-----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, rR7PmwSWnYQ46XjrJRfChtD3D+pO+ZonJyuHHN8efBaVq67riC26oTlfpALsQxQ2 D0VcReKNjWZfrPwaHLcpLQ== 0000912057-95-006316.txt : 19950814 0000912057-95-006316.hdr.sgml : 19950814 ACCESSION NUMBER: 0000912057-95-006316 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19950531 FILED AS OF DATE: 19950811 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AAR CORP CENTRAL INDEX KEY: 0000001750 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [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: 95561522 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 AAR 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, 1995 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 July 31, 1995, the aggregate market value of the Registrant's voting stock held by nonaffiliates was approximately $256,681,136. The calculation of such market value has been made for the purposes of this report only and should not be considered as an admission or conclusion by the Registrant that any person is in fact an affiliate of the Registrant. On July 31, 1995, there were 15,961,480 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The definitive proxy statement relating to the Registrant's Annual Meeting of Stockholders, to be held October 11, 1995, 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................................................................................... 4 Item 3. Legal Proceedings............................................................................ 4 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 4 Executive Officers of the Registrant......................................................... 5 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................................................................... 6 Item 6. Selected Financial Data...................................................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................... 8 Item 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 SIGNATURES.................................................................................................. 39
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, the demand for aviation aftermarket products and services improved, particularly in the latter half of this period. At the beginning of this three-year period, airlines experienced significant financial losses from reduced traffic demands and increased costs. As a result, airlines curtailed purchases and reduced or, in some cases, ceased operations, leading to a decline in demand for aviation 2 aftermarket products and services during the early 1990s. This decline in demand was exacerbated by the availability of parts from grounded aircraft, excess airline inventories and material from airlines that ceased operations. Demand improved during the last half of this period as airlines, generally, experienced increased revenue passenger and freight miles, increased aircraft fleet utilization, and in many cases, returned to operating profitability. During this period of improvement, start-up airlines emerged in niche-markets, began to record operating earnings and, in some instances, are expanding operations. The improvement in the operating results of many airlines stem from increased traffic demands, internal cost controls and from outsourcing certain support activities to third party providers. Additionally, the supply of surplus aircraft and parts inventories that increased during the industry downturn, have begun to be absorbed at a faster rate due to increased utilization of aircraft fleets by airlines and conversion of aircraft to alternative uses. Aerospace and defense manufacturers also experienced lower demand during this three year period due to reduced and cancelled orders for new aircraft. While this reduced demand still exists, increases in orders for new aircraft are expected over the next few years. Also during this period, government budget cuts resulted in a downsizing of the United States military. While this downsizing adversely effected the aerospace/aviation industry, the military continues to require products to support ongoing rapid deployment requirements and services previously performed within the military. 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 material 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, 1995, backlog believed to be firm was approximately $79,407,000 compared to $84,550,000 at May 31, 1994. An additional $85,076,000 of unfunded government options on awarded contracts also existed at May 31, 1995. Of the 1995 year-end backlog that is firm, $23,460,000 is attributable to government contracts for products related to the U.S. Government's rapid deployment programs. It is expected that approximately $68,188,000 of the backlog will be shipped in fiscal 1996. Sales to the United States government, its agencies, and its contractors were approximately $82,708,000 (18.3% of total net sales), $77,500,000 (19.0% of total net sales) and $57,600,000 (15.0% of total net sales) in fiscal 1995, 1994 and 1993, 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 3 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, 1995, the Company employed approximately 1,940 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 Financial Condition and Results of Operations." 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 three buildings in Elk Grove Village, Illinois, one owned by the Company, another subject to an industrial revenue bond mortgage until June 1, 1995 and the third is leased. 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 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 (in a building owned by the Company); Garden City, New York (in a building owned by the Company); Frankfort, New York (subject to an industrial revenue bond 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 near 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 Port Jervis, New York, and 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, following which the Company shall purchase the facility for a nominal consideration). 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. 4 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............................... 64 Chairman of the Board and Chief Executive Officer; Director David P. Storch.............................. 42 President and Chief Operating Officer; Director Philip C. Slapke............................. 42 Vice President-Engine Group Howard A. Pulsifer........................... 52 Vice President; General Counsel; Secretary Timothy J. Romenesko......................... 38 Vice President-Controller; Chief Financial Officer; Treasurer
The term of each of the current executive officers of the Company expires on October 11, 1995, the date of the annual meeting of the Board of Directors, which will be held immediately after the 1995 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 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 1997 Annual Meeting. Mr. Storch is Mr. Eichner's son-in-law. Mr. Slapke was elected Vice President of the Company in July 1994. He is also President of a major subsidiary, a position he has held since July, 1989. He has been with the Company in various positions since 1982. Mr. Pulsifer joined the Company as General Counsel in August, 1987 and was elected a Vice President in October, 1989 and Secretary in May, 1990. He was previously with United Airlines, Inc. for 14 years, most recently as Senior Counsel. Mr. Romenesko has served as Controller of the Company since 1991. He was elected Vice President in January, 1994 and Chief Financial Officer and Treasurer in December, 1994. He has been with the Company in various positions since 1981. 5 PART II ITEM 5. MARKET FOR THE REGISTRANT'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, 1995, there were approximately 12,000 holders of the Common Stock of the Company, including participants in security position listings. Certain of the Company's debt agreements contain provisions restricting the payment of dividends or repurchase of its shares. See Note 2 of Notes to Consolidated Financial Statements included herein. Under the most restrictive of these provisions, the Company may not pay dividends (other than stock dividends) or acquire its capital stock if after giving effect thereto the aggregate amounts paid on or after June 1, 1995 exceed the sum of (i) $20,000,000 plus (ii) 50% of Consolidated Net Income of the Company after June 1, 1994. At May 31, 1995, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares totalled approximately $20,000,000. Effective June 1, 1995 unrestricted consolidated retained earnings increased to $25,232,000 due to inclusion of 50% of Consolidated Net Income of the Company for fiscal 1995. 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 1995 FISCAL 1994 --------------------------- --------------------------- PER COMMON SHARE: MARKET PRICES MARKET PRICES - ------------------------- -------------- QUARTERLY -------------- QUARTERLY QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS - ------------------------- ----- ----- --------- ----- ----- --------- First.................. 151/8 133/8 $ .12 141/8 125/8 $ .12 Second................. 131/2 12 .12 141/4 125/8 .12 Third.................. 141/8 121/2 .12 165/8 131/2 .12 Fourth................. 151/4 121/8 .12 173/8 143/8 .12 --------- --------- $ .48 $ .48 --------- --------- --------- ---------
6 ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ENDED MAY 31, ----------------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- (000'S OMITTED EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: - ---------------------------------------------- Net sales................................... $451,395 $407,754 $382,780 $422,657 $466,542 Gross profit................................ 77,871 71,910 68,436 83,440 92,246 Operating income............................ 24,438 21,824 5,343(2) 20,730(4) 30,401(5) Interest expense............................ 10,900 9,564 8,107 8,356 10,073 Income (loss) before provision (benefit) for income taxes.............................. 14,713 13,684 (1,917)(3) 13,620(4) 21,351(5) Net income.................................. 10,463 9,494 283(3) 10,020(4) 14,801(5) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Per share data: Net income................................ $ .66 $ .60 $ .02(3) $ .63(4) $ .93(5) Cash dividends............................ $ .48 $ .48 $ .48 $ .48 $ .48 Average common shares outstanding............................. 15,932 15,904 15,855 15,895 15,952 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- FINANCIAL POSITION AT YEAR END: - --------------------------------------------------------- Working capital............................. $248,492 $240,009(2) $193,399 $197,246 $189,172 Total assets................................ 425,814 411,016(1) 365,151 395,351 379,958 Short-term debt............................. 1,632 568(2) 25,025 25,005 16,500 Long-term debt.............................. 119,766 115,729(2) 66,298 67,323 68,953 Total debt.................................. 121,398 116,297(2) 91,323 92,328 85,453 Stockholders' equity........................ 197,119 189,488 189,216 196,737 193,778 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Number of shares outstanding at end of year...................................... 15,962 15,906 15,900 15,899 15,891 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Book value per share of common stock........ $ 12.35 $ 11.91 $ 11.90 $ 12.37 $ 12.19 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- - ------------------------ Notes: (1) Reflects reclassification of $6,610,000 of noncurrent tax assets against noncurrent deferred tax liabilities to conform to the fiscal 1995 presentation. (2) 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. (3) 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 State- ments). (4) 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 and a reduction in income tax expense of $700,000. (5) 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 FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 The comparison of net sales of the Company over the last three fiscal years covers a period of improving general economic conditions, and improving conditions in the aerospace/aviation industry. Airlines continue to strive to improve their financial condition which was weakened due to an extended period of operating losses during the early 1990s. Airlines are now experiencing increased aircraft fleet utilization and increased revenue passenger and freight miles, which are contributing to improved operating earnings. Airlines' operating earnings are also being positively affected by their aggressive steps to control costs through restructuring operations, exiting unprofitable routes, and by outsourcing certain support activities to third party providers. Start-up airlines emerged in niche-markets during this period and began to record operating earnings and, in some instances, are expanding operations. Supplies of surplus aircraft and parts inventories that increased during the industry downturn, are now being absorbed at a faster rate due to increased aircraft utilization and conversion of aircraft to alternate uses, such as cargo capabilities. In fiscal 1995 and 1994, the Company's revenues benefitted from aggressive pursuit of market opportunities in the improving aerospace/aviation industry. The Company's trading sales of airframe and large component parts increased as did sales from inventory management programs and inventory provisioning for start-up airlines. Sales of certain airframe and component overhaul services, as well as manufactured commercial cargo systems, also improved in fiscal 1995. Aerospace/aviation manufacturers and certain defense contractors experienced delays and cancellations of new aircraft orders and other manufactured aviation products during this period. This decreased demand resulted in a decline in Company sales of aviation fasteners for the first two years of the period. These sales have now stabilized and aerospace/aviation manufacturers are projecting increases in new aircraft orders over the next few years which should provide increased aviation fastener demand. Also, government budget cuts resulted in a downsizing of the United States military. While this downsizing adversely affected the aerospace/aviation industry generally, the military continues to require products to support ongoing rapid deployment requirements and services previously performed within the military. The Company's response to these changed requirements has resulted in increased sales of manufactured products. The Company's sales of overhaul services also benefitted from government outsourcing of certain activities previously performed within the military. The difficult general economic conditions during the early part of this three year period also adversely affected the Company's nonaviation related businesses. As the general business environment improved the Company aggressively pursued availing business opportunities in response to changing customer needs, which resulted in increased sales of the Company's floor maintenance products and overhaul services on industrial gas turbines during the latter part of fiscal 1994 and during fiscal 1995. 8 The Company believes that its established market position, its ability to respond to changes in the industry and its diverse customer base coupled with continued improvement in the aerospace/aviation industry, positions the Company to take advantage of opportunities in improving markets.
FOR THE YEAR ENDED MAY 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (000'S OMITTED) Net Sales: Trading...................................................... $ 236,723 $ 208,561 $ 211,956 Overhaul..................................................... 108,737 102,972 92,890 Manufacturing................................................ 105,935 96,221 77,934 ----------- ----------- ----------- $ 451,395 $ 407,754 $ 382,780 ----------- ----------- ----------- ----------- ----------- -----------
FISCAL 1995 COMPARED WITH FISCAL 1994 The Company's operating results continued to improve in fiscal 1995 building on improvements in the prior year. Consolidated net sales for fiscal 1995 increased $43,641,000 or 10.7% over the prior fiscal year, primarily due to increased sales of major products within each of the classes of similar products and services. Operating income increased $2,614,000 or 11.9% over the prior year due to increased consolidated net sales partially offset by a slightly lower consolidated gross profit margin and increased total selling, general and administrative costs. Net income increased $969,000 or 10.2% primarily due to increased consolidated net sales partially offset by the factors described above and increased interest expense on additional borrowings and higher interest rates, primarily resulting from the sale of $50 million of 10 year, 7 1/4% notes in October 1993. Trading sales increased $28,162,000 or 13.5% primarily as a result of increased sales of airframe and large component parts as well as sales resulting from inventory management programs and inventory provisioning of start-up airlines. Overhaul sales increased $5,765,000 or 5.6% primarily as a result of increased airframe and airframe component overhaul services partially offset by reduced sales of large component overhaul services. Manufacturing sales increased $9,714,000 or 10.1% primarily due to the sale of manufactured commercial cargo systems, products and product repairs supporting the United States governments' rapid deployment program and floor maintenance products. Consolidated gross profit increased $5,961,000 or 8.3% over the prior fiscal year due to increased consolidated net sales, although the consolidated gross profit margin of 17.3% was lower than the prior year's 17.6% gross profit margin. However, the prior fiscal year included $700,000 from a reduction in the interest rate on a nonrecourse leveraged lease obligation and $1,300,000 from leveraged lease repricing required to adjust for tax rate differentials. The margin on manufactured products and principal trading products increased year over year. Overhaul margins declined over the prior year primarily as a result of changes in the mix of labor and parts provided in overhaul services and highly competitive pricing on overhaul business. Consolidated operating income increased $2,614,000 or 11.9% over the prior year due to increased consolidated net sales partially offset by the consolidated margin decline described above and increased selling, general and administrative costs which declined as a percentage of net sales. Consolidated net income increased $969,000 or 10.2% over the prior year due to the increased consolidated net sales partially offset by the factors described above and increased interest expense. 9 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 $10,082,000 or 10.9% 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; 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 $3,395,000 or 1.6%. 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 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 affected 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 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, focusing on lowering maintenance costs, maintenance overcapacity in the industry 10 and airlines using lower-cost serviceable components, abundant in the marketplace, in preference to overhauling certain units. 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 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 decreased $15,004,000 or 18% from the prior fiscal year 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 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 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 income tax expense reduction was 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. FINANCIAL CONDITION AT MAY 31, 1995 COMPARED WITH MAY 31, 1994 In fiscal 1995 the Company generated $15,255,000 of cash from operations, primarily in the last half of the fiscal year, through increased earnings and effective working capital management. The Company also issued $6,186,000 of long-term debt bearing an interest rate of 5% in conjunction with the purchase of inventory to support long-term inventory management programs. The overall cash and cash equivalents position of the Company increased $4,413,000 to $22,487,000 at fiscal year end. The increase in cash and cash equivalents was accomplished while making $9,073,000 of capital improvements, paying $7,650,000 in dividends and carrying increased trade accounts receivable of $23,375,000 stemming from record sales in the last quarter of the fiscal year. The Company's financial position continued to improve in fiscal 1995. Working capital increased $8,483,000, average short-term borrowings were reduced, and the ratio of long-term debt to capitalization improved to 37.8%. The Company believes that its improved financial condition, along with available sources of financing, including its unused bank credit lines and facilities amounting to $133,750,000, will enable the Company to meet its anticipated working capital requirements and pursue advantageous business opportunities. 11 A summary of key indicators of financial condition and lines of credit follows:
MAY 31, ------------------ DESCRIPTION 1995 1994 - ------------------------------------------------------------ -------- -------- (000'S OMITTED) Working capital............................................. $248,492 $240,009 Current ratio............................................... 4.4:1 4.5:1 Bank credit lines: Borrowings outstanding.................................... $ -- $ -- Available but unused lines................................ 133,750 132,500 -------- -------- Total credit lines.............................. $133,750 $132,500 -------- -------- -------- -------- Long-term debt, less current maturities..................... $119,766 $115,729 Ratio of long-term debt to capitalization................... 37.8% 37.9%
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 INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AAR CORP.: We have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 1995 and 1994 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, 1995. 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, 1995 and 1994 and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, 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 June 30, 1995 13 AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED MAY 31, ---------------------------- 1995 1994 1993 -------- -------- -------- (000'S OMITTED EXCEPT PER SHARE DATA) Net sales.......................................................... $451,395 $407,754 $382,780 -------- -------- -------- Costs and operating expenses: Cost of sales.................................................... 373,524 335,844 314,344 Selling, general and administrative.............................. 53,433 50,086 52,093 Restructuring expenses (Note 11)................................. -- -- 11,000 -------- -------- -------- 426,957 385,930 377,437 -------- -------- -------- Operating income................................................... 24,438 21,824 5,343 Interest expense (Note 2).......................................... (10,900) (9,564) (8,107) Interest income (Note 3)........................................... 1,175 1,424 847 -------- -------- -------- Income (loss) before provision (benefit) for income taxes.......... 14,713 13,684 (1,917) Provision (benefit) for income taxes (Notes 1 and 3)............... 4,250 4,200 (2,200) -------- -------- -------- Income before cumulative effects of changes in accounting principles............................................ 10,463 9,484 283 Cumulative effects of changes in accounting principles (Note 1): Income taxes................................................. -- 900 -- Postretirement health care benefits, net of tax.............. -- (890) -- -------- -------- -------- Net income......................................................... $ 10,463 $ 9,494 $ 283 -------- -------- -------- -------- -------- -------- Net income per share of common stock (Note 5): Income before cumulative effects of changes in accounting principles..................................................... $ .66 $ .60 $ .02 Cumulative effects of changes in accounting principles: Income taxes................................................. -- .06 -- Postretirement health care benefits, net of tax.............. -- (.06) -- -------- -------- -------- Net income......................................................... $ .66 $ .60 $ .02 -------- -------- -------- -------- -------- --------
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, ------------------ 1995 1994 -------- -------- Current assets: Cash and cash equivalents (Note 1)................................................ $ 22,487 $ 18,074 Accounts receivable, less allowances of $2,400 and $2,000, respectively (Note 11)............................................................................. 110,420 85,947 Inventories (Notes 1 and 11)...................................................... 151,827 146,039 Equipment on or available for short-term lease (Note 1)........................... 18,501 28,881 Deferred tax assets, deposits and other (Notes 1, 3 and 7)........................ 18,397 28,782 -------- -------- Total current assets.................................................... 321,632 307,723 -------- -------- Property, plant and equipment, at cost (Note 1): Land.............................................................................. 3,101 3,088 Buildings and improvements........................................................ 36,227 34,477 Equipment, furniture and fixtures................................................. 88,872 84,536 -------- -------- 128,200 122,101 Accumulated depreciation.......................................................... (71,604) (67,318) -------- -------- 56,596 54,783 -------- -------- Other assets: Investment in leveraged leases (Notes 1 and 10)................................... 31,952 32,618 Cost in excess of underlying net assets of acquired companies (Note 1).................................................. 6,101 6,313 Retirement benefits, notes receivable and other (Notes 3, 6 and 10)............................................................. 9,533 9,579 -------- -------- 47,586 48,510 -------- -------- $425,814 $411,016 -------- -------- -------- --------
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, ------------------ 1995 1994 -------- -------- Current liabilities: Current maturities of long-term debt (Note 2)..................................... $ 1,632 $ 568 Accounts payable.................................................................. 51,393 49,599 Accrued liabilities............................................................... 15,977 13,312 Accrued taxes on income (Notes 1 and 3)........................................... 4,138 4,235 -------- -------- Total current liabilities............................................... 73,140 67,714 -------- -------- Long-term debt, less current maturities (Note 2).................................... 119,766 115,729 Deferred tax liabilities (Notes 1, 3 and 10)........................................ 30,660 32,390 Retirement benefit obligation and deferred credits (Note 6)......................... 5,129 5,695 -------- -------- 155,555 153,814 -------- -------- Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares; none issued.............. -- -- Common stock, $1.00 par value, authorized 80,000 shares; issued 16,284 and 16,215 shares at respective dates (Note 4)............................................. 16,284 16,215 Capital surplus................................................................... 82,132 81,296 Retained earnings (Note 2)........................................................ 102,309 99,496 Treasury stock, 323 and 309 shares at respective dates, at cost (Note 4).......... (3,733) (3,556) Cumulative translation adjustments (Note 1)....................................... 1,497 (2,963) Minimum pension liability (Note 6)................................................ (1,370) (1,000) -------- -------- 197,119 189,488 -------- -------- $425,814 $411,016 -------- -------- -------- --------
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, 1995
MINIMUM COMMON STOCK TREASURY STOCK CUMULATIVE PENSION ----------------- --------------- CAPITAL RETAINED TRANSLATION LIABILITY SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS ADJUSTMENTS ADJUSTMENTS ------- -------- ---- --------- -------- ---------- ----------- ----------- (NOTE 4) (NOTE 4) (NOTE 2) (NOTE 1) (NOTE 6) (000'S OMITTED) 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.................. -- -- -- -- -- -- -- (1,000) ------- -------- ---- --------- -------- ---------- ----------- ----------- Balance, May 31, 1994........................ 16,215 $16,215 309 $ (3,556) $81,296 $ 99,496 $ (2,963) $ (1,000) Net income................................. -- -- -- -- -- 10,463 -- -- Cash dividends ($.48 per share)............ -- -- -- -- -- (7,650) -- -- Treasury stock purchased................... -- -- 14 (177) -- -- -- -- Exercise of stock options and stock awards................................... 69 69 -- -- 836 -- -- -- Adjustment for net translation gain........ -- -- -- -- -- -- 4,460 -- Minimum pension liability.................. -- -- -- -- -- -- -- (370) ------- -------- ---- --------- -------- ---------- ----------- ----------- Balance, May 31, 1995........................ 16,284 $16,284 323 $ (3,733) $82,132 $ 102,309 $ 1,497 $ (1,370) ------- -------- ---- --------- -------- ---------- ----------- ----------- ------- -------- ---- --------- -------- ---------- ----------- -----------
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, ---------------------------- 1995 1994 1993 -------- -------- -------- (000'S OMITTED) Cash flows from operating activities: Net income............................................................... $ 10,463 $ 9,494 $ 283 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization........................................ 10,328 9,928 10,883 Restructuring expenses............................................... -- -- 11,000 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................................................ (23,375) (17,295) 20,910 Inventories........................................................ (3,253) (6,841) (9,171) Equipment on or available for short-term lease..................... 10,380 4,223 2,273 Deferred tax assets, deposits and other............................ 9,790 (10,968) (435) Accounts payable................................................... 1,208 17,081 (10,876) Accrued liabilities and taxes on income............................ 2,375 3,077 (7,061) Deferred tax liabilities and other deferred credits................ (2,661) 25 (1,000) -------- -------- -------- Net cash provided from operating activities............................ 15,255 6,697 16,806 -------- -------- -------- Cash flows from investing activities: Property, plant and equipment expenditures, net.......................... (9,073) (5,984) (8,918) Investment in leveraged leases........................................... 666 (391) 589 Proceeds from sale of marketable securities.............................. -- -- 1,593 Notes receivable and other, net.......................................... (939) (1,820) (1,281) -------- -------- -------- Net cash used in investing activities.................................. (9,346) (8,195) (8,017) -------- -------- -------- Cash flows from financing activities: Gross proceeds from issuance of long-term notes payable.................. 6,186 50,000 -- Repayment of bank loans with proceeds from issuance of long-term notes payable................................................................ -- (28,200) -- Change in other borrowings, net.......................................... (1,085) 3,174 (1,005) Cash dividends........................................................... (7,650) (7,635) (7,614) Purchases of treasury stock.............................................. (177) (66) (1,164) Proceeds from exercise of stock options, employee stock purchases and other.................................................................. 905 134 988 -------- -------- -------- Net cash provided from (used in) financing activities.................. (1,821) 17,407 (8,795) -------- -------- -------- Effect of exchange rate changes on cash.................................... 325 (90) 11 -------- -------- -------- Increase in cash and cash equivalents...................................... 4,413 15,819 5 Cash and cash equivalents, beginning of year............................... 18,074 2,255 2,250 -------- -------- -------- Cash and cash equivalents, end of year..................................... $ 22,487 $ 18,074 $ 2,255 -------- -------- -------- -------- -------- --------
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. In fiscal 1995 the Company adopted SFAS No. 112 "Employers' Accounting for Postemployment Benefits." Prior years' results were not restated. This standard requires an accrual method of recognizing the costs of providing postemployment benefits relating to employee severance, disability, health and life insurance. Since the Company either does not provide such benefits or accounted for those benefits provided on an accrual basis, the cumulative after-tax charge of accruing the cost of benefits under this statement was not significant to the results of operations in fiscal 1995. 19 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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, 1995 and 1994 cash equivalents of approximately $19,129,000 and $5,717,000, respectively held by the Company represent investments in funds holding high-quality commercial paper, Eurodollars and U.S. government agency-issued securities. The carrying amount of cash equivalents approximates fair value at May 31, 1995 and 1994, respectively. 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 determined on the basis of specific identification 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 and certain domestic subsidiaries transacting business in currencies other than the Company's functional currency 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, 1995 and during fiscal 1995 there were no forward exchange contracts or options outstanding. Foreign and certain domestic subsidiaries incur transaction gains and losses upon settlement of obligations in currencies other than their functional currency. The aggregate net transaction gains (losses), including those related to forward exchange contracts, reported in results of operations were $45,000, $(32,000), and $(578,000) for fiscal 1995, 1994 and 1993, 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 and cash equivalents, accounts receivable, 20 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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. 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. 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, average cost, or first-in, first-out method. Inventoried costs relating to long-term contracts and programs are stated at the actual production costs, including factory burden and initial tooling, incurred to date, reduced by amounts identified with revenue recognized on units delivered. 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, ------------------------------ 1995 1994 1993 -------- -------- -------- (000'S OMITTED) Raw materials and parts............................. $ 29,316 $ 25,349 $ 21,355 Work-in-process..................................... 11,891 11,974 11,117 Purchased aircraft parts, engines and components held for sale or exchange.......................... 110,948 106,529 105,200 Finished goods...................................... 1,734 2,189 1,785 -------- -------- -------- 153,889 146,041 139,457 Progress billings on long-term contracts and programs.......................................... (2,062) (2) (25) -------- -------- -------- $151,827 $146,039 $139,432 -------- -------- -------- -------- -------- --------
EQUIPMENT UNDER OPERATING LEASES Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation of the cost is computed on a straight-line method over the estimated service life of the equipment. 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. 21 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Depreciation is computed on the straight-line method over useful lives of 10-40 years for buildings and improvements and 3-10 years for equipment, furniture and fixtures. Leasehold improvements are amortized over the estimated useful life or the term of the applicable lease. Repairs and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts and related gains and losses included in results of operations. LEVERAGED LEASES The Company acts as an equity participant in leveraged lease transactions. The equipment cost in excess of equity contribution is furnished by third party financing in the form of secured debt. Under the lease agreements, the third parties have no recourse against the Company for 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 $230,000, $240,000 and $240,000 in fiscal 1995, 1994 and 1993, respectively. Accumulated amortization is $3,155,000, $2,950,000 and $2,710,000 at May 31, 1995, 1994 and 1993, 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 $15,200,000 and $14,600,000 at May 31, 1995 and 1994, 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, ---------------------------- 1995 1994 1993 ------ ------ ------ (000'S OMITTED) Interest paid............................................. $10,700 $8,800 $8,100 Income taxes paid......................................... 3,900 3,300 5,400 Income tax refunds and interest received.................. 330 500 5,100
22 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) BUSINESS SEGMENT INFORMATION The Company operates primarily in the aerospace/aviation industry and reports its activities in one business segment, Aviation Services. Export sales from the Company's United States operations to unaffiliated customers, the majority located in Europe, Middle East, Asia, Canada, Mexico and South America (including sales through foreign sales offices of domestic subsidiaries), were approximately $144,056,000 (31.9% of total net sales), $112,275,000 (27.5% of total net sales), and $110,597,000 (28.9% of total net sales) in fiscal 1995, 1994 and 1993, respectively. Sales to the United States government, its agencies and its contractors were approximately $82,708,000 (18.3% of total net sales), $77,500,000 (19.0% of total net sales), and $57,600,000 (15.0% of total net sales) in fiscal 1995, 1994 and 1993, respectively. RECLASSIFICATIONS Certain reclassifications have been made in the fiscal 1994 (in particular, noncurrent tax assets of $6.6 million against noncurrent deferred tax liabilities) and 1993 financial statements to conform to the fiscal 1995 presentation. 2. FINANCING ARRANGEMENTS Bank loans consisted of:
MAY 31, --------------------------- 1995 1994 1993 ------- ------- ------- (000'S OMITTED) Unsecured bank loans.................................... $ -- $ -- $24,000 Current maturities of long-term debt.................... 1,632 568 1,025 ------- ------- ------- $ 1,632 $ 568 $25,025 ------- ------- ------- ------- ------- -------
Short-term borrowing activity was as follows:
FOR THE YEAR ENDED MAY 31, ----------------------------- 1995 1994 1993 ------- ------- ------- (000'S OMITTED) Maximum amount borrowed.................................. $21,200 $33,500 $51,900 Average daily borrowings................................. 7,553 12,300 39,100 Average interest rate during the year.................... 6.2% 3.7% 4.4% ------- ------- ------- ------- ------- -------
At May 31, 1995, aggregate unsecured bank credit lines were $133,750,000. 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 $7,750,000 was available under credit agreements with foreign banks. All domestic and foreign credit lines were unused at May 31, 1995. There are no compensating balance requirements in connection with domestic or foreign lines of credit. Borrowings under domestic bank lines bear interest at or below the corporate base rate. The Company may borrow a maximum of $60,000,000 ($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 Company's option, be converted to term loans payable in equal quarterly installments over five 23 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. FINANCING ARRANGEMENTS -- (CONTINUED) 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, 1995. 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, ------------------- 1995 1994 -------- -------- (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 50,000 Installment note due June, 1999, bearing interest at 5% per annum, compounded monthly, payable in equal monthly payments of principal and interest.................................... 5,669 -- Industrial revenue bonds due in installments to 2002 with weighted average interest of approximately 5.93% at May 31, 1995 (secured by trust indentures on property, plant and equipment)................................................... 729 1,297 -------- -------- 121,398 116,297 Current maturities............................................. (1,632) (568) -------- -------- $119,766 $115,729 -------- -------- -------- --------
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, 1995, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares was approximately $20,000,000. Effective June 1, 1995, unrestricted consolidated retained earnings increased to $25,232,000 due to inclusion of 50% of the consolidated net income of the Company for fiscal 1995. The aggregate amount of long-term debt maturing during each of the next five fiscal years is $1,632,000 in 1996, $1,474,000 in 1997, $1,474,000 in 1998, $1,545,000 in 1999 and $184,000 in 2000. The Company's long-term debt was estimated to have a fair value of approximately $118,778,000 at May 31, 1995. 24 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. INCOME TAXES The provision (benefit) for income taxes included the following components:
FOR THE YEAR ENDED MAY 31, ----------------------------- 1995 1994 1993 ------- ------- ------- (000'S OMITTED) Current Federal.......................................... $ 2,255 $ 100 $ (640) Foreign.......................................... 625 530 670 State, net of refunds............................ 780 470 -- ------- ------- ------- 3,660 1,100 30 ------- ------- ------- Deferred 590 3,100 (2,230) ------- ------- ------- $ 4,250 $ 4,200 $(2,200) ------- ------- ------- ------- ------- -------
The deferred tax provisions or benefit for the fiscal years 1995, 1994 and 1993 result primarily from differences between book and tax income arising from depreciation and leveraged leases. Refundable income taxes included within Deferred tax assets, deposits and other, principally represent refunds of Federal income taxes resulting from additional tax benefits generated from export sales and foreign tax credits carried back to prior years. Interest income relating to refundable income taxes was $371,000, $576,000 and $390,000 for fiscal 1995, 1994 and 1993, respectively. 25 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. INCOME TAXES -- (CONTINUED) 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, ------------------- 1995 1994 -------- -------- (000'S OMITTED) Deferred tax liabilities: Depreciation....................................................... $ 8,500 $ 9,710 Leveraged leases................................................... 27,590 28,560 Other.............................................................. 910 730 -------- -------- Total deferred tax liabilities................................. $ 37,000 $ 39,000 -------- -------- -------- -------- Deferred tax assets-current: Inventory costs.................................................... $ 5,680 $ 7,800 Employee benefits.................................................. 420 900 Doubtful account allowance......................................... 800 780 Other.............................................................. 310 50 -------- -------- Total deferred tax assets-current.............................. 7,210 9,530 -------- -------- Deferred tax assets-noncurrent: Postretirement benefits............................................ 1,120 1,050 Restructuring expenses............................................. 640 960 Alternative minimum tax credits.................................... 4,580 4,540 Other.............................................................. -- 60 -------- -------- Total deferred tax assets-noncurrent........................... 6,340 6,610 -------- -------- Total deferred tax assets...................................... $ 13,550 $ 16,140 -------- -------- -------- --------
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. 26 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. INCOME TAXES -- (CONTINUED) The provision for income taxes differs from the amount computed by applying the United States statutory Federal income tax rate of 34% for fiscal 1995, 1994 and 1993 for the following reasons:
FOR THE YEAR ENDED MAY 31, ---------------------------- 1995 1994 1993 ------- ------- -------- (000'S OMITTED) Provision (benefit) for income taxes at the Federal statutory rate.............................................................. $ 5,000 $ 4,660 $ (650) Tax benefits on exempt earnings from export sales................ (1,350) (930) (770) State income taxes, net of Federal benefit and refunds........... 330 250 -- Amortization of goodwill......................................... 90 100 120 Reduction of income tax liabilities.............................. -- -- (1,200) Differences between foreign tax rates and the U.S. Federal statutory rate................................................. 330 80 250 Other, net....................................................... (150) 40 50 ------- ------- -------- Provision (benefit) for income taxes as reported................... $ 4,250 $ 4,200 $(2,200) ------- ------- -------- ------- ------- -------- Effective income tax rate.......................................... 28.9% 30.7% (114.8)% ------- ------- -------- ------- ------- --------
The provision for income taxes was reduced by $1,200,000 in fiscal 1993 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 $600,000, $1,300,000 and $1,200,000 at May 31, 1995, 1994 and 1993, respectively. Total foreign income taxes provided were in excess of total local statutory rates in fiscal 1995, 1994 and 1993 due to net operating losses of certain subsidiaries not deductible for tax purposes. 27 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, 1995 follows.
NUMBER OF OPTION PRICE SHARES PER SHARE --------- ---------------- 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 --------- Granted.................................................................. 250,000 12.63 to 13.75 Exercised................................................................ (10,985) 10.00 to 12.13 Surrendered/expired/cancelled............................................ (37,905) 10.00 to 24.88 --------- Outstanding, May 31, 1995 (362,132 exercisable).............................. 932,560 $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 $266,000, $538,000 and $610,000 in fiscal 1995, 1994 and 1993, respectively. The AAR CORP. Employee Stock Purchase Plan is open to all employees of the Company (other than officers, directors or participants in other stock option plans of the Company) with six months of service. The plan permits employees to purchase common stock in periodic offerings at the lesser of the fair market value on date of offering or 85% of the fair market value on the date of exercise. A participating employee pays for shares by payroll deduction over a two-year period. Upon completion of the purchase, the excess of the proceeds over the par value (or cost in the case of treasury stock) is credited to capital surplus. 28 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, 1995 ---------------------------------------- OUTSTANDING AVAILABLE TOTAL ------------- ----------- ------------ Stock Benefit Plan (Officers, Directors and key employees)... 1,015,951 277,620 1,293,571 Employee Stock Purchase Plan................................. 17,757 115,123 132,880
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, 1995 the Company had purchased 322,721 shares of Common Stock on the open market under this program at an average price of $11.57 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. 29 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 foreign operations of domestic subsidiaries also have pension plans. In most cases, the plans are defined benefit in nature. Assets of the plans are comprised of insurance contracts. Benefit formulas are similar to those used by domestic plans. It is the policy of these subsidiaries to fund at least the minimum amounts required by local law and regulation. 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, 1995 MAY 31, 1994 ------------------ ------------------ BENEFITS ASSETS BENEFITS ASSETS EXCEED EXCEED EXCEED EXCEED ASSETS BENEFITS ASSETS BENEFITS -------- -------- -------- -------- (000'S OMITTED) Actuarial present value of benefit obligation: Vested benefit obligation................ $(22,080) $ (5,135) $(21,500) $ (4,160) Nonvested benefit obligation............. (740) (20) (955) (15) -------- -------- -------- -------- Accumulated benefit obligation............... (22,820) (5,155) (22,455) (4,175) Effect of projected salary increases on the benefit obligation......................... (1,735) (1,385) (1,865) (1,120) -------- -------- -------- -------- Projected benefit obligation................. (24,555) (6,540) (24,320) (5,295) Plans' assets at fair value.................. 20,805 6,425 20,030 4,420 -------- -------- -------- -------- Plans' assets under projected benefit obligation................................. (3,750) (115) (4,290) (875) Unrecognized net loss........................ 2,225 670 3,920 915 Unrecognized prior service cost.............. 1,320 -- 930 -- Unrecognized transition obligation........... 710 245 785 225 -------- -------- -------- -------- Prepaid pension costs in the Consolidated Balance Sheets......................... $ 505 $ 800 $ 1,345 $ 265 -------- -------- -------- -------- -------- -------- -------- --------
The projected benefit obligation for domestic plans is determined using an assumed weighted average discount rate of 8.5% and 8.0% for fiscal 1995 and 1994, respectively, and an assumed average compensation increase of 3.0% in the first two years and 5% thereafter. The expected 30 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) long-term rate of return on assets is 10.0% for fiscal 1995 and 1994. Unrecognized net loss, prior service cost and transition obligation are amortized on a straight line basis over the estimated average future service period. The projected benefit obligation for non-domestic plans are determined using an assumed weighted average discount rate of 7.5% and 7.0% for fiscal 1995 and 1994, respectively, 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 1995 and 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, 1995 the Company has a minimum pension liability of $3,765,000 reported within Retirement benefit obligation in the Consolidated Balance Sheet with $1,370,000 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, --------------------------- 1995 1994 1993 ------- ------- ------- (000'S OMITTED) Service costs for benefits earned during fiscal year...... $ 1,255 $ 1,305 $ 800 Interest cost on projected benefit obligation............. 2,440 2,265 1,670 Actual investment return on plan assets................... (2,225) (1,400) (1,850) Net amortization and deferral............................. 60 (480) 290 ------- ------- ------- Pension expense for Company plans..................... 1,530 1,690 910 Pension expense for the multi-employer plan........... -- 10 40 ------- ------- ------- Total pension expense............................. $ 1,530 $ 1,700 $ 950 ------- ------- ------- ------- ------- -------
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 $830,000, $800,000 and $430,000 in fiscal 1995, 1994 and 1993, 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 this Plan in fiscal 1995, 1994 nor 1993, therefore, no expense was charged to results of operations. 31 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) DIRECTOR, EXECUTIVE AND KEY EMPLOYEE RETIREMENT BENEFIT AND PROFIT SHARING PLANS The Company provides its outside directors with benefits upon retirement on or after age 65 provided they have completed at least five years of service as a director. Benefits are payable as a quarterly annuity in an amount equal to 25% of the annual retainer fee payable by the Company to active outside directors. Payment of benefits commences upon retirement and continues for a period equal to the total number of years of the retired director's service as a director to a maximum of ten years, or death, whichever occurs first. The Company also provides supplemental retirement and profit sharing benefits for current and former executives and key employees to supplement benefits provided by the Company's other benefit plans. The plans are not fully funded and may require funding in the event of a change in control of the Company as determined by the Company's Board of Directors. Expense charged to results of operations for these plans was $585,000, $545,000 and $690,000 in fiscal 1995, 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. In fiscal 1995 the Company completed termination of postretirement healthcare and life insurance benefits attributable to future services of collective bargaining and other domestic employees. The Company recognized an after-tax gain of $250,000 from the reduction in the accumulated post retirement benefit obligation related to this termination of benefits. Net periodic postretirement benefit cost for the years ended May 31, 1995 and 1994 included the following components:
1995 1994 ----- --------- (000S OMITTED) Service cost.................................................... $ 4 $ 30 Interest cost................................................... 70 98 --- --------- $ 74 $ 128 --- --------- --- ---------
32 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The funded status of the plans at May 31, 1995 and 1994 were as follows:
1995 1994 --------- --------- (000S OMITTED) Accumulated postretirement benefit obligation: Current retirees........................................... $ 716 $ 906 Current employees -- fully eligible........................ 101 129 Current employees -- not fully eligible.................... -- 315 --------- --------- 817 1,350 Plans' assets at fair value.................................. -- -- --------- --------- Accumulated postretirement benefit obligation in excess of plans' assets............................................... 817 1,350 Unrecognized prior service cost, transition obligation and net (loss)/gain............................................. 156 -- --------- --------- Accrued postretirement benefit cost in the consolidated balance sheet............................................... $ 973 $ 1,350 --------- --------- --------- ---------
The assumed discount rates used to measure the accumulated postretirement benefit obligation were 8.5% and 8.0% at May 31, 1995 and 1994, respectively. The assumed rate of future increases in health care costs was 10.7% in fiscal 1995 and 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 $22,000 as of May 31, 1995 and would not result in a significant change to the annual postretirement benefit expense. 7. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities and equipment under agreements that expire at various dates through 2011. Rental expense under these leases was $6,545,000, $4,840,000 and $5,320,000 in fiscal 1995, 1994 and 1993, respectively. Future minimum payments under leases with initial or remaining terms of one year or more at May 31, 1995 were $5,414,000 for fiscal 1996, $4,020,000 for fiscal 1997, $3,800,000 for fiscal 1998, $3,343,000 for fiscal 1999 and $4,713,000 for fiscal 2000 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, 1995 and 1994 the Company had $2,264,000 and $10,700,000, respectively, 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. 33 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, 1995 and 1994 are as follows. FISCAL 1995
NET INCOME QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE - ------------------------------- --------- ------------ ---------- ------------ (000'S OMITTED EXCEPT PER SHARE DATA) First.......................... $ 97,191 $ 16,814 $ 2,005 $ .13 Second......................... 99,384 17,997 2,067 .13 Third.......................... 125,232 20,437 2,876 .18 Fourth......................... 129,588 22,623 3,515 .22 --------- ------------ ---------- ----- $ 451,395 $ 77,871 $10,463 $ .66 --------- ------------ ---------- ----- --------- ------------ ---------- -----
FISCAL 1994
NET GROSS NET INCOME QUARTER SALES 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 -------- ----------- ---------- ----- -------- ----------- ---------- -----
9. 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 aerospace/aviation market and the recessionary economic environment. The noncash restructuring expenses that established inventory realization reserves (see note 11 in Notes to Consolidated Financial Statements) had a remaining balance of approximately $979,000 at May 31, 1995. As the inventory for which the realization reserves were established is disposed of, the realization reserve balance is to be correspondingly reduced. 10. 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 6 to 9 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) 10. AIRCRAFT LEASING ACTIVITIES -- (CONTINUED) the lease Federal income tax deductions exceeded the lease rental income. In the later years of the lease, rental income will exceed the deductions. In fiscal 1994, the Company's Investment in leveraged leases was repriced approximately $2,000,000 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, 1995. The condensed operating results and balance sheet financial information for aircraft leasing activities were as follows:
FOR THE YEAR ENDED MAY 31, ------------------------- 1995 1994 1993 ------- ------- ------- (000'S OMITTED) Operating Results: Revenues................................................... $ 0 $ 2,195 $ 1,390 Net income (loss).......................................... (126) 1,132 (22) Balance Sheet: Total assets............................................... 37,500 39,700 37,800 Stockholder's equity....................................... 24,223 24,349 23,217
The Company's net investment in leveraged leases is composed of the following elements:
FOR THE YEAR ENDED MAY 31, ------------------ 1995 1994 -------- -------- (000'S OMITTED) Rentals receivable (net of principal and interest on the nonrecourse debt)........................................... $ 15,592 $ 16,258 Estimated residual value of leased assets.................... 23,950 23,950 Unearned and deferred income................................. (7,590) (7,590) -------- -------- Investment in leveraged leases............................. 31,952 32,618 Deferred taxes............................................... (27,590) (28,560) -------- -------- Net investment in leveraged leases......................... $ 4,362 $ 4,058 -------- -------- -------- --------
Pretax income from leveraged leases was $0, $1,955,000 and $334,000 in fiscal 1995, 1994 and 1993, respectively. The tax effect from leveraged leases was $0, $823,000 and $125,000 in fiscal 1995, 1994 and 1993, respectively. 35 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. ALLOWANCES AND RESERVES ALLOWANCE FOR DOUBTFUL ACCOUNTS
FOR THE YEAR ENDED MAY 31, --------------------------- 1995 1994 1993 ------ ------ ------- (000'S OMITTED) Balance, beginning of year............................................... $2,000 $2,000 $ 2,000 Provision charged to operations........................................ 895 600 400 Deductions for accounts written off, net of recoveries................. (495) (600) (400) ------ ------ ------- Balance, end of year..................................................... $2,400 $2,000 $ 2,000 ------ ------ ------- ------ ------ -------
INVENTORY REALIZATION RESERVES
FOR THE YEAR ENDED MAY 31, ------------------------------ 1995 1994 1993 -------- ------- ------- (000'S OMITTED) Balance, beginning of year............................................... $ 8,916 $14,000 $ 6,000 Provision charged to operations........................................ 2,909 3,104 12,300 Inventory written off and loss from disposal, net of recoveries........ (5,496) (8,188) (4,300) -------- ------- ------- Balance, end of year..................................................... $ 6,329 $ 8,916 $14,000 -------- ------- ------- -------- ------- -------
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 1995 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 1995 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 "Directors Compensation", in the Company's definitive proxy statement for the 1995 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 1995 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 1995 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 ------- Independent Auditors' Report, KPMG Peat Marwick LLP......... 13 Financial Statements -- AAR CORP. and Subsidiaries: Consolidated statements of income for the three years ended May 31, 1995....................................... 14 Consolidated balance sheets as of May 31, 1995 and 1994... 15-16 Consolidated statements of stockholders' equity for the three years ended May 31, 1995........................... 17 Consolidated statements of cash flows for the three years ended May 31, 1995....................................... 18 Notes to consolidated financial statements................ 19-36 Selected quarterly data (unaudited) for the years ended May 31, 1995 and 1994 (Note 8 to Consolidated Financial Statements).............................................. 34 Financial data schedule for the twelve month period ended May 31, 1995..............................................See exhibit index
EXHIBITS The Exhibits filed as a part of this report are set forth in the Exhibit Index contained elsewhere herein. Each of the material contracts identified as Exhibits 10.1 through 10.10 is a management contract or compensatory plan or arrangement. REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the three month period ended May 31, 1995. 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 11, 1995 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) /s/ DAVID P. STORCH PRESIDENT AND CHIEF - --------------------------------- OPERATING OFFICER; David P. Storch DIRECTOR /s/ TIMOTHY J. ROMENESKO VICE - --------------------------------- PRESIDENT-CONTROLLER, Timothy J. Romenesko CHIEF FINANCIAL OFFICER AND TREASURER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) /s/ A. ROBERT ABBOUD DIRECTOR - --------------------------------- A. Robert Abboud /s/ HOWARD B. BERNICK DIRECTOR - --------------------------------- Howard B. Bernick /s/ EDGAR D. JANNOTTA DIRECTOR August 11, 1995 - --------------------------------- 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, 1987(2) 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. (now known as Bank of America, Illinois)(11), amendment thereto dated May 16, 1994(12) and second amendment thereto dated May 19, 1995 (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, N.A. (now known as Bank of America, Illinois), as Trustee, relating to debt securities;(5) First Supplemental Indenture thereto dated August 26, 1991.(6) 4.6 Officer's certificates relating to debt securities dated October 24, 1989(10) and October 12, 1993.(10) 4.7 Credit Agreement dated October 15, 1991 between the Registrant and The First National Bank of Chicago, as Agent(7), amendment thereto dated March 31, 1994(12) and second amendment thereto dated May 31, 1995 (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. Eichner(4) and amendment thereto dated February 4, 1994.(12)
INDEX EXHIBITS - ------------------------------------ ------------------------------------------------------------------- 10.5 AAR CORP. Directors' Retirement Plan, dated April 14, 1992.(9) 10.6 AAR CORP. Supplemental Key Employee Retirement Plan, dated July 13, 1994.(13) 10.7 Employment agreement dated June 1, 1994 between the Registrant and David P. Storch. (filed herewith) 10.8 Severance and Change in Control agreement dated February 24, 1995 between the Registrant and Philip C. Slapke (filed herewith). 10.9 Severance and Change in Control agreement dated February 24, 1995 between the Registrant and Howard A. Pulsifer (filed herewith). 10.10 Severance and Change in Control agreement dated February 24, 1995 between the Registrant and Timothy J. Romenesko (filed herewith). 21. Subsidiaries of 21.1 Subsidiaries of AAR CORP. (filed herewith). the Registrant 23. Consents of experts 23.1 Consent of KPMG Peat Marwick LLP (filed herewith). and counsel 27. Financial Data 27.1 Financial Data Schedule for the Registrants' fiscal year ended May Schedules 31, 1995.
- ------------------------ 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. (12) Incorporated by reference to Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994. (13) Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994. EX-4.3 2 EXHIIT 4.3 EXHIBIT 4.3 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of May 19, 1995 (this "AMENDMENT"), amends the Credit Agreement, dated as of June 1, 1993 (as previously amended by the First Amendment dated May 16, 1994, the "CREDIT AGREEMENT"), among AAR Corp., (the "BORROWER"), the various financial institutions parties thereto (collectively, the "LENDERS") and Bank of America Illinois (formerly known as Continental Bank N.A.), as agent (the "AGENT") for the Lenders. Terms defined in the Credit Agreement are, unless otherwise defined herein or the context otherwise requires, used herein as defined therein. WHEREAS, the parties hereto have entered into the Credit Agreement, which provides for the Lenders to extend certain credit facilities to the Borrower from time to time; and WHEREAS, the parties hereto desire to amend the Credit Agreement in certain respects as hereinafter set forth; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties hereto agree as follows: SECTION 1 AMENDMENT. Effective as of May 19, 1995, Section 6.10 of the Credit Agreement shall be amended to state as follows: "6.10. RESTRICTED PAYMENTS. The Borrower will not, nor will it permit any Subsidiary to, declare or make any Restricted Payments, which together with all Restricted Payments made on or after May 31, 1995 would exceed an amount equal to the sum of (i) $20,000,000 plus (ii) 50% of Consolidated Net Income for the period commencing June 1, 1994 and extending to and including the last day of the fiscal year of the Borrower immediately preceding the date on which such Restricted Payment was made, said period to be taken as one accounting period, except that: (a) The Borrower may declare and pay dividends payable solely in stock of the Borrower of the same class as that on which such dividend is paid. (b) The Borrower may purchase, redeem or otherwise acquire or retire any class of its stock out of the proceeds of, or in exchange for, a substantially concurrent issue and sale of the same class of such stock in addition to that now issued and outstanding. (c) Any Subsidiary may declare and pay dividends to the Borrower." SECTION 2 CONDITIONS PRECEDENT. This Amendment shall become effective when duly executed bythe Borrower, the Agent and the Required Lenders. SECTION 3 REPRESENTATIVES AND WARRANTIES. To induce the Lenders and the Agent to enter into this Amendment, the Borrower hereby reaffirms, as of the date hereof, its representations and warranties contained in Article V of the Credit Agreement. SECTION 4 MISCELLANEOUS. SECTION 4.1 CONTINUING EFFECTIVENESS, ETC. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, shall remain in full force and effect and is hereby ratified, approved and confirmed in each and every respect. After the effectiveness of this Amendment in accordance with its terms, all references to the Credit Agreement in any other document, instrument, agreement or writing shall be deemed to refer to the Credit Agreement as amended hereby. SECTION 4.2 PAYMENT OF COSTS AND EXPENSES. The Borrower agrees to pay on demand all expenses of the Agent (including the fees and expenses of counsel to the Agent (including the allocated cost of internal counsel) in connection with the negotiation, preparation, execution and delivery of this Amendment. SECTION 4.3 EXECUTION IN COUNTERPARTS. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. SECTION 4.4 GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. SECTION 4.5 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. AAR Corp. By /s/ Timothy J. Romenesko -------------------------------------- Title: Vice President -------------------------------------- BANK OF AMERICA ILLINOIS, individually and as Agent By /s/ Arthur N. Traver -------------------------------------- Title: Vice President -------------------------------------- EX-4.7 3 EXHIBIT 4.7 EXHIBIT 4.7 AMENDMENT NO. 2 AMENDMENT NO. 2 dated as of May 31, 1995 (this "Amendment") to the Credit Agreement dated as of October 15, 1991, as amended by Amendment No. 1 dated as of March 31, 1994 (the "Credit Agreement") among AAR CORP., a Delaware corporation, the lenders listed on the signature pages of this Amendment and The First National Bank 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, Section 6.10 of the Credit Agreement shall be amended and restated in its entirety as follows: "6.10. RESTRICTED PAYMENTS. The Borrower will not, nor will it permit any Subsidiary to, make any Restricted Payments, which, together with all Restricted Payments made on or after June 1, 1995, would exceed an amount equal to the sum of (i) $25,000,000 plus (ii) 50% of Consolidated Net Income for the period commencing June 1, 1995 and extending to and including the last day of the fiscal year of the Borrower immediately preceding the date on which such Restricted Payment was made, said period to be taken as one accounting period, except that: (a) The Borrower may declare and pay dividends payable solely in stock of the Borrower of the same class as that on which such dividend is paid. (b) The Borrower may purchase, redeem or otherwise acquire or retire any class of its stock out of the proceeds of, or in exchange for, a substantially concurrent issue and sale of the same class of such stock in addition to that now issued and outstanding. (c) Any Subsidiary may declare and pay dividends to the Borrower." 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. 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 /s/ Timothy J. Romenesko ---------------------------------------- Title: Vice President ------------------------------------------------------------------------------- THE FIRST NATIONAL BANK OF CHICAGO, individually and as Agent By /s/ Karen Kizer ---------------------------------------- Title: Senior Vice President ------------------------------------------------------------------------------- EX-10.7 4 EXHIBIT 10.7 EXHIBIT 10.7 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") made and entered into as of the 1st day of June, 1994, by and between AAR CORP., a Delaware corporation ("Company"), and DAVID P. STORCH ("Employee"). WHEREAS, the Company currently employs Employee as President and Chief Operating Officer; and WHEREAS, Employee is currently an elected director of the Company; and WHEREAS, the Company and Employee desire to enter into an employment agreement continuing such employment pursuant to mutually acceptable terms. NOW, THEREFORE, in consideration of the mutual agreements herein set forth, the parties hereto agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee and Employee hereby accepts employment by the Company, upon the terms and subject to the conditions hereinafter set forth. 2. TERM. The term of this Agreement shall commence as of the date hereof and, unless earlier terminated as hereinafter provided, shall end on May 31, 1997, subject to extension as follows: On each day after May 31, 1994, while the Employee continues in employment hereunder, the term of employment shall automatically be extended for an additional one-day period so that on any day from and after June 1, 1994, while the Employee continues in employment hereunder, the term of employment shall expire three years thereafter until terminated pursuant to the terms hereof. 3. DUTIES. (a) Employee shall have the title, duties and responsibilities of President and Chief Operating Officer and such other duties and responsibilities as may from time to time be assigned that are consistent with such duties and responsibilities and shall report to the Chairman and Chief Executive Officer of the Company. (b) Employee agrees to do and perform all such acts and duties faithfully and diligently and to furnish such services as the Chairman and Chief Executive Officer may from time to time direct, and do and perform all acts in the ordinary course of business of the Company (within such limits as the Company may prescribe) necessary and conducive to the best interest of the Company. (c) Employee agrees to devote his full time, energy and skill to the business of the Company and to the promotion of the best interests of the Company and the performance of his duties as President and Chief Operating Officer of the Company; provided that the Employee shall not (to the extent not inconsistent with paragraphs 3(d) and 10(b) below) be prevented from (a) serving as a director of any corporation consented to in advance by resolution of the Board of Directors of the Company, (b) engaging in charitable, religious, civic or other non-profit community activities, or (c) investing his personal assets in such form or manner as will not require any substantial services on his part in the operation or affairs of the business in which such investments are made which would detract from or interfere or cause a conflict of interest with performance of his duties hereunder. (d) Employee agrees to observe policies and procedures of the Company in effect from time to time applicable to employees of the Company including, without limitation, policies with respect to employee loyalty and prohibited conflicts of interest. 4. COMPENSATION. The Company shall pay to Employee, for all services to be performed by Employee an annual base salary ("Base Salary") at the rate of Three Hundred Thirty-Two Thousand Dollars ($332,000.00) per fiscal year, or such greater amount as may be authorized by the Board of Directors of the Company, in its sole discretion upon annual review during the term of employment, payable in periodic installments in accordance with the Company's payroll practice in effect from time to time and prorated for any portion of a fiscal year (Company's fiscal year currently being the period from June 1 of each year through May 31 of the following year). 5. INCENTIVE BONUS PAYMENTS. In addition to the Base Salary described above, Employee will continue to participate in and receive payments under such incentive bonus programs as the Company, in its sole discretion, may authorize from time to time for Employee and other executive officers of the Company; provided, however, Employee will be entitled to the following during the term of this Employment Agreement: (a) ANNUAL DISCRETIONARY INCENTIVE BONUS OPPORTUNITY. Employee will have an annual incentive bonus opportunity of up to 100% of base salary, subject to annual financial targets approved by the Compensation Committee of the Board of Directors, and allocated 25% for asset management and 75% for operating performance. Performance will be measured against annual financial targets approved by the Compensation Committee of the Board of Directors. Any bonus granted under this subprovision in an amount equal to 80% or less of base salary shall be paid in cash and the balance shall be paid in restricted stock awards subject to the Company's qualified Stock Benefit Plan (valued at NYSE closing price on date of grant). Thirty-three and one third percent (33 1/3%) of each such restricted stock award shall vest on the successive anniversary dates of the respective award over a three year period based solely on the passage of time without reference to continued employment with the Company. The cash portion of the incentive bonus payable under this subprovision 5(a) will be paid no later than the 15th of July following the end of the fiscal year; the restricted stock awards shall have a grant date of July 15 each year. (b) INCENTIVE STOCK BONUS AWARDS. (1) RESTRICTED STOCK. The Company will grant Employee restricted stock awards (i) subject to the terms of the Company's qualified Stock Benefit Plan and Employee's continued employment with the Company on the vesting date, and (ii) subject to the discretion of the Compensation Committee to establish reasonable performance criteria applicable to such grants on or before each award grant date, as follows:
GRANT DATE NUMBER OF SHARES - -------------------- --------------------- October 1, 1994 8,250 October 1, 1995 9,075 October 1, 1996 9,983
Thereafter, the Compensation Committee of the Board of Directors will consider Employee for additional restricted stock awards on an ad hoc basis in its sole discretion. Twenty percent (20%) of each such restricted stock award shall be scheduled to vest on the successive grant date anniversary of the respective award over a five 2 year period. Their terms and conditions shall be consistent with restricted stock awards made to other executive officers of the Company or, if none are made, those most recently heretofore made to Employee. (2) STOCK OPTION GRANTS. The Company will grant Employee stock options for 60,000 shares of Company Common Stock subject to the terms of the AAR CORP. Stock Benefit Plan in fiscal 1995 at such time as it makes stock option grants to other key employees under the Plan. Thereafter, the Compensation Committee of the Board of Directors will consider Employee for additional stock option grants annually during the term hereof commensurate with his position and duties as President and Chief Operating Officer in their sole discretion at such time as it considers annual stock option grants for other key employees. All such grants shall vest 20%/year over a five year period and have a life of 10 years from date of grant. Other terms and conditions shall be consistent with grants made to other executive officers of the Company at the time of grant. 6. VACATION AND FRINGE BENEFITS. Employee will accrue vacation in accordance with the Company's policy in effect from time to time for other executive officers; provided that no decrease in vacation benefits from those available on the date hereof shall be applicable to Employee during the term hereof. Employee shall be entitled to participate, according to eligibility provisions of each, in such medical, life and disability insurance programs, profit sharing plans, retirement plans and in other fringe benefit plans as may be in effect from time to time during the term hereof and available to other executive officers of the Company. 7. CLUB DUES AND BUSINESS EXPENSES. During the term hereof, Employee will be entitled to reimbursement for normal travel and business expenses in accordance with applicable Company policy, and will be reimbursed membership dues in the Green Acres Country Club, the Standard Club and such professional clubs/organizations that are appropriate and conducive to the performance of his duties. 8. PROFESSIONAL FEES. The Company will reimburse Employee for professional financial planning and income tax preparation assistance expenses actually incurred in an amount not to exceed $5,000/year during the term hereof. 9. TERMINATION. (a) The Company may terminate this Agreement at any time for Cause. Any such termination will be by majority action of the Board of Directors (with Employee's vote disregarded) taken at a regular or specially called meeting of the Board, after a minimum 10 day notice thereof to Employee, with termination of this Agreement listed as an agenda item. Employee will be given a reasonable opportunity to be heard at such meeting with counsel present if Employee desires. The term "Cause" shall be limited to a good faith finding by resolution of the Board of Directors setting forth the particulars thereof, of (i) any material breach by Employee of any statutory or common law duty of loyalty, or (ii) any material breach of this Agreement which, if curable, is not cured within ten (10) days of notice thereof to Employee. Such resolution shall be final and binding upon the Employee. Upon termination for Cause, no further compensation or benefits shall accrue or be payable to Employee hereunder except for any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination. (b) The Company may terminate this Agreement at any time prior to a Change in Control of the Company as defined in Section 12(c) below for unsatisfactory performance by Employee of his 3 duties and responsibilities hereunder (including but not limited to failure to meet financial goals as may be approved by the Compensation Committee), provided that the Company has given Employee (i) written notice setting forth the particulars of his performance deficiencies and (ii) six months opportunity to correct them to the satisfaction of the Company. Any termination under this section 9(b) shall be by resolution of the Board of Directors of the Company, which shall be final and binding upon Employee. In the event of termination pursuant to this section 9(b), the Company will pay to Employee, monthly for 24 months, an amount (subject to applicable withholding) equal to Employee's regular monthly base salary at time of termination; provided, however, all such payment obligations shall terminate immediately upon any breach by Employee of paragraph 10 of this Agreement. Upon termination pursuant to this section 9(b), no further compensation or benefits shall accrue or be payable to Employee under this Agreement except for (i) the salary continuation payments provided for above, and (ii) any compensation bonus or other benefits which have accrued to Employee prior to the date of any such termination. (c) The Company or the Employee may terminate this Agreement at any time because of the Disability of Employee. "Disability" shall mean a physical or mental condition which has prevented Employee from substantially performing his duties under this Agreement for a period of 180 days and which is expected to continue to render Employee unable to substantially perform his duties for the remaining term of this Agreement on a full-time basis. The Company will make reasonable accommodation for any handicap of Employee as may be required by applicable law. In the event of termination by the Company for Disability, a good faith determination of the existence of a Disability shall be made by resolution of the Board of Directors of the Company, in its sole discretion, setting forth the particulars of the Disability which shall be final and binding upon the Employee. The Company may require the submission of such medical evidence as to the condition of the Employee as it may deem necessary in order to arrive at its determination of the occurrence of a Disability. Employee will be provided with reasonable opportunity to present additional medical evidence as to the medical condition of Employee for consideration prior to the Board making its determination of the occurrence of a Disability. Upon termination of this Agreement for Disability, Employee will continue to be eligible to participate in the Company's medical, dental and life insurance programs available to executive officers in accordance with their terms applicable to employees for a period of 3 years from the date of such termination of this Agreement. (d) This Agreement shall automatically terminate upon the death of Employee during the term. In such event, death benefits payable under any of the Company's benefit plans in which Employee was a participant at the time of his death shall be payable in accordance with the terms of such plans. (e) Employee may terminate this Agreement upon 30 days written notice if any person other than Employee is selected by the Board of Directors to succeed the present Chief Executive Officer upon his retirement, resignation or other departure from that office. In the event of termination by Employee for such reason, the Company will pay to Employee, monthly for 24 months, an amount (subject to applicable withholding) equal to Employee's regular monthly base salary at time of termination plus an amount equal to 1/12th of the most recent fiscal year cash bonus paid to Employee; provided all such payment obligations shall terminate immediately upon any breach by Employee of paragraph 10 of this Agreement. Upon termination of this Agreement by Employee pursuant to this paragraph, no further compensation or benefits shall 4 accrue or be payable to Employee under this Agreement except for (i) the salary continuation payments provided for above, and (ii) any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination. 10. CONFIDENTIAL INFORMATION AND RESTRICTION OF COMPETITION. (a) Employee acknowledges that the trade secrets, confidential information, secret processes and know-how developed and acquired by the Company and other subsidiaries of the Company (together the "Affiliated Companies") are among their most valuable assets and that the value of such information may be destroyed by unauthorized disclosure. All such trade secrets, confidential information, secret processes and know-how imparted to or learned by Employee in the course of his employment with respect to the business of the Affiliated Companies (whether acquired before or after the date hereof) will be deemed to be confidential and will not be used or disclosed by Employee, except to the extent necessary to perform his duties and, in no event, disclosed to anyone outside the employ of the Affiliated Companies and their authorized consultants and advisors, unless either such information is or has been made generally available to the public or express written authorization to use or disclose such information has been given by the Company. If Employee ceases to be employed by the Company for any reason, he shall not take with him any documents or other papers containing or reflecting trade secrets, confidential information, secret processes or know-how. Employee acknowledges that his employment hereunder will place him in a position of utmost confidence and that he will have access to confidential information concerning the operation of the business of the Affiliated Companies, including, but not limited to, manufacturing methods, developments, secret processes, know-how, costs, prices and pricing methods, sources of supply and customer names and relations. All such information is in the nature of a trade secret and is the exclusive property of the Affiliated Companies and shall be deemed confidential information for the purposes of this paragraph. (b) Employee agrees that during the term hereof and for a period of two (2) years after voluntary termination of employment hereunder by Employee or termination of employment hereunder by Company pursuant to section 9 above, he shall not, without the express written consent of the Company, either alone or as a consultant to, or partner, employee, officer, director, or stockholder of any organization, entity or business, (i) engage in direct or indirect competition with the Company or any Affiliated Company within 100 miles of any location within the United States of America or any other country where the Company or any Affiliated Company does business from time to time during the term hereof; (ii) solicit in connection with any activity which is competitive with any of the businesses of the Company or any Affiliated Company, any customers or suppliers of the Company or any Affiliated Company; (iii) solicit for employment any sales, marketing or management employee of Company or any Affiliated Company or induce or attempt to induce any customer or supplier of the Company or any Affiliated Company to terminate or materially change such relationship. Company and Employee acknowledge the reasonableness of this covenant not to compete and non-solicitation and the reasonableness thereof, including but not limited to the geographic area and duration of time which are a part hereof. This covenant not to compete may be enforced with respect to any geographic area in which the Company or any Affiliated Company does business during the term hereof. Nothing herein shall prohibit Employee from being the legal or equitable holder of not more than 5% of the outstanding capital stock of any publicly held corporation which may be in direct or indirect competition with the Company or any Affiliated Company. (c) If at any time, any clause or portion of this Section 10 shall be deemed invalid or unenforceable by the laws of the jurisdiction in which it is to be enforced by reason of being vague or unreasonable as to duration, geographic scope, nature of activities restricted, or for any other 5 reason, this provision shall be considered divisible as to such portions and the foregoing restrictions shall become and be immediately amended to include only such duration, scope or restriction and such event as shall be deemed reasonable and enforceable by the court or other body having jurisdiction to enforce this Agreement; and the parties hereto agree that the restrictions, as so amended, shall be valid and binding as though the invalid or unenforceable portion had not been involved herein. (d) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of this Section 10 and in recognition thereof, the Company shall be entitled to an injunction or other decree of specific performance with respect to any violation thereof (without any bond or other security being required) in addition to other available legal and equitable remedies. (e) This Section 10 shall survive any termination of this Agreement and any termination of Employee's employment. 11. CHANGES IN BUSINESS. The Company, acting through its Board of Directors, will at all times have complete control over the Company's business. Without limiting the generality of the foregoing, the Company may at any time or times change or discontinue any or all of its present or future operations, may close or move any one or more of its divisions or offices, may undertake any new servicing or sales operation, may sell any one or more of its divisions or offices to any company not controlled, directly or indirectly, by the Company or may take any and all other steps which its Board of Directors, in its exclusive judgment, shall deem desirable, and Employee shall have no claim or recourse by reason of such action. Provided, however, no such action shall result in the reduction of Employee's Base Salary hereunder; provided, further that if the Company discontinues operations, a discretionary bonus may or may not be granted, however, Employee will be entitled to a pro-rata share of any non-discretionary incentive bonus through the date of discontinuance. Said pro-rata bonus will be calculated by the Chief Financial Officer of the Company whose determination will be final. 12. CHANGE IN CONTROL. (a) In the event of a Change in Control of the Company and (i) the Company terminates this Agreement for other than Cause or Disability, or (ii) Employee terminates this Agreement for Good Reason by written notice to the Company setting forth the particulars thereof after having given the Company notice and opportunity to be heard with respect thereto, (1) the Company shall promptly pay to Employee, in a lump sum, a cash payment in an amount equal to three times Employee's average total compensation (base salary plus cash bonus) for the last two fiscal years or such lesser amount as Employee may elect to take, subject to applicable withholding, and (2) Employee shall continue to be covered by and receive the benefits, in accordance with their terms, of all of the Company's medical, dental and life insurance plans, for three years thereafter but at no less than the levels he was receiving immediately prior to the Change in Control. (3) Employee shall receive an additional retirement benefit, over and above that which Employee would normally be entitled to under the Company's retirement plans applicable to Employee, equal to the actuarial equivalent of the additional amount that Employee would have earned under such retirement plans or programs had he accumulated three additional continuous years of service. Such amount shall be paid to the executive in a cash lump sum payment at his normal retirement age. Employee may also elect to receive such payment at 6 his early retirement age, as provided for in the retirement plans, with a corresponding actuarial reduction in the amount of such payment based upon the earlier date of such payment. (b) The amounts paid to the Employee under this Change in Control provision applicable to Employee shall be considered severance pay in consideration of past services Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement to those payments. (c) For purposes of this provision (i) "Change in Control" means the earliest of: (1) the occurrence of any "Distribution Date", as such term is defined in Section 3 of the Rights Agreement between the Company and The First National Bank of Chicago, dated July 21, 1987, as amended; (2) the effective time of a merger or consolidation of the Company with one or more other corporations as a result of which the holders of the outstanding common stock, $1.00 par value, of the Company immediately prior to such merger or consolidation (other than those who are affiliates of any such other corporation, as defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934) hold less than 70% of the voting stock of the surviving or resulting corporation or its parent; (3) the effective time of a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 70% of the voting stock; or (4) the election to the Board during any 3 year period, without the recommendation or approval of the incumbent Board, of the lesser of (A) three directors or (B) directors constituting a majority of the number of directors of the Company then in office; or (5) the occurrence of any arrangement or understanding relating to the Company which would give rise to a filing requirement with the Securities and Exchange Commission pursuant to Rule 14f-1 of the Exchange Act Rules under the Securities Exchange Act of 1934. (ii) "Good Reason" means: (1) a material reduction in the nature or scope of Employee's duties, responsibilities, authority, power or functions from those enjoyed by Employee immediately prior to the Change in Control; or (2) a good faith determination by Employee that as the result of a Change in Control and a material change in employment circumstances thereafter, he is unable to carry out his duties and responsibilities contemplated by this Agreement in a manner consistent with the practices, standards, values or philosophy of the Company immediately prior to the Change in Control; or (3) a material breach of this Agreement by the Company; or (4) a relocation of the primary place of employment of at least 100 miles. (d) The Company will pay reasonable legal/attorney's fees incurred by Employee in connection with enforcement of any right or benefit under this provision. 7 13. NOTICES. Any notice or other instrument or thing required or permitted to be given, served or delivered to any of the parties hereto shall be delivered personally or deposited in the United States mail, with proper postage prepaid, telegram, teletype, cable or facsimile transmission to the addresses listed below: (a) If to the Company, to: AAR CORP. 1111 Nicholas Boulevard Elk Grove Village, Illinois 60007 Attention: Chairman and Chief Executive Officer With a copy to: AAR CORP. 1111 Nicholas Boulevard Elk Grove Village, Illinois 60007 Attention: General Counsel (b) If to Employee, to: David P. Storch 908 Elm Place Glencoe, IL 60022 or to such other address as either party may from time to time designate by notice to the other. Each notice shall be effective when such notice and any required copy are delivered to the applicable address. 14. NON-ASSIGNMENT. (a) The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Employee, and any attempted unpermitted assignment shall be null and void and without further effect; provided, however, that, upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into or the combination with another corporation or other business entity, or upon the liquidation or dissolution of the Company, this Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, or the shareholder effecting such liquidation or dissolution, as the case may be. After any such transaction, the term Company in this Agreement shall refer to the entity which conducts the business now conducted by the Company. The provisions of this Agreement shall be binding upon and inure to the benefit of the estate and beneficiaries of Employee and upon and to the benefit of the permitted successors and assigns of the parties hereto. (b) The Employee agrees on behalf of himself, his heirs, executors and administrators, and any other person or person claiming any benefit under him by virtue of this Employment Agreement, that this Employment Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Employee or by any beneficiary, heir, executor, administrator or other person claiming under the Employee by virtue of this Employment Agreement and shall not be subject to execution, attachment or similar process. Any attempted assigned, transfer, pledge or hypothecation or any other disposition of this Agreement or of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without further effect. 8 15. SEVERABILITY. If any term, clause or provision contained herein is declared or held invalid by any court of competent jurisdiction, such declaration or holding shall not affect the validity of any other term, clause or provision herein contained. 16. CONSTRUCTION. Careful scrutiny has been given to this Agreement by the Company, Employee, and their respective legal counsel. Accordingly, the rule of construction that the ambiguities of the contract shall be resolved against the party which caused the contract to be drafted shall have no application in the construction or interpretation of this Agreement or any clause or provision hereof. 17. ENTIRE AGREEMENT. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties and supersede all prior agreements, arrangements and communications, whether oral or written, pertaining to the subject matter hereof, including, but not limited to, all prior compensation arrangements between the Company and the Employee concerning compensation and benefits. This Agreement shall not be modified or amended except by the mutual written agreement of the Company and Employee. 18. WAIVER. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Employee and an authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 19. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles. 20. EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement. WITNESS the due execution of this Agreement by the parties hereto as of the day and year first above written. Employer: Compensation Committee AAR CORP. Board of Directors By: /s/ Erwin E. Schulze ----------------------------------- Erwin E. Schulze, CHAIRMAN AAR CORP. By: /s/ Ira A. Eichner ----------------------------------- Ira A. Eichner CHAIRMAN & CHIEF EXECUTIVE OFFICER Employee: /s/ David P. Storch ----------------------------------- David P. Storch 9 EX-10.8 5 EXHIBIT 10.8 EXHIBIT 10.8 SEVERANCE AND CHANGE IN CONTROL AGREEMENT This Severance and Change in Control Agreement ("Agreement") made and entered into as of the 24th day of February, 1995, by and between AAR CORP., a Delaware corporation ("Company"), and Philip C. Slapke ("Employee"). WHEREAS, the Company currently employs Employee as an employee at will in the capacity of Vice President-Trading Group; and WHEREAS, Employee desires the Company to pay Employee certain severance payments upon a Change in Control of AAR CORP. and upon termination of employment prior to a Change in Control; and WHEREAS, the Company is willing to pay Employee severance payments under certain circumstances if Employee agrees to confidentiality, non-compete and certain other covenants. NOW, THEREFORE, in consideration of the mutual agreements herein set forth and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. Employee will continue employment with the Company as an at will employee subject to the terms and conditions hereinafter set forth. 2. DUTIES. During the continuation of his employment, Employee shall: (a) well and faithfully serve the Company and do and perform assigned duties and responsibilities in the ordinary course of his employment and the business of the Company (within such limits as the Company may from time to time prescribe), professionally, faithfully and diligently. (b) devote his full time, energy and skill to the business of the Company and his assigned duties and responsibilities, and to the promotion of the best interests of the Company; provided that Employee shall not (to the extent not inconsistent with Section 4 below) be prevented from (a) serving as a director of any corporation consented to in advance in writing by the Company, (b) engaging in charitable, religious, civic or other non-profit community activities, or (c) investing his personal assets in such form or manner as will not require any substantial services on his part in the operation or affairs of the business in which such investments are made or which would detract from or interfere or cause a conflict of interest with performance of his duties hereunder. (c) observe all policies and procedures of the Company in effect from time to time applicable to employees of the Company including, without limitation, policies with respect to employee loyalty and prohibited conflicts of interest. 3. CONFIDENTIAL INFORMATION, ASSIGNMENT OF INVENTIONS. (a) Employee acknowledges that the trade secrets, confidential information, secret processes and know-how developed and acquired by AAR CORP. and its affiliates or subsidiaries (together the "Affiliated Companies") are among their most valuable assets and that the value of such information may be destroyed by unauthorized disclosure. All such trade secrets, confidential information, secret processes and know-how imparted to or learned by Employee in the course of his employment with respect to the business of the Affiliated Companies (whether acquired before or after the date hereof) will be deemed to be confidential and will not be used or disclosed by Employee, except to the extent necessary to perform his duties and, in no event, disclosed to anyone outside the employ of the Affiliated Companies and their authorized consultants and advisors, unless (i) such information is or has been made generally available to the public, (ii) disclosure of such information is required by law in the opinion of Employee's counsel (provided that written notice thereof is given to Company as soon as possible but not less than 24 hours prior to such disclosure), or (iii) express written authorization to use or disclose such information has been given by the Company. If Employee ceases to be employed by the Company for any reason, he shall not take with him any electronically stored data, documents or other papers containing or reflecting trade secrets, confidential information, secret processes, know-how, or computer software programs. Employee acknowledges that his employment hereunder will place him in a position of utmost confidence and that he will have access to confidential information concerning the operation of the business of the Affiliated Companies, including, but not limited to, manufacturing methods, developments, secret processes, know-how, computer software programs, costs, prices and pricing methods, sources of supply and customer names and relations. All such information is in the nature of a trade secret and is the sole and exclusive property of the Affiliated Companies and shall be deemed confidential information for the purposes of this paragraph. (b) Employee hereby assigns to the Company all rights that Employee may have as author, designer, inventor or otherwise as creator of any written or graphic material, design, invention, improvement, or any other idea or thing whatever that Employee may write, draw, design, conceive, perfect, or reduce to practice during employment with the Company or within 120 days after termination of such employment, whether done during or outside of normal work hours, and whether done alone or in conjunction with others ("Intellectual Property"), provided, however, that Employee reserves all rights in anything done or developed entirely by Employee on Employee's own personal time and without the use of any Company equipment, supplies, facilities or information, or the participation of any other Company employee, unless it relates to the Company's business or reasonably anticipated business, or grows out of any work performed by Employee for the Company. Employee will promptly disclose all such Intellectual Property developed by Employee to the Company, and fully cooperate at the Company's request and expense in any efforts by the Company or its assignees to secure protection for such Intellectual Property by way of domestic or foreign patent, copyright, trademark or service mark registration or otherwise, including executing specific assignments or such other documents or taking such further action as may be considered necessary to vest title in Company or its assignees and obtain patents or copyrights in any and all countries. 4. NON-COMPETE; SEVERANCE. (a) Employee agrees that during his continuation of employment with the Company and for one (1) year thereafter so long as the Company makes the severance payments to Employee pursuant to subsections 4(b) or 4(c) below, he shall not, without the express written consent of the Company, either alone or as a consultant to, or partner, employee, officer, director, or stockholder of any organization, entity or business, (i) take or convert for Employee's personal gain or benefit or for the benefit of any third party, any business opportunities which may be of interest to the Company or any Affiliated Company which Employee becomes aware of during the term of his employment; (ii) engage in direct or indirect competition with the Company or any Affiliated Company within 100 miles of any location within the United States of America or any other country where the Company or any Affiliated Company does business from time to time during the term hereof; (iii) solicit in connection with any activity which is competitive with any of the businesses of the Company or any Affiliated Company, any customers of the Company or any Affiliated Company; (iv) solicit for employment any sales, marketing or management employee of Company or any Affiliated Company or induce or attempt to induce any customer or supplier of the Company or any Affiliated Company to terminate or materially change such relationship. Company and Employee acknowledge the reasonableness of the foregoing covenants not to compete and non-solicitation, including but not limited to the geographic area and duration of time which are a part hereof, and further, that the restrictions stated in this Section 4 are reasonably necessary for the protection of Employer's legitimate proprietary interests. This covenant not to compete may be enforced with respect to any geographic area in which the 2 Company or any Affiliated Company does business during the term hereof. Nothing herein shall prohibit Employee from being the legal or equitable holder, solely for investment purposes, of less than 5% of the capital stock of any publicly held corporation which may be in direct or indirect competition with the Company or any Affiliated Company. (b) Upon termination of Employee's employment by the Company prior to a Change in Control (as defined in 6(b)(i) below) for any reason other than Cause (as defined in 6(b)(iv) below), the Company will pay Employee severance each month for 12 months ("Severance Period"), in an amount (subject to applicable withholding) equal to 1/12 of Employee's base salary; and, further, the Company will pay Employee a PIP bonus award in accordance with and subject to the terms and conditions of Employee's PIP in a lump sum at the time any such PIP bonuses are payable under the PIP or at such time as the Severance Period is complete, whichever is later (with interest at prime rate plus one percentage point from the earlier of such dates), for any PIP bonuses earned (1) in the completed fiscal year preceeding termination but not due and payable prior to termination, and (2) prorata for the period prior to termination of emloyment in any partial PIP fiscal year based on Employee's performance against Employee's PIP during such partial period; provided, however, that (i) all such monthly payment obligations shall terminate immediately upon Employee obtaining full time employment in a comparable position in terms of salary level, and (ii) all such payment obligations shall terminate or lapse immediately upon any breach by Employee of Section 3 or 4(a) of this Agreement or if Employee shall commence any action or proceeding in any court or before any regulatory agency arising out of or in connection with termination of his employment. (c) If Employee terminates his employment or Employee's employment is terminated by the Company for Cause (as defined below), the Company may elect (but is not required to), by written notice thereof to Employee, within five (5) days of any such termination of Employee's employment with the Company prior to a Change in Control (as defined below), to pay Employee severance as provided in and subject to the provisions of subsection 4(b) above. (d) Employee may terminate this Severance and Change in Control Agreement effective immediately upon notice thereof in writing to Company at any time while still employed within a sixty (60) calendar day period immediately following the effective date of any reduction by Company in (i) Employee's level of responsibility or position from that held by Employee as Vice President-Trading Group on the effective date of this Agreement, or (ii) Employee's level of compensation, including retirement benefits in effect immediately prior to any such change. (e) If at any time, any clause or portion of this Section 4 shall be deemed invalid or unenforceable by the laws of the jurisdiction in which it is to be enforced by reason of being vague or unreasonable as to duration, geographic scope, nature of activities restricted, or for any other reason, this provision shall be considered divisible as to such portions and the foregoing restrictions set forth in 4(a) shall become and be immediately amended to include only such duration, scope or restriction and such event as shall be deemed reasonable and enforceable by the court or other body having jurisdiction to enforce this Agreement; and the parties hereto agree that the restrictions, as so amended, shall be valid and binding as though the invalid or unenforceable portion had not been involved herein. (f) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of Section 3 or Section 4(a) above, and in recognition thereof, the Company shall be entitled to an injunction or other decree of specific performance with respect to any violation thereof (without any bond or other security being required) in addition to other available legal and equitable remedies. 3 5. TERMINATION OF EMPLOYMENT. (a) Upon and after termination of employment howsoever arising, Employee shall, upon request by Company: (1) immediately return to the Company all correspondence, documents, business calendars/diaries, or other property belonging to the Company which is in his possession, (2) immediately resign from any office Employee holds with the Company or any Affiliated Company; and (3) cooperate fully and in good faith with the Company in the resolution of all matters Employee worked on or was involved in during Employee's employment with the Company. Employee's cooperation will include reasonable consultation by telephone. Further, in connection therewith, Employee will, at Company's request upon reasonable advance notice and subject to Employee's availability, make himself available to Company in person at Company's premises, for testimony in court, or elsewhere; provided, however, that in such event, Company shall reimburse all Employee's reasonable expenses and pay Employee a reasonable per diem or hourly stipend. 6. CHANGE IN CONTROL. (a) In the event (i) a Change in Control of AAR CORP. occurs and (ii) the Company terminates Employee's employment for other than Cause or Disability, or Employee terminates Employee's employment for Good Reason by written notice to the Company setting forth the particulars thereof after having given the Company notice and opportunity to be heard with respect thereto, and (iii) neither incumbent in the positions of Chief Executive Officer or Chief Operating Officer of the Company on the effective date hereof are Chief Executive Officer of the Company at the time of such termination of employment, (1) the Company shall promptly pay to Employee, in a lump sum, a cash payment in an amount equal to three times Employee's average total compensation (base salary plus cash bonus) for the last two fiscal years or such lesser amount as Employee may elect to take, subject to applicable withholding. Employee may agree to take payments of any amounts on a schedule of his own choosing provided that such schedule shall be completed no later than three years from the occurrence of the last triggering event. (2) Employee shall continue to be covered by and receive the benefits, in accordance with their terms, of all of the Company's medical, dental and life insurance plans, for three years thereafter but at no less than the levels he was receiving immediately prior to the Change in Control. (3) Employee shall receive an additional retirement benefit, over and above that which Employee would normally be entitled to under the Company's retirement plans applicable to Employee, equal to the actuarial equivalent of the additional amount that Employee would have earned under such retirement plans or programs had he accumulated three additional continuous years of service. Such amount shall be paid to the executive in a cash lump sum payment at his normal retirement age. Employee may also elect to receive such payment at his early retirement age, as provided for in the retirement plans, with a corresponding actuarial reduction in the amount of such payment based upon the earlier date of such payment. 4 (b) For purposes of this Agreement (i) "Change in Control" means the earliest of: (1) the occurrence of any "Distribution Date", as such term is defined in Section 3 of the Rights Agreement between the Company and The First National Bank of Chicago, dated July 21, 1987, as amended; (2) the effective time of a merger or consolidation of the Company with one or more other corporations as a result of which the holders of the outstanding common stock, $1.00 par value, of the Company immediately prior to such merger or consolidation (other than those who are affiliates of any such other corporation, as defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934) hold less than 70% of the voting stock of the surviving or resulting corporation or its parent; (3) the effective time of a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 70% of the voting stock; or (4) the election to the Board during any 3 year period, without the recommendation or approval of the incumbent Board, of the lesser of (A) three directors or (B) directors constituting a majority of the number of directors of the Company then in office; or (5) the occurrence of any arrangement or understanding relating to the Company which would give rise to a filing requirement with the Securities and Exchange Commission pursuant to Rule 14f-1 of the Exchange Act Rules under the Securities Exchange Act of 1934. (ii) "Good Reason" means: (1) a material reduction in the nature or scope of Employee's duties, responsibilities, authority, power or functions from those enjoyed by Employee immediately prior to the Change in Control occurring at any time during the immediate two year period after the Change in Control; or (2) a good faith determination by Employee that as the result of a Change in Control and a material change in employment circumstances at any time during the immediate two year period after the Change in Control, he is unable to carry out his assigned duties and responsibilities in a manner consistent with the practices, standards, values or philosophy of the Company immediately prior to the Change in Control; or (3) a relocation of the primary place of employment of at least 100 miles. (iii) "Disability" means: (1) a physical or mental condition which has prevented Employee from substantially performing his assigned duties for a period of 180 consecutive days and which is expected to continue to render Employee unable to substantially perform his duties on a full-time basis and otherwise meets the benefit eligibility requirements of the Company's Long Term Disability Welfare Benefit Plan. The Company will make reasonable accommodation for any handicap of Employee as may be required by applicable law. In the event of termination by the Company for Disability after a Change in Control, a good faith determination of the existence of a Disability shall be made by resolution of the Compensation Committee of the Board of Directors of the Company, in 5 its sole discretion, setting forth the particulars of the Disability which shall be final and binding upon the Employee. The Company may require the submission of such medical evidence as to the condition of the Employee as it may deem necessary in order to arrive at its determination of the occurrence of a Disability, and Employee will cooperate in providing any such information. Employee will be provided with reasonable opportunity to present additional medical evidence as to the medical condition of Employee for consideration prior to the Board making its determination of the occurrence of a Disability. Upon termination of Employment by Company for Disability after a Change in Control, Employee will receive Disability payments pursuant to the Company's short and long term Disability welfare benefit plans then in effect according to the terms of such plans and continue to be eligible to participate in the Company's medical, dental and life insurance programs then in effect and available to officers of the Company in accordance with their terms for a period of 3 years from the date of such termination of this Agreement. (iv) "Cause" means: (1) any material breach by Employee of any statutory or common law duty of loyalty, or (2) any material breach of this Agreement which, if curable, is not cured within ten (10) days of notice thereof to Employee; provided, however, termination of employment for unsatisfactory performance (including failure to meet financial goals) shall not constitute termination for Cause. Termination for Cause shall be limited to a good faith finding by resolution of the Compensation Committee of the Board of Directors of AAR CORP. setting forth the particulars thereof. Any such action shall be taken at a regular or specially called meeting of the Compensation Committee of the Board, after a minimum 10 days notice thereof to Employee, with termination of Employee's employment with the Company for Cause listed as an agenda item. Employee will be given a reasonable opportunity to be heard at such meeting with counsel present if Employee desires. Any such resolution shall be final and binding. Upon termination of employment by Company for Cause, no further compensation or benefits shall accrue or be payable to Employee by Company except for any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination. Nothing herein shall be construed to prevent the Company from terminating Employee's employment at any time for any reason or for no reason. (c) The Company will pay reasonable legal/attorney's fees incurred by Employee in connection with enforcement of any right or benefit under this Section 6. 7. CHANGES IN BUSINESS. The Company, acting through its Board of Directors, will at all times have complete control over the Company's business and retirement and other employee health and welfare benefit plans ("Plans"). Without limiting the generality of the foregoing, the Company may at any time or times change or discontinue any or all of its present or future operations or Plans (subject to their terms), may close or move any one or more of its divisions or offices, may undertake any new servicing or sales operation, may sell any one or more of its divisions or offices to any company not controlled, directly or indirectly, by the Company or may take any and all other steps which its Board of Directors, in its exclusive judgment, shall deem 6 desirable, and Employee shall have no claim or recourse against the Company, its officers, directors or employees, by reason of such action except for enforcement of the provisions of Section 4 and 6 of this Agreement. 8. SEVERANCE PAYMENT AS SOLE OBLIGATION. Except as expressly provided in Sections 4 and 6 above, no further compensation, payments, liabilities or benefits shall accrue or be payable to Employee upon or as a result of termination of Employee's employment for any reason whatsoever except for any compensation, bonus or other benefits which accrued to Employee prior to the date of employment termination. The amounts paid to the Employee under Section 4 and 6 of this Agreement shall be considered severance pay in consideration of past services Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement to those payments. 9. NOTICES. Any notice or other instrument or thing required or permitted to be given, served or delivered to any of the parties hereto shall be delivered personally or deposited in the United States mail, with proper postage prepaid, telegram, teletype, cable or facsimile transmission to the addresses listed below: (a) If to the Company, to: AAR CORP. 1111 Nicholas Boulevard Elk Grove Village, Illinois 60007 Attention: Chairman and Chief Executive Officer With a copy to: AAR CORP. 1111 Nicholas Boulevard Elk Grove Village, Illinois 60007 Attention: General Counsel (b) If to Employee, to: Philip C. Slapke 10 Walnut Lane S. Barrington, IL 60010 or to such other address as either party may from time to time designate by notice to the other. Each notice shall be effective when such notice and any required copy are delivered to the applicable address. 10. NON-ASSIGNMENT. (a) The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Employee, and any attempted unpermitted assignment shall be null and void and without further effect; provided, however, that, upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into or the combination with another corporation or other business entity, or upon the liquidation or dissolution of the Company, this Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, or the shareholder effecting such liquidation or dissolution, as the case may be. After any such transaction, the term Company in this Agreement shall refer to the entity which conducts the business now conducted by the Company. The provisions of this Agreement shall be binding upon and inure to the benefit of the estate and beneficiaries of Employee and upon and to the benefit of the permitted successors and assigns of the parties hereto. 7 (b) The Employee agrees on behalf of himself, his heirs, executors and administrators, and any other person or person claiming any benefit under him by virtue of this Agreement, that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Employee or by any beneficiary, heir, executor, administrator or other person claiming under the Employee by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assigned, transfer, pledge or hypothecation or any other disposition of this Agreement or of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without further effect. 11. SEVERABILITY. If any term, clause or provision contained herein is declared or held invalid by any court of competent jurisdiction, such declaration or holding shall not affect the validity of any other term, clause or provision herein contained. 12. CONSTRUCTION. Careful scrutiny has been given to this Agreement by the Company, Employee, and their respective legal counsel. Accordingly, the rule of construction that the ambiguities of the contract shall be resolved against the party which caused the contract to be drafted shall have no application in the construction or interpretation of this Agreement or any clause or provision hereof. 13. ENTIRE AGREEMENT. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties and supersede all prior agreements, arrangements and communications, whether oral or written, pertaining to the subject matter hereof. 14. WAIVER. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in writing signed by Employee and an authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 15. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles. 16. EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement. WITNESS the due execution of this Agreement by the parties hereto as of the day and year first above written. Employer: AAR CORP. By: /s/ David P. Storch -------------------------------------- Title: President -------------------------------------- Employee: /s/ Philip C. Slapke ----------------------------------- Philip C. Slapke 8 EX-10.9 6 EXHIBIT 10.9 EXHIBIT 10.9 SEVERANCE AND CHANGE IN CONTROL AGREEMENT This Severance and Change in Control Agreement ("Agreement") made and entered into as of the 24th day of February, 1995, by and between AAR CORP., a Delaware corporation ("Company"), and Howard A. Pulsifer ("Employee"). WHEREAS, the Company currently employs Employee as an employee at will in the capacity of Vice President, General Counsel and Secretary; and WHEREAS, Employee desires the Company to pay Employee certain severance payments upon a Change in Control of AAR CORP. and upon termination of employment prior to a Change in Control; and WHEREAS, the Company is willing to pay Employee severance payments under certain circumstances if Employee agrees to confidentiality, non-compete and certain other covenants. NOW, THEREFORE, in consideration of the mutual agreements herein set forth and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. Employee will continue employment with the Company as an at will employee subject to the terms and conditions hereinafter set forth. 2. DUTIES. During the continuation of his employment, Employee shall: (a) well and faithfully serve the Company and do and perform assigned duties and responsibilities in the ordinary course of his employment and the business of the Company (within such limits as the Company may from time to time prescribe), professionally, faithfully and diligently. (b) devote his full time, energy and skill to the business of the Company and his assigned duties and responsibilities, and to the promotion of the best interests of the Company; provided that Employee shall not (to the extent not inconsistent with Section 4 below) be prevented from (a) serving as a director of any corporation consented to in advance in writing by the Company, (b) engaging in charitable, religious, civic or other non-profit community activities, or (c) investing his personal assets in such form or manner as will not require any substantial services on his part in the operation or affairs of the business in which such investments are made or which would detract from or interfere or cause a conflict of interest with performance of his duties hereunder. (c) observe all policies and procedures of the Company in effect from time to time applicable to employees of the Company including, without limitation, policies with respect to employee loyalty and prohibited conflicts of interest. 3. CONFIDENTIAL INFORMATION, ASSIGNMENT OF INVENTIONS. (a) Employee acknowledges that the trade secrets, confidential information, secret processes and know-how developed and acquired by AAR CORP. and its affiliates or subsidiaries (together the "Affiliated Companies") are among their most valuable assets and that the value of such information may be destroyed by unauthorized disclosure. All such trade secrets, confidential information, secret processes and know-how imparted to or learned by Employee in the course of his employment with respect to the business of the Affiliated Companies (whether acquired before or after the date hereof) will be deemed to be confidential and will not be used or disclosed by Employee, except to the extent necessary to perform his duties and, in no event, disclosed to anyone outside the employ of the Affiliated Companies and their authorized consultants and advisors, unless (i) such information is or has been made generally available to the public, (ii) disclosure of such information is required by law in the opinion of Employee's counsel (provided that written notice thereof is given to Company as soon as possible but not less than 24 hours prior to such disclosure), or (iii) express written authorization to use or disclose such information has been given by the Company. If Employee ceases to be employed by the Company for any reason, he shall not take with him any electronically stored data, documents or other papers containing or reflecting trade secrets, confidential information, secret processes, know-how, or computer software programs. Employee acknowledges that his employment hereunder will place him in a position of utmost confidence and that he will have access to confidential information concerning the operation of the business of the Affiliated Companies, including, but not limited to, manufacturing methods, developments, secret processes, know-how, computer software programs, costs, prices and pricing methods, sources of supply and customer names and relations. All such information is in the nature of a trade secret and is the sole and exclusive property of the Affiliated Companies and shall be deemed confidential information for the purposes of this paragraph. (b) Employee hereby assigns to the Company all rights that Employee may have as author, designer, inventor or otherwise as creator of any written or graphic material, design, invention, improvement, or any other idea or thing whatever that Employee may write, draw, design, conceive, perfect, or reduce to practice during employment with the Company or within 120 days after termination of such employment, whether done during or outside of normal work hours, and whether done alone or in conjunction with others ("Intellectual Property"), provided, however, that Employee reserves all rights in anything done or developed entirely by Employee on Employee's own personal time and without the use of any Company equipment, supplies, facilities or information, or the participation of any other Company employee, unless it relates to the Company's business or reasonably anticipated business, or grows out of any work performed by Employee for the Company. Employee will promptly disclose all such Intellectual Property developed by Employee to the Company, and fully cooperate at the Company's request and expense in any efforts by the Company or its assignees to secure protection for such Intellectual Property by way of domestic or foreign patent, copyright, trademark or service mark registration or otherwise, including executing specific assignments or such other documents or taking such further action as may be considered necessary to vest title in Company or its assignees and obtain patents or copyrights in any and all countries. 4. NON-COMPETE; SEVERANCE. (a) Employee agrees that during his continuation of employment with the Company and for one (1) year thereafter so long as the Company makes severance payments to Employee pursuant to subsections 4(b) or 4(c) below, he shall not, without the express written consent of the Company, either alone or as a consultant to, or partner, employee, officer, director, or stockholder of any organization, entity or business, (i) take or convert for Employee's personal gain or benefit or for the benefit of any third party, any business opportunities which may be of interest to the Company or any Affiliated Company which Employee becomes aware of during the term of his employment; (ii) engage in direct or indirect competition with the Company or any Affiliated Company within 100 miles of any location within the United States of America or any other country where the Company or any Affiliated Company does business from time to time during the term hereof; (iii) solicit in connection with any activity which is competitive with any of the businesses of the Company or any Affiliated Company, any customers of the Company or any Affiliated Company; (iv) solicit for employment any sales, marketing or management employee of Company or any Affiliated Company or induce or attempt to induce any customer or supplier of the Company or any Affiliated Company to terminate or materially change such relationship. Company and Employee acknowledge the reasonableness of the foregoing covenants not to compete and non-solicitation, including but not limited to the geographic area and duration of time which are a part hereof, and further, that the restrictions stated in this Section 4 are reasonably necessary for the protection of Employer's legitimate proprietary interests. This covenant not to compete may be enforced with respect to any geographic area in which the 2 Company or any Affiliated Company does business during the term hereof. Nothing herein shall prohibit Employee from being the legal or equitable holder, solely for investment purposes, of less than 5% of the capital stock of any publicly held corporation which may be in direct or indirect competition with the Company or any Affiliated Company. (b) The Company will pay Employee, upon termination of Employee's employment by the Company prior to a Change in Control (as defined in 6(b)(i) below) for any reason other than Cause (as defined in 6(b)(iv) below), severance each month for 12 months, in an amount (subject to applicable withholding) equal to 1/12 of Employee's base salary; and, further, if the Company pays discretionary bonuses to its officers for the fiscal year in which Employee's employment is terminated, Employee will be paid a bonus in a lump sum at the time any such bonuses are paid to other officers or at such time as the Severance Period is complete, whichever is later (with interest at prime rate plus one percentage point from the earlier of such dates), (1) for the completed fiscal year preceding termination if such bonus has not been paid prior to termination, and (2) for the fiscal year in which employment is terminated, prorata for the period prior to termination of employment based on Employee's performance during such period; provided, however, that (i) all such monthly payment obligations shall terminate immediately upon Employee obtaining full time employment in a comparable position in terms of salary level, and (ii) all such payment obligations shall terminate or lapse immediately upon any breach by Employee of Section 3 or 4(a) of this Agreement or if Employee shall commence any action or proceeding in any court or before any regulatory agency arising out of or in connection with termination of his employment. (c) If Employee terminates his employment or Employee's employment is terminated by the Company for Cause (as defined below), the Company may elect (but is not required to), by written notice thereof to Employee, within five (5) days of any such termination of Employee's employment with the Company prior to a Change in Control (as defined below), to pay Employee severance as provided in and subject to the provisions of subsection 4(b) above. (d) Employee may terminate this Severance and Change in Control Agreement effective immediately upon notice thereof in writing to Company at any time while still employed within a sixty (60) calendar day period immediately following the effective date of any reduction by Company in (i) Employee's level of responsibility or position from that held by Employee as Vice President, General Counsel and Secretary on the effective date of this Agreement, or (ii) Employee's level of compensation, including retirement benefits in effect immediately prior to any such change. (e) If at any time, any clause or portion of this Section 4 shall be deemed invalid or unenforceable by the laws of the jurisdiction in which it is to be enforced by reason of being vague or unreasonable as to duration, geographic scope, nature of activities restricted, or for any other reason, this provision shall be considered divisible as to such portions and the foregoing restrictions set forth in 4(a) shall become and be immediately amended to include only such duration, scope or restriction and such event as shall be deemed reasonable and enforceable by the court or other body having jurisdiction to enforce this Agreement; and the parties hereto agree that the restrictions, as so amended, shall be valid and binding as though the invalid or unenforceable portion had not been involved herein. (f) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of Section 3 or Section 4(a) above, and in recognition thereof, the Company shall be entitled to an injunction or other decree of specific performance with respect to any violation thereof (without any bond or other security being required) in addition to other available legal and equitable remedies. 3 5. TERMINATION OF EMPLOYMENT. (a) Upon and after termination of employment howsoever arising, Employee shall, upon request by Company: (1) immediately return to the Company all correspondence, documents, business calendars/diaries, or other property belonging to the Company which is in his possession, (2) immediately resign from any office Employee holds with the Company or any Affiliated Company; and (3) cooperate fully and in good faith with the Company in the resolution of all matters Employee worked on or was involved in during Employee's employment with the Company. Employee's cooperation will include reasonable consultation by telephone. Further, in connection therewith, Employee will, at Company's request upon reasonable advance notice and subject to Employee's availability, make himself available to Company in person at Company's premises, for testimony in court, or elsewhere; provided, however, that in such event, Company shall reimburse all Employee's reasonable expenses and pay Employee a reasonable per diem or hourly stipend. 6. CHANGE IN CONTROL. (a) In the event (i) a Change in Control of AAR CORP. occurs and (ii) the Company terminates Employee's employment for other than Cause or Disability, or Employee terminates Employee's employment for Good Reason by written notice to the Company setting forth the particulars thereof after having given the Company notice and opportunity to be heard with respect thereto, and (iii) neither incumbent in the positions of Chief Executive Officer or Chief Operating Officer of the Company on the effective date hereof are Chief Executive Officer of the Company at the time of such termination of employment, (1) the Company shall promptly pay to Employee, in a lump sum, a cash payment in an amount equal to three times Employee's average total compensation (base salary plus cash bonus) for the last two fiscal years or such lesser amount as Employee may elect to take, subject to applicable withholding. Employee may agree to take payments of any amounts on a schedule of his own choosing provided that such schedule shall be completed no later than three years from the occurrence of the last triggering event. (2) Employee shall continue to be covered by and receive the benefits, in accordance with their terms, of all of the Company's medical, dental and life insurance plans, for three years thereafter but at no less than the levels he was receiving immediately prior to the Change in Control. (3) Employee shall receive an additional retirement benefit, over and above that which Employee would normally be entitled to under the Company's retirement plans applicable to Employee, equal to the actuarial equivalent of the additional amount that Employee would have earned under such retirement plans or programs had he accumulated three additional continuous years of service. Such amount shall be paid to the executive in a cash lump sum payment at his normal retirement age. Employee may also elect to receive such payment at his early retirement age, as provided for in the retirement plans, with a corresponding actuarial reduction in the amount of such payment based upon the earlier date of such payment. 4 (b) For purposes of this Agreement (i) "Change in Control" means the earliest of: (1) the occurrence of any "Distribution Date", as such term is defined in Section 3 of the Rights Agreement between the Company and The First National Bank of Chicago, dated July 21, 1987, as amended; (2) the effective time of a merger or consolidation of the Company with one or more other corporations as a result of which the holders of the outstanding common stock, $1.00 par value, of the Company immediately prior to such merger or consolidation (other than those who are affiliates of any such other corporation, as defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934) hold less than 70% of the voting stock of the surviving or resulting corporation or its parent; (3) the effective time of a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 70% of the voting stock; or (4) the election to the Board during any 3 year period, without the recommendation or approval of the incumbent Board, of the lesser of (A) three directors or (B) directors constituting a majority of the number of directors of the Company then in office; or (5) the occurrence of any arrangement or understanding relating to the Company which would give rise to a filing requirement with the Securities and Exchange Commission pursuant to Rule 14f-1 of the Exchange Act Rules under the Securities Exchange Act of 1934. (ii) "Good Reason" means: (1) a material reduction in the nature or scope of Employee's duties, responsibilities, authority, power or functions from those enjoyed by Employee immediately prior to the Change in Control occurring at any time during the immediate two year period after the Change in Control; or (2) a good faith determination by Employee that as the result of a Change in Control and a material change in employment circumstances at any time during the immediate two year period after the Change in Control, he is unable to carry out his assigned duties and responsibilities in a manner consistent with the practices, standards, values or philosophy of the Company immediately prior to the Change in Control; or (3) a relocation of the primary place of employment of at least 100 miles. (iii) "Disability" means: (1) a physical or mental condition which has prevented Employee from substantially performing his assigned duties for a period of 180 consecutive days and which is expected to continue to render Employee unable to substantially perform his duties on a full-time basis and otherwise meets the benefit eligibility requirements of the Company's Long Term Disability Welfare Benefit Plan. The Company will make reasonable accommodation for any handicap of Employee as may be required by applicable law. In the event of termination by the Company for Disability after a Change in Control, a good faith determination of the existence of a Disability shall be made by resolution of the Compensation Committee of the Board of Directors of the Company, in 5 its sole discretion, setting forth the particulars of the Disability which shall be final and binding upon the Employee. The Company may require the submission of such medical evidence as to the condition of the Employee as it may deem necessary in order to arrive at its determination of the occurrence of a Disability, and Employee will cooperate in providing any such information. Employee will be provided with reasonable opportunity to present additional medical evidence as to the medical condition of Employee for consideration prior to the Board making its determination of the occurrence of a Disability. Upon termination of Employment by Company for Disability after a Change in Control, Employee will receive Disability payments pursuant to the Company's short and long term Disability welfare benefit plans then in effect according to the terms of such plans and continue to be eligible to participate in the Company's medical, dental and life insurance programs then in effect and available to officers of the Company in accordance with their terms for a period of 3 years from the date of such termination of this Agreement. (iv) "Cause" means: (1) any material breach by Employee of any statutory or common law duty of loyalty, or (2) any material breach of this Agreement which, if curable, is not cured within ten (10) days of notice thereof to Employee; provided, however, termination of employment for unsatisfactory performance (including failure to meet financial goals) shall not constitute termination for Cause. Termination for Cause shall be limited to a good faith finding by resolution of the Compensation Committee of the Board of Directors of AAR CORP. setting forth the particulars thereof. Any such action shall be taken at a regular or specially called meeting of the Compensation Committee of the Board, after a minimum 10 days notice thereof to Employee, with termination of Employee's employment with the Company for Cause listed as an agenda item. Employee will be given a reasonable opportunity to be heard at such meeting with counsel present if Employee desires. Any such resolution shall be final and binding. Upon termination of employment by Company for Cause, no further compensation or benefits shall accrue or be payable to Employee by Company except for any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination. Nothing herein shall be construed to prevent the Company from terminating Employee's employment at any time for any reason or for no reason. (c) The Company will pay reasonable legal/attorney's fees incurred by Employee in connection with enforcement of any right or benefit under this Section 6. 7. CHANGES IN BUSINESS. The Company, acting through its Board of Directors, will at all times have complete control over the Company's business and retirement and other employee health and welfare benefit plans ("Plans"). Without limiting the generality of the foregoing, the Company may at any time or times change or discontinue any or all of its present or future operations or Plans (subject to their terms), may close or move any one or more of its divisions or offices, may undertake any new servicing or sales operation, may sell any one or more of its divisions or offices to any company not controlled, directly or indirectly, by the Company or may take any and all other steps which its Board of Directors, in its exclusive judgment, shall deem 6 desirable, and Employee shall have no claim or recourse against the Company, its officers, directors or employees by reason of such action except for enforcement of the provisions of Sections 4 and 6 of this Agreement. 8. SEVERANCE PAYMENT AS SOLE OBLIGATION. Except as expressly provided in Sections 4 and 6 above, no further compensation, payments, liabilities or benefits shall accrue or be payable to Employee upon or as a result of termination of Employee's employment for any reason whatsoever except for any compensation, bonus or other benefits which accrued to Employee prior to the date of employment termination. The amounts paid to the Employee under Section 4 and 6 of this Agreement shall be considered severance pay in consideration of past services Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement to those payments. 9. NOTICES. Any notice or other instrument or thing required or permitted to be given, served or delivered to any of the parties hereto shall be delivered personally or deposited in the United States mail, with proper postage prepaid, telegram, teletype, cable or facsimile transmission to the addresses listed below: (a) If to the Company, to: AAR CORP. 1111 Nicholas Boulevard Elk Grove Village, Illinois 60007 Attention: Chairman and Chief Executive Officer With a copy to: AAR CORP. 1111 Nicholas Boulevard Elk Grove Village, Illinois 60007 Attention: General Counsel (b) If to Employee, to: Howard A. Pulsifer 630 Indian Way Barrington, IL 60010 or to such other address as either party may from time to time designate by notice to the other. Each notice shall be effective when such notice and any required copy are delivered to the applicable address. 10. NON-ASSIGNMENT. (a) The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Employee, and any attempted unpermitted assignment shall be null and void and without further effect; provided, however, that, upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into or the combination with another corporation or other business entity, or upon the liquidation or dissolution of the Company, this Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, or the shareholder effecting such liquidation or dissolution, as the case may be. After any such transaction, the term Company in this Agreement shall refer to the entity which conducts the business now conducted by the Company. The provisions of this Agreement shall be binding upon and inure to the benefit of the estate and beneficiaries of Employee and upon and to the benefit of the permitted successors and assigns of the parties hereto. 7 (b) The Employee agrees on behalf of himself, his heirs, executors and administrators, and any other person or person claiming any benefit under him by virtue of this Agreement, that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Employee or by any beneficiary, heir, executor, administrator or other person claiming under the Employee by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assigned, transfer, pledge or hypothecation or any other disposition of this Agreement or of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without further effect. 11. SEVERABILITY. If any term, clause or provision contained herein is declared or held invalid by any court of competent jurisdiction, such declaration or holding shall not affect the validity of any other term, clause or provision herein contained. 12. CONSTRUCTION. Careful scrutiny has been given to this Agreement by the Company, Employee, and their respective legal counsel. Accordingly, the rule of construction that the ambiguities of the contract shall be resolved against the party which caused the contract to be drafted shall have no application in the construction or interpretation of this Agreement or any clause or provision hereof. 13. ENTIRE AGREEMENT. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties and supersede all prior agreements, arrangements and communications, whether oral or written, pertaining to the subject matter hereof. 14. WAIVER. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in writing signed by Employee and an authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 15. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles. 16. EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement. WITNESS the due execution of this Agreement by the parties hereto as of the day and year first above written. Employer: AAR CORP. By: /s/ David P. Storch -------------------------------------- Title: President -------------------------------------- Employee: /s/ Howard A. Pulsifer ----------------------------------- Howard A. Pulsifer 8 EX-10.10 7 EXHIBIT 10.10 EXHIBIT 10.10 SEVERANCE AND CHANGE IN CONTROL AGREEMENT This Severance and Change in Control Agreement ("Agreement") made and entered into as of the 24th day of February, 1995, by and between AAR CORP., a Delaware corporation ("Company"), and Timothy J. Romenesko ("Employee"). WHEREAS, the Company currently employs Employee as an employee at will in the capacity of Vice President-Controller, Chief Financial Officer and Treasurer; and WHEREAS, Employee desires the Company to pay Employee certain severance payments upon a Change in Control of AAR CORP. and upon termination of employment prior to a Change in Control; and WHEREAS, the Company is willing to pay Employee severance payments under certain circumstances if Employee agrees to confidentiality, non-compete and certain other covenants. NOW, THEREFORE, in consideration of the mutual agreements herein set forth and other good and valuable consideration, the parties hereto agree as follows: 1. EMPLOYMENT. Employee will continue employment with the Company as an at will employee subject to the terms and conditions hereinafter set forth. 2. DUTIES. During the continuation of his employment, Employee shall: (a) well and faithfully serve the Company and do and perform assigned duties and responsibilities in the ordinary course of his employment and the business of the Company (within such limits as the Company may from time to time prescribe), professionally, faithfully and diligently. (b) devote his full time, energy and skill to the business of the Company and his assigned duties and responsibilities, and to the promotion of the best interests of the Company; provided that Employee shall not (to the extent not inconsistent with Section 4 below) be prevented from (a) serving as a director of any corporation consented to in advance in writing by the Company, (b) engaging in charitable, religious, civic or other non-profit community activities, or (c) investing his personal assets in such form or manner as will not require any substantial services on his part in the operation or affairs of the business in which such investments are made or which would detract from or interfere or cause a conflict of interest with performance of his duties hereunder. (c) observe all policies and procedures of the Company in effect from time to time applicable to employees of the Company including, without limitation, policies with respect to employee loyalty and prohibited conflicts of interest. 3. CONFIDENTIAL INFORMATION, ASSIGNMENT OF INVENTIONS. (a) Employee acknowledges that the trade secrets, confidential information, secret processes and know-how developed and acquired by AAR CORP. and its affiliates or subsidiaries (together the "Affiliated Companies") are among their most valuable assets and that the value of such information may be destroyed by unauthorized disclosure. All such trade secrets, confidential information, secret processes and know-how imparted to or learned by Employee in the course of his employment with respect to the business of the Affiliated Companies (whether acquired before or after the date hereof) will be deemed to be confidential and will not be used or disclosed by Employee, except to the extent necessary to perform his duties and, in no event, disclosed to anyone outside the employ of the Affiliated Companies and their authorized consultants and advisors, unless (i) such information is or has been made generally available to the public, (ii) disclosure of such information is required by law in the opinion of Employee's counsel (provided that written notice thereof is given to Company as soon as possible but not less than 24 hours prior to such disclosure), or (iii) express written authorization to use or disclose such information has been given by the Company. If Employee ceases to be employed by the Company for any reason, he shall not take with him any electronically stored data, documents or other papers containing or reflecting trade secrets, confidential information, secret processes, know-how, or computer software programs. Employee acknowledges that his employment hereunder will place him in a position of utmost confidence and that he will have access to confidential information concerning the operation of the business of the Affiliated Companies, including, but not limited to, manufacturing methods, developments, secret processes, know-how, computer software programs, costs, prices and pricing methods, sources of supply and customer names and relations. All such information is in the nature of a trade secret and is the sole and exclusive property of the Affiliated Companies and shall be deemed confidential information for the purposes of this paragraph. (b) Employee hereby assigns to the Company all rights that Employee may have as author, designer, inventor or otherwise as creator of any written or graphic material, design, invention, improvement, or any other idea or thing whatever that Employee may write, draw, design, conceive, perfect, or reduce to practice during employment with the Company or within 120 days after termination of such employment, whether done during or outside of normal work hours, and whether done alone or in conjunction with others ("Intellectual Property"), provided, however, that Employee reserves all rights in anything done or developed entirely by Employee on Employee's own personal time and without the use of any Company equipment, supplies, facilities or information, or the participation of any other Company employee, unless it relates to the Company's business or reasonably anticipated business, or grows out of any work performed by Employee for the Company. Employee will promptly disclose all such Intellectual Property developed by Employee to the Company, and fully cooperate at the Company's request and expense in any efforts by the Company or its assignees to secure protection for such Intellectual Property by way of domestic or foreign patent, copyright, trademark or service mark registration or otherwise, including executing specific assignments or such other documents or taking such further action as may be considered necessary to vest title in Company or its assignees and obtain patents or copyrights in any and all countries. 4. NON-COMPETE; SEVERANCE. (a) Employee agrees that during his continuation of employment with the Company and for one (1) year thereafter so long as the Company makes severance payments to Employee pursuant to subsections 4(b) or 4(c) below, he shall not, without the express written consent of the Company, either alone or as a consultant to, or partner, employee, officer, director, or stockholder of any organization, entity or business, (i) take or convert for Employee's personal gain or benefit or for the benefit of any third party, any business opportunities which may be of interest to the Company or any Affiliated Company which Employee becomes aware of during the term of his employment; (ii) engage in direct or indirect competition with the Company or any Affiliated Company within 100 miles of any location within the United States of America or any other country where the Company or any Affiliated Company does business from time to time during the term hereof; (iii) solicit in connection with any activity which is competitive with any of the businesses of the Company or any Affiliated Company, any customers of the Company or any Affiliated Company; (iv) solicit for employment any sales, marketing or management employee of Company or any Affiliated Company or induce or attempt to induce any customer or supplier of the Company or any Affiliated Company to terminate or materially change such relationship. Company and Employee acknowledge the reasonableness of the foregoing covenants not to compete and non-solicitation, including but not limited to the geographic area and duration of time which are a part hereof, and further, that the restrictions stated in this Section 4 are reasonably necessary for the protection of Employer's legitimate proprietary interests. This covenant not to compete may be enforced with respect to any geographic area in which the 2 Company or any Affiliated Company does business during the term hereof. Nothing herein shall prohibit Employee from being the legal or equitable holder, solely for investment purposes, of less than 5% of the capital stock of any publicly held corporation which may be in direct or indirect competition with the Company or any Affiliated Company. (b) The Company will pay Employee, upon termination of Employee's employment by the Company prior to a Change in Control (as defined in 6(b)(i) below) for any reason other than Cause (as defined in 6(b)(iv) below), severance each month for 12 months, in an amount (subject to applicable withholding) equal to 1/12 of Employee's base salary; and, further, if the Company pays discretionary bonuses to its officers for the fiscal year in which Employee's employment is terminated, Employee will be paid a bonus in a lump sum at the time any such bonuses are paid to other officers or at such time as the Severance Period is complete, whichever is later (with interest at prime rate plus one percentage point from the earlier of such dates), (1) for the completed fiscal year preceding termination if such bonus has not been paid prior to termination, and (2) for the fiscal year in which employment is terminated, prorata for the period prior to termination of employment based on Employee's performance during such period; provided, however, that (i) all such monthly payment obligations shall terminate immediately upon Employee obtaining full time employment in a comparable position in terms of salary level, and (ii) all such payment obligations shall terminate or lapse immediately upon any breach by Employee of Section 3 or 4(a) of this Agreement or if Employee shall commence any action or proceeding in any court or before any regulatory agency arising out of or in connection with termination of his employment. (c) If Employee terminates his employment or Employee's employment is terminated by the Company for Cause (as defined below), the Company may elect (but is not required to), by written notice thereof to Employee, within five (5) days of any such termination of Employee's employment with the Company prior to a Change in Control (as defined below), to pay Employee severance as provided in and subject to the provisions of subsection 4(b) above. (d) Employee may terminate this Severance and Change in Control Agreement effective immediately upon notice thereof in writing to Company at any time while still employed within a sixty (60) calendar day period immediately following the effective date of any reduction by Company in (i) Employee's level of responsibility or position from that held by Employee as Vice President-Controller, Chief Financial Officer and Treasurer on the effective date of this Agreement, or (ii) Employee's level of compensation, including retirement benefits in effect immediately prior to any such change. (e) If at any time, any clause or portion of this Section 4 shall be deemed invalid or unenforceable by the laws of the jurisdiction in which it is to be enforced by reason of being vague or unreasonable as to duration, geographic scope, nature of activities restricted, or for any other reason, this provision shall be considered divisible as to such portions and the foregoing restrictions set forth in 4(a) shall become and be immediately amended to include only such duration, scope or restriction and such event as shall be deemed reasonable and enforceable by the court or other body having jurisdiction to enforce this Agreement; and the parties hereto agree that the restrictions, as so amended, shall be valid and binding as though the invalid or unenforceable portion had not been involved herein. (f) The Employee acknowledges and agrees that the Company would be irreparably harmed by violations of Section 3 or Section 4(a) above, and in recognition thereof, the Company shall be entitled to an injunction or other decree of specific performance with respect to any violation thereof (without any bond or other security being required) in addition to other available legal and equitable remedies. 3 5. TERMINATION OF EMPLOYMENT. (a) Upon and after termination of employment howsoever arising, Employee shall, upon request by Company: (1) immediately return to the Company all correspondence, documents, business calendars/diaries, or other property belonging to the Company which is in his possession, (2) immediately resign from any office Employee holds with the Company or any Affiliated Company; and (3) cooperate fully and in good faith with the Company in the resolution of all matters Employee worked on or was involved in during Employee's employment with the Company. Employee's cooperation will include reasonable consultation by telephone. Further, in connection therewith, Employee will, at Company's request upon reasonable advance notice and subject to Employee's availability, make himself available to Company in person at Company's premises, for testimony in court, or elsewhere; provided, however, that in such event, Company shall reimburse all Employee's reasonable expenses and pay Employee a reasonable per diem or hourly stipend. 6. CHANGE IN CONTROL. (a) In the event (i) a Change in Control of AAR CORP. occurs and (ii) the Company terminates Employee's employment for other than Cause or Disability, or Employee terminates Employee's employment for Good Reason by written notice to the Company setting forth the particulars thereof after having given the Company notice and opportunity to be heard with respect thereto, and (iii) neither incumbent in the positions of Chief Executive Officer or Chief Operating Officer of the Company on the effective date hereof are Chief Executive Officer of the Company at the time of such termination of employment, (1) the Company shall promptly pay to Employee, in a lump sum, a cash payment in an amount equal to three times Employee's average total compensation (base salary plus cash bonus) for the last two fiscal years or such lesser amount as Employee may elect to take, subject to applicable withholding. Employee may agree to take payments of any amounts on a schedule of his own choosing provided that such schedule shall be completed no later than three years from the occurrence of the last triggering event. (2) Employee shall continue to be covered by and receive the benefits, in accordance with their terms, of all of the Company's medical, dental and life insurance plans, for three years thereafter but at no less than the levels he was receiving immediately prior to the Change in Control. (3) Employee shall receive an additional retirement benefit, over and above that which Employee would normally be entitled to under the Company's retirement plans applicable to Employee, equal to the actuarial equivalent of the additional amount that Employee would have earned under such retirement plans or programs had he accumulated three additional continuous years of service. Such amount shall be paid to the executive in a cash lump sum payment at his normal retirement age. Employee may also elect to receive such payment at his early retirement age, as provided for in the retirement plans, with a corresponding actuarial reduction in the amount of such payment based upon the earlier date of such payment. 4 (b) For purposes of this Agreement (i) "Change in Control" means the earliest of: (1) the occurrence of any "Distribution Date", as such term is defined in Section 3 of the Rights Agreement between the Company and The First National Bank of Chicago, dated July 21, 1987, as amended; (2) the effective time of a merger or consolidation of the Company with one or more other corporations as a result of which the holders of the outstanding common stock, $1.00 par value, of the Company immediately prior to such merger or consolidation (other than those who are affiliates of any such other corporation, as defined in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934) hold less than 70% of the voting stock of the surviving or resulting corporation or its parent; (3) the effective time of a transfer of substantially all of the assets of the Company other than to an entity of which the Company owns at least 70% of the voting stock; or (4) the election to the Board during any 3 year period, without the recommendation or approval of the incumbent Board, of the lesser of (A) three directors or (B) directors constituting a majority of the number of directors of the Company then in office; or (5) the occurrence of any arrangement or understanding relating to the Company which would give rise to a filing requirement with the Securities and Exchange Commission pursuant to Rule 14f-1 of the Exchange Act Rules under the Securities Exchange Act of 1934. (ii) "Good Reason" means: (1) a material reduction in the nature or scope of Employee's duties, responsibilities, authority, power or functions from those enjoyed by Employee immediately prior to the Change in Control occurring at any time during the immediate two year period after the Change in Control; or (2) a good faith determination by Employee that as the result of a Change in Control and a material change in employment circumstances at any time during the immediate two year period after the Change in Control, he is unable to carry out his assigned duties and responsibilities in a manner consistent with the practices, standards, values or philosophy of the Company immediately prior to the Change in Control; or (3) a relocation of the primary place of employment of at least 100 miles. (iii) "Disability" means: (1) a physical or mental condition which has prevented Employee from substantially performing his assigned duties for a period of 180 consecutive days and which is expected to continue to render Employee unable to substantially perform his duties on a full-time basis and otherwise meets the benefit eligibility requirements of the Company's Long Term Disability Welfare Benefit Plan. The Company will make reasonable accommodation for any handicap of Employee as may be required by applicable law. In the event of termination by the Company for Disability after a Change in Control, a good faith determination of the existence of a Disability shall be made by resolution of the Compensation Committee of the Board of Directors of the Company, in 5 its sole discretion, setting forth the particulars of the Disability which shall be final and binding upon the Employee. The Company may require the submission of such medical evidence as to the condition of the Employee as it may deem necessary in order to arrive at its determination of the occurrence of a Disability, and Employee will cooperate in providing any such information. Employee will be provided with reasonable opportunity to present additional medical evidence as to the medical condition of Employee for consideration prior to the Board making its determination of the occurrence of a Disability. Upon termination of Employment by Company for Disability after a Change in Control, Employee will receive Disability payments pursuant to the Company's short and long term Disability welfare benefit plans then in effect according to the terms of such plans and continue to be eligible to participate in the Company's medical, dental and life insurance programs then in effect and available to officers of the Company in accordance with their terms for a period of 3 years from the date of such termination of this Agreement. (iv) "Cause" means: (1) any material breach by Employee of any statutory or common law duty of loyalty, or (2) any material breach of this Agreement which, if curable, is not cured within ten (10) days of notice thereof to Employee; provided, however, termination of employment for unsatisfactory performance (including failure to meet financial goals) shall not constitute termination for Cause. Termination for Cause shall be limited to a good faith finding by resolution of the Compensation Committee of the Board of Directors of AAR CORP. setting forth the particulars thereof. Any such action shall be taken at a regular or specially called meeting of the Compensation Committee of the Board, after a minimum 10 days notice thereof to Employee, with termination of Employee's employment with the Company for Cause listed as an agenda item. Employee will be given a reasonable opportunity to be heard at such meeting with counsel present if Employee desires. Any such resolution shall be final and binding. Upon termination of employment by Company for Cause, no further compensation or benefits shall accrue or be payable to Employee by Company except for any compensation, bonus or other benefits which have accrued to Employee prior to the date of any such termination. Nothing herein shall be construed to prevent the Company from terminating Employee's employment at any time for any reason or for no reason. (c) The Company will pay reasonable legal/attorney's fees incurred by Employee in connection with enforcement of any right or benefit under this Section 6. 7. CHANGES IN BUSINESS. The Company, acting through its Board of Directors, will at all times have complete control over the Company's business and retirement and other employee health and welfare benefit plans ("Plans"). Without limiting the generality of the foregoing, the Company may at any time or times change or discontinue any or all of its present or future operations or Plans (subject to their terms), may close or move any one or more of its divisions or offices, may undertake any new servicing or sales operation, may sell any one or more of its divisions or offices to any company not controlled, directly or indirectly, by the Company or may take any and all other steps which its Board of Directors, in its exclusive judgment, shall deem 6 desirable, and Employee shall have no claim or recourse against the Company, its officers, directors or employees by reason of such action except for enforcement of the provisions of Sections 4 and 6 of this Agreement. 8. SEVERANCE PAYMENT AS SOLE OBLIGATION. Except as expressly provided in Sections 4 and 6 above, no further compensation, payments, liabilities or benefits shall accrue or be payable to Employee upon or as a result of termination of Employee's employment for any reason whatsoever except for any compensation, bonus or other benefits which accrued to Employee prior to the date of employment termination. The amounts paid to the Employee under Section 4 and 6 of this Agreement shall be considered severance pay in consideration of past services Employee has rendered to the Company and in consideration of Employee's continued service from the date hereof to entitlement to those payments. 9. NOTICES. Any notice or other instrument or thing required or permitted to be given, served or delivered to any of the parties hereto shall be delivered personally or deposited in the United States mail, with proper postage prepaid, telegram, teletype, cable or facsimile transmission to the addresses listed below: (a) If to the Company, to: AAR CORP. 1111 Nicholas Boulevard Elk Grove Village, Illinois 60007 Attention: Chairman and Chief Executive Officer With a copy to: AAR CORP. 1111 Nicholas Boulevard Elk Grove Village, Illinois 60007 Attention: General Counsel (b) If to Employee, to: Timothy J. Romenesko 1485 S. Lake Shore Drive Barrington, IL 60010 or to such other address as either party may from time to time designate by notice to the other. Each notice shall be effective when such notice and any required copy are delivered to the applicable address. 10. NON-ASSIGNMENT. (a) The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of Employee, and any attempted unpermitted assignment shall be null and void and without further effect; provided, however, that, upon the sale or transfer of all or substantially all of the assets of the Company, or upon the merger by the Company into or the combination with another corporation or other business entity, or upon the liquidation or dissolution of the Company, this Agreement will inure to the benefit of and be binding upon the person, firm or corporation purchasing such assets, or the corporation surviving such merger or consolidation, or the shareholder effecting such liquidation or dissolution, as the case may be. After any such transaction, the term Company in this Agreement shall refer to the entity which conducts the business now conducted by the Company. The provisions of this Agreement shall be binding upon and inure to the benefit of the estate and beneficiaries of Employee and upon and to the benefit of the permitted successors and assigns of the parties hereto. 7 (b) The Employee agrees on behalf of himself, his heirs, executors and administrators, and any other person or person claiming any benefit under him by virtue of this Agreement, that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Employee or by any beneficiary, heir, executor, administrator or other person claiming under the Employee by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assigned, transfer, pledge or hypothecation or any other disposition of this Agreement or of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without further effect. 11. SEVERABILITY. If any term, clause or provision contained herein is declared or held invalid by any court of competent jurisdiction, such declaration or holding shall not affect the validity of any other term, clause or provision herein contained. 12. CONSTRUCTION. Careful scrutiny has been given to this Agreement by the Company, Employee, and their respective legal counsel. Accordingly, the rule of construction that the ambiguities of the contract shall be resolved against the party which caused the contract to be drafted shall have no application in the construction or interpretation of this Agreement or any clause or provision hereof. 13. ENTIRE AGREEMENT. This Agreement and the other agreements referred to herein set forth the entire understanding of the parties and supersede all prior agreements, arrangements and communications, whether oral or written, pertaining to the subject matter hereof. 14. WAIVER. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in writing signed by Employee and an authorized officer of the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 15. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles. 16. EXECUTION. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement. WITNESS the due execution of this Agreement by the parties hereto as of the day and year first above written. Employer: AAR CORP. By: /s/ David P. Storch -------------------------------------- Title: President -------------------------------------- Employee: /s/ Timothy J. Romenesko ----------------------------------- Timothy J. Romenesko 8 EX-21.1 8 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 9 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.1 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, 33-58456, 33-56023, and 33-57753 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 June 30, 1995, relating to the consolidated balance sheets of AAR CORP, and subsidiaries as of May 31, 1995 and 1994 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, 1995, which report appears in the May 31, 1995 annual report on Form 10-K of AAR CORP. KPMG Peat Marwick LLP Chicago, Illinois August 11, 1995 EX-27.1 10 EX-27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MAY 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 YEAR MAY-31-1995 JUN-01-1994 MAY-31-1995 22,487 0 112,820 2,400 151,827 321,632 128,200 71,604 425,814 73,140 119,766 16,284 0 0 180,835 425,814 451,395 451,395 373,524 426,957 0 895 9,725 14,713 4,250 10,463 0 0 0 10,463 .66 .66 Provision for doubtful accounts is included in Total Costs and Expenses Interest expense is presented net of $1,175 of interest income
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