567 14,494 10,786 10,616
Income before provision for income
taxes.............................. 49,526 59,786 51,157 32,975 22,782
Net income........................... 35,163 41,671 35,657 23,025 16,012
========== ========== ======== ======== ========
Share data:(2)
Earnings per share -- basic........ $ 1.30 $ 1.51 $ 1.29 $ .92 $ .67
Earnings per share -- diluted...... $ 1.28 $ 1.49 $ 1.27 $ .91 $ .66
Cash dividends per share........... $ .34 $ .34 $ .33 $ .32 $ .32
Average common shares outstanding
-- basic......................... 27,103 27,549 27,588 25,026(4) 23,967
========== ========== ======== ======== ========
Average common shares outstanding
-- diluted....................... 27,415 28,006 28,174 25,399(4) 24,248
========== ========== ======== ======== ========
FINANCIAL POSITION
---------------------------------------
Working capital...................... $ 347,451 $ 334,600 $319,252(3) $314,119(4) $258,627
Total assets......................... 740,998 726,630 670,559 529,584(4) 437,846
Short-term debt...................... 26,314 420 237(3) 1,474 1,474
Long-term debt....................... 180,447 180,939 177,509(3) 116,818 118,292
Total debt........................... 206,761 181,359 177,746(3) 118,292 119,766
Stockholders' equity................. 339,515 326,035 300,850 269,259(4) 204,635
========== ========== ======== ======== ========
Number of shares outstanding at end
of year(2)......................... 26,865 27,381 27,717 27,306(4) 23,997
========== ========== ======== ======== ========
Book value per share of common
stock(2)........................... $ 12.64 $ 11.91 $ 10.85 $ 9.86 $ 8.53
========== ========== ======== ======== ========
</TABLE>
------------------------
Notes:
(1) In connection with certain long-term inventory management programs, the
Company purchases factory-new products on behalf of its customers from
original equipment manufacturers. These products are purchased from the
manufacturer and "passed through" to the Company's customers at the
Company's cost. Beginning with the third quarter of fiscal 2000, the
Company began reporting "pass through" sales on the Income Statement.
(2) All share and per share information reflects the three-for-two stock split
on February 23, 1998.
(3) In December 1997, the Company sold $60,000 of unsecured 6.875% Notes due
December 15, 2007.
(4) 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,
------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Sales:
Aircraft and Engines......................... $ 440,502 $ 416,196 $ 339,299
Airframe and Accessories..................... 397,090 376,259 333,283
Manufacturing................................ 119,933 125,581 109,541
---------- ---------- ----------
957,525 918,036 782,123
Pass through sales........................... 66,808 132,572 74,514
---------- ---------- ----------
$1,024,333 $1,050,608 $ 856,637
========== ========== ==========
</TABLE>
THREE-YEAR SALES SUMMARY
Over the last three fiscal years, consolidated sales, before pass through
sales, increased from $782,123 in fiscal 1998 to $957,525 in fiscal 2000. Total
sales, which include pass through sales, increased from $856,637 in fiscal 1998
to $1,024,333 in fiscal 2000. The growth in sales was the result of the growing
demand for the Company's broad line of products and services in the aviation/
aerospace market, whose rate of growth declined slightly the last two fiscal
years. In fiscal 1998, most of the world's major airlines, excluding those in
Asia, reported record or near record operating earnings driven by strong revenue
growth and their various initiatives to control costs. In 1999 and 2000,
however, many of the world's airlines experienced lower operating earnings
compared to 1998 reflecting slower revenue growth and higher expenses. Certain
domestic aviation/aerospace original equipment manufacturers also experienced
lower operating earnings during the latter half of the three-year period
reflecting the overall softening aviation/aerospace market. In addition, during
the latter part of the three-year period, many airlines replaced older aircraft,
such as the 727 and DC-9, powered by the JT8D engine family, and older 747s,
generally powered by the JT9D engine family, in favor of newer aircraft, such as
the 737-300, 747-400, 777, A320 and A330/A340. The Company continues to develop
new repair and overhaul capabilities and other support programs for the newer
generation aircraft and engines.
During fiscal 1998 and 1999, the Company's sales before pass through sales
benefited from the aggressive pursuit of market opportunities in the relatively
strong aviation/aerospace market. Sales in Aircraft and Engines benefited from
new inventory management programs and higher sales of its aircraft and engine
sales and leasing products. Sales in Airframe and Accessories increased as a
result of greater demand for the Company's repair and overhaul services and the
impact from the acquisition of a new aircraft parts distribution company during
1998. Sales in Manufacturing increased in 1999 compared to 1998 from strong
demand of the Company's products supporting U.S. deployment needs.
During fiscal 2000, sales, before pass through sales, increased due to
greater demand for the Company's repair and overhaul services, as well as the
Company's aircraft and engine sales and leasing products. Sales in Aircraft and
Engines during fiscal 2000 were negatively impacted by lower engine part sales
reflecting fewer shop visits at a main customer's engine overhaul facilities.
Sales in Manufacturing during fiscal 2000 were lower mainly as a result of the
divestiture of the Company's
8
<PAGE>
floor maintenance products manufacturing facility which occurred in the second
quarter of fiscal 1999.
Pass through sales increased in fiscal 1999 compared to 1998 mainly as a
result of new engine parts inventory management programs, but declined in fiscal
2000 primarily as a result of the aforementioned fewer shop visits at a certain
customer's engine overhaul facilities.
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.*
FISCAL 2000 COMPARED WITH FISCAL 1999
Consolidated sales in fiscal 2000, before pass through sales, increased 4.3%
to $957,525 from $918,036 in fiscal 1999. This increase was attributable to
higher demand for the Company's aircraft and engine sales and leasing products,
as well as strong demand for the Company's repair and overhaul services. Sales
in Aircraft and Engines increased $24,306 or 5.8%, as the Company experienced
strong demand for its whole engine and aircraft products, partially offset by a
continued decrease in sales from engine parts inventory management programs.
This decrease is primarily the result of reduced demand by a major customer for
certain engine parts due principally to significantly fewer engine shop visits
to this customer for the engine types the Company supports. The Company is
working to resolve pending issues with this customer, but no assurance can be
given that sales to this customer will continue at historical levels in the
future. The Company is aggressively pursuing inventory management programs with
other customers and building its engine parts manufacturing capabilities to
offset potential future reduced sales to this customer.* Sales in Airframe and
Accessories increased $20,831 or 5.5%, reflecting increased demand for the
Company's aircraft maintenance and landing gear and small component overhaul and
repair services. These increases were partially offset by lower new aircraft
parts sales to general aviation customers. Sales in Manufacturing declined
$5,648 or 4.5%, as a result of the divestiture of the Company's floor
maintenance products manufacturing subsidiary in November 1998, partially offset
by higher sales of the Company's products supporting U.S. deployment needs. Pass
through sales were $66,808 compared to $132,572 in the prior year. As certain of
the Company's inventory management programs have matured, pass through sales
have declined as the Company has sourced more of its customer's parts
requirements with used, serviceable parts, rather than with factory-new parts.
The reduction in pass through sales during the current fiscal year is
attributable to the maturation of the Company's existing long-term inventory
management programs, as well as a decline in the number of shop visits for the
engine types the Company supports at certain long-term inventory management
programs.
Consolidated gross profit was essentially even with the prior fiscal year.
The fiscal 2000 consolidated gross profit margin, excluding the impact from pass
through sales, was 18.1% in the current fiscal year, compared to 18.9% in the
prior year. The reduction in the consolidated gross profit margin was primarily
due to the unfavorable impact of the mix of inventories sold. Selling, general
and administrative expenses increased $6,317 or 6.6% as a result of a $4,000
fourth quarter charge to increase bad debts reserve in response to the Company's
accounts receivable exposure, which included two airlines that filed for
bankruptcy protection during fiscal 2000, as well as increased information
technology costs incurred as a result of the Company's e-business activities.
Interest expense increased $4,864 principally as a result of increased average
short-term borrowings outstanding during fiscal year 2000 as compared to prior
year, and interest income increased $1,327 as a result of an increase in average
outstanding interest-bearing notes receivable during the current year compared
to prior year.
------------------------------
* 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.
9
<PAGE>
Consolidated net income declined $6,508 or 15.6% from the prior year as a
result of the above factors.
FISCAL 1999 COMPARED WITH FISCAL 1998
Consolidated sales in fiscal 1999, before pass through sales, increased
17.4% to $918,036 from $782,123 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 on sales as a result of the divestiture of the Company's
floor maintenance products manufacturing subsidiary in November 1998. Pass
through sales were $132,572 compared to $74,514 in the prior year. The increase
in pass through sales in the current year as compared to the prior year was
attributable to the addition of new inventory management programs during fiscal
1999 and late fiscal 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%, excluding the impact from pass through sales, 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 $60,000 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.
FISCAL 1998 COMPARED WITH FISCAL 1997
Consolidated net sales, before pass through 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
10
<PAGE>
deployment program. Pass through sales were $74,514 compared to $44,225
reflecting strong demand of engine parts in the Company's inventory management
programs.
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%, excluding the impact from pass through sales, 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 $60,000 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.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 2000, the Company's liquidity and capital resources included cash
and cash equivalents of $1,241 and working capital of $347,451. At May 31, 2000,
the Company's long-term debt-to-capitalization ratio was 34.7% compared to 35.7%
at May 31, 1999, and the Company's total debt-to-capitalization ratio was 37.8%
at May 31, 2000, compared to 35.7% at May 31, 1999. The Company continues to
maintain its external sources of financing with $153,326 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 2000, the Company generated $10,051 of cash flow from
operations compared to $28,525 and $22,823 during fiscal 1999 and 1998,
respectively. The reduction in cash flow generated from operations was
principally due to a reduction in accounts and notes payable and accrued
liabilities during the current fiscal year.
During fiscal 2000, the Company's investing activities used $23,209,
primarily reflecting the Company's investment in property, plant and equipment
of $22,344.
During fiscal 2000, the Company's financing activities generated $6,029 of
cash, reflecting proceeds from short-term borrowings of $25,885, partially
offset by the purchase of the Company's stock of $10,530 and the payment of cash
dividends of $9,218.
The Company believes that its liquidity 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.*
------------------------------
* 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.
11
<PAGE>
A summary of key indicators of financial condition and lines of credit
follows:
<TABLE>
<CAPTION>
MAY 31,
------------------------
DESCRIPTION 2000 1999
----------- --------- ---------
<S> <C> <C>
Working capital..................................... $347,451 $334,600
Current ratio....................................... 3.1:1 2.9:1
Bank credit lines:
Borrowings outstanding............................ $ 25,885 $ --
Available but unused lines........................ 153,326 178,800
-------- --------
Total credit lines.................................. $179,211 $178,800
======== ========
Long-term debt, less current maturities............. $180,447 $180,939
Ratio of long-term debt to capitalization........... 34.7% 35.7%
Ratio of total debt to capitalization............... 37.8% 35.7%
</TABLE>
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: ability to acquire
inventory at favorable prices; integration of acquisitions; marketplace
competition; 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 2000 and 1999, the Company did not utilize derivative financial
instruments to offset these risks.
At May 31, 2000, $65,300 was available under credit lines with domestic
banks, $84,115 was available under revolving credit and term loan agreements
with domestic banks, and $3,911 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. As of May 31, 2000, the
outstanding balance under these agreements was $25,885. 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 2000.
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.
12
<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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 31, 2000 in conformity with accounting principles generally accepted
in the United States of America.
KPMG LLP
Chicago, Illinois
June 27, 2000
13
<PAGE>
[THIS PAGE LEFT INTENTIONALLY BLANK]
14
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
--------------------------------------
2000 1999 1998
----------- ----------- ----------
(000S OMITTED EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales.................................................... $ 957,525 $ 918,036 $782,123
Pass through sales....................................... 66,808 132,572 74,514
---------- ---------- --------
1,024,333 1,050,608 856,637
---------- ---------- --------
Costs and operating expenses:
Cost of sales.......................................... 851,480 877,349 708,231
Selling, general and administrative.................... 102,195 95,878 83,690
---------- ---------- --------
953,675 973,227 791,921
---------- ---------- --------
Operating income......................................... 70,658 77,381 64,716
Interest expense......................................... (23,431) (18,567) (14,494)
Interest income.......................................... 2,299 972 935
---------- ---------- --------
Income before provision for income taxes................. 49,526 59,786 51,157
Provision for income taxes............................... 14,363 18,115 15,500
---------- ---------- --------
Net income............................................... $ 35,163 $ 41,671 $ 35,657
========== ========== ========
Earnings per share of common stock--basic................ $ 1.30 $ 1.51 $ 1.29
========== ========== ========
Earnings per share of common stock--diluted.............. $ 1.28 $ 1.49 $ 1.27
========== ========== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
15
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31,
-------------------------
2000 1999
--------- ---------
(000S OMITTED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,241 $ 8,250
Accounts receivable....................................... 128,348 164,302
Inventories............................................... 275,817 270,654
Equipment on or available for short-term leases........... 60,201 33,845
Deferred tax assets, deposits and other................... 45,660 31,135
-------- --------
Total current assets........................................ 511,267 508,186
-------- --------
Property, plant and equipment, at cost:
Land...................................................... 6,331 6,331
Buildings and improvements................................ 68,387 66,123
Equipment, furniture and fixtures......................... 127,879 111,718
-------- --------
202,597 184,172
Accumulated depreciation.................................... (92,594) (80,160)
-------- --------
110,003 104,012
-------- --------
Other assets:
Investment in leveraged leases............................ 34,487 34,053
Cost in excess of underlying net assets of acquired
companies, net.......................................... 38,840 40,093
Other..................................................... 46,401 40,286
-------- --------
119,728 114,432
-------- --------
$740,998 $726,630
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
16
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MAY 31,
------------------------
2000 1999
--------- ---------
(000S OMITTED)
<S> <C> <C>
Current liabilities:
Short-term debt........................................... $ 25,885 $ --
Current maturities of long-term debt...................... 429 420
Accounts and trade notes payable.......................... 107,879 129,703
Accrued liabilities....................................... 26,596 36,803
Accrued taxes on income................................... 3,027 6,660
-------- --------
Total current liabilities................................... 163,816 173,586
-------- --------
Long-term debt, less current maturities..................... 180,447 180,939
Deferred tax liabilities.................................... 56,020 44,870
Retirement benefit obligation............................... 1,200 1,200
-------- --------
237,667 227,009
-------- --------
Stockholders' equity:
Preferred stock, $1.00 par value, authorized 250 shares;
none issued............................................. -- --
Common stock, $1.00 par value, authorized 100,000 shares;
issued 29,168 and 28,998, respectively.................. 29,168 28,998
Capital surplus........................................... 146,557 144,095
Retained earnings......................................... 210,474 184,529
Treasury stock, 2,303 and 1,617 shares at cost,
respectively............................................ (37,236) (25,463)
Accumulated other comprehensive income (loss) --
cumulative translation adjustments...................... (9,448) (6,124)
-------- --------
339,515 326,035
-------- --------
$740,998 $726,630
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
17
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED MAY 31, 2000
<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, 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)
Net income................................ -- -- -- -- -- 35,163 -- $35,163
Cash dividends............................ -- -- -- -- -- (9,218) -- --
Treasury stock............................ -- -- 686 (11,773) -- -- -- --
Exercise of stock options and stock
awards.................................. 170 170 -- -- 2,462 -- -- --
Adjustment for net translation loss....... -- -- -- -- -- -- (3,324) (3,324)
-------
Comprehensive income for fiscal 2000...... $31,839
------ ------- ----- -------- -------- -------- ------- =======
Balance, May 31, 2000....................... 29,168 $29,168 2,303 $(37,236) $146,557 $210,474 $(9,448)
====== ======= ===== ======== ======== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
18
<PAGE>
AAR CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
------------------------------
2000 1999 1998
-------- -------- --------
(000S OMITTED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 35,163 $ 41,671 $ 35,657
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization......................... 18,373 17,063 14,283
Deferred taxes........................................ 9,570 10,970 3,780
Change in certain assets and liabilities:
Accounts receivable................................. 31,532 (6,991) (14,922)
Inventories......................................... (6,644) (46,212) (34,706)
Equipment on or available for short-term leases..... (26,593) 3,214 6,664
Accounts and trade notes payable.................... (21,536) 24,659 2,730
Accrued liabilities and taxes on income............. (13,786) (3,933) 16,936
Other............................................... (16,028) (11,916) (7,599)
-------- -------- --------
Net cash provided from operating activities............. 10,051 28,525 22,823
-------- -------- --------
Cash flows from investing activities:
Property, plant and equipment expenditures, net........... (22,344) (36,131) (17,495)
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.................................................. (434) 23,369 (33,538)
Notes receivable and other................................ (431) (6,641) (19,948)
-------- -------- --------
Net cash used in investing activities................... (23,209) (22,893) (99,129)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term notes payable......... -- -- 59,347
Proceeds from short-term debt............................. 25,885 -- --
Change in borrowings...................................... (484) 2,053 (10,170)
Cash dividends............................................ (9,218) (9,375) (9,118)
Purchases of treasury stock............................... (10,530) (7,558) --
Proceeds from exercise of stock options and other......... 376 278 1,642
-------- -------- --------
Net cash provided from (used in) financing activities... 6,029 (14,602) 41,701
-------- -------- --------
Effect of exchange rate changes on cash..................... 120 (2) 122
-------- -------- --------
(Decrease) in cash and cash equivalents..................... (7,009) (8,972) (34,483)
Cash and cash equivalents, beginning of year................ 8,250 17,222 51,705
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 1,241 $ 8,250 $ 17,222
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
19
<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 2000 and 1999 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.
In connection with certain long-term inventory management programs, the
Company purchases factory-new products on behalf of its customers from original
equipment manufacturers. These products are purchased from the manufacturer and
"passed through" to the Company's customer at the Company's cost. Previously,
the Company disclosed these "pass through" sales in the notes to the
consolidated financial statements and excluded these transactions from sales and
cost of sales.
During the third quarter of fiscal 2000, the SEC issued Staff Accounting
Bulletin (SAB) No. 101 summarizing the SEC's view in applying generally accepted
accounting principles to revenue recognition. As a result of SAB No. 101, the
Company now believes that pass through sales should be included in sales. Prior
to issuance of SAB No. 101, the Company believed that excluding pass through
sales from sales was appropriate given the limited nature of the services
provided for these transactions. Beginning with the third quarter Form 10-Q, the
Company reported pass through sales and the related cost of sales on the
Consolidated Income Statement. This change has no impact on the current period
or historical net income, earnings per share, condensed consolidated balance
sheets, statements of cash flows or comprehensive income.
SEGMENT INFORMATION
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" 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.
20
<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
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, 2000 and 1999, cash
equivalents of approximately $122 and $116, 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, 2000 and 1999, 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.
The Company has an agreement to sell, on a revolving basis, an interest in a
defined pool of trade accounts receivable up to $35,000. 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 $29,359 and
$25,300 at May 31, 2000 and 1999, respectively.
FOREIGN CURRENCY
Gains and losses on foreign currency translation and foreign exchange
contracts are determined in accordance with the method of accounting prescribed
by SFAS No. 52. All balance sheet accounts of foreign and certain domestic
subsidiaries transacting business in currencies other than the Company's
functional currency are translated at year-end or historical exchange rates.
Revenues and expenses are translated at average exchange rates during the year.
Translation adjustments are excluded from the results of operations and are
recorded in stockholders' equity as 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
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)
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,
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Raw materials and parts..................................... $ 44,235 $ 50,352
Work-in-process............................................. 12,318 12,733
Purchased aircraft, parts, engines and components held for
sale...................................................... 219,264 207,569
-------- --------
$275,817 $270,654
======== ========
</TABLE>
EQUIPMENT UNDER OPERATING LEASES
Lease revenue is recognized as earned. The cost of the asset under lease is
original purchase price plus overhaul costs. Depreciation 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.
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.
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)
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 40 years. Amortization expense was $1,213, $802, and
$565 in fiscal 2000, 1999 and 1998, respectively. Accumulated amortization is
$6,188 and $4,975 at May 31, 2000 and 1999, 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.
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,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Interest paid.......................................... $22,800 $18,800 $11,600
Income taxes paid...................................... 11,300 4,400 6,200
Income tax refunds and interest received............... 500 900 6,000
</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)
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.
2. FINANCING ARRANGEMENTS
Term loans consisted of:
<TABLE>
<CAPTION>
MAY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current maturities of long-term debt........................ $429 $420 $237
==== ==== ====
</TABLE>
Short-term borrowing activity was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
-------------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Maximum amount borrowed............................... $127,600 $92,300 $59,200
Average daily borrowings.............................. 94,881 45,455 20,689
Average interest rate during the year................. 5.9% 5.4% 6.0%
======== ======= =======
</TABLE>
At May 31, 2000, aggregate unsecured bank credit arrangements were $179,211.
Of this amount, $65,300 was available under credit lines with domestic banks,
$84,115 was available under revolving credit and term loan agreements with
domestic banks and $3,911 was available under credit agreements with foreign
banks. 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 the corporate base rate or quoted Eurodollar or multicurrency rates during
the revolving credit period and one-half percent over the corporate base rate or
quoted Eurodollar rate thereafter. Borrowings outstanding under these agreements
at May 31, 2000 were $25,885. 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.
24
<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>
<CAPTION>
MAY 31,
---------------------
2000 1999
--------- ---------
<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 4.60%
at May 31, 2000 (secured by trust indentures on property,
plant and equipment)...................................... 2,158 2,358
Industrial revenue bonds due in installments to 2002 with
weighted average interest of approximately 7.47% at May
31, 2000 (secured by trust indentures on property, plant
and equipment)............................................ 84 141
Industrial revenue bonds due in monthly installments to 2019
with interest of 5.65% (secured by trust indentures on
property, plant and equipment)............................ 2,171 2,235
Note payable due in annual installments to October 2003 with
interest of 6.5%.......................................... 1,463 1,625
-------- --------
180,876 181,359
Current maturities.......................................... (429) (420)
-------- --------
$180,447 $180,939
======== ========
</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, 2000, unrestricted
consolidated retained earnings available for payment of dividends and purchase
of the Company's shares was approximately $19,504. Effective June 1, 2000,
unrestricted consolidated retained earnings increased to $37,086 due to
inclusion of 50% of the consolidated net income of the Company for fiscal 2000.
The aggregate amount of long-term debt maturing during each of the next five
fiscal years is $429 in 2001, $65,411 in 2002, $394 in 2003, $51,407 in 2004 and
$284 in 2005. The Company's long-term debt was estimated to have a fair value of
approximately $172,426 at May 31, 2000 and was based on estimates using
discounted future cash flows at an assumed rate for borrowings currently
prevailing in the marketplace for similar instruments.
25
<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,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Current
Federal.............................................. $ 4,070 $ 6,045 $ 9,950
Foreign.............................................. -- -- 720
State................................................ 723 1,100 1,050
------- ------- -------
$ 4,793 $ 7,145 $11,720
Deferred............................................... 9,570 10,970 3,780
------- ------- -------
$14,363 $18,115 $15,500
======= ======= =======
</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,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.............................................. $28,710 $16,920
Leveraged leases.......................................... 27,120 27,440
Other..................................................... 630 620
------- -------
Total deferred tax liabilities............................ $56,460 $44,980
======= =======
Deferred tax assets-current:
Inventory costs........................................... $ 3,160 $ 3,090
Employee benefits......................................... 2,980 2,410
Alternative minimum tax................................... 1,090 --
Other..................................................... 240 390
------- -------
Total deferred tax assets-current......................... $ 7,470 $ 5,890
------- -------
Deferred tax assets-noncurrent:
Postretirement benefits................................... $ 440 $ 110
------- -------
Total deferred tax assets-noncurrent...................... 440 110
------- -------
Total deferred tax assets................................. $ 7,910 $ 6,000
======= =======
Net deferred tax liabilities................................ $48,550 $38,980
======= =======
</TABLE>
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
26
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
3. INCOME TAXES -- (CONTINUED)
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 2000, 1999 and
1998, for the following reasons:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Provision for income taxes at the Federal statutory
rate................................................. $17,330 $20,925 $17,905
Tax benefits on exempt earnings from export sales.... (3,815) (3,690) (3,100)
State income taxes, net of Federal benefit and
refunds............................................ 900 900 900
Amortization of goodwill............................. 298 280 200
Differences between foreign tax rates and the U.S.
Federal statutory rate............................. -- -- (200)
Other, net........................................... (350) (300) (205)
------- ------- -------
Provision for income taxes as reported................. $14,363 $18,115 $15,500
======= ======= =======
Effective income tax rate.............................. 29.0% 30.3% 30.3%
======= ======= =======
</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 exercisable
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
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate..................................... 6.57% 5.74% 5.97%
Expected volatility of common stock......................... 38.7% 31.6% 25.5%
Dividend yield.............................................. 1.6% 1.8% 2.0%
Expected option term in years............................... 4.0 4.0 4.0
</TABLE>
The fair value weighted average per share of stock options granted during
fiscal 2000, 1999 and 1998 was $7.81, $5.20 and $5.04, respectively. Had
compensation cost for stock options awarded under
27
<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 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:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C> <C>
Net income: As reported $35,163 $41,671 $35,657
Proforma 33,097 40,403 34,478
Earnings per share -- basic: As reported 1.30 1.51 1.29
Proforma 1.22 1.47 1.25
Earnings per share -- diluted: As reported 1.28 1.49 1.27
Proforma 1.21 1.44 1.22
</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, 2000 follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
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
Granted.............................................. 519 22.48
Exercised............................................ (105) 12.40
Surrendered/expired/cancelled........................ (164) 20.05
-----
Outstanding, May 31, 2000 (1,508 exercisable).......... 3,426 $18.16
=====
</TABLE>
The following table provides additional information regarding options
outstanding as of May 31, 2000:
<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 - 12.25 649 4.1 582 $ 9.74
$12.26 - 18.38 1,253 6.7 619 15.65
$18.39 - 24.50 1,435 7.9 226 22.61
$24.51 - 30.63 89 4.6 81 27.09
----- -----
3,426 6.6 1,508 $14.98
===== =====
</TABLE>
28
<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. 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 $1,354, $1,667 and $1,400 in fiscal
2000, 1999 and 1998, respectively.
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, 2000
----------------------------------
OUTSTANDING AVAILABLE TOTAL
----------- --------- --------
<S> <C> <C> <C>
Stock Benefit Plan (officers, directors and key
employees).......................................... 3,751 1,314 5,065
Employee Stock Purchase Plan.......................... 29 133 162
</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
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)
or through privately negotiated transactions. On October 13, 1999, the Board of
Directors authorized the Company to purchase up to 1,500 additional shares of
the Company's common stock. As of May 31, 2000, the Company had purchased 1,701
shares of its common stock on the open market under these programs at an average
price of $14.12 per share.
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, 2000.
<TABLE>
<CAPTION>
MAY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Basic EPS
Net income........................................... $35,163 $41,671 $35,657
Average common shares outstanding.................... 27,103 27,549 27,588
Earnings per share-basic............................. $ 1.30 $ 1.51 $ 1.29
======= ======= =======
Diluted EPS
Net income........................................... $35,163 $41,671 $35,657
Average common shares outstanding.................... 27,103 27,549 27,588
Additional shares due to hypothetical exercise of
stock options...................................... 312 457 586
Earnings per share -- diluted........................ $ 1.28 $ 1.49 $ 1.27
======= ======= =======
</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%.
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
Prior to January 1, 2000, the pension plan for domestic salaried employees
had benefit formulas primarily based on years of service and compensation.
Effective January 1, 2000, the Company converted its existing defined benefit
plan for substantially all domestic salaried employees to a cash balance pension
plan. Under the cash balance pension plan, the retirement benefit is expressed
as a
30
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
6. EMPLOYEE BENEFIT PLANS -- (CONTINUED)
dollar amount in an account that grows with annual pay-based credits and
interest on the account balance. 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.
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 based generally on years
of service and compensation. 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,
-------------------
2000 1999
-------- --------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................... $50,154 $46,384
Service cost.............................................. 2,647 2,315
Interest cost............................................. 3,791 3,334
Plan participants' contributions.......................... 220 171
Amendments................................................ 1,231 --
Net actuarial (gain) loss................................. (2,556) (25)
Benefits paid............................................. (1,936) (1,850)
Other..................................................... -- (175)
------- -------
Benefit obligation at end of year........................... 53,551 50,154
------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year............ 44,096 42,286
Actual return on plan assets.............................. 2,369 2,725
Employer contributions.................................... 1,600 764
Plan participants' contributions.......................... 220 171
Benefits paid............................................. (1,936) (1,850)
------- -------
Fair value of plan assets at end of year.................... 46,349 44,096
------- -------
Funded status............................................. (7,202) (6,058)
Unrecognized actuarial losses............................. 5,068 6,904
Unrecognized prior service cost........................... 2,028 966
Unrecognized transitional obligation...................... 417 521
------- -------
Prepaid pension costs....................................... $ 311 $ 2,333
======= =======
</TABLE>
31
<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 8.25% at May 31, 2000 and 7.5% at
May 31, 1999, and an assumed average compensation increase of 5.0%. The expected
long-term rate of return on assets is 10.0% for fiscal 2000 and 1999. 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 6.5% at May 31, 2000 and 5.5% at
May 31, 1999, and an assumed average compensation increase of 4.0%. The expected
long-term rate of return on assets is 6.5% for fiscal 2000 and 1999.
Pension expense charged to results of operations includes the following
components:
<TABLE>
<CAPTION>
MAY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Service cost............................................ $ 2,647 $ 2,315 $ 1,643
Interest cost........................................... 3,791 3,334 3,011
Expected return on plan assets.......................... (3,881) (3,560) (3,165)
Amortization of prior service cost...................... 169 138 138
Recognized net actuarial loss........................... 411 412 173
Transitional obligation................................. 90 92 93
------- ------- -------
$ 3,227 $ 2,731 $ 1,893
======= ======= =======
</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 $1,634, $1,491 and $1,174 in fiscal 2000, 1999 and
1998, 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.
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
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)
Company as determined by the Company's Board of Directors. Expense charged to
results of operations for these plans was $345, $1,162 and $1,231 in fiscal
2000, 1999 and 1998, 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, 2000, 1999 and 1998
included the following components:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Service cost................................................ $-- $-- $--
Interest cost............................................... 104 96 89
---- ---- ----
$104 $ 96 $ 89
==== ==== ====
</TABLE>
The funded status of the plans at May 31, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS:
Benefit obligations at beginning of year.................. $ 1,463 $ 1,354
Interest cost............................................. 104 96
Benefits paid............................................. (153) (240)
Unrecognized actuarial loss............................... (57) 108
Plan participants' contributions.......................... -- 145
------- -------
Benefit obligation at end of year........................... 1,357 1,463
------- -------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year............ -- --
Company contributions..................................... 153 95
Benefits paid............................................. (153) (240)
Plan participants' contributions.......................... -- 145
------- -------
Fair value of plan assets at end of year.................... -- --
------- -------
Funded status............................................. $(1,357) $(1,463)
Unrecognized actuarial (gains)losses...................... (3) 53
Unrecognized prior service cost........................... 160 210
------- -------
Accrued postretirement costs................................ $(1,200) $(1,200)
======= =======
</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 assumed discount rate used to measure the accumulated postretirement
benefit obligation was 8.25% at May 31, 2000 and 7.5% at May 31, 1999. The
assumed rate of future increases in healthcare costs was 6.8% and 7.5% in fiscal
2000 and 1999, 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 $44 as of May 31, 2000 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 which
are accounted for as operating leases that expire at various dates through 2011.
The Company also leases certain aviation equipment which are accounted for as
operating leases. The terms of these arrangements are one to five years with
options to renew annually at the election of the Company. If the Company elects
to not renew the lease, the Company is required to purchase the aviation
equipment at its stipulated lease value. The Company may also sublease the
aviation equipment to a customer on a short- or long-term basis. Future minimum
payments under leases with initial or remaining terms of one year or more at
May 31, 2000 are as follows:
<TABLE>
<CAPTION>
FACILITIES AVIATION
YEAR AND EQUIPMENT EQUIPMENT
---- ------------- ----------
<S> <C> <C>
2001..................................................... $5,682 $2,787
2002..................................................... 4,343 2,787
2003..................................................... 3,621 2,787
2004..................................................... 3,243 2,787
2005 and thereafter...................................... 3,639 20,117
</TABLE>
Rental expense during the past three fiscal years was as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Facilities and Equipment.................................. $9,663 $8,339 $6,991
Aviation Equipment........................................ 8,344 4,242 422
</TABLE>
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, 2000 was
approximately $51,500.
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.
34
<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 20% 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,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Rentals receivable (net of principal and interest on the
nonrecourse debt)......................................... $15,488 $15,681
Estimated residual value of leased assets................... 32,952 32,952
Unearned and deferred income................................ (13,953) (14,580)
------- -------
34,487 34,053
Deferred taxes.............................................. (27,120) (27,440)
------- -------
Net investment in leveraged leases.......................... $ 7,367 $ 6,613
======= =======
</TABLE>
Pretax income from leveraged leases was $695, $702 and $1,329 in fiscal
2000, 1999 and 1998, respectively.
9. OTHER NONCURRENT ASSETS
At May 31, 2000 and 1999, other noncurrent assets consisted of the
following:
<TABLE>
<CAPTION>
MAY 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Investment in joint ventures................................ $22,811 $18,509
Notes receivable............................................ 7,822 7,130
Prepaid pension costs....................................... 311 2,333
Cash surrender value of life insurance...................... 2,719 1,884
Debt issuance costs......................................... 818 1,028
Other....................................................... 11,920 9,402
------- -------
$46,401 $40,286
======= =======
</TABLE>
35
<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 $184,718 (18.0% of total sales),
$209,712 (20.0% of total sales) and $202,481 (23.6% of total sales) in fiscal
2000, 1999 and 1998, respectively.
Sales to the U.S. Government, its agencies and its contractors were
approximately $132,048 (12.9% of total sales), $98,954 (9.4% of total sales) and
$83,114 (9.7% of total sales) in fiscal 2000, 1999 and 1998, respectively. Sales
to the Company's largest customer, excluding pass through sales, were $114,000
and $135,100 during fiscal 2000 and 1999, respectively. Including pass through
sales, sales to
36
<PAGE>
AAR CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
11. BUSINESS SEGMENT INFORMATION -- (CONTINUED)
the largest customer were $180,800 and $267,000 during fiscal 2000 and 1999,
respectively. No assurances can be given that sales to this customer will
continue at historical levels in the future.
12. SELECTED QUARTERLY DATA (UNAUDITED)
The unaudited selected quarterly data for fiscal years ended May 31, 2000
and 1999 follows. The sales amounts include pass through sales.
<TABLE>
<CAPTION>
FISCAL 2000
-----------
DILUTED EARNINGS
QUARTER SALES GROSS PROFIT NET INCOME PER SHARE
------- ---------- ------------ ---------- ----------------
<S> <C> <C> <C> <C>
First.................... $ 266,683 $ 44,190 $10,831 $ .39
Second................... 260,240 45,728 10,906 .40
Third.................... 272,331 45,074 10,955 .40
Fourth................... 225,079 37,861 2,471 .09
---------- -------- ------- -----
$1,024,333 $172,853 $35,163 $1.28
========== ======== ======= =====
<CAPTION>
FISCAL 1999
-----------
DILUTED EARNINGS
QUARTER SALES GROSS PROFIT NET INCOME PER SHARE
------- ---------- ------------ ---------- ----------------
<S> <C> <C> <C> <C>
First.................... $ 250,491 $ 41,049 $ 9,623 $ .34
Second................... 282,232 42,740 10,035 .36
Third.................... 250,984 42,706 10,278 .37
Fourth................... 266,901 46,764 11,735 .42
---------- -------- ------- -----
$1,050,608 $173,259 $41,671 $1.49
========== ======== ======= =====
</TABLE>
13. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 31,
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year.............................. $ 4,830 $ 3,157 $ 1,965
Provision charged to operations....................... 5,470 2,902 1,261
Reserves acquired..................................... -- -- 1,679
Deductions for accounts written off, net of
recoveries.......................................... (220) (1,229) (1,748)
------- ------- -------
Balance, end of year.................................... $10,080 $ 4,830 $ 3,157
======= ======= =======
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
37
<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 2000
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 2000 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 2000 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 2000 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 2000 Annual
Meeting of Stockholders.
38
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT DISCLOSURES
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report, KPMG LLP...................... 13
Financial Statements--AAR CORP. and Subsidiaries:
Consolidated statements of income for the three years
ended May 31, 2000...................................... 15
Consolidated balance sheets as of May 31, 2000 and 1999... 16-17
Consolidated statements of stockholders' equity for the
three years ended May 31, 2000.......................... 18
Consolidated statements of cash flows for the three years
ended May 31, 2000...................................... 19
Notes to consolidated financial statements................ 20-37
Selected quarterly data (unaudited) for the years ended
May 31, 2000 and 1999 (Note 12 to consolidated financial
statements)............................................. 37
Financial data schedule for the twelve-month period ended May 31,
2000 ............................................. 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 10.11 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, 2000.
39
<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.
<TABLE>
<S> <C> <C>
AAR CORP.
(Registrant)
Date: August 21, 2000 By: /s/ DAVID P. STORCH
-----------------------------------------
David P. Storch
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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
--------- ----- ----
<C> <S> <C> <C>
/s/ IRA A. EICHNER CHAIRMAN OF THE BOARD
------------------------------------ DIRECTOR
Ira A. Eichner
/s/ DAVID P. STORCH PRESIDENT AND CHIEF EXECUTIVE
------------------------------------ OFFICER; DIRECTOR (PRINCIPAL
David P. Storch EXECUTIVE OFFICER)
/s/ TIMOTHY J. ROMENESKO VICE PRESIDENT AND CHIEF
------------------------------------ FINANCIAL OFFICER (PRINCIPAL
Timothy J. Romenesko FINANCIAL OFFICER)
/s/ MICHAEL J. SHARP VICE PRESIDENT -- CONTROLLER
------------------------------------ (PRINCIPAL ACCOUNTING OFFICER)
Michael J. Sharp
/s/ A. ROBERT ABBOUD DIRECTOR
------------------------------------
A. Robert Abboud
/s/ HOWARD B. BERNICK DIRECTOR August 21, 2000
------------------------------------
Howard B. Bernick
/s/ EDGAR D. JANNOTTA DIRECTOR
------------------------------------
Edgar D. Jannotta
/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>
40
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
INDEX EXHIBITS
----- --------
<S> <C> <C> <C>
3. Articles of Incorporation and 3.1 Restated Certificate of Incorporation;(1) Amendments
By-Laws thereto dated November 3, 1987(2), October 19,
1988(2), October 16, 1989(24) and November 3, 1999
(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), July 16,
1992(24) and April 11, 2000 (included in the Amended
By-Laws filed herewith).
4. Instruments defining the 4.1 Restated Certificate of Incorporation and Amendments
rights of security holders (see Exhibit 3.1).
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,(21) and March 20, 1998,(19) December 16,
1998(23) and October 14, 1999.(25)
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(24)
and October 9, 1996(24); and his agreement to
terminate such Death Benefit Agreement dated May 30,
1999(24).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX EXHIBITS
----- --------
<S> <C> <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(24) and May 31, 1999(24).
10.5 AAR CORP Directors' Retirement Plan, dated April 14,
1992,(9) amended May 26, 2000 (filed herewith).
10.6 AAR CORP. Amended and Restated Supplemental Key
Employee Retirement Plan, dated May 4, 2000 (filed
herewith).
10.7 Amended and Restated Employment Agreement dated July
14, 1998 between the Registrant and David P. Storch
(filed herewith).
10.8 Amended and Restated Severance and Change in Control
agreement dated April 11, 2000 between the Registrant
and Philip C. Slapke (filed herewith).
10.9 Amended and Restated Severance and Change in Control
agreement dated April 11, 2000 between the Registrant
and Howard A. Pulsifer (filed herewith).
10.10 Amended and Restated Severance and Change in Control
agreement dated April 11, 2000 between the Registrant
and Timothy J. Romenesko (filed herewith).
10.11 Amended and Restated AAR CORP. Nonemployee Directors'
Deferred Compensation Plan, dated April 8, 1997,
amended May 26, 2000 (filed herewith).
21. Subsidiaries of the Registrant 21.1 Subsidiaries of AAR CORP. (filed herewith).
23. Consents of experts and 23.1 Consent of KPMG LLP (filed herewith).
counsel
27. Financial Data Schedule 27.1 Financial Data Schedule for the Registrant's fiscal
year ended May 31, 2000.
</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.
<PAGE>
(5) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the Quarter ended November 30, 1989.
(6) Incorporated by reference to Exhibits to Registrant's Registration
Statement on Form S-3 filed August 27, 1991.
(7) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1991
(8) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1985.
(9) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1992.
(10) Incorporated by reference to Exhibits to the Registrant's Current Reports
on Form 8-K dated October 24, 1989 and October 12, 1993, 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.
(23) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1998.
(24) Incorporated by reference to Exhibits to the Registrant's Annual Report on
Form 10-K for the fiscal year ended May 31, 1999.
(25) Incorporated by reference to Exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended November 30, 1999.
