-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LepgrHh7ZvJkxRRI4/GMg6y5kdaPdgvK76baxWaWirjdanc0USNhkgWqURQFYjjy x9WlkU/NfOcp4ZuZeA7e0w== 0001047469-03-001161.txt : 20030114 0001047469-03-001161.hdr.sgml : 20030114 20030113155602 ACCESSION NUMBER: 0001047469-03-001161 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021130 FILED AS OF DATE: 20030113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AAR CORP CENTRAL INDEX KEY: 0000001750 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT & PARTS [3720] IRS NUMBER: 362334820 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06263 FILM NUMBER: 03512288 BUSINESS ADDRESS: STREET 1: 1100 N WOOD DALE RD CITY: WOOD DALE STATE: IL ZIP: 60191 BUSINESS PHONE: 6302272000 MAIL ADDRESS: STREET 1: 1100 N WOOD DALE RD CITY: WOOD DALE STATE: IL ZIP: 60191 FORMER COMPANY: FORMER CONFORMED NAME: ALLEN AIRCRAFT RADIO INC DATE OF NAME CHANGE: 19700204 10-Q 1 a2100508z10-q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2002
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 1-6263

AAR CORP.
(Exact name of registrant as specified in its charter)

Delaware		36-2334820
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One AAR Place, 1100 N. Wood Dale Road Wood Dale, Illinois (Address of principal executive offices)		60191 (Zip Code)
(630) 227-2000 (Registrant's telephone number, including area code)

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 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 ý No o

As of December 31, 2002, there were 31,844,196 shares of the registrant's Common Stock, $1.00 par value per share, outstanding.

AAR CORP. and Subsidiaries
Quarterly Report on Form 10-Q
November 30, 2002

Table of Contents

			Page
Part I—FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets	3-4
		Condensed Consolidated Statements of Operations	5
		Condensed Consolidated Statements of Cash Flows	6
		Condensed Consolidated Statements of Comprehensive Income	7
		Notes to Condensed Consolidated Financial Statements	8-13
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14-20
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	21
	Item 4.	Controls and Procedures	21
Part II—OTHER INFORMATION
	Item 4.	Submission of Matters to a Vote of Security Holders	22
	Item 6.	Exhibits and Reports on Form 8-K
		Exhibits	22
		Reports on Form 8-K	22
	Signature Page		23
	Certifications		24-25
	Exhibit Index		26

PART I, ITEM 1—FINANCIAL STATEMENTS

AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of November 30, 2002 and May 31, 2002
(In thousands)

			November 30, 2002		May 31, 2002
			(Unaudited)		(Audited)
ASSETS
Current assets:
	Cash and cash equivalents		$	39,310	$	34,522
	Accounts receivable, less allowances of $11,583 and $10,624, respectively			75,249		77,528
	Inventories			237,165		238,032
	Equipment on or available for short-term lease			46,425		48,556
	Deferred tax assets, deposits and other			35,289		38,018

		Total current assets		433,438		436,656

Property, plant and equipment, net				96,000		102,591

Other assets:
	Investments in leveraged leases			28,251		29,088
	Goodwill, net			45,927		45,906
	Equipment on long-term lease			73,812		42,910
	Other			50,348		53,048

				198,338		170,952

			$	727,776	$	710,199

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

AAR CORP. and Subsidiaries
Condensed Consolidated Balance Sheets
As of November 30, 2002 and May 31, 2002
(In thousands)

			November 30, 2002			May 31, 2002
			(Unaudited)			(Audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Short-term debt		$	39,900		$	40,500
	Current maturities of long-term debt			51,142			394
	Notes payable			730			1,631
	Accounts payable			64,396			49,529
	Accrued liabilities			41,191			54,563
	Accrued taxes on income			—			3,847

		Total current liabilities		197,359			150,464

Long-term debt, less current maturities				162,568			217,699
Non-recourse debt, less current maturities				32,700			—
Deferred tax liabilities				28,116			30,601
Retirement benefit obligation				799			1,200

				224,183			249,500

Stockholders' equity:
	Preferred stock, $1.00 par value, authorized 250 shares; none issued			—			—
	Common stock, $1.00 par value, authorized 100,000 shares; issued 33,546 and 33,568 shares, respectively			33,546			33,568
	Capital surplus			164,883			165,188
	Retained earnings			150,141			156,479
	Treasury stock, 1,703 and 1,698 shares at cost, respectively			(27,004	)		(26,986	)
	Unearned restricted stock awards			(727	)		(1,138	)
	Accumulated other comprehensive income (loss)—
		Cumulative translation adjustments		(7,953	)		(10,224	)
		Minimum pension liability		(6,652	)		(6,652	)

				306,234			310,235

			$	727,776		$	710,199

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended November 30, 2002 and 2001
(Unaudited)
(In thousands except per share data)

		Three Months Ended November 30,						Six Months Ended November 30,
		2002			2001			2002			2001
Sales:
	Sales from products and leasing	$	131,389		$	124,458		$	261,984		$	304,850
	Sales from services		21,662			20,431			42,232			43,032

			153,051			144,889			304,216			347,882
Costs and operating expenses:
	Cost of products and leasing		112,084			107,594			226,687			263,408
	Cost of services		18,037			16,787			36,834			34,826
	Cost of sales-impairment charges		—			75,900			—			75,900
	Selling, general and administrative and other		19,443			20,679			40,224			44,374
	Special charges		—			10,100			—			10,100

			149,564			231,060			303,745			428,608
Operating income (loss)			3,487			(86,171	)		471			(80,726	)
Interest expense			(4,883	)		(5,426	)		(9,750	)		(10,970	)
Interest income			377			942			753			1,689

Loss before income tax benefit			(1,019	)		(90,655	)		(8,526	)		(90,007	)
Income tax benefit			(356	)		(36,171	)		(2,984	)		(36,009	)

Net loss		$	(663	)	$	(54,484	)	$	(5,542	)	$	(53,998	)

Loss per share of common stock—Basic		$	(0.02	)	$	(2.03	)	$	(0.17	)	$	(2.01	)
Loss per share of common stock—Diluted		$	(0.02	)	$	(2.03	)	$	(0.17	)	$	(2.01	)
Weighted average common shares outstanding—Basic			31,844			26,877			31,855			26,911
Weighted average common shares outstanding—Diluted			31,844			26,877			31,855			26,911
Dividends paid and declared per share of common stock		$	—		$	0.025		$	0.025		$	0.11

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended November 30, 2002 and 2001
(Unaudited)
(In thousands)

				Six Months Ended November 30,
				2002			2001
Cash flows from operating activities:
	Net loss			$	(5,542	)	$	(53,998	)
	Adjustments to reconcile net loss to net cash provided from (used in) operating activities:
		Depreciation and amortization			14,142			10,708
		Deferred taxes			(2,361	)		893
		Impairment and other special charges, net of tax			—			51,686
		Changes in certain assets and liabilities:
			Accounts receivable		1,064			26,523
			Inventories		1,780			(8,661	)
			Equipment on or available for short-term lease		1,424			(3,239	)
			Equipment on long-term lease		405			(25,174	)
			Accounts and trade notes payable		10,759			(4,350	)
			Accrued liabilities and taxes on income		(14,793	)		(3,619	)
			Other, primarily prepaids		2,261			(7,714	)

	Net cash provided from (used in) operating activities				9,139			(16,945	)

Cash flows from investing activities:
	Property, plant and equipment expenditures, net				(4,883	)		(6,141	)
	Business acquisition				—			(13,251	)
	Proceeds from sale of facility, net				2,969			—
	Investment in leveraged leases				837			(191	)
	Other				2			(928	)

	Net cash used in investing activities				(1,075	)		(20,511	)

Cash flows from financing activities:
	Proceeds from borrowings				—			145,772
	Reduction in borrowings				(2,517	)		(65,274	)
	Cash dividends				(796	)		(2,962	)
	Purchases of treasury stock				—			(205	)
	Other				9			(580	)

	Net cash provided from (used in) financing activities				(3,304	)		76,751

Effect of exchange rate changes on cash					28			25

Increase in cash and cash equivalents					4,788			39,320
Cash and cash equivalents, beginning of period					34,522			13,809

Cash and cash equivalents, end of period				$	39,310		$	53,129

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

AAR CORP. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
For the Six Months Ended November 30, 2002 and 2001
(Unaudited)
(In thousands)

		Six Months Ended November 30,
		2002			2001
Net loss		$	(5,542	)	$	(53,998	)
Other comprehensive income—
	Foreign currency translation		2,271			838

Total comprehensive loss		$	(3,271	)	$	(53,160	)

The accompanying Notes to Condensed Consolidated Financial
Statements are an integral part of these statements.

AAR CORP. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
November 30, 2002
(Unaudited)
(In thousands)

Note A—Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of AAR CORP. and its subsidiaries ("the Company") after elimination of intercompany accounts and transactions.

These statements have been prepared by the Company without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of May 31, 2002 has been derived from audited financial statements. To prepare the financial statements in conformity with accounting principles generally accepted in the United States of America, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and footnote disclosures, normally included in comprehensive financial statements prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K.

In the opinion of management of the Company, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of AAR CORP. and its subsidiaries as of November 30, 2002 and the condensed consolidated results of operations for the three- and six-month periods ended November 30, 2002 and 2001, and the condensed consolidated cash flows and comprehensive income for the six-month periods ended November 30, 2002 and 2001. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

Note B—New Accounting Standards

In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 146 "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company intends to adopt the provisions of SFAS No. 146 for any exit or disposal activities initiated after December 31, 2002.

Note C—Revenue Recognition

Sales and related cost of sales for products are recognized upon shipment to the customer. Service revenues and the related cost of services are generally recognized when customer owned material is shipped to the customer. Sales and related cost of sales on certain long-term manufacturing contracts and on certain large airframe maintenance contracts are recognized by the percentage of completion method, based on the relationship of costs incurred to date to estimated total costs under the respective contracts. Lease revenues are recognized as earned.

Note D—Impairment and Special Charges

Prior to September 11, 2001 the Company was executing its plan to reduce its investment in support of older generation aircraft in line with the commercial airlines' scheduled retirement plans for these aircraft. The events of September 11 caused a severe and sudden disruption in the commercial airline industry, which brought about a rapid acceleration of those retirement plans. System-wide capacity was reduced by approximately 20% and many airlines cancelled or deferred new aircraft deliveries. Based on management's assessment of these and other conditions, the Company in the second quarter ended November 30, 2001, reduced the value of and provided loss accruals for certain of its inventories and engine leases which support older generation aircraft by $75,900, of which $57,900 was related to the Inventory and Logistic Services segment and $18,000 was related to the Aircraft and Engine Sales and Leasing segment.

In addition, the Company recorded special charges of $10,100 during the three-month period ended November 30, 2001 principally related to an increase in the allowance for doubtful accounts to reflect its inability to recover certain accounts receivable.

A summary of the carrying value of impaired inventory and engines, after giving effect to the impairment charges as described above, is as follows:

		November 30, 2002			May 31, 2002			November 30, 2001
Net impaired inventory and engines		$	67,600		$	75,600		$	89,600

Proceeds from sales of impaired inventory and engines for the six-month period ended November 30, 2002 and the six-month period ended May 31, 2002 were $7,200 and $15,600 respectively.

Note E—Inventory

		November 30, 2002		May 31, 2002
The summary of inventories is as follows:
	Raw materials and parts	$	52,718	$	54,708
	Work-in-process		20,092		20,987
	Purchased aircraft, parts, engines and components held for sale		164,355		162,337

		$	237,165	$	238,032

Note F—Investment in Joint Ventures

At May 31, 2002, the Company owned a 50% equity interest in each of two joint ventures. The remaining 50% equity interest in each joint venture was owned by a major U.S. financial institution. Each joint venture owned one wide-body aircraft, on lease to a major foreign carrier. Each joint venture financed the purchase of its aircraft primarily with debt that is without recourse to the joint venture and to the joint venture partners. On June 20, 2002, the Company purchased the other 50% equity interest in one of the joint ventures from the joint venture partner for nominal consideration. As

a result, the book value of the aircraft and the non-recourse debt were recorded on the Company's balance sheet at November 30, 2002. The book value of the aircraft and the non-recourse debt recorded on the Company's consolidated balance sheet were $35,611 and $32,938 respectively at November 30, 2002.

The Company's investment in the remaining joint venture at November 30, 2002 was $1,509 and the Company's investment in the two joint ventures at May 31, 2002 was $4,038. The investment amounts are included in "Other assets" on the Condensed Consolidated Balance Sheets.

The following table provides combined summarized joint venture financial information at November 30, 2002 and May 31, 2002.

	November 30, 2002		May 31, 2002
Total assets	$	40,531	$	80,270
Total non-recourse debt		37,514		72,194

Net assets of joint ventures	$	3,017	$	8,076

AAR CORP.'s 50% equity interest in joint venture(s)	$	1,509	$	4,038

Note G—Supplemental Cash Flows Information

	Six Months Ended November 30,
	2002		2001
Interest paid	$	8,814	$	7,990
Income taxes paid		3,087		1,071
Income tax refunds received		325		138

See Note F for additional information regarding non-cash activities.

Note H—Common Stock and Earnings per Share of Common Stock

The computation of basic earnings per share is based on the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options. The following table provides a

reconciliation of the computations of basic and diluted earnings per share information for the three- and six-month periods ended November 30, 2002 and 2001.

		Three Months Ended November 30,						Six Months Ended November 30,
		2002			2001			2002			2001
Basic EPS:
	Net loss	$	(663	)	$	(54,484	)	$	(5,542	)	$	(53,998	)
	Weighted average common shares outstanding		31,844			26,877			31,855			26,911

	Loss per share—Basic	$	(.02	)	$	(2.03	)	$	(.17	)	$	(2.01	)

Diluted EPS:
	Net loss	$	(663	)	$	(54,484	)	$	(5,542	)	$	(53,998	)
	Weighted average common shares outstanding		31,844			26,877			31,855			26,911
	Additional shares due to hypothetical exercise of stock options		—			—			—			—

			31,844			26,877			31,855			26,911

	Loss per share—Diluted	$	(.02	)	$	(2.03	)	$	(.17	)	$	(2.01	)

Note I—Financing Arrangements

At November 30, 2002, aggregate committed unsecured bank credit arrangements were $67,233. Of this amount, $65,000 was committed under separate revolving credit and term loan agreements with three domestic banks and $2,233 was committed under credit agreements with one foreign bank. In November 2002, the Company completed amendments to two of its domestic credit arrangements. These amendments lowered the commitment amounts under each arrangement and amended the fixed charge coverage ratio at November 30, 2002. In addition, the maturity date for one of the domestic credit arrangements was changed from February 9, 2004 to June 10, 2003. Borrowings outstanding under the unsecured domestic credit arrangements were $39,900 at November 30, 2002 and $40,500 at May 31, 2002. Cash and cash equivalents were $39,310 at November 30, 2002 and $34,522 at May 31, 2002. The Company is actively considering various financing alternatives to replace the maturing credit arrangements.

On October 15, 2003, the Company's $49,500 of 7.25% notes mature and therefore have been classified as current on the November 30, 2002 Consolidated Balance Sheet.

Note J—Aviation Equipment Operating Leases

The Company from time to time leases aviation equipment (engines and aircraft) from lessors under arrangements that are classified by the Company as operating leases. The Company may also sublease the aviation equipment to a customer on a short- or long-term basis. The terms of the operating leases in which the Company is the lessee are one year with options to renew annually at the election of the Company for up to four years. If the Company elects not to renew a lease, the Company may elect either to (1) direct the lessor to sell the equipment at which time the Company would be required to reimburse the lessor for the shortfall, if any, between the proceeds on the sale and the scheduled purchase option price, or (2) purchase the equipment from the lessor at its

scheduled purchase option price. The terms of the lease agreements also allow the Company to purchase the equipment at any time during a lease at its scheduled purchase option price.

In those instances in which the Company anticipates that it will purchase aviation equipment and that the scheduled purchase option price will exceed the fair value of such equipment, the Company records an accrual for loss. The scheduled purchase option values amounted to $34,803 at November 30, 2002 and $35,623 at May 31, 2002.

During the fourth quarter of fiscal 2002 ended May 31, 2002, the Company purchased the equity interest in $31,080 of aviation equipment. As a result, this amount was recorded as an asset on the May 31, 2002 Consolidated Balance Sheet. The lease obligations for these assets, owing to the lessor, converted to term loans upon the purchase in the amount of $29,737, which was also recorded on the May 31, 2002 Consolidated Balance Sheet.

Note K—Segment Reporting

The Company is a leading provider of value-added products and services to the global aviation/aerospace industry. The Company reports its activities in four business segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing.

Revenues in the Inventory and Logistic Services segment are derived from the sale of a wide variety of new, overhauled and repaired engine and airframe parts and components to the commercial, military, general and business aviation markets.

Revenues in the Maintenance, Repair and Overhaul segment are derived from the repair and overhaul of a wide range of commercial and military aircraft engine and airframe parts and components; repair and overhaul of a wide variety of airframes and the repair and overhaul of parts for industrial gas and steam turbine operators.

Revenues in the Manufacturing segment are derived from the manufacture and sale of in-plane cargo loading and handling systems, advanced composite materials and components and a wide array of containers, pallets and shelters used to support the U.S. Military's tactical deployment requirements.

Revenues in the Aircraft and Engine Sales and Leasing segment are derived from the sale and lease of used commercial aircraft and new, overhauled and repaired commercial aircraft engines.

The accounting policies for the segments are the same as those for the Company. The chief decision making officer of the Company evaluates performance based on the segments. The expenses and assets related to corporate activities are not allocated to the segments.

Selected financial information for each reportable segment is as follows:

		Three Months Ended November 30,				Six Months Ended November 30,
		2002		2001		2002		2001
Sales:
	Inventory and Logistic Services	$	65,198	$	55,882	$	126,497	$	137,068
	Maintenance, Repair and Overhaul		52,388		55,151		99,314		111,838
	Manufacturing		29,316		25,482		57,303		47,437
	Aircraft and Engine Sales and Leasing		6,149		8,374		21,102		51,539

		$	153,051	$	144,889	$	304,216	$	347,882

Gross profit, before consideration of impairment charges:
	Inventory and Logistic Services	$	9,126	$	5,109	$	16,767	$	16,300
	Maintenance, Repair and Overhaul		7,471		7,136		13,074		17,423
	Manufacturing		5,058		3,763		8,146		5,824
	Aircraft and Engine Sales and Leasing		1,275		4,500		2,708		10,101

		$	22,930	$	20,508	$	40,695	$	49,648

PART I, ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

AAR CORP. and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(In thousands)

Factors Which May Affect Future Results

The Company's future operating results and financial position may be adversely affected or fluctuate substantially on a quarterly basis as a result of continuing difficulties in the commercial aviation environment exacerbated by the September 11, 2001 terrorist attacks and the events that followed, the relatively weak worldwide economic climate and other factors, including: (1) decline in demand for the Company's products and services and the ability of the Company's customers to meet their financial obligations to the Company, particularly in light of the poor financial condition of many of the world's commercial airlines; (2) decline in demand from airline customers as a result of international military conflicts, offset by increased defense-related demand due to such conflicts; (3) lack of assurance that sales to the U.S. Government, its agencies and its contractors (which were approximately 25.5% of total sales in fiscal 2002), will continue at levels previously experienced, since such sales are subject to competitive bidding and government funding; (4) access to the debt and equity capital markets, which may be limited in light of industry conditions and Company performance; (5) changes in or noncompliance with laws and regulations that may affect certain of the Company's aviation related activities that are subject to licensing, certification and other regulatory requirements imposed by the FAA and other regulatory agencies, both domestic and foreign; (6) competitors, including original equipment manufacturers, in the highly competitive aviation aftermarket industry that have greater financial resources than the Company; (7) exposure to product liability and property claims that may be in excess of the Company's substantial liability insurance coverage; (8) difficulties in being able to successfully integrate business acquisitions; (9) the potential risk for declining market values for aviation products and equipment caused as a result of the United Airlines and US Airways, Inc. bankruptcies, possible future airline bankruptcies and other factors within the airline industry; (10) difficulty in re-leasing or selling aircraft and engines that are currently being leased on a long- or short-term basis and (11) the outcome of any pending or future material litigation or environmental proceedings.

Critical Accounting Policies

The Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States. Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosures of contingent liabilities to prepare the consolidated financial statements. The most significant estimates made by management of the Company include adjustments to reduce the value of inventories and equipment on or available for lease, allowance for doubtful accounts and loss accruals for aviation equipment operating leases. Accordingly, actual results could differ materially from those estimates. The following is a summary of certain accounting policies considered critical by management of the Company.

Allowance for Doubtful Accounts The Company's allowance for doubtful accounts is intended to reduce the value of customer accounts receivable to amounts expected to be collected. In determining the required allowance, the Company considers factors such as general and industry-specific economic conditions, customer credit history, and the customer's current and expected future financial performance.

Inventories Inventories are valued at the lower of cost or market. Cost is determined by either the specific identification, average cost or first-in, first-out method. Provisions are made for excess and obsolete inventories and inventories that have been impaired as a result of industry conditions. The Company has utilized certain assumptions when determining the recoverability of excess, obsolete and impaired inventories, such as the historical performance of the inventory, current and expected future aviation usage trends, estimated market values and expected future demand. Principally as a result of the terrorist acts of September 11, 2001, the Company recorded a significant charge for impaired inventories during the quarter ended November 30, 2001 utilizing those assumptions. Further reductions in demand for certain of the Company's inventories or declining market values, as well as differences between actual results and the assumptions utilized by the Company when determining the market value of assets, could result in additional impairment charges in future periods.

Equipment on or Available for Lease Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation is computed using the straight-line method over the estimated service life of the equipment, and maintenance costs are expensed as incurred. The balance sheet classification is based on the lease term, with fixed-term leases less than twelve months classified as short-term and all others classified as long-term.

Aviation Equipment Operating Leases The Company from time to time leases aviation equipment (engines and aircraft) from lessors under arrangements that are classified by the Company as operating leases. The Company may also sublease the aviation equipment to a customer on a short- or long-term basis. The terms of the operating leases in which the Company is the lessee are one year with options to renew annually at the election of the Company for up to four years. If the Company elects not to renew a lease, the Company may elect either to (i) direct the lessor to sell the equipment at which time the Company would be required to reimburse the lessor for the shortfall, if any, between the proceeds on the sale and the scheduled purchase option price, or (ii) purchase the equipment from the lessor at its scheduled purchase option price. The terms of the lease agreements also allow the Company to purchase the equipment at any time during a lease at its scheduled purchase option price. In those instances in which the Company anticipates that it will purchase aviation equipment and that the scheduled purchase option price will exceed estimated undiscounted cash flows related to the equipment, the Company records an accrual for loss. The Company has utilized certain assumptions when estimating future undiscounted cash flows, such as current and future lease rates, residual values, estimated market values and expected future demand. Differences between actual results and the assumptions utilized by the Company when determining undiscounted cash flows could result in provisions for losses on aviation equipment under operating leases in future periods.

Results of Operations—Three- and Six-Month Periods Ended November 30, 2002
(as compared with the same periods of the prior year)

The Company reports its activities in four business segments: Inventory and Logistic Services; Maintenance, Repair and Overhaul; Manufacturing; and Aircraft and Engine Sales and Leasing. The

table below sets forth consolidated sales for the Company's four business segments for the three- and six-month periods ended November 30, 2002 and 2001.

		Three Months Ended November 30,				Six Months Ended November 30,
		2002		2001		2002		2001
Sales:
	Inventory and Logistic Services	$	65,198	$	55,882	$	126,497	$	137,068
	Maintenance, Repair and Overhaul		52,388		55,151		99,314		111,838
	Manufacturing		29,316		25,482		57,303		47,437
	Aircraft and Engine Sales and Leasing		6,149		8,374		21,102		51,539

		$	153,051	$	144,889	$	304,216	$	347,882

Three-Month Period Ended November 30, 2002
(as compared with the same period of the prior year)

Consolidated sales for the second quarter of the Company's fiscal year ending May 31, 2003 increased $8,162 or 5.6% over the same period in the prior year. The increase in sales was principally due to increased demand for the Company's manufactured products which support the U.S. Military's tactical deployment requirements and higher sales to the U.S. Military and its major contractors for spares and logistics support.

In the Inventory and Logistic Services segment, sales increased $9,316 or 16.7% over the same period in the prior year. The increase in sales is attributable to strong demand from the U.S. Military and certain major contractors for spares and logistics support, as well as higher sales of engine parts to the Company's commercial airline customers.

In the Maintenance, Repair and Overhaul segment, sales decreased $2,763 or 5.0% reflecting reduced demand for certain aircraft component maintenance services.

In the Manufacturing segment, sales increased $3,834 or 15.0% primarily as a result of strong demand for products that support the U.S. Military's tactical deployment requirements.

In the Aircraft and Engine Sales and Leasing segments, sales decreased $2,225 or 26.6% over the same period in the prior year. Prior year sales include the sale of an aircraft that was delivered prior to the events of September 11, 2001. Sales in this segment remain historically low, which is attributable to the commercial aviation industry-wide reduction in capital asset activity due to the lower demand for aircraft and engines.

Consolidated gross profit increased $2,422 or 11.8% before consideration of asset impairment charges recorded in the second quarter of last year, due to increased sales and an increase in the consolidated gross profit margin from 14.2% last year to 15.0% this year. The increase in the consolidated gross margin was principally due to lower indirect expenses in each of the Company's reportable segments, increased volume through certain of the Company's Manufacturing operations and the favorable mix of products and services sold in the Inventory and Logistic Services and Maintenance, Repair and Overhaul segments.

Operating income increased by $3,658 over the prior year before consideration of asset impairment and other special charges recorded in the second quarter of last year, due to increased consolidated sales, an improvement in the consolidated gross margin and a reduction in selling, general and administrative expenses. The Company reduced its selling, general and administrative costs by $1,236 or 6.0% compared to the prior year principally through lower personnel costs and other operating expenses, partially offset by substantially higher insurance expense. Interest expense decreased $543 as

a result of lower average borrowings during the current quarter compared to last year and interest income decreased $565 as a result of a decrease in average invested cash during the quarter.

During the second quarter of last fiscal year, principally in response to the events of September 11, 2001, the Company reduced the value of and provided loss accruals for certain inventories and engine leases that support older generation aircraft by $75,900. In addition, the Company recorded special charges of $10,100 during the same quarter, principally related to an increase in the allowance for doubtful accounts reflecting the inability to recover certain accounts receivable.

Consolidated net loss for the three months ended November 30, 2002 was $663 compared to a net loss of $54,484 last year. The improvement reflects the factors discussed above.

Six-Month Period Ended November 30, 2002
(as compared with the same period of the prior year)

Consolidated sales for the six-month period ended November 30, 2002 decreased $43,666 or 12.6% over the same period in the prior year. The decline in sales during the six-month period was attributable to reduced demand for certain of the Company's products and services from its airline customers. Partially offsetting the year to date decline was increased demand for the Company's products supporting the U.S. Military and its major contractors.

Sales in the Inventory and Logistic Services segment decreased $10,571 or 7.7% compared to the same period in the prior year. The decrease in sales is primarily due to lower demand for new airframe parts, as well as a downsizing of the Company's new parts distribution unit. Partially offsetting the decline was increased sales of spares and logistics support to the U.S. Military and its major contractors.

In the Maintenance, Repair and Overhaul segment, sales decreased $12,524 or 11.2% over the prior year reflecting lower demand for certain of the Company's aircraft component overhaul services and landing gear overhaul services.

Sales in the Manufacturing segment increased $9,866 or 20.8% due to strong demand for the Company's manufactured products that support the U.S. Military's tactical deployment requirements as well as an increase in sales of composite structure products.

In the Aircraft and Engine Sales and Leasing segment, sales decreased $30,437 or 59.1% compared to the prior year. The reduction in sales is principally attributable to the commercial aviation industry-wide reduction in capital asset investment activity reflecting the difficult commercial airline environment, including lack of available financing and fluctuating market values for aircraft and engines.

Consolidated gross profit decreased $8,953 or 18.0% over the prior year before consideration of impairment charges, due to lower sales and a reduction in the gross profit margin to 13.4% in the current year from 14.3% in fiscal 2002. The reduction in the consolidated gross profit margin was attributable to lower margins experienced in the Maintenance, Repair and Overhaul segment principally as a result of lower volume, and in the Aircraft and Engine Sales and Leasing segment principally due to the mix of inventories sold. Partially offsetting this decline was an improvement in gross margin in the Manufacturing segment primarily as a result of increased volume.

Operating income decreased $4,803 or 91.1% from the prior year before consideration of impairment and other special charges recorded in the second quarter of last year, due to lower gross profit offset by reduced selling, general and administrative costs. The Company reduced its selling, general and administrative costs by $4,150 or 9.4% compared to the same period in the prior year principally through lower personnel costs and other operating expenses, partially offset by substantially higher insurance expense. Interest expense decreased $1,220 primarily as a result of lower average

borrowings. Interest income declined $936 as a result of a decrease in average cash invested during the period.

The Company recorded a net loss of $5,542 during the six months ended November 30, 2002 compared to a net loss of $53,998 in the prior year as a result of the factors discussed above.

Financial Condition at November 30, 2002
(as compared with May 31, 2002)

Historically, the Company has funded its growth, met its contractual commitments and paid dividends through the generation of cash from operations, augmented by the periodic issuance of common stock and debt to the public and private markets. The Company also relies on its unsecured bank credit arrangements, an accounts receivable securitization program and finances certain aviation equipment with operating leases to provide additional liquidity. The Company completed a private placement of long-term debt in the amount of $75,000 in June 2001 and a common stock offering in February 2002 in the amount of $34,334. However, the Company's continuing ability to issue debt, borrow from its lenders or sell equity securities in the future may be negatively affected by a number of factors, including general economic conditions, airline and aviation industry conditions and Company performance. The Company's ability to use the accounts receivable securitization program and aviation equipment operating leases is also dependent on those factors. The Company's ability to generate cash from operations is influenced primarily by the operating performance of the Company and working capital management.

At November 30, 2002, the Company's liquidity and capital resources included cash of $39,310 and working capital of $236,079. At November 30, 2002, the Company's ratio of long-term debt to capitalization was 38.9%, down from 41.2% at May 31, 2002 and at November 30, 2002, the Company's ratio of total debt to capitalization was 48.4% compared to 45.6% at May 31, 2002. The increase in the total debt to capitalization ratio is primarily attributable to the non-recourse debt of $32,938 recorded when the Company purchased the equity interest in a joint venture (See Note F). The Company continues to maintain its external sources of financing, including unsecured bank credit arrangements and a universal shelf registration on file with the Securities and Exchange Commission under which, subject to market conditions, up to $163,675 of common stock, preferred stock or medium- or long-term debt securities may be issued or sold.

At November 30, 2002, aggregate committed unsecured bank credit arrangements were $67,233. Of this amount, $65,000 was committed under separate revolving credit and term loan agreements with three domestic banks and $2,233 was committed under credit agreements with one foreign bank. In November 2002, the Company completed amendments to two of its domestic credit arrangements. These amendments lowered the commitment amounts under each of the two arrangements and amended the fixed charge coverage ratio at November 30, 2002. In addition, the maturity date for one of the domestic credit arrangements was changed from February 9, 2004 to June 10, 2003. Borrowings outstanding under the unsecured domestic credit arrangements were $39,900 at November 30, 2002 and

$40,500 at May 31, 2002, respectively. The commitment amounts for each of the three domestic banks under the unsecured credit arrangements as of November 30, 2002 and subsequent dates are as follows:

		Domestic Bank No. 1		Domestic Bank No. 2		Domestic Bank No. 3		Total
Date of Availability:
	November 30, 2002	$	25,000	$	15,000	$	25,000	$	65,000
	December 1, 2002		15,000		15,000		25,000		55,000
	December 31, 2002		15,000		10,000		25,000		50,000
	March 1, 2003		7,500		10,000		25,000		42,500
	April 10, 2003		7,500		—		—		7,500
Date of Maturity			6/10/03		4/10/03		4/10/03

The Company has an accounts receivable securitization program under which the Company may sell an interest in a defined pool of accounts receivable up to $35,000. In November 2002, the Company completed an amendment to the accounts receivable securitization program in which the commitment amount was reduced to $25,000. Cash proceeds from the sale of accounts receivable, net of retained interest, under this arrangement were $18,300 and $20,100 at November 30, 2002 and May 31, 2002 respectively. This resulted in a reduction of accounts receivable in those amounts on the November 30, 2002 and May 31, 2002 Consolidated Balance Sheets. The accounts receivable securitization program expires on August 30, 2004, however, on an annual basis, the financial institution has the option to not renew funding of the program. The financial institution has informed the Company that it does not wish to renew funding of the program after November 30, 2002. However, the financial institution has extended funding of the program through February 28, 2003 while the Company is in discussions with other financial institutions regarding the replacement of this program.

On October 15, 2003, the Company's $49,500 of 7.25% notes mature and therefore have been classified as current on the November 30, 2002 Consolidated Balance Sheet. The Company expects to satisfy this obligation, as well as other obligations due under the accounts receivable securitization program and the unsecured credit arrangements with existing cash and cash equivalents, cash generated from operations and asset sales, as well as with a new and expanded accounts receivable facility and other forms of debt financing.

During the six-month period ended November 30, 2002, the Company's operations generated $9,139 of cash principally reflecting positive earnings before depreciation and amortization of $8,600.

During the six-month period ended November 30, 2002, the Company's investing activities used $1,075 of cash reflecting capital expenditures of $4,883 partially offset by the net proceeds from the sale of the Company's Elk Grove Village, Illinois facility in the amount $2,969 and cash from leveraged leases of $837.

During the six-month period ended November 30, 2002, the Company's financing activities used $3,304 of cash primarily reflecting reductions in borrowings of $2,517 and the payment of cash dividends of $796.

On October 9, 2002, the Company's Board of Directors voted to suspend the quarterly common stock dividend. This action is consistent with other actions taken by the Company to lower costs and preserve cash.

A summary of long-term debt, bank borrowings, non-cancelable operating lease commitments for aviation equipment and accounts receivable securitization as of November 30, 2002 is as follows:

			Payments Due by Period
			Total			Within One Year		Within Two Years		Within Three Years		Within Four Years		Within Five Years		Beyond Five Years
On Balance Sheet:
	Debt		$	247,140		$	52,984	$	34,058	$	21,333	$	1,245	$	297	$	137,223
	Bank Borrowings			39,900	(1)		39,900		—		—		—		—		—
Off Balance Sheet:
	Aviation Equipment
		Operating Leases		39,756			3,199		10,574		9,080		1,644		15,259		—
	Accounts Receivable
		Securitization Program		18,300	(2)		18,300		—		—		—		—		—

(1): At November 30, 2002, the Company had three committed unsecured bank lines aggregating $67,233 of which $39,900 had been drawn and $4,374 utilized for letters of credit, leaving unused available committed bank lines of $22,959. The maturity dates for the lines of credit drawn are April 10, 2003 and June 10, 2003.
(2): The accounts receivable securitization program expires on August 30, 2004; however, on an annual basis, the financial institution has the option to not renew funding of the program. The financial institution has informed the Company that it does not wish to renew funding of the program after November 30, 2002. However, the financial institution has also informed the Company that it will extend funding of the program through February 28, 2003 while the Company is in discussions with other financial institutions regarding the replacement of this program.
(3): The Company routinely issues letters of credit, performance bonds or credit guarantees in the ordinary course of its business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at November 30, 2002 was approximately $14,026.

Forward-Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including those factors discussed under this Item 2 entitled "Factors Which May Affect Future Results". Should one or more of those risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. Those events and uncertainties are difficult or impossible to predict accurately and many are beyond the Company's control. The Company assumes no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

PART 1, ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company's exposure to market risk includes fluctuating interest rates under its unsecured bank credit agreements, foreign exchange rates and accounts receivable. See Part I, Item 2 for a discussion on accounts receivable exposure. During the six-month periods ended November 30, 2002 and 2001, the Company did not utilize derivative financial instruments to offset these risks.

At November 30, 2002, $21,054 was available under credit lines with domestic banks under revolving credit and term loan agreements, and $1,905 was available under credit agreements with foreign banks (credit facilities). Interest on amounts borrowed under the credit facilities is LIBOR based. As of November 30, 2002, the outstanding balance under these agreements was $39,900. A hypothetical 10 percent increase to the average interest rate under the credit facilities applied to the average outstanding balance during the six-month period ended November 30, 2002 would not have had a material impact on the financial position or results of operations of the Company.

Revenues and expenses of the Company's foreign operations in The Netherlands are translated at average exchange rates during the period and balance sheet accounts are translated at period-end exchange rates. Balance sheet translation adjustments are excluded from the results of operations and are recorded in stockholders' equity as a component of accumulated other comprehensive income (loss). A hypothetical 10 percent devaluation of foreign currencies against the U.S. dollar would not have a material impact on the financial position or results of operations of the Company.

PART I, ITEM 4—CONTROLS AND PROCEDURES

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q, the chief executive officer and chief financial officer of the Company evaluated the effectiveness of the Company's disclosure controls and procedures and have concluded that the Company's controls and procedures effectively ensure that the information required to be disclosed in the reports that are filed or submitted under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely manner. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

AAR CORP. and Subsidiaries
November 30, 2002

PART II—OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Stockholders of the Company was held on October 9, 2002. The following items were acted upon at the meeting:

1) Election of three Class III directors to serve until the 2005 Annual Meeting of Stockholders. Three directors were nominated and elected by the stockholders by the requisite vote.

Directors Nominated and Elected at the Meeting

	Votes For	Votes Withheld
Howard B. Bernick	29,211,711	4,432
Ira A. Eichner	28,376,530	839,523
Ronald R. Fogleman	29,207,682	8,371

Continuing Directors

A. Robert Abboud
James G. Brocksmith, Jr.
James E. Goodwin
Edgar D. Jannotta
Joel D. Spungin
David P. Storch

2) Approval of the AAR CORP. Section 162(m) Performance-Based Annual Cash Bonus Program.

		Votes For		Votes Against		Abstentions
		27,454,135		2,204,163		55,984

Item 6. Exhibits and Reports on Form 8-K

1) Exhibits

The exhibits to this report are listed on the Exhibit Index included elsewhere herein.

2) Reports on Form 8-K for Quarter ended November 30, 2002

The Company filed no reports on Form 8-K during the three months ended November 30, 2002.

SIGNATURE

Pursuant to the requirements of the Securities and 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: January 13, 2003	/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko Vice President and Chief Financial Officer (Principal Financial Officer and officer duly authorized to sign on behalf of registrant)
	/s/ MICHAEL J. SHARP Michael J. Sharp Vice President—Controller (Principal Accounting Officer)

CERTIFICATION

I, David P. Storch, President and Chief Executive Officer of AAR CORP., certify that:

1. I have reviewed this quarterly report on Form 10-Q of AAR CORP. (the registrant);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

January 13, 2003
		/s/ DAVID P. STORCH David P. Storch President and Chief Executive Officer

CERTIFICATION

I, Timothy J. Romenesko, Vice President and Chief Financial Officer of AAR CORP., certify that:

1. I have reviewed this quarterly report on Form 10-Q of AAR CORP. (the registrant);

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

January 13, 2003
		/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko Vice President and Chief Financial Officer

EXHIBIT INDEX

Index		Exhibits
4.	Instruments defining the rights of the security holders	4.3	Amendment No. 5 dated November 26, 2002 to the Second Amended and Restated Credit Agreement dated May 27, 1998 between Registrant and Bank of America National Trust and Savings Association as agent (filed herewith).
		4.7	Amendment No. 4 dated November 30, 2002 to the Second Amended and Restated Credit Agreement dated February 10, 1998, between the Registrant and The First National Bank of Chicago (now known as Bank One, N.A.) (filed herewith).
99.	Additional exhibits	99.1	Chief Executive Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith).
		99.2	Chief Financial Officer certification pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith).

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Table of Contents

PART I, ITEM 1—FINANCIAL STATEMENTS

PART I, ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

PART 1, ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

PART I, ITEM 4—CONTROLS AND PROCEDURES

PART II—OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

Item 6. Exhibits and Reports on Form 8-K

SIGNATURE
CERTIFICATION
CERTIFICATION
EXHIBIT INDEX
EX-4.3 3 a2100508zex-4_3.htm EX-4.3
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EXHIBIT 4.3

FIFTH AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AGREEMENT

THIS FIFTH AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this "Fifth Amendment"), is made and dated as of November 26, 2002 among AAR CORP., a Delaware corporation ("Borrower"), the Lenders party hereto ("Lenders"), and BANK OF AMERICA, N.A., as Agent (in such capacity, "Agent").

RECITALS

1. The Borrower, the Lenders and the Agent are parties to that certain Second Amended and Restated Credit Agreement, dated as of May 27, 1998, as amended by that certain First Amendment to Second Amended and Restated Credit Agreement, dated as of December 28, 1998, as further amended by that certain Second Amendment to Second Amended and Restated Credit Agreement, dated as of February 5, 2002, as further amended by that certain Third Amendment to Second Amended and Restated Credit Agreement, dated as of May 23, 2002, and as further amended by that certain Fourth Amendment to Second Amended and Restated Credit Agreement, dated as of August 31, 2002 (as heretofore amended, the "Existing Credit Agreement").

2. The Borrower, the Lenders, and the Agent have agreed to certain amendments to the Existing Credit Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows:

Part 1

Definitions

Section 1.1. Certain Definitions. Unless otherwise defined herein or the context otherwise requires, the following terms used in this Fifth Amendment have the following meanings:

"Amended Credit Agreement" means the Existing Credit Agreement as amended hereby.

"Fifth Amendment Effective Date" shall mean November 30, 2002, subject to the Borrower's satisfaction of, or the Lenders' waiver of, each of the conditions set forth in Part 5 of this Fifth Amendment.

Section 1.2. Other Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Fifth Amendment have the meanings provided in the Amended Credit Agreement.

Part 2

Amendments to Existing Credit Agreement

Effective on (and subject to the occurrence of) the Fifth Amendment Effective Date, the Existing Credit Agreement is hereby amended in accordance with this Part 2. Except as so amended, the Existing Credit Agreement shall continue in full force and effect.

Section 2.1. Amendment of Definitions in Existing Credit Agreement. Article I of the Existing Credit Agreement is amended by changing the definitions of each of the respective terms to read in their entirety as follows:

"Applicable Margin" means at all times 2.50%.

"Facility Fee" means a facility fee on the amount of the Aggregate Commitment from time to time in an amount equal to 0.50% per annum.

"Revolving Credit Termination Date" means the earliest of (a) April 10, 2003, (b) the "maturity date" under the LaSalle Agreement, as defined therein, and (c) the "revolving credit termination

date" under the Bank One Agreement, as defined therein; provided, however, that if from time to time such "maturity date," such "revolving credit termination date," or other comparable facility termination dates (if any) in such foregoing Parallel Agreements is earlier than April 10, 2003, by amendment or otherwise, or either such respective Parallel Agreement is terminated and/or the commitment thereunder is terminated, then "Revolving Credit Termination Date" shall mean such earlier date of termination.

Section 2.3. Amendment of Section 2.5 (Reductions in Aggregate Commitment). Section 2.5(b) of the Existing Credit Agreement is amended in its entirety to read as follows:

(b) The Aggregate Commitment shall automatically be reduced (i) by $5,000,000 on June 30, 2002, (ii) by $10,000,000 on September 30, 2002, (iii) by $10,000,000 on November 30, 2002, and (iv) by $5,000,000 on December 31, 2002 (each date identified in (i) through (iv) being a "Reduction Date"). Each of these automatic reductions in the Aggregate Commitment shall be in addition to, and not in lieu of, any other mandatory reductions in the Aggregate Commitment required hereunder.

Section 2.4. Amendment of Section 6.23 (Fixed Charge Coverage Ratio). Section 6.23 of the Existing Credit Agreement is amended to read in its entirety as follows:

6.23 Fixed Charge Coverage Ratio. The Borrower will maintain a Fixed Charge Coverage Ratio of (a) not less than 0.50:1.00 as of the last day of the fiscal quarter of the Borrower ended November 30, 2002, and (b) not less than 0.75:1.00 as of the last day of each fiscal quarter of the Borrower thereafter. The Fixed Charge Coverage Ratio shall be determined based on four of the previous five fiscal quarters of the Borrower that occurred immediately prior to the calculation date, at the Borrower's option, except that for each of the quarters ended November 30, 2002 and February 28, 2003, the Borrower may elect to calculate the Fixed Charge Coverage Ratio based solely upon that quarter's results.

Part 3

Representations and Warranties

The Borrower represents and warrants to the Lenders and the Agent that, on and as of the Fifth Amendment Effective Date, and after giving effect to this Fifth Amendment:

Section 3.1. Authority. The Borrower has all the necessary corporate power to make, execute, deliver, and perform this Fifth Amendment, and this Fifth Amendment constitutes the legal, valid and enforceable obligation of the Borrower, enforceable against the Borrower in accordance with its terms.

Section 3.2. No Legal Obstacle to Agreement. Neither the execution of this Fifth Amendment, the making by the Borrower of any borrowings under the Amended Credit Agreement, nor the performance of the Amended Credit Agreement has constituted or resulted in or will constitute or result in a breach of the provisions of any contract to which Borrower is a party, or the violation of any law, judgment, decree or governmental order, rule or regulation applicable to the Borrower, or result in the creation under any agreement or instrument of any security interest, lien, charge, or encumbrance upon any of the assets of the Borrower. No approval or authorization of any governmental authority is required to permit the execution, delivery or performance by the Borrower of this Fifth Amendment, the Amended Credit Agreement, or the transactions contemplated hereby or thereby, or the making of any borrowings by the Borrower under the Amended Credit Agreement.

Section 3.3. Incorporation of Certain Representations. The representations and warranties set forth in Article V of the Amended Credit Agreement are true and correct in all material respects on and as of the Fifth Amendment Effective Date as though made on and as of the date hereof except for

any representations and warranties that expressly relate solely to an earlier date, which representations and warranties were true and accurate in all material respects on and as of such earlier date.

Section 3.4. Default. No Default or Unmatured Default has occurred and is continuing under the Amended Credit Agreement.

Part 4

Additional Agreements

Section 4.1. Commitments under Parallel Agreements. Upon the Fifth Amendment Effective Date, the Aggregate Commitment shall be reduced to $15,000,000, giving effect to the step-down in the Aggregate Commitment required by Section 2.5(b) of the Amended Credit Agreement. The Aggregate Commitment of $15,000,000 shall be subject to (i) further scheduled reductions occurring after November 30, 2002, as required by Section 2.5(b)(ii) of the Amended Credit Agreement, and (ii) any further reductions in the Aggregate Commitment required by Section 2.5(c) of the Amended Credit Agreement from time to time. The Borrower may, but shall not be obligated to, agree (i) with its lenders under the Bank One Agreement that the commitments of such lenders be reduced to an aggregate amount of not less than $15,000,000 as of November 30, 2002, and (ii) with its lenders under the LaSalle Agreement that the commitments of such lenders thereunder be reduced to $15,000,000 as of November 30, 2002. For the avoidance of doubt, (a) any such reductions of the commitments under the Bank One Agreement or the LaSalle Agreement to $15,000,000 shall not cause an additional reduction in the Aggregate Commitment pursuant to Section 2.5(c) of the Amended Credit Agreement; and (b) the Ratable Amount shall not exceed at any time the ratio of the Aggegate Commitment as of the Fifth Amendment Effective Date to the Parallel Agreement Commitments as of the Fifth Amendment Effective Date.

Part 5

Conditions to Effectiveness

This Fifth Amendment shall be and become effective on the Fifth Amendment Effective Date provided that (i) each of the conditions set forth in this Part 5 shall have been satisfied (or satisfaction thereof has been waived by the Agent and the Lenders) on or before November 30, 2002, and (ii) the Required Lenders and the Borrower shall have duly executed counterparts of this Fifth Amendment and provided original copies thereof to the Agent. If the Borrower fails to satisfy each of the conditions set forth in this Part 5 prior to 12:00 p.m. (Eastern time) on November 30, 2002, then, at the option of the Agent and the Lenders, upon notice to the Borrower, this Fifth Amendment shall be null and void.

Section 5.1. Corporate Resolutions. The Agent shall have received a copy of the resolution or resolutions passed by the Board of Directors of the Borrower, certified by the Secretary or an Assistant Secretary of Borrower as being in full force and effect on the date hereof, authorizing the amendments to the Existing Credit Agreement herein provided for and the execution, delivery and performance of this Fifth Amendment and any note or other instrument or agreement required hereunder.

Section 5.2. Authorized Signatories. The Agent shall have received a certificate, signed by the Secretary or an Assistant Secretary of the Borrower, dated as of the date hereof, as to the incumbency of the person or persons authorized to execute and deliver this Fifth Amendment and any instrument or agreement required hereunder on behalf of the Borrower.

Section 5.3. Legal Opinion. The Agent shall have received a legal opinion of senior counsel to the Borrower, in form and content reasonably satisfactory to the Agent, opining that this Fifth Amendment has been duly authorized, executed and delivered by the Borrower and constitutes the valid, binding, and enforceable obligation of the Borrower, except as such enforceability may be subject

to (i) bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally and (ii) general principles of equity.

Section 5.4. Closing Certificate. The Agent shall have received an officer's certificate from the Borrower, executed by either the Chief Executive Officer or the Chief Financial Officer of the Borrower, certifying that after giving effect to this Fifth Amendment, no Default or Unmatured Default will be in existence, such certificate being in form reasonably satisfactory to the Agent.

Section 5.5. Letter Agreement. The Borrower shall have executed, delivered to the Agent and performed its obligations pursuant to the letter agreement, in form and substance acceptable to the Agent, dated on or about the date hereof between the Borrower and the Agent.

Part 6

Miscellaneous

Section 6.1. References to the Credit Agreement. Each reference to the Credit Agreement in the Amended Credit Agreement, the Notes or any of the other instruments, agreements, certificates or other documents executed in connection therewith (collectively, the "Loan Documents"), shall be deemed to be a reference to the Amended Credit Agreement, and as the same may be further amended, restated, supplemented or otherwise modified from time to time in accordance therewith.

Section 6.2. Expenses of Agent. Within seven (7) Business Days of the receipt from the Agent of a detailed bill, the Borrower shall pay all reasonable costs and expenses incurred by the Agent in connection with the preparation, negotiation and execution of the Amended Credit Agreement, this Fifth Amendment and any other Loan Documents executed pursuant hereto and any and all modifications, and supplements thereto, including, without limitation, the reasonable costs and fees of the Agent's legal counsel and any taxes or expenses associated with or incurred in connection with any instrument or agreement referred to herein or contemplated hereby.

Section 6.3. Benefits. This Fifth Amendment shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns.

Section 6.4. GOVERNING LAW. THIS FIFTH AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS, WITHOUT GIVING EFFECT TO CONFLICTS OF LAW PRINCIPLES.

Section 6.5. Effect. Except as expressly herein amended, the terms and conditions of the Existing Credit Agreement shall remain in full force and effect without amendment or modification, express or implied. The entering into this Fifth Amendment by the Lenders shall not be construed or interpreted as an agreement by the Lenders to enter into any future amendment or modification of the Amended Credit Agreement or any of the other Loan Documents.

Section 6.6. Counterparts; Telecopied Signatures. This Fifth Amendment may be executed in any number of counterparts and by different parties to this Fifth Amendment on separate counterparts, each of which when so executed shall be deemed to be an original and shall be binding upon all parties, their successors and assigns, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. Any signature delivered or transmitted by a party by facsimile transmission shall be deemed to be an original signature hereto.

Section 6.7. Integration. This Fifth Amendment, together with the Loan Documents, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Fifth Amendment supersedes all prior drafts and communications with respect thereto. This Fifth Amendment may not be amended except in a writing.

Section 6.8. Further Assurances. The Borrower agrees to take such further actions as the Agent shall reasonably request from time to time in connection herewith to evidence or give effect to the amendments set forth herein or any of the transactions contemplated hereby.

Section 6.9. Section Titles. Section titles and references used in this Fifth Amendment shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreements among the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to be duly executed and delivered as of the date first written above.

	AAR CORP.
	By		/s/ TIMOTHY J. ROMENESKO Timothy J. Romenesko Vice President
	BANK OF AMERICA, N.A., as Agent and Lender
	By		/s/ MICHAEL J. MCKENNEY Michael J. McKenney Managing Director

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EXHIBIT 4.3

EX-4.7 4 a2100508zex-4_7.htm EX-4.7
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EXHIBIT 4.7

FOURTH AMENDMENT TO CREDIT AGREEMENT

This Fourth Amendment (the "Amendment") is dated as of November 30, 2002 and is among AAR CORP., a Delaware Corporation (the "Borrower"), the undersigned Lenders and Bank One, NA (f/k/a The First National Bank of Chicago), having its principal office in Chicago, Illinois, as agent for the Lenders (the "Agent").

W I T N E S S E T H:

WHEREAS, the Borrower, the Lenders and the Agent are parties to that certain Second Amended and Restated Credit Agreement dated as of February 10, 1998 (as previously amended, the "Agreement"); and

WHEREAS, subject to the terms of this Amendment, the Borrower, the undersigned Lenders and the Agent desire to (i) amend the Agreement in certain respects as more fully described below and (ii) change the "Revolving Credit Termination Date" as more fully described below;

NOW, THEREFORE, in consideration of the premises herein contained, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows:

1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to such terms in the Agreement.

2. Amendment.

(a) The definition of "Aggregate Commitment" in Article I of the Agreement is hereby amended and restated in its entirety as follows:

"Aggregate Commitment" means, (i) from December 1, 2002 through the end of business on February 28, 2003, $15,000,000 and (ii) on and after March 1, 2003, $7,500,000.

(b) The definition of "Eurodollar Rate" in Article I of the Agreement is hereby amended and restated in its entirety as follows:

"Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Eurodollar Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base Rate applicable to such Eurodollar Interest Period, divided by (b) one minus the Reserve Requirement (expressed as a decimal) applicable to such Eurodollar Interest Period, plus (ii) the Applicable Margin. As used in this definition, "Applicable Margin" means 2.50%. The Eurodollar Rate shall be rounded to the next higher multiple of 1/16 of 1% if the rate is not such a multiple.

(c): The following defined term is hereby added to Article I of the Agreement in proper alphabetical order:

"Debt Securities" shall mean (i) debt securities issued pursuant to the $200,000,000 Omnibus Shelf Registration for the issuance of debt securities pursuant to Registration Statement Form S-3 under the Securities Act of 1933, as amended, dated May 29, 1998, filed with the United States Securities & Exchange Commission, Registration File No. 333-52853, including (a) the 6.875% interest rate $60,000,000 notes issued by the Borrower and maturing on December 15, 2007, and (b) the 7.25% interest rate $50,000,000 notes issued by the Borrower and maturing on October 15, 2003, (ii) debt securities issued pursuant to the Borrower's Note Purchase Agreement dated as of May 1, 2001, including (a) the 7.98% interest rate $20,000,000 notes issued by the Borrower and maturing on May 15, 2008, and (b) the 8.39% interest rate $55,000,000 notes issued by the Borrower and maturing on May 15, 2011, and (iii) any replacement of the notes issued under clauses (i) and (ii) above.

(d) Section 2.4 of the Agreement is hereby amended and restated in its entirety as follows:

2.4 Fees. The Borrower agrees to pay to the Agent, for the ratable account of the Lenders, a facility fee on the amount of the Aggregate Commitment, for the period from the date hereof to and including the Revolving Credit Termination Date, payable quarterly in advance on each Payment Date hereafter, equal to 0.50% per annum.

(e) Section 6.26 of the Agreement is hereby amended and restated in its entirety as follows:

6.26 Fixed Charge Coverage Ratio. The Borrower will maintain a Fixed Charge Coverage Ratio of not less than (i) 0.50:1.00 as of the last day of the fiscal quarter of the Borrower ended November 30, 2002 and (ii) 0.75:1.00 as of the last day of each fiscal quarter of the Borrower commencing on the quarter ended February 28, 2003 and thereafter. The Fixed Charge Coverage Ratio shall be determined based on four of the previous five fiscal quarters of the Borrower that occurred immediately prior to the calculation date, at the Borrower's option.

As used herein, the following terms have the following meanings:

"Fixed Charge Coverage Ratio" means, for any period, the ratio of (a) Consolidated Earnings Available for Fixed Charges to (b) Consolidated Fixed Charges for such period.

"Consolidated Earnings Available for Fixed Charges" means, for any period, the sum of (i) Consolidated Net Income (excluding gains and losses from the sale of assets other than in the ordinary course of business and income or losses derived from discontinued operations), plus to the extent deducted in determining Consolidated Net Income (ii) all provisions for any federal, state, or other income taxes made by the Borrower and its Subsidiaries during such period, (iii) Consolidated Fixed Charges during such period, and (iv) deferred financing costs for such period.

"Consolidated Fixed Charges" means, without duplication, for any period, the sum of (i) current maturities for such period, (ii) interest expense on indebtedness (excluding capitalized leases) for such period, (iii) total rent expense under all leases other than capitalized leases, and (iv) imputed interest expense under capitalized leases for the Borrower and its Subsidiaries for such period.

(f) A new Section 6.27 is hereby added to the Agreement, which Section 6.27 shall read as follows:

6.27 Debt Securities. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly voluntarily prepay, defease or in substance defease, purchase, redeem, retire or otherwise acquire, any Debt Securities prior to the stated maturity thereof.

3. Revolving Credit Termination Date. The Revolving Credit Termination Date shall now be June 10, 2003.

4. Representations and Warranties. In order to induce the Agent and the undersigned Lenders to enter into this Amendment, the Borrower represents and warrants that:

(a) The representations and warranties set forth in Article V of the Agreement are true, correct and complete on the date hereof as if made on and as of the date hereof and, there exists no Default or Unmatured Default on the date hereof.

(b) The execution and delivery by the Borrower of this Amendment have been duly authorized by proper corporate proceedings of the Borrower and this Amendment, and the Agreement, as amended by this Amendment, constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms, except as

enforceability may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally.

(c) Neither the execution and delivery by the Borrower of this Amendment, nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof will violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on the Borrower or the Borrower's articles or certificate of incorporation or by-laws or the provisions of any indenture, instrument or agreement to which the Borrower is a party or is subject, or by which it or its property, is bound, or conflict with or constitute a default thereunder.

5. Effective Date. This Amendment shall be deemed effective as of November 30, 2002 (the "Effective Date") upon receipt by the Agent of counterparts of this Amendment duly executed by the Borrower and the Lenders.

6. Ratification. The Agreement, as amended hereby, shall remain in full force and effect and is hereby ratified, approved and confirmed in all respects.

7. Reference to Agreement. From and after the Effective Date, each reference in the Agreement to "this Agreement", "hereof", or "hereunder" or words of like import, and all references to the Agreement in any and all agreements, instruments, documents, notes, certificates and other writings of every kind and nature shall be deemed to mean the Agreement, as amended by this Amendment.

8. Costs and Expenses. The Borrower agrees to pay all costs, fees, and out-of-pocket expenses (including attorneys' fees and time charges of attorneys for the Agent, which attorneys may be employees of the Agent) incurred by the Agent in connection with the preparation, execution and enforcement of this Amendment.

9. CHOICE OF 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 NATIONAL BANKS.

10. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

IN WITNESS WHEREOF, the Borrower, the undersigned Lenders and the Agent have executed this Amendment as of the date first above written.

	AAR CORP.
	By:		/s/ TIMOTHY J. ROMENESKO
	Name:		Timothy J. Romenesko
	Title:		Vice President, Treasurer & CFO
	BANK ONE, NA, individually as a Lender and as Agent
	By:		/s/ HENRY W. HOWE
	Name:		Henry W. Howe
	Title:		Officer

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EXHIBIT 4.7

EX-99.1 5 a2100508zex-99_1.htm EX-99.1
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EXHIBIT 99.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the AAR CORP. (the "Company") Quarterly Report on Form 10-Q for the period ending November 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David P. Storch, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 13, 2003

/s/ DAVID P. STORCH

David P. Storch
President and Chief Executive Officer

The foregoing certification is provided solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002.

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EXHIBIT 99.1

EX-99.2 6 a2100508zex-99_2.htm EX-99.2
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EXHIBIT 99.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the AAR CORP. (the "Company") Quarterly Report on Form 10-Q for the period ending November 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Timothy J. Romenesko, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: January 13, 2003

/s/ TIMOTHY J. ROMENESKO

Timothy J. Romenesko
Vice President and Chief Financial Officer

The foregoing certification is provided solely for purposes of complying with the provisions of Section 906 of the Sarbanes-Oxley Act of 2002.

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EXHIBIT 99.2

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