-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, dotseHNkbyhfDzWplpyhQi18x4i/BB+rSmga7601ttYE8e4YcaHTfQONNYVSuOHu jDS8pgunusztX7tJZYSf/Q== 0000912057-94-002818.txt : 19940829 0000912057-94-002818.hdr.sgml : 19940829 ACCESSION NUMBER: 0000912057-94-002818 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19940531 FILED AS OF DATE: 19940824 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AAR CORP CENTRAL INDEX KEY: 0000001750 STANDARD INDUSTRIAL CLASSIFICATION: 5080 IRS NUMBER: 362334820 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06263 FILM NUMBER: 94545798 BUSINESS ADDRESS: STREET 1: 1111 NICHOLAS BLVD CITY: ELK GROVE VILLAGE STATE: IL ZIP: 60007 BUSINESS PHONE: 7084393939 MAIL ADDRESS: STREET 1: 1111 NICHOLAS BLVD CITY: ELK GROVE VILLAG STATE: IL ZIP: 60007 FORMER COMPANY: FORMER CONFORMED NAME: ALLEN AIRCRAFT RADIO INC DATE OF NAME CHANGE: 19700204 10-K 1 10-K - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 1994 COMMISSION FILE NUMBER 1-6263 AAR CORP. (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-2334820 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1111 NICHOLAS BOULEVARD, ELK GROVE VILLAGE, ILLINOIS 60007 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (708) 439-3939 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - - ----------------------------------- ----------------------------------- COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE CHICAGO STOCK EXCHANGE COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE CHICAGO STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ At June 30, 1994, the aggregate market value of the Registrant's voting stock held by nonaffiliates was approximately $218,718,000. The calculation of such market value has been made for the purposes of this report only and should not be considered as an admission or conclusion by the Registrant that any person is in fact an affiliate of the Registrant. On June 30, 1994, there were 15,906,792 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The definitive proxy statement relating to the Registrant's Annual Meeting of Stockholders, to be held October 12, 1994, is incorporated by reference in Part III to the extent described therein. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business..................................................................................... 2 Item 2. Properties................................................................................... 3 Item 3. Legal Proceedings............................................................................ 4 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 4 Executive Officers of the Registrant......................................................... 4 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters.................................................................................... 6 Item 6. Selected Financial Data...................................................................... 7 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition........................................................................ 8 Item 8. Financial Statements and Supplementary Data.................................................. 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 36 PART III Item 10. Directors and Executive Officers of the Registrant........................................... 37 Item 11. Executive Compensation....................................................................... 37 Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 37 Item 13. Certain Relationships and Related Transactions............................................... 37 PART IV Item 14. Exhibits, Financial Statements, and Reports on Form 8-K...................................... 38 39 SIGNATURES..................................................................................................
1 PART I ITEM 1. BUSINESS AAR CORP. and its subsidiaries are referred to herein collectively as the "Company," unless the context indicates otherwise. The Company was organized in 1955 as the successor to a business founded in 1951 and was reincorporated in Delaware in 1966. The Company supplies a variety of products and services for aviation in the United States and abroad. Certain of the Company's aviation-related activities and products are subject to licensing, certification and other requirements imposed by the Federal Aviation Administration and other regulatory agencies, both domestic and foreign. The Company believes that it has all licenses and certifications that are material to the conduct of its business. The Company's trading activities include the purchase, sale and lease of a wide variety of new, used and overhauled aviation products, principally aircraft equipment such as engines, avionics, accessories, airframe and engine parts and components. The Company also provides customized inventory supply and management programs for certain aircraft and engine parts in support of customer maintenance activities. The Company is also a distributor of new aviation hardware and parts. The Company's primary sources of aviation products are domestic and foreign airlines, independent aviation service companies and airframe, engine and other original equipment manufacturers. The Company's trading activities also include the purchase, sale, lease and lease financing of new and used jet aircraft. The Company provides a wide range of services, parts, component exchange and other products as part of its overhaul activities. The Company overhauls, repairs and modifies components for commercial and military aircraft, including landing gear and engine components for most models of commercial aircraft. It provides aircraft terminal services (fueling and aircraft storage), maintenance, modification, special equipment installation and painting services for commercial and business aircraft. The Company manufactures, installs and repairs specialized aviation products, including pallets, containers, cargo handling systems and lightweight air logistics shelters, primarily for domestic and foreign military organizations, airframe manufacturers, commercial airlines and others. The Company furnishes Aviation Services directly through its own employees. Domestic and foreign airlines, airframe, engine and other original equipment manufacturers, aircraft leasing companies, domestic and foreign military organizations and independent aviation support companies are the principal customers for the Company's aviation trading activities. Principal customers of the Company's aviation overhaul activities are commercial airlines, aircraft leasing companies, business aircraft operators, military overhaul depots, military contractors and original equipment manufacturers. Sales of Aviation Services to commercial airlines are generally affected by such factors as the number, type and average age of aircraft in service, the levels of aircraft utilization (E.G., frequency of schedules), the number of airline operators and the level of sales of new and used aircraft. The Company is a leading independent supplier of Aviation Services to the aviation aftermarket, which is highly competitive. Competition is based on quality, ability to provide a broad range of products and services, speed of delivery and price. During the past three years, demand for aviation aftermarket products and services declined as airlines reduced operations and curtailed purchases to counter the impact of the airlines' reduced traffic demand which has not until recently showed signs of improvement. Additionally, during this period many airlines continued experiencing financial losses, and certain carriers ceased operations. Aggressive price competition among the airlines has led carriers to continue to reduce costs and to defer or curtail 2 nonessential spending. The ongoing soft demand for aviation products and services was exacerbated by increased competition due to availability of parts removed from grounded aircraft and from entry onto the market of inventories from liquidated airlines. Aerospace manufacturers have over the last few years experienced reduced demand caused by cancellations of new aircraft orders and government spending cuts reducing their parts support requirements. The Company competes with other independent distributors and independent support facilities, as well as with airlines and original equipment manufacturers, including aerospace equipment manufacturers, some of which have greater resources than the Company. In certain of its leasing and commercial jet aircraft trading activities, the Company faces competition from financial institutions, syndicators, commercial and specialized leasing companies and other entities that provide financing, some of which have greater resources than the Company. The Company believes it has maintained a satisfactory competitive position. In addition to its aviation-related activities, the Company manufactures highly engineered proprietary products, including industrial floor cleaning and materials handling equipment and nuclear shielding material. The Company sells these products directly and through independent distributors to a wide variety of commercial customers and domestic and foreign governments. The markets for these products are highly competitive, based on price, quality and availability. At May 31, 1994, backlog believed to be firm was approximately $84,550,000 compared to $77,520,000 at May 31, 1993. An additional $82,620,000 of unfunded government options on awarded contracts also existed at May 31, 1994. Of the 1994 year-end backlog that is firm, $41,460,000 is attributable to government contracts for products related to the U.S. Government's rapid deployment programs. It is expected that approximately $70,523,000 of the backlog will be shipped in fiscal 1995. Sales to the United States government and its agencies were approximately $77,500,000 (19.0% of total net sales), $57,600,000 (15.0% of total net sales) and $54,000,000 (12.8% of total net sales) in fiscal 1994, 1993 and 1992, respectively. Because such sales are subject to competitive bidding and government funding, no assurance can be given that such sales will continue at levels previously experienced. The majority of the Company's government contracts are for aviation products and services used for ongoing routine military logistic support activities; unlike weapons systems and other high technology military requirements, these products and services are less likely to be affected by reductions in defense spending. The Company's contracts with the United States government and its agencies are typically firm agreements to provide aviation products and services at a fixed price and have a term of one year or less, frequently subject to extension for one or more additional periods of one year at the option of the government agency. Although the Company's government contracts are subject to termination at the election of the government, in the event of such a termination the Company would be entitled to recover from the government all allowable costs incurred by the Company through the date of termination. At May 31, 1994, the Company employed approximately 1,860 persons worldwide. For information concerning the Company's Business Segment activities, including classes of similar products and services, see Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition." For information concerning export sales, see "Business Segment Information" in Note 1 of Notes to Consolidated Financial Statements. ITEM 2. PROPERTIES Aviation trading activities are conducted from two buildings in Elk Grove Village, Illinois, one owned by the Company, the other subject to an industrial revenue bond mortgage until 1995. In addition to warehouse space, which is mechanized for efficient access to the diverse inventory, these facilities include executive offices, sales offices and a service center. Warehouse facilities are 3 leased in Cerritos, California and Hawthorne, New York for the purpose of aviation hardware distribution and in Hamburg, Germany and Nantgarw, United Kingdom for the purpose of aviation part and component distribution. Aviation overhaul facilities are located in The Netherlands near Schiphol International Airport (owned by the Company); Garden City, New York (owned by the Company); Frankfort, New York (subject to an industrial revenue bond lease to the Company until 2001, at which time the Company shall purchase the facility for a nominal consideration); Windsor, Connecticut (in a building owned by the Company); Miami, Florida (in leased facilities near the airport); Singapore (in leased facilities adjacent to the airport); London, England (in leased facilities); Paris, France (in leased facilities) and Oklahoma City, Oklahoma (in facilities leased from airport authorities). The Company's experience indicates that lease renewal is available on reasonable terms consistent with its business needs. The Company's principal manufacturing activities are conducted at owned facilities in Cadillac and Livonia, Michigan. Industrial floor cleaning equipment is manufactured in a plant located in Aberdeen, North Carolina (subject to an industrial revenue bond lease to the Company until October 1994, at which time the Company shall purchase the facility for a nominal consideration) with a sales office in Bad Hamburg, Germany. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings other than routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. SUPPLEMENTAL INFORMATION: EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning each executive officer of the Company is set forth below:
NAME AGE PRESENT POSITION WITH THE COMPANY - - --------------------------------------------- --- ------------------------------------------------------------ Ira A. Eichner............................... 63 Chairman of the Board and Chief Executive Officer; Director David P. Storch.............................. 41 President and Chief Operating Officer; Director Robert D. Johnson............................ 47 Vice President-Services and Manufacturing Group Howard A. Pulsifer........................... 51 Vice President; General Counsel; Secretary
The term of each of the current executive officers of the Company expires on October 12, 1994, the date of the annual meeting of the Board of Directors, which will be held immediately after the 1994 Annual Meeting of Stockholders. Mr. Eichner, the founder of the Company, has been Chairman of the Board of the Company since 1973, and his directorship expires at the 1996 Annual Meeting. Mr. Eichner has been a director and the Chief Executive Officer of the Company since 1955. Mr. Eichner also serves as a director of United Stationers, Inc. Mr. Eichner is Mr. Storch's father-in-law. Mr. Storch was elected President of the Company in July, 1989. He had been a Vice President of the Company since January, 1988. Mr. Storch joined the Company in 1979 and had been President of a major subsidiary since June, 1984. Mr. Storch has been a director of the Company since 1989, and his directorship expires at the 1994 Annual Meeting. Mr. Storch is Mr. Eichner's son-in-law. 4 Mr. Johnson joined the Company as Vice President-Services and Manufacturing Group in June, 1993. He was previously with the General Electric Company for more than 24 years in various management positions, most recently as General Manager of several General Electric aircraft engines service and overhaul operations. Mr. Johnson resigned from the Company effective July 6, 1994. Mr. Pulsifer joined the Company as General Counsel in August, 1987 and was elected a Vice President in October, 1989 and Secretary in May, 1990. He was previously with United Airlines, Inc. for 14 years, most recently as Senior Counsel. 5 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. On June 30, 1994, there were approximately 14,500 holders of the Common Stock of the Company, including participants in security position listings. Certain of the Company's debt agreements contain provisions restricting the payment of dividends or repurchase of its shares. See Note 2 of Notes to Consolidated Financial Statements included herein. Under the most restrictive of these provisions, the Company may not pay dividends (other than stock dividends) or acquire its capital stock if after giving effect thereto the aggregate amounts paid on or after June 1, 1991 exceed the sum of (i) $29,300,000 plus (ii) 50% of Consolidated Net Income of the Company after June 1, 1991. At May 31, 1994, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares totalled approximately $10,320,000. Effective June 1, 1994 unrestricted consolidated retained earnings increased to $15,067,000 due to the inclusion of 50% of the Consolidated Net Income of the Company for fiscal 1994. The table below sets forth for each quarter of the fiscal year indicated the reported high and low sales price of the Company's Common Stock on the New York Stock Exchange and the amount of dividends declared.
FISCAL 1994 FISCAL 1993 ------------------------------- ---------------------------- PER COMMON SHARE: MARKET PRICES MARKET PRICES - - ---------------------------- -------------------- QUARTERLY ----------------- QUARTERLY QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS - - ---------------------------- --------- --------- --------- --------- ------ --------- First..................... 14 1/8 12 5/8 $.12 13 5/8 11 7/8 $.12 Second.................... 14 1/4 12 5/8 .12 12 1/2 11 1/8 .12 Third..................... 16 5/8 13 1/2 .12 12 7/8 11 .12 Fourth.................... 17 3/8 14 3/8 .12 14 5/8 11 5/8 .12 --------- --------- $.48 $.48 --------- --------- --------- ---------
6 ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED MAY 31, ------------------------------------------------------------------------ 1994 1993 1992 1991 1990 ------------ ------------ ------------ ------------ ------------ (000'S OMITTED EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: - - ---------------------------------------------- Net sales................................... $407,754 $382,780 $422,657 $466,542 $444,875 Gross profit................................ 71,910 68,436 83,440 92,246 100,763 Operating income............................ 21,824 5,343(2) 20,730(3) 30,401(4) 46,851 Interest expense............................ 9,564 8,107 8,356 10,073 9,989 Income (loss) before provision (benefit) for income taxes.............................. 13,684 (1,917)(2) 13,620(3) 21,351(4) 38,155 Net income.................................. 9,494 283(2) 10,020(3) 14,801(4) 25,655 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Per share data: Net income................................ $ .60 $ .02(2) $ .63(3) $ .93(4) $ 1.60 Cash dividends............................ $ .48 $ .48 $ .48 $ .48 $ .47 Average common shares outstanding............................. 15,904 15,855 15,895 15,952 16,053 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ FINANCIAL POSITION AT YEAR END: - - ------------------------------------------------------------ Working capital............................. $240,009(1) $193,399 $197,246 $189,172 $184,932 Total assets................................ 417,626 365,151 395,351 379,958 388,521 Short-term debt............................. 568(1) 25,025 25,005 16,500 33,821 Long-term debt.............................. 115,729(1) 66,298 67,323 68,953 72,329 Total debt.................................. 116,297(1) 91,323 92,328 85,453 106,150 Stockholders' equity........................ 189,488 189,216 196,737 193,778 189,548 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Number of shares outstanding at end of year...................................... 15,906 15,900 15,899 15,891 16,082 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Book value per share of common stock........ $ 11.91 $ 11.90 $ 12.37 $ 12.19 $ 11.79 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ - - ------------------------ Notes: (1) In October 1993, the Company sold $50,000,000 of unsecured 7.25% Notes due October 15, 2003. Proceeds were used to repay short-term bank borrowings and utilized in the Company's operations. (2) Fiscal 1993 includes non-cash restructuring expenses of $11,000,000 (or $7,200,000 after-tax) primarily related to the writedown of certain inventories to reflect the impact of market conditions (See Note 11 of Notes to Consolidated Financial Statements) and a reduction in income tax expense of $1,200,000 (See Note 3 of Notes to Consolidated Financial Statements). (3) Fiscal 1992 includes expenses of $5,800,000 (or $3,800,000 after-tax) related to the Company's restructuring of its Oklahoma City maintenance subsidiary (See Note 11 of Notes to Consolidated Financial Statements) and a reduction in income tax expense of $700,000 (See Note 3 of Notes to Consolidated Financial Statements). (4) Fiscal 1991 includes expenses of $3,300,000 (or $2,150,000 after-tax) primarily related to the restructuring of the Oklahoma City maintenance subsidiary and an airline customer bankruptcy.
7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The Company reports its activities in one business segment: Aviation Services. The table below sets forth net sales for the Company's classes of similar products and services within this segment for each of the last three fiscal years ended May 31. THREE-YEAR NET SALES SUMMARY Any comparison of net sales for the last three fiscal years should be viewed in light of the economic weakness of the aerospace/aviation industry during much of this period. The Company believes that industry conditions have stabilized and in certain respects improved toward the end of this time frame. Airlines, in general, have recently experienced increased aircraft utilization, seen growth in revenue passenger and freight miles and posted modest operating gains. The Company continued to aggressively pursue market opportunities, resulting in improved revenues in fiscal 1994. A decline in sales of aviation fasteners, due to lower demand by aerospace/aviation manufacturers, offset what otherwise would have been an increase in trading sales during the three year period. Further affecting the decline in fastener sales was the Company's election not to make significant new investments in inventory for fastener programs with uncertain return potential in a shrinking market. During this period the Company experienced an increase in engine and airframe parts sales. Fiscal 1994 overhaul sales increased from the prior year in part due to an increase in maintenance services at the Company's Oklahoma City facility. Additionally, sales of manufactured products increased in fiscal 1994 from the prior year due primarily to sales to the U.S. government for the rapid deployment program. The Company believes it is well positioned to take advantage of available opportunities in the improving aerospace/aviation industry.
FOR THE YEAR ENDED MAY 31, ---------------------------- 1994 1993 1992 -------- -------- -------- (000'S OMITTED) Net Sales: Trading........................................... $199,433 $202,464 $209,410 Overhaul.......................................... 112,100 102,382 115,250 Manufacturing..................................... 96,221 77,934 97,997 -------- -------- -------- $407,754 $382,780 $422,657 -------- -------- -------- -------- -------- --------
FISCAL 1994 COMPARED WITH FISCAL 1993 The Company's operating results improved in fiscal 1994 despite the highly competitive and economically weak aerospace/aviation market. Consolidated net sales for fiscal 1994 increased $24,974,000 or 6.5% over the prior fiscal year primarily as a result of increased manufacturing and overhaul sales. Net income increased $9,211,000 over the prior year, which included restructuring expenses of $11,000,000 ($7,200,000 after tax) related to the write-down of certain inventories. Excluding restructuring expenses, net income increased $2,011,000 or 26.9% as the result of sales increases and reduced selling, general and administrative costs. Manufacturing sales increased $18,287,000 or 23.5%, primarily from the sale of products to the U.S. government. Overhaul sales increased $9,718,000 or 9.5% due to increased demand for maintenance services at the Oklahoma City facility and increased sales of rotable landing gear inventory. Trading sales increased in its primary products, such as airframe and engine parts; 8 however, these gains were offset by reduced demand for aviation fasteners and the Company's decision not to enter into fastener programs requiring significant inventory investment with uncertain returns. These factors resulted in an overall decline in trading sales of $3,031,000 or 1.5%. Consolidated gross profit increased $3,474,000 or 5.1% over the prior year primarily due to increased sales revenue. Fiscal 1994 consolidated gross profit included $700,000 from a reduction in the interest rate on a nonrecourse leveraged lease obligation negotiated by the Company, and $1,300,000 from leveraged lease repricing required to adjust for tax rate differentials. The consolidated gross profit margin was slightly lower than the prior year, down from 17.9% to 17.6%. Trading and manufacturing margins improved year over year while overhaul margins declined. The overhaul margin decline was due to increased price competition resulting from maintenance overcapacity in the industry and airlines using lower-cost serviceable replacement components in preference to overhaul services. Consolidated operating income increased $16,481,000 over the prior year. Without the fiscal 1993 restructuring expenses of $11,000,000, operating income increased $5,481,000 or 33.5% due primarily to the increased sales and a reduction of $2,007,000 in selling, general and administrative costs. The Company maintained its effort to contain costs, reduce nonessential spending and create operating efficiencies wherever possible. Consolidated net income increased $9,211,000 notwithstanding increased interest expense of $1,457,000 due to higher fixed-rate interest on debt from the issuance of $50 million of new 7.25% long-term notes issued in October, 1993. Proceeds from this fixed-rate debt repaid $28 million of short-term bank borrowings at lower interest rates. Higher margins on fiscal 1994 export sales reduced the effective tax rate, which also contributed to the net income increase. FISCAL 1993 COMPARED WITH FISCAL 1992 Consolidated net sales for fiscal 1993 decreased $39,877,000 or 9% from the prior fiscal year. Net income decreased $9,737,000 or 97% as the result of the sales decrease, restructuring expenses of $11,000,000 (or $7,200,000 after tax) and a reduction in the consolidated gross profit margin. The operating results of each major business activity in fiscal 1993 were adversely impacted by the continued weak economic environment, particularly in the aerospace/aviation market. Trading activities benefitted from increased sales of its primary products, such as airframe and engine parts. Even with these increases, trading sales decreased $6,946,000 or 3%, primarily due to reduced demand for aviation fasteners. The demand for fasteners decreased due to aerospace/aviation manufacturers' reduced requirements caused by delays and cancellations of new aircraft orders and government budget cuts affecting certain defense contractors. The sales of overhaul services decreased $13,986,000 or 12%, primarily as a result of lower demand and the effect of downsizing the Oklahoma City maintenance facility. The lower demand was caused by airlines downsizing their active fleets and focusing on lowering maintenance costs. The resulting maintenance overcapacity increased competition which resulted in lower prices and a Company decision not to compete for certain overhaul work. Also, airlines used lower-cost serviceable components, abundant in the marketplace, in preference to overhauling certain units. Simultaneously, the Company took steps within its overhaul activities to reduce costs. Manufacturing sales decreased $18,945,000, or 20%; however, it should be noted that fiscal 1992 included $11,000,000 of non-recurring product sales for the Persian Gulf conflict. Sales for the government's rapid deployment program increased during fiscal 1993 and the order backlog was higher at the end of fiscal 1993 as compared to the same period in fiscal 1992. Further, sales were reduced due to the reduction and deferral of orders for commercial and military aircraft cargo systems 9 and spare parts, and lower sales at the Company's floor maintenance equipment unit due to a recession-induced decline in demand, intense competition and the effect of converting to a direct distribution system in Europe. Consolidated gross profit contribution decreased $15,004,000 or 18% from fiscal 1992 due to a reduction in sales and a decrease in consolidated gross profit margin from 19.7% to 17.9%. Lower production and sales levels in relation to fixed costs at a few units, as well as increased competition, hampered the margin; the Company's floor maintenance equipment unit was most affected incurring a loss for the year. Following aggressive cost-reduction efforts and an improvement in sales, operating performance significantly improved in the third and fourth quarters. The consolidated gross profit margin benefitted from sales of airframe and engine parts at margins consistent with the prior year and the effect of cost reductions at the Oklahoma City maintenance facility. Cost reductions implemented company wide during fiscal 1993 benefitted ongoing operations. The Company reduced selling, general and administrative expenses $4,817,000 or 8% in response to a decrease in sales and competitive market conditions. The Company continued its focus on cost containment and improvement in operating efficiencies in an effort to maintain its operating margins. In February, 1993 the Company recorded noncash restructuring expenses of $11,000,000 for the writedown of certain inventories and associated costs. The inventories most affected were parts for older-model commercial aircraft, certain manufactured products and material supporting original equipment manufacturers. The writedown resulted from the Company's assessment of the impact on inventories of then very recent changes in the aerospace/aviation market, as well as the continued recessionary environment. The Company believes the reduction in inventory value improved its competitive position and facilitated sale of the inventories. The income tax benefit of $2,200,000 reported in fiscal 1993 included an expense reduction of $1,200,000 from the reversal of income tax liabilities. The income tax benefit before the expense reduction was higher than that determined using the statutory rate as the result of state income tax refunds and the effect of tax benefits on exempt earnings from export sales. The provision for income taxes in fiscal 1992 was lower than the amount computed using the statutory Federal income tax rate due to tax benefits generated from export sales and an income tax expense reduction of $700,000. The income tax expense reductions were for income tax liabilities recorded in prior years, but no longer required due to the conclusion by the Internal Revenue Service of its examination of the Company's Federal income tax returns for prior years. Fourth quarter fiscal 1993 sales decreased $8,009,000 or 7% as compared to the same quarter of the prior year; however, net income increased $300,000. Sales and earnings continued to be impacted by adverse market conditions. The fourth quarter fiscal 1993 operating results improved from the third quarter fiscal 1993 as the result of a 22% increase in consolidated sales and lower operating costs. Fiscal 1992's fourth quarter operating results included restructuring expenses of $5,800,000, or $3,800,000 after tax, related to the Oklahoma City maintenance facility. FISCAL 1992 Consolidated net sales decreased $43,885,000 or 9% primarily as a result of a cessation of shipments of manufactured logistics support products for the Allied Coalition in the Persian Gulf conflict and reduced sales at the Company's Oklahoma City maintenance facility amounting to $53,000,000 in the prior year. These reductions were partially mitigated by increases in certain trading and overhaul activities stemming from the provisioning of transitioned aircraft, maintenance part activities, and component overhaul activities, despite the difficult economic environment and airline customer's curtailment of nonessential spending. 10 Consolidated operating income decreased $9,671,000 primarily due to the reductions in consolidated net sales described above and restructuring expenses of $5,800,000 recorded for restructuring and reduction in size of the Company's Oklahoma City maintenance facility. The reduction in the overhaul subsidiary resulted from continued operating losses being experienced by an industry-wide overcapacity for certain maintenance services, which led to facility and workforce underutilization. Consolidated net income decreased $4,781,000 as a result of the events impacting consolidated net sales and the restructuring expenses previously described. The impact of these events were moderated by interest expense savings attributed to a decline in short-term interest rates and a lower provision for income taxes resulting from tax benefits generated from export sales and a reduction of previously recorded tax liabilities no longer required due to the conclusion by the Internal Revenue Service of its examination of previous years Federal income tax returns of the Company. FINANCIAL CONDITION AT MAY 31, 1994 COMPARED WITH MAY 31, 1993 In fiscal 1994, the Company's primary sources of liquidity were the proceeds of $50,000,000 from the issuance of 7.25% unsecured ten-year notes in October, 1993 and cash provided from operations of $6,697,000. The proceeds from the issuance of the notes were used to repay all outstanding short-term bank debt, thus making available to the Company the full amount of its credit lines and borrowing facilities. The balance of the note proceeds were used for working capital requirements, primarily inventory and accounts receivable. Net cash provided from operating activities decreased $10,109,000 in fiscal 1994 from the prior year as a result of new inventory investments to support government contracts and deposits made on purchases of inventory (see note 7 in Notes to Consolidated Financial Statements) to support new inventory provisioning contracts entered into during fiscal 1994. Cash provided in excess of these requirements was used primarily for capital expenditures and to pay dividends. The Company's financial condition remains solid. The Company improved its current ratio and working capital position during the year in spite of operating in an aerospace/aviation industry that continued to be financially troubled although improving. The Company's improved financial condition and available sources of financing, including its unused bank credit lines and facilities amounting to $132,500,000, will enable the Company to meet its anticipated working capital requirements and pursue advantageous business opportunities. A summary of key indicators of financial condition and lines of credit follows:
MAY 31, ------------------ DESCRIPTION 1994 1993 - - ------------------------------------------------------------ -------- -------- (000'S OMITTED) Working capital............................................. $240,009 $193,399 Current ratio............................................... 4.5:1 3.7:1 Bank credit lines: Borrowings outstanding.................................... $ -- $ 24,000 Available but unused lines................................ 132,500 103,700 -------- -------- Total credit lines.............................. $132,500 $127,700 -------- -------- -------- -------- Long-term debt, less current maturities..................... $115,729 $ 66,298 Ratio of long-term debt to capitalization................... 37.9% 25.9%
11 The Company has a shelf registration statement on file with the Securities and Exchange Commission for $85,000,000 of medium or long-term debt securities, which it may issue at its discretion and subject to market conditions. EFFECTS OF INFLATION The Company believes that results of operations for the periods reported were not materially affected by inflation. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AAR CORP.: We have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 1994 and 1993 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended May 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAR CORP. and subsidiaries as of May 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1994, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 3 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, as of June 1, 1993. As discussed in Notes 1 and 6 to the consolidated financial statements, the Company also adopted the provisions of the Financial Accounting Standards Board's SFAS No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, as of June 1, 1993. KPMG Peat Marwick LLP Chicago, Illinois July 1, 1994 13 AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED MAY 31, ---------------------------- 1994 1993 1992 -------- -------- -------- (000'S OMITTED EXCEPT PER SHARE DATA) Net sales.......................................................... $407,754 $382,780 $422,657 -------- -------- -------- Costs and operating expenses: Cost of sales.................................................... 335,844 314,344 339,217 Selling, general and administrative.............................. 50,086 52,093 56,910 Restructuring expenses (Note 11)................................. -- 11,000 5,800 -------- -------- -------- 385,930 377,437 401,927 -------- -------- -------- Operating income................................................... 21,824 5,343 20,730 Interest expense (Note 2).......................................... (9,564) (8,107) (8,356) Interest income (Note 3)........................................... 1,424 847 1,246 -------- -------- -------- Income (loss) before provision (benefit) for income taxes.......... 13,684 (1,917) 13,620 Provision (benefit) for income taxes (Notes 1 and 3)............... 4,200 (2,200) 3,600 -------- -------- -------- Income before cumulative effects of changes in accounting principles............................................ 9,484 283 10,020 Cumulative effects of changes in accounting principles: Income taxes................................................. 900 -- -- Postretirement health care benefits, net of tax.............. (890) -- -- -------- -------- -------- Net income......................................................... $ 9,494 $ 283 $ 10,020 -------- -------- -------- -------- -------- -------- Net income per share of common stock (Note 5): Income before cumulative effects of changes in accounting principles..................................................... $ .60 $ .02 $ .63 Cumulative effects of changes in accounting principles: Income taxes................................................. .06 -- -- Postretirement health care benefits, net of tax.............. (.06) -- -- -------- -------- -------- Net income......................................................... $ .60 $ .02 $ .63 -------- -------- -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 14 AAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS ($000'S OMITTED)
MAY 31, ------------------ 1994 1993 -------- -------- Current assets: Cash and cash equivalents (Note 1)................................................ $ 18,074 $ 2,255 Accounts receivable, less allowances of $2,000 at each date (Note 13).......................................................... 85,947 68,849 Inventories (Notes 1 and 13)...................................................... 146,039 139,432 Equipment on or available for short-term lease (Note 1)........................... 28,881 33,104 Prepaid income taxes, deposits and other (Notes 1, 3 and 7)....................... 28,782 21,396 -------- -------- Total current assets.................................................... 307,723 265,036 -------- -------- Property, plant and equipment, at cost (Notes 1 and 9): Land.............................................................................. 3,088 3,088 Buildings and improvements........................................................ 34,477 33,910 Equipment, furniture and fixtures................................................. 84,536 81,587 -------- -------- 122,101 118,585 Accumulated depreciation (Note 10)................................................ (67,318) (62,533) -------- -------- 54,783 56,052 -------- -------- Other assets: Investment in leveraged leases (Notes 1 and 12)................................... 32,618 30,210 Cost in excess of underlying net assets of acquired companies (Note 1).................................................. 6,313 6,571 Prepaid income taxes, retirement benefits, notes receivable and other (Notes 3, 6 and 12)......................................................................... 16,189 7,282 -------- -------- 55,120 44,063 -------- -------- $417,626 $365,151 -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 15 AAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (000'S OMITTED)
MAY 31, ------------------ 1994 1993 -------- -------- Current liabilities: Bank loans and current maturities of long-term debt (Note 2)...................... $ 568 $ 25,025 Accounts payable.................................................................. 49,599 32,525 Accrued liabilities............................................................... 13,312 11,693 Accrued taxes on income (Notes 1 and 3)........................................... 4,235 2,394 -------- -------- Total current liabilities............................................... 67,714 71,637 -------- -------- Long-term debt, less current maturities (Note 2).................................... 115,729 66,298 Deferred income taxes (Notes 1, 3 and 12)........................................... 39,000 38,000 Retirement benefit obligation and other deferred credits (Note 6)................... 5,695 -- -------- -------- 160,424 104,298 -------- -------- Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares; none issued.............. -- -- Common stock, $1.00 par value, authorized 80,000 shares; issued 16,215 and 16,205 shares at respective dates (Note 4)............................................. 16,215 16,205 Capital surplus................................................................... 81,296 81,172 Retained earnings (Note 2)........................................................ 99,496 97,637 Treasury stock, 309 and 304 shares at respective dates, at cost (Note 4).......... (3,556) (3,490) Cumulative translation adjustments (Note 1)....................................... (2,963) (2,308) Minimum pension liability (Note 6)................................................ (1,000) -- -------- -------- 189,488 189,216 -------- -------- $417,626 $365,151 -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 16 AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED MAY 31, 1994
COMMON STOCK TREASURY STOCK INVESTMENT CUMULATIVE ----------------- --------------- CAPITAL RETAINED VALUATION TRANSLATION SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS ALLOWANCE ADJUSTMENTS ------- -------- ---- --------- -------- ---------- ---------- ----------- (NOTE 4) (NOTE 4) (NOTE 2) (NOTE 1) (000'S OMITTED) Balance, May 31, 1991........................ 16,097 $16,097 206 $ (2,326) $80,194 $ 102,579 $ (664) $ (2,102) Net income................................. -- -- -- -- -- 10,020 -- -- Cash dividends ($.48 per share)............ -- -- -- -- -- (7,631) -- -- Adjustment for net translation loss........ -- -- -- -- -- -- -- (192) Stock awards and employee stock purchases................................ 8 8 -- -- 90 -- -- -- Reclassification of allowance.............. -- -- -- -- -- -- 664 -- ------- -------- ---- --------- -------- ---------- ---------- ----------- Balance, May 31, 1992........................ 16,105 $16,105 206 $ (2,326) $80,284 $ 104,968 $ -- $ (2,294) Net income................................. -- -- -- -- -- 283 -- -- Cash dividends ($.48 per share)............ -- -- -- -- -- (7,614) -- -- Treasury stock purchased................... -- -- 98 (1,164) -- -- -- -- Adjustment for net translation loss........ -- -- -- -- -- -- -- (14) Exercise of stock options, stock awards and employee stock purchases................. 100 100 -- -- 888 -- -- -- ------- -------- ---- --------- -------- ---------- ---------- ----------- Balance, May 31, 1993........................ 16,205 $16,205 304 $ (3,490) $81,172 $ 97,637 $ -- $ (2,308) Net income................................. -- -- -- -- -- 9,494 -- -- Cash dividends ($.48 per share)................................... -- -- -- -- -- (7,635) -- -- Treasury stock purchased................... -- -- 5 (66) -- -- -- -- Exercise of stock options and stock awards......................... 10 10 -- -- 124 -- -- -- Adjustment for net translation loss..................................... -- -- -- -- -- -- -- (655) Minimum pension liability.................. -- -- -- -- -- -- -- -- ------- -------- ---- --------- -------- ---------- ---------- ----------- Balance, May 31, 1994........................ 16,215 $16,215 309 $ (3,556) $81,296 $ 99,496 $-- $ (2,963) ------- -------- ---- --------- -------- ---------- ---------- ----------- ------- -------- ---- --------- -------- ---------- ---------- ----------- MINIMUM PENSION LIABILITY ADJUSTMENTS ----------- (NOTE 6) Balance, May 31, 1991........................ $ -- Net income................................. -- Cash dividends ($.48 per share)............ -- Adjustment for net translation loss........ -- Stock awards and employee stock purchases................................ -- Reclassification of allowance.............. -- ----------- Balance, May 31, 1992........................ $ -- Net income................................. -- Cash dividends ($.48 per share)............ -- Treasury stock purchased................... -- Adjustment for net translation loss........ -- Exercise of stock options, stock awards and employee stock purchases................. -- ----------- Balance, May 31, 1993........................ $ -- Net income................................. -- Cash dividends ($.48 per share)................................... -- Treasury stock purchased................... -- Exercise of stock options and stock awards......................... -- Adjustment for net translation loss..................................... -- Minimum pension liability.................. (1,000) ----------- Balance, May 31, 1994........................ $ (1,000) ----------- -----------
The accompanying notes to consolidated financial statements are an integral part of these statements. 17 AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, ---------------------------- 1994 1993 1992 -------- -------- -------- (000'S OMITTED) Cash flows from operating activities: Net income............................................................... $ 9,494 $ 283 $ 10,020 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization........................................ 9,928 10,883 11,628 Restructuring expenses............................................... -- 11,000 5,800 Cumulative effect of changes in accounting principles: Income tax benefit................................................. (900) -- -- Postretirement health care benefits expense........................ 890 -- -- Leveraged lease repricing............................................ (2,017) -- -- Change in certain assets and liabilities: Accounts receivable................................................ (17,295) 20,910 (620) Inventories........................................................ (6,841) (9,171) (6,432) Equipment on or available for short-term lease..................... 4,223 2,273 (11,376) Prepaid income taxes, deposits and other........................... (10,968) (435) (2,225) Accounts payable................................................... 17,081 (10,876) 8,194 Accrued liabilities and taxes on income............................ 3,077 (7,061) (7,175) Deferred income taxes and other deferred credits................... 25 (1,000) 1,000 -------- -------- -------- Net cash provided from operating activities............................ 6,697 16,806 8,814 -------- -------- -------- Cash flows from investing activities: Property, plant and equipment expenditures, net.......................... (5,984) (8,918) (7,968) Investment in leveraged leases........................................... (391) 589 805 Proceeds from sale of marketable securities.............................. -- 1,593 -- Notes receivable and other, net.......................................... (1,820) (1,281) (425) -------- -------- -------- Net cash used in investing activities.................................. (8,195) (8,017) (7,588) -------- -------- -------- Cash flows from financing activities: Gross proceeds from issuance of long-term notes payable.................. 50,000 -- -- Repayment of bank loans with proceeds from issuance of long-term notes payable................................................................ (28,200) -- -- Change in other borrowings, net.......................................... 3,174 (1,005) 6,873 Cash dividends........................................................... (7,635) (7,614) (7,631) Purchases of treasury stock.............................................. (66) (1,164) -- Proceeds from exercise of stock options, employee stock purchases and other.................................................................. 134 988 98 -------- -------- -------- Net cash provided from (used in) financing activities.................. 17,407 (8,795) (660) -------- -------- -------- Effect of exchange rate changes on cash.................................... (90) 11 131 -------- -------- -------- Increase in cash and cash equivalents...................................... 15,819 5 697 Cash and cash equivalents, beginning of year............................... 2,255 2,250 1,553 -------- -------- -------- Cash and cash equivalents, end of year..................................... $ 18,074 $ 2,255 $ 2,250 -------- -------- -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 18 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany accounts and transactions. REVENUE RECOGNITION Sales and related cost of sales are recognized primarily upon shipment of products and performance of services. Sales and related cost of sales on long-term contracts are recognized as units are delivered, determined by the percentage of completion method based on the relationship of costs incurred to date to estimated total costs under the respective contracts. Lease revenue is recognized as earned. ACCOUNTING CHANGES Effective June 1, 1993, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes." Prior years' results were not restated. The cumulative effect of the accounting change was a tax benefit of $900,000 ($.06 per share) recorded in the three month period ended August 31, 1993. The adoption of SFAS No. 109 changes the Company's method of accounting for income taxes from the deferred method of Accounting Principles Board Opinion ("APB") No. 11 to the asset and liability method of accounting. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using statutory tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized in the consolidated results of operations for the period in which the changes occurred. Pursuant to the deferred method under APB No. 11, which was applied in 1993 and prior years, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting and income tax purposes using the tax rate applicable for the year of calculation. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates. Effective June 1, 1993, the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." Prior years' results were not restated. SFAS No. 106 requires that the projected future cost of nonpension postretirement benefits be recognized as an expense as employees render services instead of when claims are incurred, as the Company had done in the past. Upon adoption, the Company elected, as permitted under SFAS No. 106, to record a one-time transition obligation of $1,350,000 ($890,000 after tax or $.06 per share) which represents that portion of future retiree benefit costs related to service already rendered by both active and retired employees up to the date of adoption. The initial accumulated postretirement benefit obligation of $1,350,000 primarily represented health and life insurance benefits for certain current employees and retirees. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At May 31, 1994 cash equivalents of approximately $5,717,000 held by the Company represent investments in funds holding high-quality commercial paper, Eurodollars and U.S. government agency-issued securities. The carrying amount of cash equivalents approximates fair value at May 31, 1994. 19 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) MARKETABLE SECURITIES The Company recorded net proceeds of $1,593,000 in fiscal 1993 from the sale of marketable securities and included a $57,000 net loss in the consolidated results of operations. Marketable securities were carried at the lower of aggregate cost or market value. FOREIGN CURRENCY Gains and losses on foreign currency translation and foreign exchange contracts are determined in accordance with the method of accounting prescribed by SFAS No. 52. All balance sheet accounts of foreign subsidiaries are translated at year-end exchange rates. Revenues and expenses are translated at average exchange rates during the year. Translation adjustments are excluded from the results of operations and are recorded in Stockholders' equity as Cumulative translation adjustments. The Company from time to time uses forward exchange contracts or options to hedge its loss exposure from the translation of foreign subsidiaries results of operations from functional currencies into United States dollars. Forward exchange contracts or options losses are included in results of operations in the period the loss is determinable. Gains are recorded when realized upon contract settlement. At May 31, 1994 there were no forward exchange contracts or options outstanding. Foreign subsidiaries incur transaction gains and losses upon settlement of obligations in currencies other than their functional currency. The aggregate net transaction gains (losses), including those related to forward exchange contracts, reported in results of operations were $(32,000), $(578,000) and $25,000 for fiscal 1994, 1993 and 1992, respectively. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF MARKET OR CREDIT RISK Financial instruments that potentially subject the Company to concentrations of market or credit risk consist principally of forward exchange contracts or options and trade receivables. The forward exchange contracts discussed above subject the Company to market risk from exchange rate movements. Accordingly, the Company recognizes losses in the period such losses are determinable. While the Company's trade receivables are diverse based on the number of entities and geographic locations, the majority are concentrated in the aerospace/aviation industry. The Company performs evaluations of customers' financial condition prior to extending credit privileges and performs on-going credit evaluations of payment experience, current financial condition, and risk analysis. The Company typically requires collateral in the form of security interest in assets, letters of credit, or obligation guarantees from financial institutions for transactions other than normal trade terms. SFAS No. 107 "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain financial instruments. Cash, accounts receivable, short-term borrowing, accounts payable and accrued liabilities are reflected in the financial statements at fair value because of the short-term maturity of these instruments. Marketable securities are recorded in the financial statements at current market values. Non-current notes receivable and long-term debt bearing a variable interest rate are reflected in the financial statements at fair value. Those bearing a fixed interest rate have fair values based on estimates using discounted future cash flows at an assumed discount rate for borrowing currently prevailing in the marketplace for similar instruments. 20 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. INVENTORIES Inventories are priced at the lower of cost or market. Cost is determined by either the specific identification or first-in, first-out method. Inventoried costs relating to long-term contracts and programs are stated at the actual production costs, including factory burden and initial tooling, incurred to date, reduced by amounts identified with revenue recognized on units delivered. The costs attributed to units delivered under long-term contracts and programs are based on the estimated average cost of all units scheduled to be produced. Progress billings under government contracts are based on an allowable percentage of the cost of material received and labor and factory burden incurred. The following is a summary of inventories at:
MAY 31, ------------------------------ 1994 1993 1992 -------- -------- -------- (000'S OMITTED) Raw materials and parts............................. $ 25,349 $ 21,355 $ 29,069 Work-in-process..................................... 11,974 11,117 12,139 Purchased aircraft parts, engines and components held for sale or exchange.......................... 106,529 105,200 95,459 Finished goods...................................... 2,189 1,785 1,549 -------- -------- -------- 146,041 139,457 138,216 Progress billings on long-term contracts and programs.......................................... (2) (25) (214) -------- -------- -------- $146,039 $139,432 $138,002 -------- -------- -------- -------- -------- --------
EQUIPMENT UNDER OPERATING LEASES Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation of the cost is based on the straight-line method over the lease term. Maintenance costs are expensed as incurred. The assets are available for sale at the end of each lease term. The balance sheet classification is based on the lease term. Leases with a fixed term under twelve months are considered short-term and all others are classified as long-term. Equipment on short-term lease consists of aircraft engines and parts on or available for lease to satisfy immediate short-term customer requirements. The leases are renewable with fixed terms, which generally vary from one to six months. PROPERTY, PLANT AND EQUIPMENT Depreciation is computed on the straight-line method over useful lives of 10-40 years for buildings and improvements and 3-10 years for equipment, furniture and fixtures. Leasehold improvements are amortized over the estimated useful life or the term of the applicable lease. 21 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Repairs and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts and related gains and losses included in results of operations. LEVERAGED LEASES The Company acts as an equity participant in leveraged lease transactions. The equipment cost in excess of equity contribution is furnished by third party financing in the form of secured debt. Under the lease agreements, the third parties have no recourse against the Company for non-payment of the obligations. The third party debt is collateralized by the lessees' rental obligations and the leased equipment. The Company has ownership rights to the leased assets and is entitled to the investment tax credits, and benefits of tax deductions for depreciation on the leased assets and for interest on the secured debt financing. COST IN EXCESS OF UNDERLYING NET ASSETS OF ACQUIRED COMPANIES The cost in excess of underlying net assets of companies acquired is being amortized over a period of forty years. Amortization was $240,000, $240,000 and $228,000 in fiscal 1994, 1993 and 1992, respectively. Accumulated amortization is $2,950,000, $2,710,000 and $2,470,000 at May 31, 1994, 1993 and 1992, respectively. INCOME TAXES Income taxes are determined in accordance with the method of accounting prescribed by SFAS No. 109. Federal income taxes are not provided on the undistributed earnings of certain foreign subsidiaries (approximately $14,600,000 and $13,300,000 at May 31, 1994 and 1993, respectively), as it is the Company's intention to reinvest a portion of these earnings indefinitely in the foreign operations. From time to time, as the earnings are treated as taxable in the United States, the related tax expense would be offset substantially by foreign tax credits. Foreign income taxes are provided at the local statutory rates and reflect estimated taxes payable. The benefits of investment tax credits are recognized for book purposes under the deferral method of accounting for leveraged leases. The investment tax credits are recognized in the year earned for income tax purposes. STATEMENTS OF CASH FLOWS Supplemental information on cash flows follows.
FOR THE YEAR ENDED MAY 31, ---------------------------- 1994 1993 1992 ------ ------ ------ (000'S OMITTED) Interest paid............................................... $8,800 $8,100 $8,600 Income taxes paid........................................... 3,300 5,400 6,300 Income tax refunds and interest received.................... 500 5,100 5,600
BUSINESS SEGMENT INFORMATION The Company operates primarily in the aerospace/aviation industry and reports its activities in one business segment, Aviation Services. 22 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Export sales from the Company's United States operations to unaffiliated customers, the majority located in Europe, Middle East, Asia, Canada and South America (including sales through foreign sales offices of domestic subsidiaries), were approximately $112,275,000 (27.5% of total net sales), $110,597,000 (28.9% of total net sales) and $127,228,000 (30.1% of total net sales) in fiscal 1994, 1993 and 1992, respectively. Sales to the United States government and its agencies were approximately $77,500,000 (19.0% of total net sales), $57,600,000 (15.0% of total net sales) and $54,000,000 (12.8% of total net sales) in fiscal 1994, 1993 and 1992, respectively. RECLASSIFICATIONS Certain reclassifications have been made in the fiscal 1993 and 1992 financial statements to conform to the fiscal 1994 presentation. 2. FINANCING ARRANGEMENTS Bank loans and commercial paper consisted of:
MAY 31, --------------------------- 1994 1993 1992 ------- ------- ------- (000'S OMITTED) Unsecured bank loans.................................... $ -- $24,000 $13,000 Commercial paper........................................ -- -- 11,000 Current maturities of long-term debt.................... 568 1,025 1,005 ------- ------- ------- $ 568 $25,025 $25,005 ------- ------- ------- ------- ------- -------
Short-term borrowing activity was as follows:
FOR THE YEAR ENDED MAY 31, ----------------------------- 1994 1993 1992 ------- ------- ------- (000'S OMITTED) Maximum amount borrowed.................................. $33,500 $51,900 $45,800 Average daily borrowings................................. 12,300 39,100 29,300 Average interest rate during the year (computed based on the prevailing interest rate during the period the short-term debt was outstanding)....................... 3.7% 4.4% 6.0% ------- ------- ------- ------- ------- -------
At May 31, 1994, aggregate unsecured bank credit lines were $132,500,000. Of this amount, $66,000,000 was available under credit lines with domestic banks, $60,000,000 was available under revolving credit and term loan agreements with domestic banks and $6,500,000 was available under credit agreements with foreign banks. All domestic and foreign credit lines were unused at May 31, 1994. There are no compensating balance requirements in connection with domestic or foreign lines of credit. Borrowings under domestic bank lines bear interest at or below the corporate base rate. Commercial paper is supported by all available domestic bank lines. The Company may borrow a maximum of $60,000,000 ($30,000,000 available through October 15, 1996 and an additional $30,000,000 available through April 15, 1996) under revolving credit and term loan agreements with domestic banks. Revolving credit borrowings may, at the 23 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. FINANCING ARRANGEMENTS -- (CONTINUED) Company's option, be converted to term loans payable in equal quarterly installments over five years. Interest is based on corporate base rate or quoted Eurodollar or multicurrency rates during the revolving credit period, and 1/2% over corporate base rate or quoted Eurodollar rate thereafter. There were no borrowings under these agreements outstanding at May 31, 1994. There are no compensating balance requirements on any of the committed lines but the Company is required to pay a commitment fee. There are no restrictions on the withdrawal or use of these funds. Long-term debt was as follows:
MAY 31, ----------------- 1994 1993 ------- ------- (000'S OMITTED) Notes payable due November 1, 2001 with interest of 9.5% payable semi-annually on May 1 and November 1.......................... $65,000 $65,000 Notes payable due October 15, 2003 with interest of 7.25% payable semi-annually on April 15 and October 15..... 50,000 -- Industrial revenue bonds due in installments to 2002 with weighted average interest of approximately 5.93% at May 31, 1994 (secured by trust indentures on property, plant and equipment).................................................... 1,297 2,323 ------- ------- 116,297 67,323 Current maturities.............................................. (568) (1,025) ------- ------- $115,729 $66,298 ------- ------- ------- -------
The Company is subject to a number of covenants under the revolving credit and term loan agreements, including restrictions which relate to the payment of cash dividends, maintenance of minimum net working capital and tangible net worth levels, sales of assets, additional financing, purchase of the Company's shares and other matters. The Company is in compliance with all restrictive financial provisions of the agreements. At May 31, 1994, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares was approximately $10,320,000. Effective June 1, 1994 unrestricted consolidated retained earnings increased to $15,067,000 due to the inclusion of 50% of the consolidated net income of the Company for fiscal 1994. The aggregate amount of long-term debt maturing during each of the next five fiscal years is $568,000 in 1995, $347,000 in 1996, $124,000 in 1997, $57,000 in 1998, $57,000 in 1999. The Company's long-term debt was estimated to have a fair value of approximately $109,703,000 at May 31, 1994. 3. INCOME TAXES The Company adopted SFAS No. 109 "Accounting for Income Taxes" effective June 1, 1993. The prior periods were not restated. The effects of this accounting change are discussed in note 1 of Notes to Consolidated Financial Statements. The following disclosures are in accordance with SFAS No. 109 "Accounting for Income Taxes" which requires the asset and liability method of accounting upon adoption. 24 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. INCOME TAXES -- (CONTINUED) The provision (benefit) for income taxes included the following components:
FOR THE YEAR ENDED MAY 31, ----------------------------- 1994 1993 1992 ------- ------- ------- (000'S OMITTED) Current Federal.......................................... $ 100 $ (640) $ 4,460 Foreign.......................................... 530 670 940 State, net of refunds............................ 470 -- 900 ------- ------- ------- 1,100 30 6,300 ------- ------- ------- Deferred Federal.......................................... $ 2,850 $(2,050) $(2,480) Foreign.......................................... -- -- -- State............................................ 250 (180) (220) ------- ------- ------- 3,100 (2,230) (2,700) ------- ------- ------- $ 4,200 $(2,200) $ 3,600 ------- ------- ------- ------- ------- -------
The deferred tax provisions for the fiscal years 1994, 1993 and 1992 result primarily from differences between book and tax income arising from depreciation and leveraged leases. Refundable income taxes included within Prepaid income taxes, deposits and other, principally represent refunds of Federal income taxes resulting from additional tax benefits generated from export sales and foreign tax credits carried back against prior years. Interest income relating to refundable income taxes was $576,000, $390,000 and $910,000 for fiscal 1994, 1993 and 1992, respectively. The balance of deferred tax liabilities and assets arises from the differences in the timing of the recognition for transactions between book and income tax purposes and consists of the following components:
MAY 31, 1994 ------- (000'S OMITTED) Deferred tax liabilities: Depreciation............................................................. $9,710 Leveraged leases......................................................... 28,560 Other.................................................................... 730 ------- Total deferred tax liabilities....................................... $39,000 ------- ------- Deferred tax assets-current: Inventory costs.......................................................... $7,800 Employee benefits........................................................ 900 Doubtful account allowance............................................... 780 Other.................................................................... 50 ------- Total deferred tax assets-current.................................... 9,530 ------- Deferred tax assets-noncurrent: Postretirement benefits.................................................. 1,050 Restructuring expenses................................................... 960 Alternative minimum tax credits.......................................... 4,540 Other.................................................................... 60 ------- Total deferred tax assets-noncurrent................................. 6,610 ------- Total deferred tax assets............................................ $16,140 ------- -------
25 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. INCOME TAXES -- (CONTINUED) The Company has determined, more likely than not, that a valuation allowance is not required, based upon the Company's history of prior operating earnings, its expectations for continued future earnings and the scheduled reversal of deferred tax liabilities, primarily related to leveraged leases, which exceed the amount of the deferred tax assets. The provision for income taxes differs from the amount computed by applying the United States statutory Federal income tax rate of 34.0% for fiscal 1994, 1993 and 1992 for the following reasons:
FOR THE YEAR ENDED MAY 31, -------------------------- 1994 1993 1992 ------- ------- ------ (000'S OMITTED) Provision (benefit) for income taxes at the Federal statutory rate... $4,660 $ (650) $4,630 Tax benefits on exempt earnings from export sales.................. (930) (770) (860) State income taxes, net of Federal benefit and refunds............. 250 -- 600 Amortization of goodwill........................................... 100 120 120 Reduction of income tax liabilities................................ -- (1,200) (700) Differences between foreign tax rates and the U.S. Federal statutory rate................................................... 80 250 160 Other, net......................................................... 40 50 (350) ------- ------- ------ Provision (benefit) for income taxes as reported..................... $4,200 $(2,200) $3,600 ------- ------- ------ ------- ------- ------ Effective income tax rate............................................ 30.7% (114.8)% 26.4% ------- ------- ------ ------- ------- ------
The provision for income taxes was reduced by $1,200,000 and $700,000 in fiscal 1993 and 1992, respectively, due to the reversal of tax liabilities previously recorded but no longer required as the result of the resolution of issues arising from the Internal Revenue Service's examination of the Federal income tax returns for the fiscal years 1979 through 1989. The years are now closed to assessments, therefore certain tax accruals previously provided are no longer required. The fiscal 1993 income tax benefit before the reversal of tax liabilities on consolidated pre-tax income was higher than the statutory rate primarily as the result of state income tax refunds received and the effect of tax benefits on exempt earnings from export sales. Pretax income from foreign subsidiaries was approximately $1,300,000, $1,200,000 and $2,300,000 at May 31, 1994, 1993 and 1992, respectively. Total foreign income taxes provided were in excess of total local statutory rates in fiscal 1994, 1993 and 1992 due to net operating losses of certain subsidiaries not deductible for tax purposes. 26 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. COMMON STOCK AND STOCK OPTION PLANS A summary of changes in stock options granted to officers, key employees and non-employee directors under stock option plans for the three years ended May 31, 1994 follows.
NUMBER OF OPTION PRICE SHARES PER SHARE --------- ---------------- Outstanding, May 31, 1991 (127,250 exercisable).............................. 445,890 $10.00 to $35.13 Granted.................................................................. 156,950 12.75 to 13.63 Exercised................................................................ -- -- Surrendered/expired/cancelled............................................ (19,600) 10.00 to 35.13 --------- Outstanding, May 31, 1992 (214,618 exercisable).............................. 583,240 $10.00 to $35.13 Granted.................................................................. 224,200 11.38 to 12.88 Exercised................................................................ (8,800) 10.00 Surrendered/expired/cancelled............................................ (154,385) 10.00 to 35.13 --------- Outstanding, May 31, 1993 (184,436 exercisable).............................. 644,255 $10.00 to $35.13 Granted.................................................................. 161,400 13.25 to 15.00 Exercised................................................................ (2,805) 10.00 to 13.63 Surrendered/expired/cancelled............................................ (71,400) 10.00 to 17.88 --------- Outstanding, May 31, 1994 (236,284 exercisable).............................. 731,450 $10.00 to $35.13 --------- ---------
The options are granted at prices equal to the closing market price on the date of grant, become exercisable at such times as may be specified by the Board of Directors or as otherwise provided by the applicable stock option plan, and expire five to ten years from date of grant. Upon exercise of stock options, the excess of the proceeds over par value, or cost in the case of treasury stock, is credited to Capital surplus in the Consolidated Balance Sheets. The AAR CORP. Stock Benefit Plan also provides for the grant of restricted stock awards. Restrictions are released at the end of applicable restricted periods. The number of shares and the restricted period, which varies from two to ten years, are determined by the Compensation Committee of the Board of Directors. The market value of the award on the date of grant is recorded as a deferred expense, common stock and capital surplus. The deferred expense is included in results of operations over the restricted term. The expense relating to outstanding restricted stock awards was $538,000, $610,000 and $640,000 in fiscal 1994, 1993 and 1992, respectively. The AAR CORP. Employee Stock Purchase Plan is open to all employees of the Company (other than officers, directors or participants in other option plans of the Company) having six months of service. The plan permits employees to purchase common stock in periodic offerings at the lesser of the fair market value on date of offering and 85% of the fair market value on the date of exercise. A participating employee pays for shares by payroll deduction over a two-year period. Upon completion of the purchase, the excess of the proceeds over the par value (or cost in the case of treasury stock) is credited to capital surplus. 27 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED) The number of options and awards outstanding and available for grant or issuance for each of the Company's stock plans is as follows:
MAY 31, 1994 ---------------------------------------- OUTSTANDING AVAILABLE TOTAL ------------- ----------- ------------ Stock Benefit Plan (Officers, Directors and key employees)... 769,788 261,577 1,031,365 Employee Stock Purchase Plan................................. -- 132,880 132,880
Pursuant to a shareholder rights plan adopted in 1987 and amended in 1989, each outstanding share of the Company's Common Stock carries with it a Right to purchase one additional share at a price of $85 (subject to anti-dilution adjustments). The Rights become exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 20% or more of the common stock by a person or group (an "Acquiring Person") or the commencement of a tender or exchange offer for 30% or more of the Common Stock. In the event that an Acquiring Person acquires 20% or more of the Common Stock, or if the Company is the surviving corporation in a merger involving an Acquiring Person, or if the Acquiring Person engages in certain types of self-dealing transactions, each Right entitles the holder to purchase for $85 (or the then current exercise price) shares of the Company's Common Stock having a market value of $170 (or two times the exercise price), subject to certain exceptions. Similarly, if the Company is acquired in a merger or other business combination or 50% or more of its assets or earning power is sold, each Right entitles the holder to purchase at the then current exercise price that number of shares of Common Stock of the surviving corporation having a market value of two times the exercise price. The Rights, which do not entitle the holder thereof to vote or to receive dividends, expire on August 6, 1997 and may be redeemed by the Company for $.01 per Right under certain circumstances. On September 21, 1990, the Board of Directors authorized the Company to purchase up to 1,000,000 shares of the Company's Common Stock on the open market or through privately negotiated transactions. As of May 31, 1994 the Company had purchased 308,927 shares of Common Stock on the open market under this program at an average price of $11.51 per share. 5. NET INCOME PER SHARE OF COMMON STOCK Primary net income per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the year. Shares granted as restricted stock awards under The AAR CORP. Stock Benefit Plan are considered outstanding from the date of grant. Common Stock equivalents consist of the average number of shares issuable upon the exercise of all dilutive employee stock options, less the common shares which could have been purchased, at the average market price during each quarter, with the assumed proceeds from the exercise of the options. 6. EMPLOYEE BENEFIT PLANS The Company has defined contribution or defined benefit plans covering substantially all full-time domestic employees and certain employees in the Netherlands. 28 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) DEFINED BENEFIT PLANS The pension plans for domestic salaried employees have benefit formulas based primarily on years of service and compensation. The pension benefit for hourly employees is generally based on a fixed amount per year of service. The Company follows the provisions of SFAS No. 87, "Employers' Accounting for Pensions," for all domestic operations. The Company's funding policy for domestic plans is to contribute annually, at a minimum, an amount which is deductible for Federal income tax purposes and that is sufficient to meet actuarially computed pension benefits. Contributions are intended to provide for benefits attributed to service to date and for benefits expected to be earned in the future. The assets of the pension plans are invested primarily in mutual funds, common stocks, investment grade bonds and United States government obligations. Certain international subsidiaries also have pension plans. In most cases, the plans are defined benefit in nature. Assets of the plans are comprised of insurance contracts. Benefit formulas are similar to those used by U.S. plans. It is the policy of these subsidiaries to fund at least the minimum amounts required by local law and regulation. Effective June 1, 1993, all non-domestic pension plans have adopted the provisions of SFAS No. 87. The following table sets forth the plans' funded status and the amount recognized in the Company's Consolidated Balance Sheets. The plans are grouped according to the portion of the accumulated benefit obligation funded as follows:
MAY 31, JUNE 1, MAY 31, 1994 1993 1993 ------------------------ ----------- ----------- BENEFITS ASSETS BENEFITS ASSETS EXCEED EXCEED EXCEED EXCEED ASSETS BENEFITS ASSETS BENEFITS ----------- ----------- ----------- ----------- (000'S OMITTED) Actuarial present value of benefit obligation: Vested benefit obligation................................ $ (21,500) $ (4,160) $ (19,725) $ (4,890) Nonvested benefit obligation............................. (955) (15) (1,110) -- ----------- ----------- ----------- ----------- Accumulated benefit obligation............................... (22,455) (4,175) (20,835) (4,890) Effect of projected salary increases on the benefit obligation................................................. (1,865) (1,120) (2,125) (450) ----------- ----------- ----------- ----------- Projected benefit obligation................................. (24,320) (5,295) (22,960) (5,340) Plans' assets at fair value.................................. 20,030 4,420 18,825 5,090 ----------- ----------- ----------- ----------- Plans' assets under projected benefit obligation............. (4,290) (875) (4,135) (250) Unrecognized net loss........................................ 3,920 915 3,665 -- Unrecognized prior service cost.............................. 930 -- 1,020 -- Unrecognized transition obligation........................... 785 225 850 250 ----------- ----------- ----------- ----------- Prepaid pension costs in the Consolidated Balance Sheets................................................. $ 1,345 $ 265 $ 1,400 $ 0 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The projected benefit obligation for domestic plans is determined using an assumed weighted average discount rate of 8.0% for fiscal 1994 and 1993, respectively and an assumed average increase of 4.6% in compensation. The expected long-term rate of return on assets is 10.0% for fiscal 1994 and 1993. Unrecognized net loss, prior service cost and transition obligation are amortized on a straight line basis over the estimated average future service period. 29 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The projected benefit obligation for non-domestic plans are determined using an assumed weighted average discount rate of 7.0% for fiscal 1994 and an assumed average compensation increase of 2.0% for the first 5 years and 4.0%, thereafter. The expected long-term rate of return on assets is 6.5% for fiscal 1994. The provisions of SFAS No. 87 "Employers' Accounting for Pensions" require recognition in the balance sheet of an additional minimum liability, equity and related intangible assets for pension plans with accumulated benefits in excess of plan assets. At May 31, 1994 the Company has a minimum pension liability of $3,400,000 reported within Retirement benefit obligation in the Consolidated Balance Sheet with $1,000,000 charged to Stockholders' equity in accordance with the provisions of SFAS No. 87. Pension expense charged to results of operations includes the following components:
FOR THE YEAR ENDED MAY 31, --------------------------- 1994 1993 1992 ------- ------- ------- (000'S OMITTED) Service costs for benefits earned during fiscal year...... $ 1,305 $ 800 $ 800 Interest cost on projected benefit obligation............. 2,265 1,670 1,610 Actual investment return on plan assets................... (1,400) (1,850) (1,410) Net amortization and deferral............................. (480) 290 190 ------- ------- ------- Pension expense for Company plans..................... 1,690 910 1,190 Pension expense for the multi-employer plan........... 10 40 50 ------- ------- ------- Total pension expense............................. $ 1,700 $ 950 $ 1,240 ------- ------- ------- ------- ------- -------
DEFINED CONTRIBUTION PLAN The defined contribution plan is a profit sharing plan which is intended to qualify as a 401(k) plan under the Internal Revenue Code. Under the plan, employees may contribute up to 15% of their pretax compensation, subject to applicable regulatory limits. The Company may make matching contributions up to 6% of compensation. Participants vest immediately in Company contributions. Expense charged to results of operations was $800,000, $430,000 and $860,000 in fiscal 1994, 1993 and 1992, respectively. LONG TERM PERFORMANCE INCENTIVE PLAN The long term performance incentive plan is administered by the Compensation Committee of the Board of Directors. The plan provides for incentive awards to certain key employees designated by the Compensation Committee based on the long term performance of the Company. No awards were earned under the Plan in fiscal 1994, 1993 nor 1992, therefore, no expense was charged to results of operations. SUPPLEMENTAL RETIREMENT BENEFIT PLANS Supplemental Retirement agreements provide benefits to certain current and former key employees. During fiscal 1993 and 1992, $260,000 and $570,000 were deposited into trust funds for payment of these benefits. The amounts are being amortized over the remaining terms of employment. Expense charged to results of operations was $470,000, $570,000 and $460,000 in fiscal 1994, 1993 and 1992, respectively. The unamortized amount of $880,000 at May 31, 1994 is 30 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) reported with Prepaid income taxes, retirement benefits, notes receivable and other in the Consolidated Balance Sheets. At May 31, 1994, the trust fund assets were adequate to provide for the estimated retirement benefits. BOARD OF DIRECTORS' RETIREMENT PLAN The Company adopted a Directors' Retirement Plan for its outside directors in April, 1992. The Plan provides for a benefit to outside directors upon retirement on or after age 65 provided they have completed at least five years of service as a director. Benefits are payable as a quarterly annuity in an amount equal to 25% of the annual retainer fee payable by the Company to active outside directors. Payment of benefits commences upon retirement and continues for a period equal to the total number of years of the retired director's service as a director to a maximum of ten years, or death, whichever occurs first. The Directors' Retirement Plan is unfunded, with costs and obligations recognized in accordance with SFAS No. 87. Expense charged to results of operations was $75,000 and $120,000 in fiscal 1994 and 1993, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides health and life insurance benefits for certain eligible employees and retirees under a variety of plans. Generally these benefits are contributory, with retiree contributions adjusted annually. The postretirement plans are unfunded and the Company has the right to modify or terminate any of these plans in the future, in certain cases subject to union bargaining agreements. Effective June 1, 1993, the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." Prior to fiscal year 1994, the Company recognized retiree health and life insurance expense when benefits were paid. Prior years' results were not restated. Upon adoption, the Company elected to record a one-time transition obligation of $1,350,000 ($890,000 after tax) which represents that portion of future retiree benefit costs related to service already rendered by both active and retired employees up to the date of adoption. Net periodic postretirement benefit cost for fiscal 1994 included the following components: Service cost............................................ $ 30,000 Interest cost........................................... 98,000 --------- $ 128,000 --------- ---------
31 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The funded status of the plans at May 31, 1994 were as follows: Accumulated postretirement benefit obligation: Current retirees.................................... $ 906,000 Current employees -- fully eligible................. 129,000 Current employees -- not fully eligible............. 315,000 ----------- 1,350,000 Plans' assets at fair value........................... -- ----------- Accumulated postretirement benefit obligation in excess of plans' assets.............................. 1,350,000 Unrecognized prior service cost, transition obligation and net loss/(gain).................................. -- ----------- Accrued postretirement benefit cost in the consolidated balance sheet........................... $ 1,350,000 ----------- -----------
The assumed discount rate used to measure the accumulated postretirement benefit obligation was 8.0%. The assumed rate of future increases in health care costs was 10.0% in fiscal 1994, declining to 6.0% by the year 2004 and remaining at that rate thereafter. A one percent increase in the assumed health care cost trend rate would increase the accumulated postretirement obligation by approximately $100,000 as of May 31, 1994 and would not result in a significant change to the annual postretirement benefit expense. 7. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities under agreements that expire at various dates through 2011. Rental expense under these leases was $4,840,000, $5,320,000 and $4,850,000 in fiscal 1994, 1993 and 1992, respectively. Future minimum payments under leases with initial or remaining terms of one year or more at May 31, 1994 were $4,820,000 for fiscal 1995, $3,490,000 for fiscal 1996, $3,310,000 for fiscal 1997, $2,850,000 for fiscal 1998 and $10,310,000 for fiscal 1999 and thereafter. The Company regularly places deposits with suppliers on short-term commitments to purchase inventory. These conditional contractual commitments are made in the ordinary course of business. At May 31, 1994 the Company had $10,700,000 of deposits outstanding with suppliers. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition. 32 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. SELECTED QUARTERLY DATA (UNAUDITED) The unaudited selected quarterly data for fiscal years ended May 31, 1994 and 1993 are as follows. FISCAL 1994
NET INCOME QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE - - ------------------------------- --------- ------------ ---------- ------------ (000'S OMITTED EXCEPT PER SHARE DATA) First.......................... $ 98,306 $ 18,044 $ 2,492 $ .16 Second......................... 93,185 16,624 2,378 .15 Third.......................... 96,199 17,680 2,212 .14 Fourth......................... 120,064 19,562 2,412 .15 --------- ------------ ---------- ----- $ 407,754 $ 71,910 $ 9,494 $ .60 --------- ------------ ---------- ----- --------- ------------ ---------- -----
FISCAL 1993
NET INCOME NET GROSS NET INCOME (LOSS) QUARTER SALES PROFIT (LOSS) PER SHARE - - ------------------------------- -------- ----------- ---------- ------------ (000'S OMITTED EXCEPT PER SHARE DATA) First.......................... $ 98,072 $19,101 $ 3,103 $ .20 Second......................... 101,930 17,317 1,575 .10 Third.......................... 82,337 14,745 (5,705) (.36) Fourth......................... 100,441 17,273 1,310 .08 -------- ----------- ---------- ------ $382,780 $68,436 $ 283 $ .02 -------- ----------- ---------- ------ -------- ----------- ---------- ------
In the third quarter of fiscal 1993, the Company recorded noncash restructuring expenses of $11,000,000 (or $7,200,000 after-tax) primarily related to the writedown of certain inventories to reflect the impact of market conditions (See Note 11) and a reduction in income tax expense of $1,200,000 (See Note 3). 9. PROPERTY, PLANT AND EQUIPMENT
EQUIPMENT, BUILDINGS FURNITURE AND AND LAND IMPROVEMENTS FIXTURES TOTAL ------ ------------ ---------- -------- (000'S OMITTED) Balance, May 31, 1991.................................... $2,374 $29,586 $72,242 $104,202 Additions, at cost..................................... 714 1,945 5,559 8,218 Retirements or sales................................... -- -- (432) (432) Restructuring allowance (See Note 11).................. -- (750) (1,650) (2,400) Translation adjustments................................ -- 371 541 912 ------ ------------ ---------- -------- Balance, May 31, 1992.................................... 3,088 31,152 76,260 110,500 Additions, at cost..................................... -- 2,932 6,021 8,953 Retirements or sales................................... -- (131) (607) (738) Translation adjustments................................ -- (43) (87) (130) ------ ------------ ---------- -------- Balance, May 31, 1993.................................... 3,088 33,910 81,587 118,585 Additions, at cost..................................... -- 749 5,664 6,413 Retirements or sales................................... -- (21) (2,434) (2,455) Translation adjustments................................ -- (161) (281) (442) ------ ------------ ---------- -------- Balance, May 31, 1994.................................... $3,088 $34,477 $84,536 $122,101 ------ ------------ ---------- -------- ------ ------------ ---------- --------
33 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
EQUIPMENT, BUILDINGS & FURNITURE IMPROVEMENTS & FIXTURES TOTAL ------------ ---------- ------- (000'S OMITTED) Balance, May 31, 1991................................................ $ 9,750 $38,529 $48,279 Depreciation and amortization expense.............................. 1,347 6,586 7,933 Retirements or sales............................................... -- (182) (182) Translation adjustments............................................ 155 351 506 ------------ ---------- ------- Balance, May 31, 1992................................................ 11,252 45,284 56,536 Depreciation and amortization expense.............................. 1,448 5,220 6,668 Retirements or sales............................................... (131) (572) (703) Translation adjustments............................................ 5 27 32 ------------ ---------- ------- Balance, May 31, 1993................................................ 12,574 49,959 62,533 Depreciation and amortization expense.............................. 1,219 5,823 7,042 Retirements or sales............................................... (139) (1,887) (2,026) Translation adjustments............................................ (69) (162) (231) ------------ ---------- ------- Balance, May 31, 1994................................................ $13,585 $53,733 $67,318 ------------ ---------- ------- ------------ ---------- -------
11. RESTRUCTURING EXPENSES The Company recorded noncash restructuring expenses of $11,000,000 for the writedown of certain inventories and associated costs in fiscal 1993. The inventories most affected were parts for older-model commercial aircraft, certain manufactured products as well as material supporting original equipment manufacturers. The writedown resulted from the Company's assessment of the impact on inventories of the changes in the aviation/aerospace market and the recessionary economic environment. The noncash restructuring expenses that established inventory realization reserves (see note 13 in Notes to Consolidated Financial Statements) had a remaining balance of approximately $4,488,000 at May 31, 1994. As the inventory for which the realization reserves were established is disposed of, the realization reserve balance is to be correspondingly reduced. The Company recorded expenses of $5,800,000 in fiscal 1992 relating to the restructuring of its Oklahoma City maintenance facility. The expenses included the excess of net book over estimated recoverable value of idle leasehold improvements and equipment, excess inventory and uncollectible accounts receivable, as well as related personnel termination costs and other facility reduction expenses. These expenses had been fully realized as of May 31, 1994. 12. AIRCRAFT LEASING ACTIVITIES The Company is an owner participant in four leveraged lease agreements entered into between March 1986 and May 1988. These agreements cover four narrow body commercial aircraft and spare parts. The transactions involve aircraft currently operated by major carriers. The remaining terms of the leases range from 7 to 10 years. The Company's equity investment in these aircraft represents approximately one third of the aggregate equipment cost. The remaining portion of the equipment cost is financed by third-party nonrecourse debt. The Company has ownership rights to the equipment subject to the right of the lessees to exercise certain purchase, renewal and termination options. For Federal income tax purposes, the Company receives investment tax credits and has the benefit of tax deductions for depreciation on the aggregate equipment cost and interest on the nonrecourse debt. During the early years of 34 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. AIRCRAFT LEASING ACTIVITIES -- (CONTINUED) the lease Federal income tax deductions exceeded the lease rental income, allowing excess deductions to be applied against the Company's other income. In the later years of the lease, rental income exceeds the deductions and taxes will be recorded in accordance with SFAS No. 109. Further, deferred taxes were provided net of the Company's Alternative Minimum Tax (AMT) position. In fiscal 1994, the Company's Investment in leveraged leases was repriced approximately $2,000,000 for the impact of an interest rate reduction on nonrecourse long-term debt secured by aircraft under leveraged lease, the tax rate change under the Omnibus Budget Reconciliation Act of 1993 and the Company's AMT position in accordance with SFAS No. 13 "Accounting for Leases." In August 1990, the Company sold a partial residual interest in a Boeing 737-300 aircraft currently subject to a leveraged lease. The lease term expires in March 2001. The principal portion of the proceeds from this sale were received in the form of a $2,000,000 note and are included with Prepaid income taxes, retirement benefits, notes receivable and other on the Consolidated Balance Sheets. This note has an interest rate of 9.9%. The note and accrued interest of $3,600,000 are due in March 2001. The carrying amount of the note receivable approximates its fair value at May 31, 1994. The condensed operating results and balance sheet financial information for aircraft leasing activities were as follows:
FOR THE YEAR ENDED MAY 31, ------------------------- 1994 1993 1992 ------- ------- ------- (000'S OMITTED) Operating Results: Revenues................................................... $ 2,195 $ 1,390 $ 2,740 Net income (loss).......................................... 1,132 (22) (11) Balance Sheet: Total assets............................................... 39,700 37,800 41,190 Stockholder's equity....................................... 24,349 23,217 23,239
The Company's net investment in leveraged leases is composed of the following elements:
FOR THE YEAR ENDED MAY 31, ------------------ 1994 1993 -------- -------- (000'S OMITTED) Rentals receivable (net of principal and interest on the nonrecourse debt)........................................... $ 16,258 $ 15,510 Estimated residual value of leased assets.................... 23,950 23,950 Unearned and deferred income................................. (7,590) (9,250) -------- -------- Investment in leveraged leases............................. 32,618 30,210 Deferred taxes, net of AMT in fiscal 1993.................... (28,560) (28,310) -------- -------- Net investment in leveraged leases......................... $ 4,058 $ 1,900 -------- -------- -------- --------
Pretax income from leveraged leases was $1,955,000, $334,000 and $529,000 in fiscal 1994, 1993 and 1992, respectively. The tax effect of pretax income from leveraged leases was $823,000, $125,000 and $199,000 in fiscal 1994, 1993 and 1992, respectively. 35 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. ALLOWANCES AND RESERVES ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEAR ENDED MAY 31, ----------------------- 1994 1993 1992 ------ ------ ------- (000'S OMITTED) Balance, beginning of year............................................... $2,000 $2,000 $ 2,000 Provision charged to operations........................................ 600 400 1,600 Deductions for accounts written off, net of recoveries................. (600) (400) (1,600) ------ ------ ------- Balance, end of year..................................................... $2,000 $2,000 $ 2,000 ------ ------ ------- ------ ------ -------
INVENTORY REALIZATION RESERVES
FOR THE YEAR ENDED MAY 31, -------------------------- 1994 1993 1992 -------- ------- ------- (000'S OMITTED) Balance, beginning of year........................................... $ 14,000 $ 6,000 $ 4,700 Provision charged to operations.................................... 3,104 12,300 3,300 Inventory written off and loss from disposal, net of recoveries.... (8,188) (4,300) (2,000) -------- ------- ------- Balance, end of year................................................. $ 8,916 $14,000 $ 6,000 -------- ------- ------- -------- ------- -------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 36 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item regarding the Directors of the Company is incorporated by reference to the information contained under the caption "Nominees and Continuing Directors" in the Company's definitive proxy statement for the 1994 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. The information required by this item regarding the Executive Officers of the Company appears under the caption "Executive Officers of the Registrant" in Part I above. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The information required by this item regarding the compliance with Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") is incorporated by reference to the information contained under the caption "Compliance with Section 16(a) of The Exchange Act" in the Company's definitive proxy statement for the 1994 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information contained under the captions "Executive Compensation and Other Information" (but excluding the following sections thereof, "Compensation Committee's Report on Executive Compensation" and "Stockholder Return Performance Graphs"); "Employment and Other Agreements" and "Director's Compensation", in the Company's definitive proxy statement for the 1994 Annual Meeting of Stockholders' to be filed pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information contained under the caption "Security Ownership of Management and Others" in the Company's definitive proxy statement for the 1994 Annual Meeting of Stockholders' to be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the 1994 Annual Meeting of Stockholders' to be filed pursuant to Regulation 14A. 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants, KPMG Peat Marwick LLP........................................... 13 Financial Statements -- AAR CORP. and Subsidiaries: Consolidated statements of income for the three years ended May 31, 1994................................ 14 Consolidated balance sheets as of May 31, 1994 and 1993................................................. 15-16 Consolidated statements of stockholders' equity for the three years ended May 31, 1994.................. 17 Consolidated statements of cash flows for the three years ended May 31, 1994............................ 18 Notes to consolidated financial statements.............................................................. 19-36 Selected quarterly data (unaudited) for the years ended May 31, 1994 and 1993 (Note 8 to Consolidated Financial Statements).................................................................................. 33
No financial data schedules are required to be filed. EXHIBITS The Exhibits filed as a part of this report are set forth on the Exhibit Index contained elsewhere herein. Each of the material contracts identified as Exhibits 10.1 through 10.5 is a management contract or compensatory arrangement. REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the three month period ended May 31, 1994. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AAR CORP. (Registrant) Date: August 24, 1994 By: /s/ IRA A. EICHNER ----------------------------------- Ira A. Eichner CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER ------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE - - --------------------------------- ------------------------- ---------------- /s/ IRA A. EICHNER CHAIRMAN OF THE BOARD AND - - --------------------------------- CHIEF EXECUTIVE OFFICER; Ira A. Eichner DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) (PRINCIPAL FINANCIAL OFFICER) /s/ DAVID P. STORCH PRESIDENT AND CHIEF - - --------------------------------- OPERATING OFFICER; David P. Storch DIRECTOR /s/ TIMOTHY J. ROMENESKO VICE PRESIDENT-CONTROLLER - - --------------------------------- (PRINCIPAL ACCOUNTING Timothy J. Romenesko OFFICER) /s/ A. ROBERT ABBOUD DIRECTOR - - --------------------------------- A. Robert Abboud /s/ EDGAR D. JANNOTTA DIRECTOR August 24, 1994 - - --------------------------------- Edgar D. Jannotta /s/ ROBERT D. JUDSON DIRECTOR - - --------------------------------- Robert D. Judson /s/ ERWIN E. SCHULZE DIRECTOR - - --------------------------------- Erwin E. Schulze /s/ JOEL D. SPUNGIN DIRECTOR - - --------------------------------- Joel D. Spungin /s/ LEE B. STERN DIRECTOR - - --------------------------------- Lee B. Stern /s/ RICHARD D. TABERY DIRECTOR - - --------------------------------- Richard D. Tabery 39 EXHIBIT INDEX
INDEX EXHIBITS - - ------------------------------------ -------------------------------------------------------------------- 3. Articles of Incorporation 3.1 Restated Certificate of Incorporation;1 Amendments thereto dated and By-Laws November 3, 19872 and October 19, 1988.2 3.2 By-Laws, as amended.2 Amendment thereto dated April 12, 1994 (filed herewith) 4. Instruments defining the 4.1 Restated Certificate of Incorporation and Amendments (see Exhibit rights of security holders 3.1). 4.2 By-Laws, as amended (filed herewith). 4.3 Credit Agreement dated June 1, 1993 between the Registrant and Continental Bank N.A.11 and amendment thereto dated May 16, 1994 (filed herewith). 4.4 Rights Agreement between the Registrant and the First National Bank of Chicago;1 Amendment thereto dated July 18, 1989.2 4.5 Indenture dated October 15, 1989 between the Registrant and Continental Bank, National Association, as Trustee, relating to debt securities;5 First Supplemental Indenture thereto dated August 26, 1991.6 4.6 Officer's certificates dated October 24, 198910 and October 12, 1993.10 4.7 Credit Agreement dated October 15, 1991 between the Registrant and The First National Bank of Chicago, as Agent7 and amendment thereto dated March 31, 1994 (filed herewith). Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant is not filing certain documents. The Registrant agrees to furnish a copy of each such document upon the request of the Commission. 10. Material Contracts 10.1 AAR CORP. Stock Benefit Plan.11 10.2 Death Benefit Agreement dated August 24, 1984 between the Registrant and Ira A. Eichner;8 Amendment thereto dated August 12, 1988.4 10.3 Further Restated and Amended Employment Agreement dated August 1, 1985 between the Registrant and Ira A. Eichner;3 Amendment thereto dated August 12, 1988.4 10.4 Trust Agreement dated August 12, 1988 between the Registrant and Ira A. Eichner4 and amendment thereto dated February 4, 1994 (filed herewith). 10.5 AAR CORP. Directors' Retirement Plan, dated April 14, 1992.9
INDEX EXHIBITS - - ------------------------------------ -------------------------------------------------------------------- 21. Subsidiaries of 21.1 Subsidiaries of AAR CORP. (filed herewith). the Registrant 23. Consents of experts 23.1 Consent of Independent Public Accountants -- KPMG Peat Marwick and counsel (filed herewith).
- - ------------------------ Notes: 1 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1987. 2 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989. 3 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1986. 4 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988. 5 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended November 30, 1989. 6 Incorporated by reference to Exhibits to Registrant's Registration Statement on Form S-3 filed August 27, 1991. 7 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991. 8 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1985. 9 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992. 10 Incorporated by reference to Exhibits to the Registrant's Current Reports on Form 8-K dated October 24, 1989 and October 12, 1993. 11 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993. EX-3.2 2 EXHIBIT 3.2 Exhibit 3.2 AMENDMENT TO THE AAR CORP. BY-LAWS WHEREAS, AAR CORP. (the "Company") has adopted a form of by-laws (the "By-Laws") and reserves the right to amend the By-Laws; and WHEREAS, the Company has amended the By-Laws from time to time in the past, and now desires to amend the By-Laws further to provide that shares abstaining on a vote not be counted as having voted; NOW, THEREFORE, the By-laws are hereby amended effective April 12, 1994 in the following respect: Article II, Section 10 of the Amended By-Laws of AAR CORP. is hereby amended to read as follows: "SECTION 10. VOTING. Each share of stock shall entitle the holder thereof to one vote. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power. In determining whether a proposal has been approved, shares abstaining or not voting but otherwise present at the meeting will not be counted as having been voted on the proposal. All elections of directors shall be written ballots. Voting by ballot shall not be required for any other corporate action except as otherwise provided by the General Corporation Law." This Amendment has been executed by the Company by its duly authorized officer effective as of April 12, 1994 and attested by its Secretary. AAR CORP. By -------------------------- Ira A. Eichner, Chairman of the Board ATTEST: - - ------------------------------- Howard A. Pulsifer, Secretary EX-4.2 3 BYLAWS EXHIBIT 4.2 AMENDED BY-LAWS* OF AAR CORP. A Delaware Corporation ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal office shall be at 229 South State Street, in the City of Dover, County of Kent, State of Delaware, and the name of the resident agent in charge thereof is THE PRENTICE-HALL CORPORATION SYSTEM, INC. SECTION 2. OTHER OFFICES. The corporation may also have an office or offices at such other place or places, within or without the State of Delaware, as the Board of Directors may from time to time designate or the business of the corporation require. ARTICLE II STOCKHOLDERS' MEETINGS SECTION 1. TIME. The annual meeting of the stock- holders of the corporation for the election of directors and the transaction of such other business as may properly come before such meeting shall be held each year on the second Wednesday in October at three o'clock P.M. (Chicago time), or if said day be a legal holiday, then on the next succeeding day not a legal holiday, or shall be held on such other time and date as shall be determined by the Board of Directors. A special meeting of the stockholders *as of April 12, 1994 shall be held on the date and at the time fixed by those persons authorized by the Certificate of Incorporation to call such meeting. SECTION 2. PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware. SECTION 3. CALL. Annual meetings may be called by the directors or by any officer instructed by the directors to call the meeting. SECTION 4. NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date and hour of the meeting. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting), state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. If any action is proposed to be taken which would, if taken, entitle stockholders to receive payment for their shares of stock, the notice shall include a statement of that purpose and to that effect. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be 2 given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice by him before or after the time stated therein. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. SECTION 5. STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged 3 in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 6. CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting -- the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, Executive Vice President, a Vice President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The person presiding over the meeting shall have authority to prescribe the agenda for the meeting and to control the length and order of discussion. The Secretary of the corporation, or in his absence, an Assistant 4 Secretary, shall act as Secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, the Chairman of the meeting shall appoint a secretary of the meeting. SECTION 7. PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A power may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. SECTION 8. INSPECTORS AND JUDGES. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election or judges of the vote, as the case may be, to act at the meeting or any adjournment thereof. If an inspector or inspectors or judge or judges are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors or judges. In case any person who may be appointed as an inspector or judge fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the 5 meeting or at the meeting by the person presiding thereat. Each inspector or judge, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector or judges at such meeting with strict impartiality and according to the best of his ability. The inspectors or judges, if any, shall determine the shares of stock represented at the meeting, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. SECTION 9. QUORUM. The holders of a majority of the outstanding shares of stock present or represented by proxy at any such meeting of stockholders shall constitute a quorum at such meeting for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. SECTION 10. VOTING. Each share of stock shall entitle the holder thereof to one vote. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or 6 a different exercise of voting power. In determining whether a proposal has been approved, shares abstaining or not voting but otherwise present at the meeting will not be counted as having been voted on the proposal. All elections of directors shall be written ballots. Voting by ballot shall not be required for any other corporate action except as otherwise provided by the General Corporation Law. ARTICLE III DIRECTORS SECTION 1. NUMBER AND QUORUM. a. The Board of Directors shall consist of between three and fifteen directors, with the exact number of directors to be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors then in office. b. A majority of the members of the Board of Directors acting at a meeting duly assembled, shall constitute a quorum for the transaction of business; provided, however, that, whenever the corporation is permitted by law to have only one director, then, and, in that event only, one director shall constitute a quorum. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting, without further notice from time to time until a quorum shall have been obtained. Except as otherwise provided by law, by the Certificate of Incorporation, or these by-laws, the act of the directors at a meeting at which a quorum is present shall be the 7 act of the Board. Member or members of the Board of Directors shall be deemed present at a meeting if such person or persons are participating in the meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. SECTION 2. MEETINGS. Meetings of the Board of Directors shall be held at such place within or outside the State of Delaware as may from time to time be fixed by resolution of the Board of Directors, or as may be specified in the notice of the meeting. Regular meetings of the Board of Directors shall be held at such times as may from time to time be fixed by resolution of the Board of Directors, and special meetings may be held at any time upon the call of the Chairman of the Board or, in the absence of the Chairman of the Board, the President or any Vice President or the Secretary or any two directors by oral, telegraphic or written notice duly served on or sent or mailed to each director not less than two days before such meeting. A meeting of the Board of Directors may be held without notice immediately after the annual meeting of Notice need not be given of regular meetings of the Board of Directors. The notice of any meeting need not specify the purpose of the meeting. Any requirement of furnishing a notice shall be waived by any director who signs a written waiver of such notice before or after the time stated therein. Further, the attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the purpose of objecting, at the 8 beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 3. COMMITTEES. a. The Board of Directors shall appoint from among its members the following committees: audit, compensation, nominating and executive. These committees shall consist of such number, shall have such powers and duties, and the members thereof shall otherwise serve as shall from time to time be prescribed by the Board of Directors. b. The Board of Directors may, in its discretion, by the affirmative vote of a majority of the whole Board of Directors, appoint other committees which shall have and may exercise such powers and duties as shall be conferred or authorized by the resolutions appointing them. c. A majority of any committee appointed pursuant to the provisions of a. and b. above, if such committee be composed of more than two members, may determine its action and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to discharge any such committee. d. Any and all actions by any committee shall be reported to the Board of Directors at the board meeting succeeding such action. SECTION 4. DIVIDENDS. Subject always to the provisions of the law and the Certificate of Incorporation, the Board of Directors shall have full power to determine whether any, and if any, what part of any, funds legally available for the payment of 9 dividends shall be declared in dividends and paid to stockholders; the division of the whole or any part of such funds of the corporation shall rest wholly within the lawful discretion of the Board of Directors, and it shall not be required at any time, against such discretion, to divide or pay any part of such funds among or to the stockholders as dividends or otherwise; and the Board of Directors may fix a sum which may be set aside or reserved over and above the capital paid in of the corporation as working capital for the corporation or as a reserve for any proper purpose, and from time to time may increase, diminish, and vary the same in its absolute judgment and discretion. SECTION 5. INTENTIONALLY OMITTED. SECTION 6. INFORMAL ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes or proceedings of the board or committee. ARTICLE IV OFFICERS SECTION 1. NUMBER. The Board of Directors, as soon as may be after the election thereof held in each year, shall elect a Chairman of the Board, President, Secretary, Chief Financial Officer, and Treasurer, and from time to time may appoint a Vice Chairman of the Board, one or more Vice Presidents and such 10 Assistant Secretaries, Assistant Treasurers and such other officers, agents and employees as it may deem proper. Any two offices may be held by the same person. More than two offices other than the offices of Chairman of the Board or President and Secretary may be held by the same person. The Chairman, the Vice Chairman and the President may, but need not, be chosen from among the directors. The Treasurer shall report to the Chief Financial Officer if not also elected to the position of Chief Financial Officer. SECTION 2. TERM AND REMOVAL. The term of office of all officers shall be one year and until their respective successors are elected and qualify, but any officer may be removed from office, either with or without cause, at any time by the affirmative vote of a majority of the members of the Board of Directors then in office. A vacancy in any office arising from any cause may be filled for the unexpired portion of the term by the Board of Directors. SECTION 3. POWERS AND DUTIES. The Chairman of the Board shall be the Chief Executive Officer of the corporation, shall preside at all meetings of the Board of Directors, shall have such powers and perform such duties as are assigned to him by these by-laws, and shall have such other powers and perform such other duties as generally pertains to his office. In the absence or disability of the Chairman of the Board, the Vice Chairman of the Board, if one has been appointed, shall assume the duties, powers and position of the said Chairman. The President shall be the 11 Chief Operating Officer and, in the absence or disability of the Chairman of the Board and the Vice Chairman of the Board, if the latter has been appointed, the President shall assume the duties, powers and position of the said Chairman. The remaining officers of the corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors. The Vice President or Vice Presidents, the Assistant Secretary or Assistant Secretaries and the Assistant Treasurer or Assistant Treasurers shall, in the order of their respective seniorities, in the absence or disability of the President, Secretary or Treasurer, respectively, perform the duties of such officer and shall generally assist the President, Secretary or Treasurer, respectively; provided, however, and notwithstanding anything hereinabove to the contrary, that if the Board of Directors designates a Vice President as an Executive Vice President, he shall perform the duties of the President in his absence or disability, regardless of the order of seniority of said Executive Vice President to the other Vice Presidents. SECTION 4. VOTING CORPORATION'S SECURITIES. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, or in the event of his inability to act, the President, or in the event of his inability to act, the Vice President designated by the Board of Directors to act in the absence of the President, shall have full power and authority on behalf of the corporation to attend and to act and to vote at any meetings of security holders 12 of corporations in which the corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities, and which as the owner thereof the corporation might have possessed and exercised, if present. The Board of Directors, by resolution from time to time, may confer like powers upon any other person or persons. ARTICLE V CERTIFICATES OF STOCK SECTION 1. FORM AND TRANSFERS. The interest of each stockholder of the corporation shall be evidenced by certificates for shares of stock, certifying the number of shares represented thereby and in such form not inconsistent with the Certificate of Incorporation as the Board of Directors may from time to time prescribe. Upon compliance with any provisions restricting the transferability of shares that may be set forth in the Certificate of Incorporation, these by-laws, or any written agreement in respect thereof, transfers of shares of the capital stock of the corporation shall be made only on the books of the corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation, or with a transfer clerk or a transfer agent appointed as in Section 4 of this Article provided, and on surrender of the certificate or certificates for such shares 13 properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided that whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact, if known to the Secretary of the corporation, shall be so expressed in the entry of transfer. The Board may, from time to time, make such additional rules and regulations as it may deem expedient, not inconsistent with these by-laws, concerning the issue, transfer, and registration of certificates for shares of the capital stock of the corporation. The certificates of stock shall be signed by or in the name of the company by the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by such named holder, and sealed with the seal of the corporation. Such seal may be a facsimile, engraved or printed. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the company with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 2. RECORD DATE FOR STOCKHOLDERS. For the 14 purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to or dissent from any corporate action in writing without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not be more than sixty days nor less than ten days before the date of such meting, nor more than sixty days prior to any other action. If no record date is fixed: (1) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and (3) the record date for determining stockholders for any other purpose shall be the close of business on the day on which the Board of Directors adopts the resolution relating thereto. When a determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders has been made as provided in this paragraph, such determination shall apply to any adjournment thereof; provided, 15 however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 3. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. No certificates for shares of stock in the corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the corporation, if the Board of Directors shall so require, of a bond of indemnity in such amount (not exceeding twice the value of the shares represented by such certificate), upon such terms and secured by such surety as the Board of Directors may in its discretion require. SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. SECTION 5. EXAMINATION OF BOOKS BY STOCKHOLDERS. The Board shall have power to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations the accounts and books and documents of the corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of the corporation. 16 ARTICLE VI FISCAL YEAR The fiscal year of the corporation shall begin on the first day of June in each year and shall end on the last day of May next following, unless otherwise determined by the Board of Directors. ARTICLE VII CORPORATE SEAL The corporate seal of the corporation shall be in such form as the Board of Directors shall prescribe. ARTICLE VIII AMENDMENTS The by-laws of this corporation may be amended, altered or repealed and new by-laws not inconsistent with any provision of the Certificate of Incorporation, as amended, may be made (i) by the affirmative vote of a majority of the members of the Board of Directors then in office, or (ii) by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this corporation entitled to vote in the election of directors, considered for purposes of this Article VIII as one class. 17 EX-4.3 4 EXHIBIT 4.3 Exhibit 4.3 FIRST AMENDMENT DATED AS OF MAY 16, 1994 TO CREDIT AGREEMENT DATED AS OF JUNE 1, 1993 THIS AMENDMENT, dated as of May 16, 1994, is entered into among AAR CORP., a Delaware corporation (the "Borrower"), the financial institutions (the "Lenders") signatory to the hereinafter defined Agreement, CONTINENTAL BANK, N.A. ("Continental") as agent (the "Agent") for the Lenders. RECITALS: A. The Borrower, the Lenders and the Agent have entered into that certain Credit Agreement dated as of June 1, 1993 (said Credit Agreement shall hereinafter be referred to as the "Agreement"; the terms defined in the Agreement and not otherwise defined herein shall be used herein as defined in the Agreement). B. The Borrower, the Lenders and the Agent wish to amend certain provisions of the Agreement. C. Therefore, the parties hereto agree as follows: 1. AMENDMENTS TO THE AGREEMENT. 1.1 ARTICLE I OF THE AGREEMENT. ARTICLE I of the Agreement is amended by adding the following term and definition in proper alphabetical sequence: "Foreign Accounts" means Accounts, as defined in Section 6.13, with respect to which the obligor is a Person which is (i) organized under the laws of a jurisdiction other than the United States of America, any State of the United States of America or the District of Columbia, in the case of a Person which is not a natural person, or (ii) a citizen of a country other than the United States of America, in the case of a natural person. 1.2 SECTION 5.9 OF THE AGREEMENT. Section 5.9 of the Agreement is amended by deleting the amount "$5,000,000" in line 2 thereof and by substituting the amount "$10,000,000" in its place. 1.3 SECTION 6.1 OF THE AGREEMENT. Section 6.1 of the Agreement is amended by inserting the words "or Treasurer" after the phrase "the Borrower's chief financial officer" wherever such phrase appears in clauses (ii), (iii), (iv), (v) and (vii). 1.4 SECTION 6.13 OF THE AGREEMENT. Section 6.13(c) of the Agreement is amended to read in its entirety as follows: (c) The Borrower or any Subsidiary may sell or otherwise dispose of its Foreign Accounts to any Person for the purpose of collection, provided that the aggregate face amount of all such Foreign Accounts so transferred by the Borrower and its Subsidiaries during any fiscal year of the Borrower shall not exceed an amount equal to 15% of the gross Accounts of the Borrower and its Subsidiaries as of the last day of the Borrower's immediately preceding fiscal year and determined from the Borrower's consolidated balance sheet delivered pursuant to Section 6.1(i). 1.5 SECTION 6.22 OF THE AGREEMENT. Section 6.22 of the Agreement is amended by deleting the amount "$160,000,000" and by substituting the amount "$155,000,000" in its place. 1.6 SECTION 7.11 OF THE AGREEMENT. Section 7.11 of the Agreement is amended by deleting the amount "$5,000,000" in line 2 thereof and by substituting the amount "$10,000,000" in its place. 2. WARRANTIES. To induce the Lenders to enter into this Amendment, the Borrower warrants that: 2.1 AUTHORIZATION. The Borrower is duly authorized to execute and deliver this Amendment and is and will continue to be duly authorized to borrow monies under the Agreement, as amended hereby, and to perform its obligations under the Agreement, as amended hereby. 2.2 NO CONFLICTS. The execution and delivery of this Amendment and the performance by the Borrower of its obligations under the Agreement, as amended hereby, do not and will not conflict with any provision of law or of the charter or by-laws of the Borrower or of any agreement binding upon the Borrower. 2.3 VALIDITY AND BINDING EFFECT. The Agreement, as amended hereby, is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 3. CONDITIONS PRECEDENT TO AMENDMENTS. The amendments contemplated by Section 1 hereof are subject to the satisfaction of each of the following conditions precedent: Page 2 3.1 DOCUMENTATION. The Borrower shall have delivered to the Agent all of the following, each duly executed and dated the date hereof, in form and substance satisfactory to the Agent: (a) CERTIFICATE. A certificate of the president, chief financial officer or Treasurer of the Borrower as to the matters set out in Sections 3.2 and 3.3 hereof. (b) OTHER. Such other documents as the Agent may reasonably request. 3.2 NO DEFAULT. As of the date hereof, no Event of Default or Unmatured Event of Default shall have occurred and be continuing. 3.3 WARRANTIES. As of the date hereof, the warranties in Section 5 of the Agreement and in Section 2 of this Amendment shall be true and correct as though made on such date, except for such changes as are specifically permitted under the Agreement. 4. GENERAL 4.1 EXPENSES. The Borrower agrees to pay the Agent, upon demand for all reasonable expenses, including reasonable attorneys' and legal assistants' fees incurred by the Agent in connection with the preparation, negotiation and execution of this Amendment, and any document required to be furnished therewith. 4.2 LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS. 4.3 SUCCESSORS. This Amendment shall be binding upon the Borrower, the Agent and the Lenders and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Agent and the Lenders and their successors and assigns. 4.4 CONFIRMATION OF THE AGREEMENT. Except as amended hereby, the Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. 4.5 REFERENCES TO THE AGREEMENT. Each reference in the Agreement to "this Agreement," "hereunder," "hereof," or words of like import, and each reference to the Agreement in any and all instruments or documents provided for in the Agreement or delivered or to be delivered thereunder or in connection therewith, shall, except where the context otherwise requires, be deemed a reference to the Agreement, as amended hereby. Page 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered at Chicago, Illinois by their respective officers thereunto duly authorized as of the date first written above. AAR CORP. By: -------------------------------- Title: ------------------------------ CONTINENTAL BANK N.A., as a Lender and as Agent By: -------------------------------- Title: ------------------------------ EX-4.7 5 EXHIBIT 4.7 Exhibit 4.7 AMENDMENT NO. 1 AMENDMENT NO. 1 dated as of March 31, 1994 (this "Amendment") to the Credit Agreement dated as of October 15, 1991 (the "Credit Agreement") among AAR CORP., a Delaware corporation, the lenders listed on the signature pages of this Amendment and The First National lender of Chicago, as agent for such lenders. The parties hereto wish to amend the Credit Agreement in certain respects and accordingly hereby agree as follows: 1. DEFINITIONS. Unless the context otherwise requires, all terms used herein which are defined in the Credit Agreement shall have the meanings assigned to them therein. 2. AMENDMENT. Effective upon the satisfaction of the conditions precedent set forth in Section 4 of this Amendment, the Credit Agreement shall be amended as follows: (a) Section 5.9 of the Credit Agreement shall be amended by deleting the dollar figure "$5,000,000" in the two places where it appears therein and substituting in lieu thereof the dollar figure "$10,000,000". (b) Section 6.1 of the Credit Agreement shall be amended by deleting each reference to "chief financial officer" contained therein and substituting in lieu thereof the phrase "chief financial officer or Treasurer". (c) Section 6.13 of the Credit Agreement shall be amended by restating clause (c) of said Section 6.13 as follows: "(c) the Borrower or any Subsidiary may sell or otherwise dispose of its Accounts to any Person; PROVIDED that (i) each such disposition shall be without any recourse (either direct or contingent) to the Borrower or any Subsidiary, (ii) the Borrower and its Subsidiaries shall be in compliance with Section 6.12 upon giving effect thereto and (iii) the aggregate face amount of all such Accounts so transferred by the Borrower and its Subsidiaries during any fiscal year of the Borrower shall not exceed an amount equal to 15% of the gross Accounts of the Borrower and its Subsidiaries as of the last day of the Borrower's immediately preceding fiscal year and determined from the Borrower's consolidated balance sheet delivered pursuant to Section 6.1(i)." (d) Section 6.22 of the Credit Agreement shall be amended by deleting the dollar figure "$160,000,000" where it appears therein and substituting in lieu thereof the dollar figure "$155,000,000". (e) Section 7.11 of the Credit Agreement shall be amended by deleting the dollar figure "$5,000,000" in the two places where it appears therein and substituting in lieu thereof the dollar figure "$10,000,000". 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby confirms, reaffirms and restates as of the date hereof the representations and warranties set forth in Article V of the Credit Agreement, provided that such representations and warranties shall be and hereby are amended as follows: each reference therein to "this Agreement", including, without limitation, such a reference included in the term "Loan Documents", shall be deemed to be a collective reference to the Credit Agreement, this Amendment and the Credit Agreement as amended by this Amendment. A Default under and as defined in the Credit Agreement as amended by this Amendment shall be deemed to have occurred if any representation or warranty made pursuant to the foregoing sentence of this Section 3 shall be materially false as of the date on which made. 4. CONDITIONS PRECEDENT. This Amendment and the amendment to the Credit Agreement provided for herein shall become effective as of the date hereof when this Amendment shall have been duly executed and delivered by the Agent and the Borrower on one counterpart and Lenders constituting the Required Lenders shall have signed a counterpart or counterparts hereof and notified the Agent by telex or telephone that such action has been taken and that such executed counterpart or counterparts will be mailed or otherwise delivered to the Agent. 5. EFFECT ON THE EXISTING AGREEMENT. Except as expressly amended hereby, all of the representations, warranties, terms, covenants and conditions of the Credit Agreement and the other Loan Documents (a) shall remain unaltered, (b) shall continue to be, and shall remain, in full force and effect in accordance with their respective terms, and (c) are hereby ratified and confirmed in all respects. Upon the effectiveness of this Amendment, all references in the Credit Agreement (including references in the Credit Agreement as amended by this Amendment) to "this Agreement" (and all indirect references such as "hereby", "herein", "hereof" and "hereunder") shall be deemed to be references to the Credit Agreement as amended by this Amendment. 6. EXPENSES. The Borrower shall reimburse the Agent for any and all reasonable costs, internal charges and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) paid or incurred by the Agent in connection with the preparation, review, execution and delivery of this Amendment. 7. ENTIRE AGREEMENT. This Amendment, the Credit Agreement as amended by this Amendment and the other Loan Documents embody the entire agreement and understanding between the parties hereto and supersede any and all prior agreements and understandings between the parties hereto relating to the subject matter hereof. Page 2 8. GOVERNING LAW. This Amendment shall be construed in accordance with the internal laws (and not the law of conflicts) of the State of Illinois, but giving effect to federal laws applicable to a national banking association located in the State of Illinois. 9. COUNTERPARTS. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Amendment by signing any such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. AAR CORP. By: ------------------------------ Title: ----------------------------- THE FIRST NATIONAL BANK OF CHICAGO By: ------------------------------ Title: ----------------------------- Page 3 EX-10.4 6 EXHIBIT 10.4 Exhibit 10.4 AMENDMENT II TO TRUST AGREEMENT DATED AUGUST 12, 1988 BY AND AMONG AAR CORP., THE NORTHERN TRUST COMPANY AND IRA A. EICHNER ----------------------------------------------------- WHEREAS, AAR CORP., The Northern Trust Company and Ira A. Eichner (the "Parties") entered into a trust agreement dated August 12, 1988 (the "Trust Agreement"); and WHEREAS, the Trust Agreement was amended by Amendment I thereto dated May 25, 1990; and WHEREAS, the Parties reserved the right to amend the Trust Agreement and now deem it appropriate to further amend the Trust Agreement in certain respects; NOW, THEREFORE, the last sentence of Section 10.2 of the Trust Agreement is amended, effective as of the date hereof, to read as follows: Upon termination of the Trust, all assets remaining in the Trust Fund shall be distributed to the Beneficiary designated by Eichner in his last will and testament, or in accordance with a written instrument last delivered to the Trustee prior to the date of his death. If no such designation is made, or if all designated Beneficiaries predecease Eichner, upon termination of the Trust all assets remaining in the Trust fund shall be distributed as follows: (a) to Eichner's widow, if living; or if not, (b) to Eichner's lawful descendants PER STIRPES, then living, or if none, (c) to the duly appointed legal representatives of Eichner's estate; or (d) if there shall be no such legal representative duly appointed and qualified within six months of the date of death of Eichner, then to such persons, as at the date of his death, would be entitled to share in the distribution of his personal estate under the provisions of the Illinois statute then in force governing the descent of intestate property, in the proportions specified in such statute. IN WITNESS WHEREOF, the Parties have caused this Amendment II to the Trust Agreement to be executed as of the day of , 1994. ATTEST: AAR CORP. - - ---------------------------- --------------------------------- ATTEST: THE NORTHERN TRUST COMPANY - - ---------------------------- --------------------------------- --------------------------------- Ira A. Eichner 2 EX-21.1 7 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF AAR CORP. (1) STATE OF NAME OF CORPORATION INCORPORATION ------------------- ------------- AAR Allen Airmotive, Inc. ................. Illinois AAR Aviation Services, Inc. (2) ........... New York AAR Aviation Trading, Inc. (3) ............ Illinois AAR Financial Services Corp. .............. Illinois AAR Hardware Corp. (4) .................... Illinois AAR Manufacturing, Inc. (5) ............... Illinois AAR Oklahoma, Inc. (6) .................... Oklahoma AAR PowerBoss, Inc. (7) ................... Illinois - - ----------- (1) Subsidiaries required to be listed pursuant to Regulation S-K Item 601(b)(21). (2) Also does business under the name of AAR Engine Component Services, AAR Landing Gear Center, AAR Technical Service Center, AAR Technical Service Center - Midwest and Mars Aircraft Radio. (3) Also does business under the names AAR Aircraft Turbine Center, AAR Allen Aircraft, AAR Defense Systems and AAR Expendables. (4) Also does business under the name AAR Hardware. (5) Also does business under the names AAR Advanced Structures, AAR Cadillac Manufacturing, AAR Handling Systems, AAR Skydyne and Aeronetics. AAR Manufacturing, Inc. was formerly known as AAR Brooks & Perkins Corp. (6) Also does business under the names Warsaw Aircraft Parts and AAR Southern Star. (7) Also does business under the name AAR PowerBoss. EX-23.1 8 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors AAR CORP: We consent to the incorporation by reference in Registration Statement Nos. 33-19767, 33-26783, 33-38042, 33-43839, and 33-58456 on Form S-8 and in Registration Statement Nos., 33-30222 and 33-42326 on Form S-3 of AAR CORP. of our report dated July 1, 1994, relating to the consolidated balance sheets of AAR CORP, and subsidiaries as of May 31, 1994 and 1993 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended May 31, 1994, which report appears in the May 31, 1994 annual report on Form 10-K of AAR CORP. KPMG Peat Marwick LLP Chicago, Illinois August 24, 1994 -----END PRIVACY-ENHANCED MESSAGE-----