-----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, OCM/kYDo+pXw52oj8BjaNnv0DFAPeSNXrOLAHrY/x7/PyEFVxm+P4VkkO4lQUQwl ECdG39Hs+nj3ijTtNKYuhg== 0001047469-99-032978.txt : 19990819 0001047469-99-032978.hdr.sgml : 19990819 ACCESSION NUMBER: 0001047469-99-032978 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990818 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-K405 SEC ACT: SEC FILE NUMBER: 001-06263 FILM NUMBER: 99695615 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-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 1999 COMMISSION FILE NUMBER 1-6263 AAR CORP. (Exact Name of Registrant as Specified in its Charter) DELAWARE 36-2334820 (State or Other Jurisdiction of (I. R. S. Employer Incorporation or Organization) Identification No.) ONE AAR PLACE, 1100 N. WOOD DALE ROAD, WOOD DALE, ILLINOIS 60191 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (630) 227-2000 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE CHICAGO STOCK EXCHANGE COMMON STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE CHICAGO STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes/X/ No/ / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ At July 31, 1999, the aggregate market value of the Registrant's voting stock held by nonaffiliates was approximately $531,655,581. The calculation of such market value has been made for the purposes of this report only and should not be considered as an admission or conclusion by the Registrant that any person is in fact an affiliate of the Registrant. On July 31, 1999, there were 27,401,304 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The definitive proxy statement relating to the Registrant's Annual Meeting of Stockholders, to be held October 13,1999, is incorporated by reference in Part III to the extent described therein. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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............................... 5 Executive Officers of the Registrant.............................................. 5 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................................................................ 6 Item 6. Selected Financial Data........................................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 8 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................ 14 Item 8. Financial Statements and Supplementary Data....................................... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................... 39 PART III Item 10. Directors and Executive Officers of the Registrant................................ 40 Item 11. Executive Compensation............................................................ 40 Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 40 Item 13. Certain Relationships and Related Transactions.................................... 40 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................. 41 SIGNATURES....................................................................................... 42
1 PART I ITEM 1. BUSINESS (IN THOUSANDS, EXCEPT PERCENTAGE AND EMPLOYEE DATA) AAR CORP. and its subsidiaries are referred to herein collectively as "AAR" or the "Company," unless the context indicates otherwise. The Company was organized in 1955 as the successor to a business founded in 1951 and was reincorporated in Delaware in 1966. The Company is a worldwide leader in supplying aftermarket products and services to the global aviation/aerospace industry. Certain of the Company's aviation-related activities and products are subject to licensing, certification and other requirements imposed by the Federal Aviation Administration (FAA) and other regulatory agencies, both domestic and foreign. The Company believes that it has all licenses and certifications that are material to the conduct of its business. The Company reports its activities in one business segment: Aviation Services. Three classes of similar products and services are included within this segment: (i) Aircraft and Engines, (ii) Airframe and Accessories and (iii) Manufacturing. The Company's Aircraft and Engines activities include (i) the purchase, sale, and lease of new and used commercial jet aircraft, (ii) the purchase, sale and lease of a wide variety of new, overhauled and repaired engines and engine products for the aviation aftermarket, including a broad range of spare engines and engine parts and other engine components and accessories, and (iii) the overhaul, repair and exchange of a wide range of engine parts and components and other engine support services for its commercial and military customers. The Company also provides customized inventory supply and management programs for engine parts and components in support of customer maintenance activities. The Company has two FAA licensed repair stations in the U.S. to perform engine component overhaul services which cover a broad range of internal engine parts and components. The Company also provides turbine engine overhaul and parts supply services to industrial gas and steam turbine operators. The Company's primary sources of aviation products for its Aircraft and Engine activities are domestic and foreign airlines, independent aviation service companies, aircraft leasing companies and original equipment manufacturers. The Company's Airframe and Accessories activities consist of (i) the purchase, sale and lease of new, overhauled and repaired airframe parts and accessories for the aviation aftermarket, and (ii) a wide variety of airframe and accessory parts and components overhaul, as well as repair and exchange services for its commercial, military and general aviation customers. The Company also provides customized inventory supply and management programs for certain airframe parts and components in support of customer maintenance activities. The Company's primary sources of airframe parts for its Airframe and Accessories activities are domestic and foreign airlines, independent aviation service companies and aircraft leasing companies. The Company is also an authorized distributor for more than 200 leading aviation/aerospace product manufacturers. The Company's Airframe and Accessories overhaul and repair capabilities include most commercial aircraft landing gear, a wide variety of avionics, instruments, electrical, electronic, fuel, hydraulic and pneumatic components and a broad range of internal airframe components. AAR also operates an aircraft maintenance facility providing maintenance, modification, special equipment installation, painting services and aircraft terminal services for various models of commercial, military, regional, business and general aviation aircraft. During fiscal 1999, the Company purchased the assets of Tempco Hydraulics, Inc., a regional aircraft landing gear repair and overhaul business. AAR's overhaul and repair of parts and components also support the sale, lease and inventory management activities of the Company. AAR has eight FAA-licensed repair stations in the U.S. and two in Europe to perform airframe/component overhaul services. 2 The Company's Manufacturing activities include (i) the design, manufacture and installation of in-plane cargo loading and handling systems for commercial and military aircraft and helicopters, (ii) the design and manufacture of advanced composite materials for commercial, business and military aircraft, (iii) the manufacture and repair of a wide array of containers, pallets and shelters in support of military and humanitarian rapid deployment activities, (iv) the design and manufacture of a line of specialized protective transport cases that are used to transport sensitive and calibrated tools and instruments, and a variety of vacuum storage containers that protect machinery and equipment during long-term storage. During fiscal 1999, the Company divested substantially all of its assets and related liabilities of its floor maintenance products manufacturing subsidiary. The Company furnishes aviation products and services primarily through its own employees. The principal customers for the Company's products and services are domestic and foreign commercial airlines, regional/commuter airlines, business aircraft operators, aviation original equipment manufacturers, aircraft leasing companies, domestic and foreign military organizations and independent aviation support companies. Sales of aviation products and services to commercial airlines are generally affected by such factors as the number, type and average age of aircraft in service, the levels of aircraft utilization (e.g., frequency of schedules), the number of airline operators and the level of sales of new and used aircraft. The Company is a leading independent supplier of aviation products and services to the highly competitive worldwide aviation/aerospace aftermarket. Competition is based on quality, ability to provide a broad range of products and services, speed of delivery and price. Competitors in the parts supply business include the original equipment manufacturers, commercial airlines, and other independent suppliers of parts and services. In certain of its leasing and commercial jet aircraft trading activities, the Company faces competition from financial institutions, syndicators, commercial and specialized leasing companies and other entities that provide financing. AAR also competes with various repair and overhaul organizations, which include the service arms of original equipment manufacturers, the maintenance departments or divisions of large commercial airlines (some of which also offer maintenance services to third parties) and independent organizations. AAR's pallet, container and shelter manufacturing activities compete with several modest-sized private companies, and its cargo systems competitors include a number of divisions of large corporations. Although certain of the Company's competitors have substantially greater financial and other resources than the Company, the Company believes that it has maintained a satisfactory competitive position through its responsiveness to customer needs, its attention to quality and its unique combination of trading expertise, technical capabilities and financial strength. At May 31, 1999, backlog believed to be firm was approximately $83,600 compared to $107,400 at May 31, 1998. An additional $8,100 of unfunded government options on awarded contracts also existed at May 31, 1999. It is expected that approximately $82,100 of the May 31, 1999 backlog will be shipped in fiscal 2000. 3 Sales to the U.S. Government, its agencies and its contractors were approximately $98,954 (10.8 % of total net sales), $83,114 (10.6% of total net sales) and $82,125 (13.9% of total net sales) in fiscal years 1999, 1998 and 1997, respectively. Because such sales are subject to competitive bidding and government funding, no assurance can be given that such sales will continue at levels previously experienced. The majority of the Company's government contracts are for aviation products and services used for ongoing routine military logistic support activities; unlike weapons systems and other high-technology military requirements, these products and services are less likely to be affected by reductions in defense spending. The Company's contracts with the U.S. Government and its agencies are typically firm agreements to provide aviation products and services at a fixed price and have a term of one year or less, frequently subject to extension for one or more additional periods of one year at the option of the government agency. Although the Company's government contracts are subject to termination at the election of the government, in the event of such a termination the Company would be entitled to recover from the government all allowable costs incurred by the Company through the date of termination. At May 31, 1999, the Company employed approximately 2,900 persons worldwide. For additional information concerning the Company's business segment activities, including classes of similar products and services, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." For information concerning export sales, see "Business Segment Information" in Note 11 of Notes to Consolidated Financial Statements. ITEM 2. PROPERTIES The Company's principal aircraft and engine sales and leasing activities as well as engine and airframe components and aftermarket parts distribution activities are conducted from one building, which is owned by the Company, in Wood Dale, Illinois. In addition to warehouse space, the facility includes executive and sales offices. The Company also owns and operates one building in Elk Grove Village, Illinois for the purpose of the distribution of new aviation parts. Warehouse facilities are leased in Windsor Locks, Connecticut; Hamburg and Hannover, Germany; Nantgarw, Wales; and Brussels, Belgium for the purpose of aviation parts distribution. Aviation overhaul facilities are located in The Netherlands near Schiphol International Airport in a building owned by the Company; Garden City, New York in a building owned by the Company; Frankfort, New York (subject to an industrial revenue bond to the Company until 2001, at which time the Company expects to purchase the facility for nominal consideration); Windsor, Connecticut in a building owned by the Company; Miami, Florida in leased facilities; London, England in leased facilities, and Oklahoma City, Oklahoma in facilities leased from airport authorities. The Company's experience indicates that lease renewal is available on reasonable terms consistent with its business needs. The Company's principal manufacturing activities are conducted at owned facilities in Clearwater, Florida (subject to an industrial revenue bond); Port Jervis, New York; and Cadillac and Livonia, Michigan. The Company believes that its owned and lease facilities are suitable and adequate for its existing business. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material, pending legal proceedings (including any governmental or environmental proceedings) other than routine litigation incidental to its existing business. 4 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. SUPPLEMENTAL INFORMATION: EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning each executive officer of the Company is set forth below:
NAME AGE PRESENT POSITION WITH THE COMPANY - ---- --- --------------------------------- David P. Storch 46 President and Chief Executive Officer; Director Ira A. Eichner 68 Chairman of the Board; Director Philip C. Slapke 46 Executive Vice President Howard A. Pulsifer 56 Vice President; General Counsel; Secretary Timothy J. Romenesko 42 Vice President and Chief Financial Officer
MR. STORCH has been President of the Company since 1989 and Chief Executive Officer since 1996. Previously, he was Chief Operating Officer from 1989 to 1996 and a Vice President of the Company from 1988 to 1989. Mr. Storch joined the Company in 1979 and was President of a major subsidiary from 1984 to 1988. Mr. Storch has been a director of the Company since 1989. Mr. Storch is Mr. Eichner's son-in-law. MR. EICHNER, the founder of the Company, has been Chairman of the Board of the Company since 1973, and an executive officer and director since it was founded in 1955. Mr. Eichner retired as an executive officer and active employee of the Company on May 31, 1999, and is continuing as a director and nonexecutive Chairman of the Board of the Company. Mr. Eichner was the Company's Chief Executive Officer from 1955 until 1996. Mr. Eichner is Mr. Storch's father-in-law. At the July 1999 Board Meeting, the Board of Directors acknowledged the extraordinary contributions to AAR of Ira A. Eichner as he relinquished his role as an executive officer. As founder of the Company, Mr. Eichner's vision, foresight and leadership has resulted in growing AAR into a billion dollar New York Stock Exchange public company, recognized as the pre-eminent product and services provider in the aviation industry. His energetic dedication to the Company's success and to ensuring shareholder value has been unparalleled for more than 48 years. He brought diversity to the Company's capabilities and customer base through a series of strategic acquisitions, creating balance and synergies between its trading, overhaul and manufacturing businesses. He also set a standard of integrity, instilling it into the Company's culture for all employees to emulate. In addition to leading AAR through good times and more difficult periods, achieving profitability every year since the Company's inception, Mr. Eichner emphasized the importance to the Company's future of prudent fiscal management and a strong balance sheet. He built an outstanding management team, paying special attention to successful management planning in order to provide for the Company's ongoing growth. The Board of Directors feel most fortunate that, as a continuing director and nonexecutive Chairman of the Board, Ira Eichner will give his guidance and counsel to the Company's management, sharing his wealth of experience. MR. SLAPKE was elected Executive Vice President of the Company in 1999. From 1994 to 1999, he was a Vice President of the Company. He is also President of a major subsidiary, a position he has held since 1989, and has been with the Company in various positions since 1981. MR. PULSIFER joined the Company as General Counsel in 1987 and has been a Vice President since 1989 and Secretary since 1990. He was previously with United Airlines, Inc. for 14 years, most recently as Senior Counsel. MR. ROMENESKO has been a Vice President and Chief Financial Officer since 1994. Previously he served as Controller of the Company from 1991 to 1995 and in various other positions since joining the Company in 1981. 5 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (IN THOUSANDS, EXCEPT PER SHARE INFORMATION, PERCENTAGE DATA AND NUMBER OF STOCKHOLDERS) The Company's Common Stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. On June 30, 1999, there were approximately 11,000 holders of the Common Stock of the Company, including participants in security position listings. Certain of the Company's debt agreements contain provisions restricting the payment of dividends or repurchase of its shares. See Note 2 of Notes to Consolidated Financial Statements included herein. Under the most restrictive of these provisions, the Company may not pay dividends (other than stock dividends) or acquire its capital stock if, after giving effect to the aggregate amounts paid on or after June 1, 1996, such amounts exceed the sum of $25,000 plus 50% of Consolidated Net Income of the Company after June 1, 1996. At May 31, 1999, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares totaled approximately $18,482. At June 1, 1999, unrestricted consolidated retained earnings increased to $39,318, due to inclusion of 50% of Consolidated Net Income of the Company for fiscal 1999. The table below sets forth for each quarter of the fiscal year indicated the reported high and low market prices of the Company's Common Stock on the New York Stock Exchange and the quarterly dividends declared.
FISCAL 1999 FISCAL 1998 -------------------------------------- ------------------------------------- Per Common Share: Market Prices Quarterly Market Prices Quarterly ----------------------------- --------------------- ---------------------- QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS ------- ---- --- --------- ---- --- --------- First......................... 29 15/16 22 1/8 $.085 25 5/8 20 1/2 $.080 Second........................ 25 3/8 17 3/4 .085 26 1/4 21 13/16 .080 Third......................... 25 3/8 15 .085 32 7/16 24 11/16 .085 Fourth........................ 21 9/16 15 3/8 .085 30 3/8 25 7/8 .085 ----- ----- $.340 $.330 ----- ----- ----- -----
6 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
For the Year Ended May 31, ----------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------- ----------- ----------- ----------- ----------- RESULTS OF OPERATIONS Net sales..................................... $918,036 $782,123 $589,328 $504,990 $451,395 Gross profit.................................. 173,259 148,406 108,541 90,765 77,871 Operating income.............................. 77,381 64,716 42,890 32,442 24,438 Interest expense.............................. 18,567 14,494 10,786 10,616 10,900 Income before provision for income taxes.......................... 59,786 51,157 32,975 22,782 14,713 Net income.................................... 41,671 35,657 23,025 16,012 10,463 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Share data:(1) Earnings per share - basic.................. $ 1.51 $ 1.29 $ .92 $ .67 $ .44 Earnings per share - diluted................ $ 1.49 $ 1.27 $ .91 $ .66 $ .44 Cash dividends per share.................... $ .34 $ .33 $ .32 $ .32 $ .32 Average common shares outstanding - basic.................... 27,549 27,588 25,026(3) 23,967 23,898 Average common shares outstanding - diluted.................. 28,006 28,174 25,399(3) 24,248 23,966 FINANCIAL POSITION Working capital............................... $334,600 $319,252(2) $314,119(3) $258,627 $248,492 Total assets.................................. 726,630 670,559 529,584(3) 437,846 425,814 Short-term debt............................... 420 237(2) 1,474 1,474 1,632 Long-term debt................................ 180,939 177,509(2) 116,818 118,292 119,766 Total debt.................................... 181,359 177,746(2) 118,292 119,766 121,398 Stockholders' equity.......................... 326,035 300,850 269,259(3) 204,635 197,119 Number of shares outstanding at end of year(1).............................. 27,381 27,717 27,306(3) 23,997 23,942 Book value per share of common stock(1).................................. $ 11.91 $ 10.85 $ 9.86 $ 8.53 $ 8.23
- ----------------- Notes: (1) All share and per share information reflects the three-for-two stock split on February 23, 1998. (2) In December 1997, the Company sold $60,000 of unsecured 6.875% Notes due December 15, 2007. (3) In February 1997, the Company sold three million shares of its common stock for $50,075, net of expenses. 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PERCENTAGE DATA) RESULTS OF OPERATIONS The Company reports its activities in one business segment: Aviation Services. The table below sets forth net sales for the Company's classes of similar products and services within this segment for each of the last three fiscal years ended May 31.
FOR THE YEAR ENDED MAY 31, ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Net Sales: Aircraft and Engines.......................... $416,196 $339,299 $263,074 Airframe and Accessories...................... 376,259 333,283 221,433 Manufacturing................................. 125,581 109,541 104,821 -------- -------- -------- $918,036 $782,123 $589,328 -------- -------- -------- -------- -------- --------
THREE-YEAR NET SALES SUMMARY Over the last three fiscal years, consolidated net sales increased as the Company successfully pursued opportunities in the aviation/aerospace market. The Company has broadened the range of products sold, created and maintained long-term strategic supply relationships with customers, and established industry-leading capabilities in inventory asset management programs. The Company has developed a customized portfolio of value-added products and services, such as Internet-based electronic commerce tools, to take advantage of changing market dynamics. Net sales growth during the three-year period also benefited from acquisitions of new-parts distribution and aircraft composites manufacturing businesses, as well as an overall growth in customer base. These factors, coupled with a sustained period of economic growth and profitability in the worldwide aviation/aerospace market, resulted in a net sales increase in all three of the Company's classes of similar products and services over the last three fiscal years. The Company believes that its established global market position, its ability to respond to changes in the industry, including technological changes, and its diverse customer base, position the Company to take advantage of future opportunities in the aviation/aerospace market.* * THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE IDENTIFIED WITH AN ASTERISK (*). PLEASE SEE COMMENTS ON FORWARD-LOOKING STATEMENT RISK FACTORS IN THE "FORWARD-LOOKING STATEMENTS" SECTION ON PAGE 12 . 8 FISCAL 1999 COMPARED WITH FISCAL 1998 Consolidated net sales for fiscal 1999 increased 17.4% to $918.0 million from $782.1 million in fiscal 1998. This increase was attributable to continued strong demand for the Company's broad range of products and services and, among other things, full-year sales from businesses acquired in fiscal 1998. Aircraft and Engines sales increased $76,897 or 22.7% resulting from higher sales of engine parts, driven primarily from strength in inventory management programs, and increased aircraft sales and leasing revenues. These increases were partially offset by the impact of certain engine parts sales which were recorded by Turbine Engine Asset Management L.L.C. (an unconsolidated joint venture company) during fiscal 1999, but were recorded by Aircraft and Engines during the first half of fiscal 1998. Airframe and Accessories sales increased $42,976 or 12.9%, driven primarily by the impact of full-year sales from the new-parts distribution companies acquired during fiscal 1998, as well as increased demand for aircraft maintenance and landing gear overhaul repair capabilities. Manufacturing sales increased $16,040 or 14.6% due to increased sales of products supporting the U.S.Government's rapid deployment program, the inclusion of full-year sales from AAR Composites (acquired in fiscal 1998) and higher sales of cargo handling systems. These gains were partially offset by the unfavorable impact of the divestiture of the Company's floor maintenance products manufacturing subsidiary in November 1998. Consolidated gross profit increased $24,853 or 16.7% due to increased consolidated net sales. The fiscal 1999 consolidated gross profit margin of 18.9% is slightly less than the consolidated gross profit margin of 19.0% of the prior year. Consolidated operating income increased $12,665 or 19.6% over the prior year on the strength of increased sales, partially offset by increased selling, general and administrative expenses. Selling, general and administrative expenses were lower as a percentage of consolidated net sales; however, total expenses increased due to the impact from companies acquired during fiscal 1998, as well as increased marketing support and information technology costs, which include Year 2000 compliance costs. Interest expense increased $4,073 or 28.1% over the prior year primarily due to the full-year effect of the $60 million of unsecured 6.875% Notes issued in December 1997. Consolidated net income increased $6,014 or 16.9% over the prior year as a result of the above-noted factors. 9 FISCAL 1998 COMPARED WITH FISCAL 1997 Consolidated net sales increased $192,795 or 32.7% over the prior fiscal year, reflecting strong demand for the Company's broad range of products and services and the effect of acquisitions during fiscal 1998. Acquisitions, net of prior year dispositions, contributed $77,234 to the sales increase over the prior year. Aircraft and Engines sales increased $76,225 or 29.0%, resulting from higher sales in its engine and engine parts businesses, as well as increased aircraft sales. Airframe and Accessories sales increased $111,850 or 50.5%, driven primarily by sales from the new-parts distribution companies, which were acquired in fiscal 1998, and increased demand for the Company's aircraft maintenance and aircraft component overhaul and repair capabilities. Sales in Manufacturing increased $4,720 or 4.5%, reflecting increased cargo loading and handling system sales and the inclusion of sales from ATR (AAR Composites), which was acquired in October 1997, partially offset by lower sales from products supporting the U.S. Government's rapid deployment program. Consolidated gross profit increased $39,865 or 36.7%, due to increased consolidated net sales and an increase in the consolidated gross profit margin to 19.0% from 18.4% in the prior year. The increase in the consolidated gross profit margin during fiscal 1998 reflected the favorable mix of inventories sold and improved margins in certain manufactured products. Consolidated operating income increased $21,826 or 50.9% over the prior fiscal year as a result of the increase in net sales and the higher gross profit margin, partially offset by increased selling, general and administrative expenses. Selling, general and administrative expenses were lower as a percentage of consolidated net sales; however, total expenses increased principally due to the inclusion of recently acquired companies and increased personnel costs. Interest expense increased $3,708 or 34.4% over the prior year, principally due to the impact of the Company's sale of $60 million of unsecured 6.875% Notes in December 1997. Consolidated net income increased $12,632 or 54.9% over the prior year as a result of the factors previously discussed. FISCAL 1997 COMPARED WITH FISCAL 1996 The Company's operating results showed improvement over the prior fiscal year as it experienced higher demand for its products and services in a strong aviation/aerospace market. Consolidated net sales increased $84,338 or 16.7% over the prior fiscal year reflecting higher sales in the Company's Aircraft and Engines and Airframe and Accessories activities. Consolidated operating income increased $10,448 or 32.2% over the prior year due to increased consolidated net sales and a higher consolidated gross profit margin, partially offset by higher selling, general and administrative costs. Net income increased $7,013 or 43.8%, due to increased consolidated net sales and gross profit margin. Aircraft and Engines sales increased $80,845 or 44.4% over the prior year due to growth in sales of engine parts and engine and aircraft sales and leasing products. Increased volume through the Company's long-term inventory management programs contributed to the sales increase in engine parts. Airframe and Accessories sales increased $18,550 or 9.1%, reflecting increased demand for certain aircraft and aircraft component repair and maintenance services and higher airframe parts sales. Sales in Manufacturing declined $15,057 or 12.6%, resulting from lower demand for products supporting the U.S. Government's rapid deployment program. Consolidated gross profit increased $17,776 or 19.6%, due to increased consolidated net sales and an increase in the consolidated gross profit margin to 18.4% from 18.0% in the prior year. The increase in the consolidated gross profit margin during fiscal 1997 was attributable to the favorable mix of products and services sold through Aircraft and Engines and Airframe and Accessories activities, partially offset by lower margins on certain manufactured products due to lower sales volume. 10 Consolidated operating income increased $10,448 or 32.2% over the prior year as a result of the increase in consolidated net sales and the higher consolidated gross profit margin, partially offset by higher selling, general and administrative costs. The increase in selling, general and administrative costs was driven by increased personnel and marketing support costs. Consolidated net income increased $7,013 or 43.8% over the prior year as a result of the factors discussed above. 11 LIQUIDITY AND CAPITAL RESOURCES At May 31, 1999, the Company's liquidity and capital resources included cash and cash equivalents of $8,250 and working capital of $334,600. At May 31, 1999, the Company's long-term debt-to-capitalization ratio was 35.7%, compared to 37.1% at May 31, 1998. The Company continues to maintain its external sources of financing with $178,800 of unused available bank lines and a shelf registration statement on file with the Securities and Exchange Commission under which up to $200 million of common stock, preferred stock or medium- or long-term debt securities may be issued or sold subject to market conditions. During fiscal 1999, the Company generated $28,525 of cash from operations compared to $22,823 and $9,531 during fiscal 1998 and 1997, respectively. This was principally attributable to increased net income and improved working capital management. During fiscal 1999, the Company's investing activities used $22,893 of cash primarily composed of $36,131 of property, plant and equipment expenditures reflecting the Company's continued investment in new information technology systems and facility expansions; a $6,000 payment made for the Tempco acquisition, which was acquired in October 1998; and a final payment of $9,175 for the acquisition of AVSCO, which was acquired in December 1997, offset by proceeds from the sale of equipment on long-term lease and cash received from the divestiture of the Company's floor maintenance products manufacturing subsidiary of $11,685. During fiscal 1999, the Company's financing activities used $14,602 of cash, reflecting primarily the payment of cash dividends of $9,375 and the purchase of $7,558 of the Company's stock, offset by proceeds of an industrial revenue bond of $2,300. The Company believes that its cash and cash equivalents and available sources of capital will continue to provide the Company with the ability to meet its ongoing working capital requirements, make anticipated capital expenditures, meet contractual commitments and pay dividends.* A summary of key indicators of financial condition and lines of credit follows:
MAY 31, ------------------------ DESCRIPTION 1999 1998 ----------- ---------- ---------- Working capital............................................... $334,600 $319,252 Current ratio................................................. 2.9:1 3.1:1 Bank credit lines: Borrowings outstanding..................................... $ -- $ -- Available but unused lines................................. 178,800 190,970 -------- -------- Total credit lines............................................ $178,800 $190,970 -------- -------- -------- -------- Long-term debt, less current maturities....................... $180,939 $177,509 Ratio of long-term debt to capitalization..................... 35.7% 37.1%
12 YEAR 2000 During fiscal 1997, the Company initiated a comprehensive information technology systems review which resulted in a formal plan to replace and enhance certain of the Company's business application systems to meet current operational requirements and provide for future expansion. These replacement systems are Year 2000 compliant and include new information technology systems in the Company's new-parts distribution business, all of the Company's manufacturing facilities and three of the Company's overhaul facilities. During the third quarter of fiscal 1999, the Company successfully completed the implementation of the replacement systems at its manufacturing facilities. During March 1999, the Company successfully completed the implementation of the replacement system in its new-parts distribution business. The capital outlay associated with the successful implementation of the replacement systems in the manufacturing and new-parts distribution businesses was $8,700, of which $7,600 was paid during the twelve-month period ended May 31, 1999. The Company has expanded and modified its plans to replace the existing systems at its overhaul facilities to include, among other things, purchasing new hardware, upgrading the main existing operating system and converting the existing business application to ensure Year 2000 compliance. The Company believes that the cost of the new hardware and the cost to upgrade the existing operating system to provide for Year 2000 compliance for the overhaul businesses' current systems will be approximately $1,000.* Additional enhancements, which include the implementation of the new systems, may continue into the Year 2000, although the Company anticipates that the business applications supporting the three overhaul facilities will be Year 2000 compliant by October 1999.* In addition to the above, the Company has conducted an extensive Year 2000 compliance review of its internal systems which are not being replaced. Based on this study and program testing, the Company believes that the business applications supporting the Company's trading businesses and certain other overhaul businesses are Year 2000 compliant.* In addition, the Company believes that its existing major financial applications are Year 2000 compliant, although the Company is in the process of upgrading its major financial applications to the most recent version.* In addition to the cost of the business application systems being implemented or enhanced to meet operational requirements, the Company expects to incur other Year 2000 compliance costs unrelated to the replacement systems referenced above. The Company has numerous local-area networks, wide-area networks, servers, voice mail systems and other technical support systems (the "sub-systems"). The Company has completed an inventory of the sub-systems, as well as the compliance status of the sub-systems, and believes that approximately 95% of the sub-systems are Year 2000 compliant.* The Company expects the remaining sub-systems will be Year 2000 compliant by September 30, 1999 at a cost of less than $100.* - ----------------- * See "Forward Looking Statements" section of this item. 13 YEAR 2000 (CONTINUED) As part of its continuing review, the Company has communicated with its material vendors, customers and suppliers regarding their Year 2000 compliance. While the Company is aggressively addressing the Year 2000 issue internally, the compliance status of third parties with which the Company has material relationships is presently unknown and the failure of third parties to be compliant could potentially have an adverse effect on the Company's operations.* The Company believes that the Year 2000 compliance failure of a significant third-party supplier or customer is the most reasonably likely worst case scenario for a Year 2000 failure.* As compliance risks become known for significant third parties, contingency plans will be developed accordingly. FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995 and are identified by an asterisk(*). These forward-looking statements are based on beliefs of Company management, as well as assumptions and estimates based on information currently available to the Company, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated, depending on a variety of factors, including: integration of acquisitions; marketplace competition; implementation of Year 2000 compliant information technology systems and system enhancements; unidentified Year 2000 problems; failure of a third-party supplier, service provider or customer to be Year 2000 compliant; economic and aviation/aerospace market stability and Company profitability. Should one or more of these risks or uncertainties materialize adversely, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk is limited to fluctuating interest rates under its unsecured bank credit agreements, and foreign exchange rates. During fiscal 1999 and 1998, the Company did not utilize derivative financial instruments to offset these risks. At May 31, 1999, $65,300 was available under credit lines with domestic banks, $110,000 was available under revolving credit and term loan agreements with domestic banks, and $3,500 was available under credit agreements with foreign banks (credit facilities). Interest on amounts borrowed under the credit facilities is based on an overnight bid rate. While the Company utilized these credit facilities during fiscal 1999, as of May 31, 1999, there was no outstanding balance. A hypothetical 10 percent increase to the average interest rate under the credit facilities would not have had a material impact on the results of operations for the Company during fiscal 1999. Revenues and expenses of the Company's foreign operations in The Netherlands are translated at average exchange rates during the year and balance sheet accounts are translated at year-end exchange rates. Balance sheet translation adjustments are excluded from the results of operations and are recorded in stockholders' equity as a component of accumulated other comprehensive income (loss). A hypothetical 10 percent devaluation of foreign currencies against the U.S. dollar would not have a material impact on the financial position or results of operations of the Company. - ----------------- * See "Forward Looking Statements" section of this item. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AAR CORP.: We have audited the accompanying consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAR CORP. and subsidiaries as of May 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 1999 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois June 23, 1999 15 AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED MAY 31, ---------------------------------------- 1999 1998 1997 ---------- ---------- ---------- (000S OMITTED EXCEPT PER SHARE DATA) Net sales............................................................ $918,036 $782,123 $589,328 -------- -------- -------- Costs and operating expenses: Cost of sales.................................................. 744,777 633,717 480,787 Selling, general and administrative............................ 95,878 83,690 65,651 -------- -------- -------- 840,655 717,407 546,438 -------- -------- -------- Operating income..................................................... 77,381 64,716 42,890 Interest expense..................................................... (18,567) (14,494) (10,786) Interest income...................................................... 972 935 871 -------- -------- -------- Income before provision for income taxes............................. 59,786 51,157 32,975 Provision for income taxes........................................... 18,115 15,500 9,950 -------- -------- -------- Net income........................................................... $ 41,671 $ 35,657 $ 23,025 -------- -------- -------- -------- -------- -------- Earnings per share of common stock - basic........................... $ 1.51 $ 1.29 $ .92 -------- -------- -------- -------- -------- -------- Earnings per share of common stock - diluted......................... $ 1.49 $ 1.27 $ .91 -------- -------- -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 16 AAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
MAY 31, ---------------------------- 1999 1998 ---------- ---------- (000S OMITTED) Current assets: Cash and cash equivalents.................................................................. $ 8,250 $ 17,222 Accounts receivable........................................................................ 164,302 163,359 Inventories................................................................................ 270,654 229,930 Equipment on or available for short-term leases............................................ 33,845 33,495 Deferred tax assets, deposits and other.................................................... 31,135 24,394 -------- -------- Total current assets.......................................................................... 508,186 468,400 -------- -------- Property, plant and equipment, at cost: Land....................................................................................... 6,331 6,181 Buildings and improvements................................................................. 66,123 57,388 Equipment, furniture and fixtures.......................................................... 111,718 92,142 -------- -------- 184,172 155,711 Accumulated depreciation...................................................................... (80,160) (72,806) -------- -------- 104,012 82,905 -------- -------- Other assets: Investment in leveraged leases............................................................. 34,053 36,533 Equipment on long-term leases.............................................................. -- 24,611 Cost in excess of underlying net assets of acquired companies, net......................... 40,093 26,565 Other...................................................................................... 40,286 31,545 -------- -------- 114,432 119,254 -------- -------- $726,630 $670,559 -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 17 AAR CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
MAY 31, ---------------------------- 1999 1998 ---------- ---------- (000S OMITTED) Current liabilities: Current maturities of long-term debt................................................. $ 420 $ 237 Accounts and trade notes payable..................................................... 129,703 112,980 Accrued liabilities.................................................................. 36,803 29,614 Accrued taxes on income.............................................................. 6,660 6,317 -------- -------- Total current liabilities............................................................... 173,586 149,148 -------- -------- Long-term debt, less current maturities................................................. 180,939 177,509 Deferred tax liabilities................................................................ 44,870 36,850 Other liabilities....................................................................... -- 1,699 Retirement benefit obligation .......................................................... 1,200 4,503 -------- -------- 227,009 220,561 -------- -------- Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares; none issued Common stock, $1.00 par value, authorized 80,000 shares; issued 28,998 and 28,832, respectively.................................................. . 28,998 28,832 Capital surplus...................................................................... 144,095 140,898 Retained earnings.................................................................... 184,529 152,233 Treasury stock, 1,617 and 1,128 shares at cost, respectively......................... (25,463) (16,470) Accumulated other comprehensive income (loss) - cumulative translation adjustments................................................. (6,124) (4,643) -------- -------- 326,035 300,850 -------- -------- $726,630 $670,559 -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 18 AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED MAY 31, 1999
ACCUMULATED COMMON STOCK TREASURY STOCK OTHER ---------------- --------------- CAPITAL RETAINED COMPREHENSIVE COMPREHENSIVE SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) INCOME (LOSS) ------ ------ ------ ------ ------- -------- ------------- ------------- (000S OMITTED) Balance, May 31, 1996 ..................... 16,404 $16,404 406 $ (5,285) $ 83,975 $110,645 $(1,104) Net income ............................... -- -- -- -- -- 23,025 -- $23,025 Cash dividends ........................... -- -- -- -- -- (7,976) -- -- Issuance of common stock ................. 2,000 2,000 -- -- 48,075 -- -- -- Treasury stock ........................... -- -- 322 (8,080) -- -- -- -- Exercise of stock options and stock awards ........................... 528 528 -- -- 8,966 -- -- -- Adjustment for net translation loss ...... (1,914) (1,914) ------- Comprehensive income for fiscal 1997 .... -- -- -- -- -- -- -- $21,111 ------ ------- ----- -------- -------- -------- ------- ------- Balance, May 31, 1997 ..................... 18,932 $18,932 728 $(13,365) $141,016 $125,694 $(3,018) -- Net income ............................... -- -- -- -- -- 35,657 -- $35,657 Cash dividends ........................... -- -- -- -- -- (9,118) -- -- Issuance of common stock ................. -- -- (93) 1,699 1,158 -- Treasury stock ........................... -- -- 126 (4,804) -- -- -- -- Three-for-two stock split ................ 9,589 9,589 367 -- (9,589) Exercise of stock options and stock awards ........................... 311 311 -- -- 8,313 Adjustment for net translation loss ...... -- -- -- -- -- -- (1,625) (1,625) ------- Comprehensive income for fiscal 1998 ..... $34,032 ------ ------- ----- -------- -------- -------- ------- ------- Balance, May 31, 1998 ..................... 28,832 $28,832 1,128 $(16,470) $140,898 $152,233 $(4,643) Net income ............................... -- -- -- -- -- 41,671 -- $41,671 Cash dividends ........................... -- -- -- -- -- (9,375) -- -- Treasury stock ........................... -- -- 489 (8,993) -- -- -- -- Exercise of stock options and stock awards ........................... 166 166 -- -- 3,197 -- -- -- Adjustment for net translation loss ...... -- -- -- -- -- -- (1,481) (1,481) ------- Comprehensive income for fiscal 1999 .... $40,190 ------ ------- ----- -------- -------- -------- ------- ------- Balance, May 31, 1999 ..................... 28,998 $28,998 1,617 $(25,463) $144,095 $184,529 $(6,124) ------ ------- ----- -------- -------- -------- ------- ------- ------ ------- ----- -------- -------- -------- ------- -------
The accompanying notes to consolidated financial statements are an integral part of these statements. 19 AAR CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, ----------------------------------- 1999 1998 1997 ---- ---- ---- (000S OMITTED) Cash flows from operating activities: Net income............................................................. $ 41,671 $ 35,657 $ 23,025 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization..................................... 17,063 14,283 12,287 Deferred taxes.................................................... 10,970 3,780 (80) Change in certain assets and liabilities: Accounts receivable............................................ (6,991) (14,922) (16,333) Inventories.................................................... (46,212) (34,706) (35,930) Equipment on or available for short-term leases................ 3,214 6,664 (3,808) Accounts and trade notes payable............................... 24,659 2,730 25,637 Accrued liabilities and taxes on income........................ (3,933) 16,936 5,935 Other.......................................................... (11,916) (7,599) (1,202) -------- -------- -------- Net cash provided from operating activities......................... 28,525 22,823 9,531 -------- -------- -------- Cash flows from investing activities: Property, plant and equipment expenditures, net........................ (36,131) (17,495) (30,292) Acquisitions, less cash acquired....................................... (15,175) (28,148) -- Proceeds from sale of business......................................... 11,685 -- -- Investment in equipment on long-term leases and leveraged leases....... 23,369 (33,538) 3,299 Notes receivable and other............................................. (6,641) (19,948) (4,975) -------- -------- -------- Net cash used in investing activities............................... (22,893) (99,129) (31,968) -------- -------- -------- Cash flows from financing activities: Proceeds from issuance of long-term notes payable...................... -- 59,347 -- Change in borrowings................................................... 2,053 (10,170) (1,474) Cash dividends......................................................... (9,375) (9,118) (7,976) Purchases of treasury stock............................................ (7,558) -- (1,165) Proceeds from exercise of stock options and other...................... 278 1,642 1,191 Proceeds from common stock offering.................................... -- -- 50,075 -------- -------- -------- Net cash provided from (used in) financing activities............... (14,602) 41,701 40,651 -------- -------- -------- Effect of exchange rate changes on cash................................... (2) 122 (115) -------- -------- -------- Increase (decrease) in cash and cash equivalents.......................... (8,972) (34,483) 18,099 Cash and cash equivalents, beginning of year.............................. 17,222 51,705 33,606 -------- -------- -------- Cash and cash equivalents, end of year.................................... $ 8,250 $ 17,222 $ 51,705 -------- -------- -------- -------- -------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. 20 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AAR CORP. (the Company) supplies a variety of products and services to the worldwide aviation/aerospace industry. Products and services are sold primarily to commercial, domestic and foreign airlines; business aircraft operators; aviation original equipment manufacturers; aircraft leasing companies; domestic and foreign military agencies and independent aviation support companies. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of intercompany accounts and transactions. The Company conducts portions of its business through joint venture investments accounted for under the equity method. These equity affiliates are primarily engaged in the distribution of certain engine parts and aircraft rotable spares to worldwide aviation customers. The financial position and results of operations for the joint ventures during fiscal 1999 and 1998 are not material. REVENUE RECOGNITION Sales and related cost of sales are recognized primarily upon shipment of products and performance of services. Lease revenue is recognized as earned. NEW ACCOUNTING STANDARDS FASB Statement of Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted the provisions of SFAS No. 130 in fiscal 1999. 21 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) NEW ACCOUNTING STANDARDS (CONTINUED) SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for public companies to report financial and descriptive information about reportable operating segments in annual financial statements and interim financial reports issued to stockholders. The Company operates in one segment: Aviation Services. The Company's determination of its reportable segment is based on the commonalities among the products and services within its Aviation Services segment, and is consistent with the manner in which the Company's management reviews and evaluates operating performance. SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" is effective for fiscal years beginning after December 15, 1997. SFAS No. 132 revises disclosures for pension and other postretirement plans, but does not change the measurement or recognition of liabilities or expense related to pension or other postretirement plans. The Company adopted the provisions of SFAS No. 132 in fiscal 1999. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accounts (ACSEC) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In April 1998, the ACSEC issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." The adoption of SOP 98-1 and SOP 98-5 did not have a material effect on the Company's financial position or results of operations during fiscal 1999. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for certain hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company is evaluating the new Statement's provisions to determine the impact, if any, and will adopt SFAS No. 133 in its first quarter of fiscal 2002. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents. At May 31, 1999 and 1998, cash equivalents of approximately $116 and $177, respectively, represent investments in funds holding high-quality commercial paper, Eurodollars and U.S. Government agency-issued securities. The carrying amount of cash equivalents approximates fair value at May 31, 1999 and 1998, respectively. TRANSFER OF FINANCIAL ASSETS During fiscal 1998, the Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which requires the Company to recognize the financial and servicing assets it controls and the liabilities it has incurred, and to derecognize financial assets when control has been surrendered. During fiscal 1999, the Company amended its agreement to sell, on a revolving basis, an interest in a defined pool of trade accounts receivable. Among the terms amended, the amount of accounts receivable which could be sold under the program was reduced from $50 million to $35 million. The Company, as agent for the purchaser of the accounts receivable, retains collection and administrative responsibilities for the participating interests of accounts receivable. Accounts receivable sold under this arrangement were $25,300 and $0 at May 31, 1999 and 1998, respectively. 22 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) FOREIGN CURRENCY Gains and losses on foreign currency translation and foreign exchange contracts are determined in accordance with the method of accounting prescribed by SFAS No. 52. All balance sheet accounts of foreign and certain domestic subsidiaries transacting business in currencies other than the Company's functional currency are translated at year-end or historical exchange rates. Revenues and expenses are translated at average exchange rates during the year. Translation adjustments are excluded from the results of operations and are recorded in Stockholders' equity as a component of accumulated other comprehensive income (loss). FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF MARKET OR CREDIT RISK Financial instruments that potentially subject the Company to concentrations of market or credit risk consist principally of trade receivables. While the Company's trade receivables are diverse based on the number of entities and geographic regions, the majority are in the aviation/aerospace industry. The Company performs evaluations of customers' financial condition prior to extending credit privileges and performs ongoing credit evaluations of payment experience, current financial condition and risk analysis. The Company typically requires collateral in the form of security interest in assets, letters of credit, and/or obligation guarantees from financial institutions, or sells its receivables, usually on a nonrecourse basis, for transactions other than normal trade terms. SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" requires disclosure of the fair value of certain financial instruments. Cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and accrued liabilities are reflected in the consolidated financial statements at fair value because of the short-term maturity of these instruments. The carrying value of noncurrent notes receivable and long-term debt bearing a variable interest rate approximates fair market value. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. INVENTORIES Inventories are priced at the lower of cost or market. Cost is determined by either the specific identification, average cost or first-in, first-out method. The following is a summary of inventories:
MAY 31, ------------------------------- 1999 1998 --------------- ------------ Raw materials and parts............................................. $ 50,352 $ 46,573 Work-in-process..................................................... 12,733 15,787 Purchased aircraft, parts, engines and components held for sale..................................................... 207,569 166,140 Finished goods...................................................... -- 1,430 -------- -------- $270,654 $229,930 -------- -------- -------- --------
23 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) EQUIPMENT UNDER OPERATING LEASES Lease revenue is recognized as earned. The cost of the asset under lease is original purchase price plus overhaul costs. Depreciation is computed on a straight-line method over the estimated service life of the equipment and maintenance costs are expensed as incurred. The balance sheet classification is based on the lease term with fixed-term leases less than twelve months classified as short term and all others classified as long term. Equipment on short-term lease consists of aircraft engines and parts on or available for lease to satisfy customers' immediate short-term requirements. The leases are renewable with fixed terms, which generally vary from one to twelve months. Equipment on long-term lease consists of aircraft and engines on lease to customers with a lease term greater than twelve months. PROPERTY, PLANT AND EQUIPMENT Depreciation is computed on the straight-line method over useful lives of 10-40 years for buildings and improvements and 3-10 years for equipment, furniture and fixtures and capitalized software. Leasehold improvements are amortized over the shorter of the estimated useful life or the term of the applicable lease. Repairs and maintenance expenditures are expensed as incurred. Upon sale or disposal, cost and accumulated depreciation are removed from the accounts and related gains and losses are included in results of operations. LEVERAGED LEASES The Company acts as an equity participant in leveraged lease transactions. The equipment cost in excess of equity contribution is financed by third parties in the form of secured debt. Under the lease agreements, the third parties have no recourse against the Company for nonpayment of the obligations. The third-party debt is collateralized by the lessees' rental obligations and the leased equipment. The Company has ownership rights to the leased assets and is entitled to the investment tax credits and benefits of tax deductions for depreciation on the leased assets and for interest on the secured debt financing. COST IN EXCESS OF UNDERLYING NET ASSETS OF ACQUIRED COMPANIES The cost in excess of underlying net assets of acquired companies is being amortized over a period of forty years. The increase in cost in excess of underlying net assets of acquired companies at May 31, 1999 is attributable to the Company's acquisition of Tempco during fiscal 1999, as well as final purchase price adjustments related to acquisitions made during fiscal 1998. Amortization expense was $802, $565 and $223 in fiscal 1999, 1998 and 1997, respectively. Accumulated amortization is $4,975 and $4,173 at May 31, 1999 and 1998, respectively. The Company evaluates the existence of impairment on the basis of whether the cost in excess of underlying net assets of acquired companies is fully recoverable from projected, undiscounted net cash flows. 24 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) INCOME TAXES Income taxes are determined in accordance with SFAS No. 109. The benefits of investment tax credits are recognized for financial reporting purposes under the deferral method of accounting for leveraged leases. The investment tax credits are recognized in the year earned for income tax purposes. STATEMENTS OF CASH FLOWS Supplemental information on cash flows follows:
FOR THE YEAR ENDED MAY 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Interest paid............................................. $18,800 $11,600 $10,500 Income taxes paid......................................... 4,400 6,200 8,600 Income tax refunds and interest received.................. 900 6,000 500
USE OF ESTIMATES Management of the Company has made estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year's presentation. 25 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 2. FINANCING ARRANGEMENTS Term loans consisted of:
MAY 31, ----------------------------------- 1999 1998 1997 ---------- ---------- ---------- Current maturities of long-term debt.......................... $ 420 $ 237 $ 1,474 ----- ----- ------- ----- ----- -------
Short-term borrowing activity was as follows:
FOR THE YEAR ENDED MAY 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Maximum amount borrowed..................................... $92,300 $59,200 $25,300 Average daily borrowings.................................... 45,455 20,689 3,624 Average interest rate during the year....................... 5.4% 6.0% 5.8% ------- ------- -------
At May 31, 1999, aggregate unsecured bank credit arrangements were $178,800. Of this amount, $65,300 was available under credit lines with domestic banks, $110,000 was available under revolving credit and term loan agreements with domestic banks and $3,500 was available under credit agreements with foreign banks. All domestic and foreign credit lines were unused at May 31, 1999. There are no compensating balance requirements in connection with domestic or foreign lines of credit. Borrowings under domestic bank lines bear interest at or below the corporate base rate. The Company may borrow a maximum of $110,000 (available through February 9, 2002) under revolving credit and term loan agreements with domestic banks. Revolving credit borrowings may, at the Company's option, be converted to term loans payable in equal quarterly installments over five years. Interest is based on corporate base rate or quoted Eurodollar or multicurrency rates during the revolving credit period and 1/2% over corporate base rate or quoted Eurodollar rate thereafter. There were no borrowings under these agreements outstanding at May 31, 1999. There are no compensating balance requirements on any of the committed lines, but the Company is required to pay a commitment fee. There are no restrictions on the withdrawal or use of these funds. 26 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 2. FINANCING ARRANGEMENTS -- (CONTINUED) Long-term debt was as follows: MAY 31, -------------------------- 1999 1998 ---------- ---------- Notes payable due November 1, 2001 with interest of 9.5% payable semi-annually on May 1 and November 1.................................. $ 65,000 $ 65,000 Notes payable due October 15, 2003 with interest of 7.25% payable semi-annually on April 15 and October 15............................... 50,000 50,000 Notes payable due December 15, 2007 with interest of 6.875% payable semi-annually on June 15 and December 15............................... 60,000 60,000 Industrial revenue bonds due in quarterly installments to 2011 with weighted average interest of approximately 3.45% at May 31, 1999 (secured by trust indentures on property, plant and equipment)................................... 2,358 2,543 Industrial revenue bonds due in installments to 2002 with weighted average interest of approximately 6.62% at May 31, 1999 (secured by trust indentures on property, plant and equipment)............................. 141 203 Industrial revenue bonds due in monthly installments to 2019 with interest of 5.65% (secured by trust indentures on property, plant and equipment)..................................................................... 2,235 -- Note payable due in annual installments to October 2003 with interest of 6.5%............................................................... 1,625 -- -------- -------- 181,359 177,746 Current maturities.............................................................. (420) (237) -------- -------- $180,939 $177,509 -------- -------- -------- --------
The Company is subject to a number of covenants under the revolving credit and term loan agreements, including restrictions which relate to the payment of cash dividends, maintenance of minimum net working capital and tangible net worth levels, sales of assets, additional financing, purchase of the Company's shares and other matters. The Company is in compliance with all restrictive financial provisions of the agreements. At May 31, 1999, unrestricted consolidated retained earnings available for payment of dividends and purchase of the Company's shares was approximately $18,482. Effective June 1, 1999, unrestricted consolidated retained earnings increased to $39,318 due to inclusion of 50% of the consolidated net income of the Company for fiscal 1999. The aggregate amount of long-term debt maturing during each of the next five fiscal years is $521 in 2000, $524 in 2001, $65,499 in 2002, $475 in 2003 and $51,479 in 2004. The Company's long-term debt was estimated to have a fair value of approximately $185,639 at May 31, 1999 and was based on estimates using discounted future cash flows at an assumed rate for borrowings currently prevailing in the marketplace for similar instruments. 27 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 3. INCOME TAXES The provision for income taxes included the following components:
FOR THE YEAR ENDED MAY 31, ------------------------------------------ 1999 1998 1997 ----------- ----------- ---------- Current Federal.............................................. $ 6,045 $ 9,950 $ 8,605 Foreign............................................. -- 720 535 State............................................... 1,100 1,050 890 ------- ------- ------- $ 7,145 $11,720 $10,030 Deferred................................................. 10,970 3,780 (80) ------- ------- ------- $18,115 $15,500 $ 9,950 ------- ------- ------- ------- ------- -------
The deferred tax provisions result primarily from differences between financial reporting and tax income arising from depreciation and leveraged leases. Deferred tax liabilities and assets result primarily from the differences in the timing of the recognition for transactions between financial reporting and income tax purposes and consist of the following components:
MAY 31, ----------------------- 1999 1998 ---------- ---------- Deferred tax liabilities: Depreciation............................................... $16,920 $ 9,770 Leveraged leases........................................... 27,440 26,980 Other...................................................... 620 300 ------- ------- Total deferred tax liabilities............................. $44,980 $37,050 ------- ------- ------- ------- Deferred tax assets-current: Inventory costs............................................ $ 3,090 $ 5,420 Employee benefits.......................................... 2,410 2,540 Doubtful account allowance................................. -- 130 Other...................................................... 390 750 ------- ------- Total deferred tax assets-current.......................... $ 5,890 $ 8,840 ------- ------- Deferred tax assets-noncurrent: Postretirement benefits.................................... $ 110 $ 200 ------- ------- Total deferred tax assets-noncurrent....................... 110 200 ------- ------- Total deferred tax assets.................................. $ 6,000 $ 9,040 ------- ------- ------- ------- Net deferred tax liabilities................................... $38,980 $28,010 ------- ------- ------- -------
28 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 3. INCOME TAXES -- (CONTINUED) The Company has determined that the realization of deferred tax assets is more likely than not, and that a valuation allowance is not required based upon the Company's history of prior operating earnings, its expectations for continued future earnings and the scheduled reversal of deferred tax liabilities, primarily related to leveraged leases, which exceed the amount of the deferred tax assets. The provision for income taxes differs from the amount computed by applying the U.S. Federal statutory income tax rate of 35% for fiscal 1999, 1998 and 1997, for the following reasons:
FOR THE YEAR ENDED MAY 31, ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Provision for income taxes at the Federal statutory rate................ $20,925 $17,905 $11,540 Tax benefits on exempt earnings from export sales..................... (3,690) (3,100) (2,000) State income taxes, net of Federal benefit and refunds................ 900 900 800 Amortization of goodwill.............................................. 280 200 80 Differences between foreign tax rates and the U.S. Federal statutory rate...................................................... -- (200) (200) Other, net............................................................ (300) (205) (270) ------- ------- ------- Provision for income taxes as reported.................................. $18,115 $15,500 $ 9,950 ------- ------- ------- ------- ------- ------- Effective income tax rate................................................ 30.3% 30.3% 30.2% ------- ------- ------- ------- ------- -------
4. COMMON STOCK AND STOCK OPTION PLANS The Company has established stock option plans for officers and key employees of the Company. Stock option awards typically expire ten years from the date of grant or earlier upon termination of employment, become excercisable in five equal increments on successive grant anniversary dates at the New York Stock Exchange closing stock price on the date of grant and are accompanied by reload features and, for certain individuals, stock rights exercisable in the event of a change in control of the Company. The Company accounts for these plans under APB No. 25, under which no compensation cost has been recognized. Proforma information regarding net income and earnings per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of each option grant, including reloads, is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
STOCK OPTIONS GRANTED IN FISCAL YEAR ------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Risk-free interest rate.................................................... 5.74% 5.97% 6.40% Expected volatility of common stock........................................ 31.6% 25.5% 24.0% Dividend yield............................................................. 1.8% 2.0% 2.4% Expected option term in years.............................................. 4.0 4.0 3.6
The fair value weighted average per share of stock options granted during fiscal years 1999, 1998 and 1997 was $5.20, $5.04 and $4.57, respectively. Had compensation cost for stock options awarded under the plans been determined in accordance with SFAS No. 123, the Company's net income and earnings per share would have been changed to the following proforma amounts: 29 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 4. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED)
1999 1998 1997 ---- ---- ---- Net income: As reported $41,671 $35,657 $23,025 Proforma 40,403 34,478 22,158 Earnings per share - basic: As reported 1.51 1.29 .92 Proforma 1.47 1.25 .89 Earnings per share - diluted: As reported 1.49 1.27 .91 Proforma 1.44 1.22 .87
A summary of changes in stock options granted to officers, key employees and non-employee directors under stock option plans for the three years ended May 31, 1999 follows:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE --------------- ------------------ Outstanding, May 31, 1996 (745 exercisable).......................... 1,711 $ 9.45 Granted........................................................ 935 15.50 Exercised...................................................... (624) 8.79 Surrendered/expired/cancelled.................................. (44) 11.19 ----- Outstanding, May 31, 1997 (664 exercisable).......................... 1,978 $12.48 Granted........................................................ 891 23.57 Exercised...................................................... (339) 11.32 Surrendered/expired/cancelled.................................. (46) 16.17 ----- Outstanding, May 31, 1998 (785 exercisable).......................... 2,484 $16.54 Granted........................................................ 827 19.41 Exercised...................................................... (71) 11.95 Surrendered/expired/cancelled.................................. (64) 18.53 ----- Outstanding, May 31, 1999 (1,148 exercisable)........................ 3,176 $17.36 ----- -----
The following table provides additional information regarding options outstanding as of May 31,1999:
WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE OPTION EXERCISE OPTIONS REMAINING CONTRACTUAL OPTIONS EXERCISE PRICE OF PRICE RANGE OUTSTANDING LIFE OF OPTIONS (YEARS) EXERCISABLE OPTIONS EXERCISABLE --------------------- ------------- ----------------------- ----------------- -------------------- $ 6.13 - 12.25 727 5.1 517 $ 9.55 $12.26 - 18.38 1,332 7.7 402 15.33 $18.39 - 24.50 1,033 8.3 155 22.39 $24.51 - 30.63 84 5.6 74 27.05 ------ ----- 3,176 7.3 1,148 $14.43 ------ ----- ------ -----
The AAR CORP. Stock Benefit Plan also provides for the grant of restricted stock awards. Restrictions are released at the end of applicable restricted periods. The number of shares and the restricted period, which varies from two to ten years, are determined by the Compensation Committee of the Board of Directors. The market value of the award on the date of grant is recorded as a deferred expense, Common stock and Capital surplus. The deferred expense is included in results of operations over the vesting period. The expense relating to outstanding restricted stock awards was $1,667, $1,400 and $1,054 in fiscal 1999, 1998 and 1997, respectively. 30 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 4. COMMON STOCK AND STOCK OPTION PLANS -- (CONTINUED) The AAR CORP. Employee Stock Purchase Plan is open to employees of the Company (other than officers, directors or participants in other stock option plans of the Company) and permits employees to purchase common stock in periodic offerings by payroll deductions. The numbers of options and awards outstanding and available for grant or issuance for each of the Company's stock plans are as follows:
MAY 31, 1999 ----------------------------------------- OUTSTANDING AVAILABLE TOTAL --------------- ------------- --------- Stock Benefit Plan (officers, directors and key employees)...................................................... 3,544 1,107 4,651 Employee Stock Purchase Plan........................................ 67 115 182
Pursuant to a shareholder rights plan adopted in 1997, each outstanding share of the Company's common stock carries with it a Right to purchase one and one half additional shares at a price of $83.33 per share (adjusted to reflect the February 23, 1998 stock split and subject to further antidilution adjustments). The Rights become exercisable (and separate from the shares) when certain specified events occur, including the acquisition of 15% or more of the common stock by a person or group (an "Acquiring Person") or the commencement of a tender or exchange offer for 15% or more of the common stock. In the event that an Acquiring Person acquires 15% or more of the common stock, or if the Company is the surviving corporation in a merger involving an Acquiring Person or if the Acquiring Person engages in certain types of self-dealing transactions, each Right entitles the holder to purchase for $83.33 per share, (or the then-current exercise price) shares of the Company's common stock having a market value of $166.66 (or two times the exercise price), subject to certain exceptions. Similarly, if the Company is acquired in a merger or other business combination or 50% or more of its assets or earning power is sold, each Right entitles the holder to purchase at the then-current exercise price that number of shares of common stock of the surviving corporation having a market value of two times the exercise price. The Rights, which do not entitle the holder thereof to vote or to receive dividends, replace the common stock purchase rights which were initially distributed to the Company's shareholders in 1987 and which expired by their own terms on August 6, 1997. The Rights will expire on August 6, 2007, and may be redeemed by the Company for $.01 per Right under certain circumstances. On September 21, 1990, the Board of Directors authorized the Company to purchase up to 1,500 shares (adjusted for the three-for-two stock split) of the Company's common stock on the open market or through privately negotiated transactions. As of May 31, 1999, the Company had purchased 1,083 shares of its common stock on the open market under this program at an average price of $12.46 per share. 31 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 5. EARNINGS PER SHARE The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the year. Diluted earnings per share is based on the weighted average number of common shares outstanding during the year plus, when their effect is dilutive, common stock equivalents consisting of shares subject to stock options. The following table provides a reconciliation of the computations of basic and diluted earnings per share information for each of the years in the three-year period ended May 31, 1999.
MAY 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- BASIC EPS Net income ........................................................ $41,671 $35,657 $23,025 Average common shares outstanding ................................. 27,549 27,588 25,026 Earnings per share-basic .......................................... $ 1.51 $ 1.29 $ 0.92 ------- ------- ------- ------- ------- ------- DILUTED EPS Net Income ........................................................ $41,671 $35,657 $23,025 Average common shares outstanding ................................. 27,549 27,588 25,026 Additional shares due to hypothetical exercise of stock options ....................................... 457 586 373 Earnings per share-diluted ........................................ $ 1.49 $ 1.27 $ 0.91 ------- ------- ------- ------- ------- -------
In January 1998, the Board of Directors declared a three-for-two stock split which was effected in the form of a stock dividend on February 23, 1998 to shareholders of record February 2, 1998, and a quarterly cash dividend of 8.5 cents per share on the increased shares, which effectively increased the cash dividend payment by 6.25%. Prior year earnings per share amounts have been restated to reflect the three-for-two stock split. 6. EMPLOYEE BENEFIT PLANS The Company has defined contribution or defined benefit plans covering substantially all full-time domestic employees and certain employees in The Netherlands. DEFINED BENEFIT PLANS The pension plans for domestic, salaried employees have benefit formulas primarily based on years of service and compensation. The pension benefit for hourly employees is generally based on a fixed amount per year of service. The Company follows the provisions of SFAS No. 87 "Employers' Accounting for Pensions" and SFAS No. 132 "Employer's Disclosures about Pension and Other Postretirement Benefits" for all pension and postretirement plans. 32 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The Company's funding policy for domestic plans is to contribute annually, at a minimum, an amount which is deductible for Federal income tax purposes and that is sufficient to meet actuarially computed pension benefits. Contributions are intended to provide for benefits attributed to service to date and for benefits expected to be earned in the future. The assets of the pension plans are invested primarily in mutual funds, common stocks, investment grade bonds and U.S. Government obligations. Certain foreign operations of domestic subsidiaries also have pension plans. In most cases, the plans are defined benefit in nature. Assets of the plans are comprised of insurance contracts. Benefit formulas are similar to those used by domestic plans. It is the policy of these subsidiaries to fund at least the minimum amounts required by local law and regulation. The following table sets forth the plans' funded status, including the change in plan assets, and the amount recognized in the Company's Consolidated Balance Sheets.
MAY 31 ---------------------------- 1999 1998 ---------- ---------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year........................ $46,384 $38,340 Service cost................................................... 2,315 1,643 Interest cost.................................................. 3,334 3,011 Plan participants' contributions............................... 171 170 Net actuarial (gain)loss....................................... (25) 4,852 Benefits paid.................................................. (1,850) (1,632) Other.......................................................... (175) -- ------- ------- Benefit obligation at end of year.................................. 50,154 46,384 ------- ------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year................ 42,286 35,452 Actual return on plan assets.................................. 2,725 5,324 Employer contributions........................................ 764 2,972 Plan participants' contributions.............................. 171 170 Benefits paid................................................. (1,850) (1,632) ------- ------- Fair value of plan assets at end of year........................... 44,096 42,286 ------- ------- Funded status................................................. (6,058) (4,098) Unrecognized actuarial losses................................. 6,904 6,807 Unrecognized prior service cost............................... 966 1,103 Unrecognized transitional obligation.......................... 521 618 ------- ------- Prepaid pension costs.............................................. $ 2,333 $ 4,430 ------- ------- ------- -------
33 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The projected benefit obligation for domestic plans is determined using an assumed weighted average discount rate of 7.5% for fiscal 1999 and 1998, and an assumed average compensation increase of 5.0%. The expected long-term rate of return on assets is 10.0% for fiscal 1999 and 1998. The unrecognized actuarial losses, prior service cost and transition obligation are amortized on a straight-line basis over the estimated average future service period. The projected benefit obligation for nondomestic plans is determined using an assumed weighted average discount rate of 5.5% for fiscal 1999 and 1998, and an assumed average compensation increase of 2.0% for the first two years and 4.0% thereafter. The expected long-term rate of return on assets is 6.5% for fiscal 1999 and 1998. Pension expense charged to results of operations includes the following components:
MAY 31 ---------------------------------- 1999 1998 1997 --------- ---------- ---------- Service cost .................................................... $ 2,315 $ 1,643 $ 1,455 Interest cost ................................................... 3,334 3,011 2,785 Expected return on plan assets .................................. (3,560) (3,165) (2,904) Amortization of prior service cost .............................. 138 138 138 Recognized net actuarial loss ................................... 412 173 181 Transitional obligation ......................................... 92 93 92 ------- ------- ------- $ 2,731 $ 1,893 $ 1,747 ------- ------- ------- ------- ------- -------
DEFINED CONTRIBUTION PLAN The defined contribution plan is a profit sharing plan which is intended to qualify as a 401(k) plan under the Internal Revenue Code. Under the plan, employees may contribute up to 15.0% of their pretax compensation, subject to applicable regulatory limits. The Company may make matching contributions up to 6.0% of compensation. Participants vest on a pro-rata basis in Company contributions during the first three years of employment. Expense charged to results of operations was $1,491, $1,174 and $930 in fiscal 1999, 1998 and 1997, respectively. DIRECTOR, EXECUTIVE AND KEY EMPLOYEE RETIREMENT BENEFIT AND PROFIT SHARING PLANS The Company provides its outside directors with benefits upon retirement on or after age 65 provided they have completed at least five years of service as a director. Benefits are paid quarterly in cash in an amount equal to 25.0% of the annual retainer fee payable by the Company to active outside directors. Payment of benefits commences upon retirement and continues for a period equal to the total number of years of the retired director's service as a director to a maximum of ten years, or death, whichever occurs first. 34 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) The Company also provides supplemental retirement and profit sharing benefits for current and former executives and key employees to supplement benefits provided by the Company's other benefit plans. The plans are not fully funded and may require funding in the event of a change in control of the Company as determined by the Company's Board of Directors. Expense charged to results of operations for these plans was $1,162, $1,231 and $970 in fiscal 1999, 1998 and 1997, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides health and life insurance benefits for certain eligible employees and retirees under a variety of plans. Generally these benefits are contributory with retiree contributions adjusted annually. The postretirement plans are unfunded and the Company has the right to modify or terminate any of these plans in the future, in certain cases, subject to union bargaining agreements. In fiscal 1995, the Company completed termination of postretirement healthcare and life insurance benefits attributable to future services of collective bargaining and other domestic employees. Postretirement benefit cost for the years ended May 31, 1999, 1998 and 1997 included the following components:
1999 1998 1997 ---- ---- ---- Service cost ........................................................ $-- $-- $-- Interest cost ....................................................... 96 89 85 --- --- --- $96 $89 $85 --- --- --- --- --- --- The funded status of the plans at May 31, 1999 and 1998 was as follows: 1999 1998 ------ ------ CHANGE IN BENEFIT OBLIGATIONS: Benefit obligations at beginning of year ......................... $1,354 $1,138 Interest cost .................................................... 96 89 Benefits paid .................................................... (240) (216) Unrecognized actuarial loss ...................................... 108 214 Plan participants' contributions ................................. 145 129 ------ ------ Benefit obligation at end of year ................................... 1,463 1,354 ------ ------ CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year ................... -- -- Company contributions ............................................ 95 87 Benefits paid .................................................... (240) (216) Plan participants' contributions ................................. 145 129 ------ ------ Fair value of plan assets at end of year ............................ -- -- ------ ------
35 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 6. EMPLOYEE BENEFIT PLANS -- (CONTINUED) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) Funded status ............................................................... $(1,463) $(1,354) Unrecognized actuarial (gains)losses ........................................ 53 (72) Unrecognized prior service cost ............................................. 210 226 ------- ------- Accrued postretirement costs .................................................. $(1,200) $(1,200) ------- ------- ------- -------
The assumed discount rate used to measure the accumulated postretirement benefit obligation was 7.5% at May 31, 1999 and 1998. The assumed rate of future increases in healthcare costs was 7.5% and 8.1% in fiscal 1999 and 1998, respectively, declining to 5.25% by the year 2004 and remaining at that rate thereafter. A one percent increase in the assumed healthcare cost trend rate would increase the accumulated postretirement benefit obligation by approximately $43 as of May 31, 1999 and would not result in a significant change to the annual postretirement benefit expense. 7. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities and equipment under agreements that expire at various dates through 2011. Rental expense under these leases was $9,843, $6,991 and $6,660 in fiscal 1999, 1998 and 1997, respectively. Future minimum payments under leases with initial or remaining terms of one year or more at May 31, 1999 were $11,222 for fiscal 2000, $3,526 for fiscal 2001, $2,836 for fiscal 2002, $1,925 for fiscal 2003 and $2,298 for fiscal 2004 and thereafter. The Company routinely issues letters of credit, performance bonds or credit guarantees in the ordinary course of its business. These instruments are typically issued in conjunction with insurance contracts or other business requirements. The total of these instruments outstanding at May 31, 1999 was approximately $22,700. The Company is involved in various claims and legal actions, including environmental matters, arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial condition or results of operations. 36 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 8. INVESTMENT IN LEVERAGED LEASES From time to time, the Company acquires aircraft under lease that qualify for leveraged lease accounting treatment. Typically, these are long-term leases of late-model aircraft operated by major carriers where the Company is an equity participant of at least twenty percent and there is a third-party provider of nonrecourse debt of the remaining equipment cost. During the lease term the Company is required, in accordance with SFAS No. 13, to adjust the elements of the investment in leveraged leases to reflect changes in important economic assumptions, such as the renegotiating of the interest rate on the nonrecourse debt or changes in income tax rates. In addition, the Company may sell options or other rights to the residual proceeds over the book value at the end of the lease term. The Company's net investment in leveraged leases is comprised of the following elements:
FOR THE YEAR ENDED MAY 31, ------------------------ 1999 1998 ---------- ---------- Rentals receivable (net of principal and interest on the nonrecourse debt)..................................... $ 15,681 $ 25,889 Estimated residual value of leased assets.................... 32,952 33,952 Unearned and deferred income................................. (14,580) (23,308) -------- -------- 34,053 36,533 Deferred taxes............................................... (27,440) (26,980) -------- -------- Net investment in leveraged leases........................... $ 6,613 $ 9,553 -------- -------- -------- --------
Pretax income from leveraged leases was $702, $1,329 and $0 in fiscal 1999, 1998 and1997, respectively. 9. OTHER NONCURRENT ASSETS At May 31, 1999 and 1998, other noncurrent assets consisted of the following:
MAY 31, ------------------------ 1999 1998 ---------- ---------- Investment in joint ventures................................. $18,509 $13,805 Notes receivable............................................. 7,130 3,676 Prepaid pension costs........................................ 2,333 4,430 Cash surrender value of life insurance....................... 1,884 986 Debt issuance costs.......................................... 1,028 1,296 Other........................................................ 9,402 7,352 ------- ------- $40,286 $31,545 ------- ------- ------- -------
37 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 10. ACQUISITIONS On October 19, 1998, the Company acquired substantially all of the assets and assumed certain liabilities of Tempco Hydraulics Inc. (Tempco), a regional aircraft landing gear repair and overhaul business. The purchase price of approximately $7.5 million was paid with a combination of cash and a note. The transaction was recorded under the purchase method of accounting. The Company has included in its consolidated financial statements the results of operations of Tempco since the date of acquisition. On December 31, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of AVSCO Aviation Service Corporation (AVSCO), a distributor of factory-new parts and accessories to the commercial, regional/commuter and general aviation markets. The purchase price of approximately $18.4 million was paid with a combination of cash and a note and the transaction was recorded under the purchase method of accounting. The Company has included in its consolidated financial statements the results of operations of AVSCO since the date of acquisition. On October 24, 1997, the Company purchased the stock of ATR International, Inc. (ATR), a company which engineers and manufactures composite parts and structures for the aviation/aerospace industry. The Company acquired ATR for approximately $19 million cash and the transaction was recorded under the purchase method of accounting. The Company has included in its consolidated financial statements the results of operations of ATR since the date of acquisition. On June 2, 1997, the Company acquired substantially all of the assets and assumed certain liabilities of Cooper Aviation Industries, Inc. (Cooper), a distributor of factory-new aviation parts and accessories to the commercial, regional/commuter and general aviation markets. The purchase price was paid by issuing 140 thousand common shares (adjusted for the three-for-two stock split) and was recorded under the purchase method of accounting. In addition, the Company assumed short-term debt which was paid off by the Company during the first quarter of fiscal 1998. The Company has included in its consolidated financial statements the results of operations of Cooper since the date of acquisition. The historical operating results of the acquisitions for the periods preceding the acquisitions are not material when compared to the operating results of the Company. 11. BUSINESS SEGMENT INFORMATION The carrying value of long-lived assets in Company facilities located in foreign countries, and sales from these facilities in total, are not material to the consolidated financial statements. Export sales from the Company's U.S. operations to unaffiliated customers, the majority of which are located in Europe, the Middle East, Canada, Mexico, South America and Asia (including sales through foreign sales offices of domestic subsidiaries), were approximately $209,712 (22.8% of total net sales), $202,481 (25.9% of total net sales) and $204,808 (34.8% of total net sales) in fiscal 1999, 1998 and 1997, respectively. Sales to the U.S. Government, its agencies and its contractors were approximately $98,954 (10.8% of total net sales), $83,114 (10.6% of total net sales) and $82,125 (13.9% of total net sales) in fiscal 1999, 1998 and 1997, respectively. Sales to the Company's largest customer were approximately $135,100 (14.7% of total net sales) during fiscal 1999. 38 AAR CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA) 12. SELECTED QUARTERLY DATA (UNAUDITED) The unaudited selected quarterly data for fiscal years ended May 31, 1999 and 1998 are as follows.
FISCAL 1999 ----------- DILUTED EARNINGS QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE - ------- --------- ------------ ---------- --------- First.............................. $215,898 $ 41,049 $ 9,623 $ .34 Second............................. 228,798 42,740 10,035 .36 Third ............................ 227,699 42,706 10,278 .37 Fourth............................. 245,641 46,764 11,735 .42 -------- -------- -------- ------ $918,036 $173,259 $ 41,671 $ 1.49 -------- -------- -------- ------ -------- -------- -------- ------ FISCAL 1998 ----------- DILUTED EARNINGS QUARTER NET SALES GROSS PROFIT NET INCOME PER SHARE - ------- --------- ------------ ---------- --------- First............................. $170,906 $ 31,928 $ 7,310 $ .26 Second............................ 180,156 34,055 8,411 .30 Third............................. 208,492 38,915 9,314 .33 Fourth............................ 222,569 43,508 10,622 .37 $782,123 $148,406 $ 35,657 $ 1.27 -------- -------- -------- ------ -------- -------- -------- ------
13. ALLOWANCES FOR DOUBTFUL ACCOUNTS
FOR THE YEAR ENDED MAY 31, ----------------------------------- 1999 1998 1997 -------- -------- -------- Balance, beginning of year................................................. $ 3,157 $ 1,965 $ 2,490 Provision charged to operations.......................................... 2,902 1,261 500 Reserves acquired........................................................ -- 1,679 -- Deductions for accounts written off, net of recoveries................... (1,229) (1,748) (1,025) ------- ------- ------- Balance, end of year....................................................... $ 4,830 $ 3,157 $1,965 ------- ------- ------- ------- ------- -------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item regarding the Directors of the Company is incorporated by reference to the information contained under the caption "Board of Directors" in the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders. The information required by this item regarding the Executive Officers of the Company appears under the caption "Executive Officers of the Registrant" in Part I above. The information required by this item regarding the compliance with Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") is incorporated by reference to the information contained under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information contained under the captions "Executive Compensation and Other Information" (but excluding the following sections thereof, "Compensation Committee's Report on Executive Compensation" and "Stockholder Return Performance Graphs"); "Employment and Other Agreements" and "Directors' Compensation" in the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information contained under the caption "Security Ownership of Management and Others" in the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive proxy statement for the 1999 Annual Meeting of Stockholders. 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS PAGE Independent Auditors' Report, KPMG LLP................................................................... 15 Financial Statements -- AAR CORP. and Subsidiaries: Consolidated statements of income for the three years ended May 31, 1999.............................. 16 Consolidated balance sheets as of May 31, 1999 and 1998............................................... 17-18 Consolidated statements of stockholders' equity for the three years ended May 31, 1999................ 19 Consolidated statements of cash flows for the three years ended May 31, 1999.......................... 20 Notes to consolidated financial statements............................................................ 21-39 Selected quarterly data (unaudited) for the years ended May 31, 1999 and 1998 (Note 12 to consolidated financial statements)..................................................... 39 Financial data schedule for the twelve-month period ended May 31, 1999............................ See Exhibit Index
EXHIBITS The Exhibits filed as a part of this report are set forth in the Exhibit Index contained elsewhere herein. Each of the material contracts identified as Exhibits 10.1 through 10.10 is a management contract or compensatory plan or arrangement. REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the three-month period ended May 31, 1999. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AAR CORP. (Registrant) Date: August 18, 1999 BY: /s/ DAVID P. STORCH -------------------------------- David P. Storch PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ IRA A. EICHNER CHAIRMAN OF THE BOARD ----------------------------------------------- Ira A. Eichner DIRECTOR /s/ DAVID P. STORCH PRESIDENT AND CHIEF EXECUTIVE ----------------------------------------------- David P. Storch OFFICER; DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) /s/ TIMOTHY J. ROMENESKO VICE PRESIDENT AND CHIEF FINANCIAL ----------------------------------------------- Timothy J. Romenesko OFFICER (PRINCIPAL FINANCIAL OFFICER) /S/ MICHAEL J. SHARP VICE PRESIDENT - CONTROLLER (PRINCIPAL ----------------------------------------------- Michael J. Sharp ACCOUNTING OFFICER) /s/ A. ROBERT ABBOUD DIRECTOR ----------------------------------------------- A. Robert Abboud /s/ HOWARD B. BERNICK DIRECTOR ----------------------------------------------- Howard B. Bernick August 18, 1999 /s/ EDGAR D. JANNOTTA DIRECTOR ----------------------------------------------- Edgar D. Jannotta /s/ ROBERT D. JUDSON DIRECTOR ----------------------------------------------- Robert D. Judson /s/ ERWIN E. SCHULZE DIRECTOR ----------------------------------------------- Erwin E. Schulze /s/ JOEL D. SPUNGIN DIRECTOR ----------------------------------------------- Joel D. Spungin /s/ LEE B. STERN DIRECTOR ----------------------------------------------- Lee B. Stern /s/ RICHARD D. TABERY DIRECTOR ----------------------------------------------- Richard D. Tabery
42 EXHIBIT INDEX
INDEX EXHIBITS ----- -------- 3. Articles of Incorporation 3.1 Restated Certificate of Incorporation; and By-Laws 1 Amendments thereto dated November 3, 1987(2), October 19, 1988(2) and October 16, 1989 (included in the Restated Certificate of Incorporation filed herewith). 3.2 By-Laws, as amended(2) Amendment thereto dated April 12, 1994(12), January 13, 1997(22), and July 16, 1992 (included in the Amended By-Laws filed herewith). 4. Instruments defining 4.1 Restated Certificate of Incorporation the rights of security and Amendments (see Exhibit 3.1). holders 4.2 By-Laws, as amended (See Exhibit 3.2). 4.3 Credit Agreement dated September 9, 1996, between the Registrant and the Bank of America, Illinois.(15) 4.4 Rights Agreement between the Registrant and the First National Bank of Chicago dated July 8, 1997.(17) 4.5 Indenture dated October 15, 1989 between the Registrant and U.S. Bank Trust National Association (formerly known as First Trust, National Association, as successor in interest to Continental Bank, National Association) as Trustee, relating to debt securities; (5) First Supplemental Indenture thereto dated August 26, 1991;(6) Second Supplemental Indenture thereto dated December 10, 1997.(18) 4.6 Officers' certificates relating to debt securities dated October 24, 1989(10) and October 12, 1993.(10) 4.7 Second Amended and Restated Credit Agreement dated February 10, 1998, between the Registrant and The First National Bank of Chicago.(19) 4.8 Credit Agreement dated November 1, 1997 between the Registrant and The Northern Trust Company.(20) Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant is not filing certain documents. The Registrant agrees to furnish a copy of each such document upon the request of the Commission. 10. Material Contracts 10.1 AAR CORP. Stock Benefit Plan,11 Amendments thereto dated July 29, 1996, January 2, 1997,(15) May 6, 1997,(2)1 and March 20, 1998.(19) 10.2 Death Benefit Agreement dated August 24, 1984 between the Registrant and Ira A. Eichner;(8) Amendments thereto dated August 12, 1988(4), May 25, 1990 and October 9, 1996 (filed herewith respectively); and his agreement to terminate such Death Benefit Agreement dated May 30, 1999 (filed herewith).
43
INDEX EXHIBITS ----- -------- 10.3 Further Restated and Amended Employment Agreement dated August 1, 1985 between the Registrant and Ira A. Eichner;(3) Amendments thereto dated August 12, 1988,(4) May 25, 1990, 16 July 13, 1994,(16) October 9, 1996(21) and October 31, 1997.(21) 10.4 Trust Agreement dated August 12, 1988 between the Registrant and Ira A. Eichner(4) and amendments thereto dated May 25, 1990(16), February 4, 1994(12), October 9, 1996 and May 31, 1999 (filed herewith respectively). 10.5 AAR CORP Directors' Retirement Plan, dated April 14, 1992.(9) 10.6 AAR CORP. Supplemental Key Employee Retirement Plan, dated July 13, 1994(13), amended June 1, 1995(16), January 1, 1996(16) and June 1, 1996.(16) 10.7 Employment agreement dated June 1, 1994 between the Registrant and David P. Storch;(14) Amendment thereto dated October 9, 1996,(15) May 29, 1997(21) and July 14, 1997.(21) 10.8 Amended and Restated Severance and Change in Control agreement dated April 8, 1997 between the Registrant and Philip C. Slapke.(21) 10.9 Amended and Restated Severance and Change in Control agreement dated April 8, 1997 between the Registrant and Howard A. Pulsifer.(21) 10.10 Amended and Restated Severance and Change in Control agreement dated April 8, 1997 between the Registrant and Timothy J. Romenesko.(21) 21. Subsidiaries of 21.1 Subsidiaries of AAR CORP. (filed the Registrant herewith). 23. Consents of experts 23.1 Consent of KPMG LLP (filed herewith). and counsel 27. Financial Data 27.1 Financial Data Schedule for the Schedule Registrant's fiscal year ended May 31, 1999.
- ----------------- Notes: 1 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1987. 2 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1989. 3 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1986. 4 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1988. 5 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended November 30, 1989. 44 6 Incorporated by reference to Exhibits to Registrant's Registration Statement on Form S-3 filed August 27, 1991. 7 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1991 8 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1985. 9 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1992. 10 Incorporated by reference to Exhibits to the Registrant's Current Reports on Form 8-K dated October 24, 1989 and October 12, 1993, respectively. 11 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1993. 12 Incorporated by reference to Exhibits to Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1994. 13 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1994. 14 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1995. 15 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1996. 16 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1996. 17 Incorporated by reference to Exhibits to the Registrant's Current Report on Form 8-K dated August 4, 1997. 18 Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-3 filed December 10, 1997. 19 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998. 20 Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-3 filed May 15, 1998. 21 Incorporated by reference to Exhibits to the Registrant's Quarterly Report on Form 10-Q for the quarter ended November 30, 1997. 22 Incorporated by reference to Exhibits to the Registrant's Annual Report on Form 10-K for the fiscal year ended May 31, 1998. 45 EX-3.1 2 EXHIBIT 3.1 COMPOSITE OF RESTATED CERTIFICATE OF INCORPORATION OF AAR CORP. It is hereby certified that: 1. (a) The present name of the corporation (hereinafter called the "Corporation") is AAR CORP. (b) The name under which the Corporation was originally incorporated is Allen Aircraft Radio, Inc.; and the date of filing the original certificate of incorporation of the Corporation with the Secretary of State of Delaware is April 11, 1966. 2. The provisions of the certificate of incorporation of the Corporation as heretofore amended or supplemented, are hereby restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Restated Certificate of Incorporation of AAR CORP. The Restated Certificate of Incorporation of AAR CORP. only restates and integrates and does not further amend the provisions of the Corporation's certificate of incorporation as theretofore amended or supplemented, and there is no discrepancy between those provisions and the provisions of the Restated Certificate of Incorporation of AAR CORP. 3. The Board of Directors of the Corporation has duly adopted this Restated Certificate of Incorporation pursuant to the provisions of Section 245 of the General Corporation Law of the State of Delaware in the form set forth as follows: Restated Certificate of Incorporation of AAR CORP. FIRST: The name of the corporation (hereinafter called the Corporation) is: AAR CORP. SECOND: The respective names of the County and of the City within the County in which the registered office of the Corporation is to be located in the State of Delaware are the County of Kent and the City of Dover. The name of the registered agent of the Corporation is The Prentice-Hall Corporation System, Inc. The street and number of said registered office and the address by street and number of said registered agent is 229 South State Street, Dover, Delaware. THIRD: The nature of the business of the Corporation and the objects or purposes to be transacted, promoted or carried on by it are as follows: To acquire, buy, sell, import, export, invent, devise, design, manufacture, make, contract with others for the manufacture of, construct, assemble, service, salvage, overhaul, renovate, recondition, remodel, alter, repair, refinish, recover, develop, use, own, operate, charter, lease as lessor and lessee, license the use of as licensor and licensee, acquire, receive, assign, transfer and grant options, franchises, and rights in respect of, maintain, exchange, distribute and generally deal in and with, at wholesale and retail and as principal, agent, broker, factor, jobber, distributor, and in any other lawful capacity, civilian and military aircraft and spacecraft of any and all kinds, including vertical and short take-off and landing aircraft and experimental models and engines, fuselages, motors, parts, accessories, radios, communication and navigational aids, supplies, appliances, devices, apparatus, fixtures, specialties, appurtenances, sundries and equipment for aircraft of any and all kinds. To maintain and operate plants, laboratories and establishments for testing, developing and improving the design and construction of any and all kinds of aircraft and aircraft engines, propellers, equipment, instruments and accessories, and any and all kinds of devices, appliances, apparatus and mechanisms used or useful in connection with aerial navigation or transportation, or in aid thereof; to discover and apply new or improved technical principles relating thereto, and generally, to conduct, carry on, and engage in any and all kinds of research and experimental work in or in connection with, any and all branches of the art or science of aeronautics and of aerodynamics and of any and all related arts or sciences; to give, hold, maintain, carry on, manage, and participate in exhibitions and compositions of any and all kinds useful or proper for increasing and developing interest in aeronautics or disseminating information with respect thereto. To own, design, erect, build, construct, license the use of as licensor and licensee, lease as lessor and lessee, buy, or otherwise acquire, sell, charter, exchange, transfer, assign, convey, or otherwise dispose of, equip, maintain, use, operate, or otherwise manage, aircraft, airports, aircraft landing fields, seadromes, terminals, stations, depots, docks, land and sea lighthouses, landing buoys, mooring facilities, shops, buildings, factories, hangars, garages, shipyards, wharves, warehouses, and all other structures and air and water navigation facilities, ratio and all other types and kinds of communications systems, and any and all 2 facilities, equipment and appurtenances incidental, necessary, useful, auxiliary to, or convenient for, the business and operations conducted, engaged in, and carried on by the corporation. To acquire by purchase, exchange, concession, easement, contract, lease or otherwise, to hold, own, use, control, manage, improve, maintain and develop, to mortgage, pledge, grant, sell, convey, exchange, assign, divide, lease, sublease, or otherwise encumber and dispose of, and to deal and trade in, real estate improved or unimproved, lands, leaseholds, options, concessions, easements, tenements, hereditaments and interests in real, mixed, and personal property, of every kind and description wheresoever situated, and any and all rights therein. To manufacture, process, purchase, sell and generally to trade and deal in and with goods, wares and merchandise of every kind, nature and description, and to engage and participate in any mercantile, industrial or trading business of any kind or character whatsoever. To apply for, register, obtain, purchase, lease, take licenses in respect of or otherwise acquire, and to hold, own, use, operate, develop, enjoy, turn to account, grant licenses and immunities in respect of, manufacture under and to introduce, sell, assign, mortgage, pledge or otherwise dispose of, and, in any manner deal with and contract with reference to: (a) inventions, devices, formulae, processes and any improvements and modifications thereof; (b) letters patent, patent rights, patented processes, copyrights, designs, and similar rights, trademarks, trade symbols and other indications of origin and ownership granted by or recognized under the laws of the United States of America or of any state or subdivision thereof, or of any foreign country or subdivision thereof, and all rights connected therewith or appertaining thereunto; (c) franchises, licenses, grants and concessions. To purchase or otherwise acquire, and to hold, mortgage, pledge, sell, exchange or otherwise dispose of, securities (which term, for the purpose of this Article THIRD, includes, without limitation of the generality thereof, any shares of stock, bonds, debentures, notes, mortgages, or other obligations, and any certificates, receipts or other instruments representing rights to receive, purchase or 3 subscribe for the same, or representing any other rights or interests therein or in any property or assets) created or issued by any persons, firms, associations, corporations, or governments or subdivisions thereof; to make payment therefor in any lawful manner; and to exercise, as owner or holder of any securities, any and all rights, powers and privileges in respect thereof. To make, enter into, perform and carry out contracts of every kind and description with any person, firm, association, corporation or government or subdivision thereof; to enter into general partnerships, limited partnerships (whether the corporation be a limited or general partner), joint ventures, syndicates, pools, associations and other arrangements for carrying on of one or more of the purposes set forth in this Certificate of Incorporation, jointly or in common with others. To acquire by purchase, exchange or otherwise, all, or any part of, or any interest in, the properties, assets, business and good will of any one or more persons firms, associations or corporations heretofore or hereafter engaged in any business for which a corporation may now or hereafter be organized under the laws of the State of Delaware; to pay for the same in cash, property or its own or other securities; to hold, operate, reorganize, liquidate, sell or in any manner dispose of the whole or any part thereof; and in connection therewith, to assume or guarantee performance of any liabilities, obligations or contracts of such persons, firms, associations or corporations, and to conduct the whole or any part of any business thus acquired. To lend its uninvested funds from time to time to such extent, to such persons, firms, associations, corporations, governments or subdivisions thereof, and on such terms and on such security, if any, as the Board of Directors of the corporation may determine. To endorse or guarantee the payment of principal, interest or dividends upon, and to guarantee the performance of sinking fund or other obligations of, any securities, and to guarantee in any way permitted by law the performance of any of the contracts or other undertakings in which the corporation may otherwise be or become interested, of any person firm, association, corporation, government or subdivision thereof, or of any other combination, organization or entity whatsoever. 4 To borrow money for any of the purposes of the corporation, from time to time, and without limit as to amount; from time to time to issue and sell its own securities in such amounts, on such terms and conditions, for such purposes and for such prices, now or hereafter permitted by the laws of the State of Delaware and by this Certificate of Incorporation, as the Board of Directors of the Corporation may determine; and to secure such securities by mortgage upon, or the pledge of, or the conveyance or assignment in trust of, the whole or any part of the properties, assets, business and good will of the corporation, then owned or thereafter acquired. To draw, make, accept, endorse, discount, execute, and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures, and other negotiable or transferable instruments and evidences of indebtedness whether secured by mortgage or otherwise, as well as to secure the same by mortgage or otherwise, so far as may be permitted by the laws of the State of Delaware. To purchase, hold, cancel, reissue, sell, exchange, transfer or otherwise deal in its own securities from time to time to such an extent and in such manner and upon such terms as the Board of Directors of the Corporation shall determine; provided that the Corporation shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital, except to the extent permitted by law; and provided further that shares of its own capital stock belonging to the corporation shall not be voted upon directly or indirectly. To organize or cause to be organized under the laws of the State of Delaware, or of any other State of the United States of America, or of the District of Columbia, or of any territory, dependency, colony or possession of the United States of America, or of any foreign country, a corporation or corporations for the purpose of transacting, promoting or carrying on any or all of the objects or purposes for which corporations may be organized, and to dissolve, wind up, liquidate, merge or consolidate any such corporation or corporations or to cause the same to be dissolved, wound up, liquidated, merged or consolidated. To conduct its business in any and all of its branches and maintain offices both within and without the State of Delaware, in any and all States of the United States of America, in the District of Columbia, in any or all territories, dependencies, colonies or possessions of the United States of America, and in foreign countries. 5 To carry out all or any part of the foregoing objects and purposes in any and all parts of the world and to conduct business in all or any of its branches as principal, factor, agent, contractor or otherwise, either alone or through or in conjunction with any corporation, associations, partnerships, firms, trustees, syndicates, individuals, organizations and other entities located in or organized under the laws of any part of the world, either directly or indirectly as a member of any partnership, general or limited, and, in carrying out, conducting or performing its business and attaining or furthering any of its objects and purposes, to maintain offices, branches and agencies in any part of the world, to make and perform any contracts and to do any acts and things, and to carry on any business, and to exercise any powers suitable, convenient or proper for the accomplishment of any of the objects and purposes herein specified or which at any time may appear conducive to or expedient for the accomplishment of any of such objects and purposes and which might be engaged in or carried on by a corporation formed under the General Corporation Law and to have and exercise all of the powers conferred by the laws of the State of Delaware upon corporations formed under the General Corporation Law. The foregoing provisions of this Article THIRD shall be construed both as purposes and powers and each as an independent purpose and power. The foregoing enumeration of specific purposes and powers shall not be held to limit or restrict in any manner the purposes and powers of the Corporation, and the purposes and powers herein specified shall, except when otherwise provided in this Article THIRD, be in no wise limited or restricted by reference to, or inference from, the terms of any provision of this or any other Article of this Certificate of Incorporation; provided, that the Corporation shall not carry on any business or exercise any power in the State of Delaware or in any state, territory, or country which under the laws thereof the Corporation may not lawfully carry on or exercise. FOURTH: The total number of shares which the Corporation shall have authority to issue is Eighty Million Two Hundred Fifty Thousand (80,250,000), of which Two Hundred Fifty Thousand (250,000) shares of the par value of $1.00 per share shall be Preferred Stock and Eighty Million (80,000,000) shares of the par value of $1.00 per share shall be Common Stock. Any and all such shares issued, and for which the full consideration has been paid or delivered, shall be deemed fully paid shares and the holder of such shares shall not be liable for any further call, assessment or any other payment thereon. The Preferred Stock shall be issued from time to time in one or more series with such distinctive serial designations and (a) may have such voting powers, full or limited, or may be without voting powers; (b) may be subject to redemption at 6 such time or times and at such price or prices; (c) may be entitled to receive dividends (which may be cumulative or noncumulative) at such rate or rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes of stock; (d) may be entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; (e) may be made convertible into, or exchangeable for, shares of any other class or classes of stock of the Corporation at such price or prices or at such rates of exchange and with such adjustments; and (f) shall have such other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, all as shall hereafter be stated and expressed in the resolution or resolutions providing for the issuance of such Preferred Stock from time to time adopted by the Board of Directors pursuant to authority so to do which is hereby vested in the Board. No holder of any of the shares of the stock of the corporation, whether now or hereafter authorized and issued, shall be entitled as of preemptive right to purchase or subscribe for (1) any unissued stock of any class, or (2) any additional shares of any class to be issued by reason of any increase of the authorized capital stock of the corporation of any class, or (3) bonds, certificates of indebtedness, debentures or other securities convertible into stock of the corporation, or carrying any right to purchase stock of any class, and any such unissued stock or such additional authorized issue of any stock or of other securities convertible into stock, or carrying any right to purchase stock, may be issued and disposed of pursuant to resolution of the Board of Directors to such persons, firms, corporations or associations and upon such terms as may be deemed advisable by the Board of Directors in the exercise of its discretion. Each share of Common Stock shall entitle the holder thereof to one vote, in person or by proxy, at any and all meetings of the stockholders of the Corporation, on all propositions before such meetings and cumulative voting shall not apply in the election of directors. FIFTH: The minimum amount of capital with which the corporation will commence business is One Thousand Dollars. SIXTH: The names and places of residence of each of the incorporators are as follows:
Name Place of Residence ---- ------------------ R. G. Dickerson Dover, Delaware J. A. Kent Dover, Delaware Z. A. Pool, III Dover, Delaware
SEVENTH: The corporation is to have perpetual existence. 7 EIGHTH: The private property of the stockholders of the corporation shall not be subject to the payment of corporate debts to any extent whatever. NINTH: For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation and of its directors and stockholders, it is further provided: 1. In no event shall the number of directors be less than the minimum number prescribed by law. The election of directors need not be by ballot. Directors need not be stockholders. 2. In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized and empowered: (a) To make, alter, amend, and repeal by-laws. (b) Subject to the applicable provisions of the by-laws then in effect, to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations the accounts and books of the corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the corporation, except as conferred by the laws of the State of Delaware, unless and until authorized so to do by resolution of the Board of Directors or of the stockholders of the corporation. (c) Without the assent or vote of the stockholders, to authorize and issue obligations of the corporation, secured or unsecured, to include therein such provisions as to redeemability, convertibility or otherwise, as the Board of Directors, in its sole discretion, may determine, and to authorize the mortgaging or pledging, as security therefor, of any property of the corporation, real or personal, including after-acquired property. (d) To establish bonus, profit sharing or other types of incentive or compensation plans for the employee (including officers and directors) of the corporation and to fix the amount of profits to be distributed or shared and to determine the persons to participate in any such plans and the amounts of their respective participations. In addition to the powers and authorities hereinbefore or by statute expressly conferred upon it, the Board of Directors may exercise all such powers and do all such acts and things as may be exercised or done by the corporation, subject, nevertheless, to the provisions of the laws of the State of Delaware, of the Certificate of Incorporation and of the by-laws of the corporation. 8 3. Any officer elected or appointed by the Board of Directors may be removed at any time in such manner as shall be provided in the by-laws of the Corporation. 4. In the absence of fraud, no contract or other transaction between this corporation and any other corporation or any partnership or association shall be affected or invalidated by the fact that any director or officer of this corporation is pecuniarily or otherwise interested in or is a director, member or officer of such other corporation or of such firm, association or partnership or is a party to or is pecuniarily or otherwise interested in such contract or other transaction or in any way connected with any person or persons, firm, associations partnership or corporation pecuniarily or otherwise interested therein, provided such interest is either known or made known to the other directors; any director may be counted in determining the existence of a quorum at any meeting of the Board of Directors of this corporation for the purpose of authorizing any such contract or transaction, and may vote thereat to authorize any such contract or transaction with like force and effect as if he were not so interested, or were not an officer, director, member, or partner of such other firm, corporation, association or partnership. 5. Any contract, act or transaction of the corporation or of the directors may be ratified by a vote of a majority of the shares having voting powers at any meeting of stockholders, or at any special meeting called for such purpose, and such ratification shall, so far as permitted by law and by this Certificate of Incorporation, be as valid and as binding as though ratified by every stockholder of the corporation. TENTH: The business and affairs of this corporation shall be managed by or under the direction of the Board of Directors. Subject to the other provisions of this Article TENTH, the Board of Directors shall determine the rights, powers, duties, rules and procedures that shall affect the power of the Board of Directors to manage and direct the business and affairs of this Corporation. The Board of Directors shall consist of between three and fifteen directors, with the exact number of directors to be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors then in office. The directors shall be divided into three classes, each to consist, as nearly as may be possible, of one-third of the total number of authorized directors fixed by the Board of Directors. At each annual meeting following the initial classification and election, which occurred in 1970 pursuant to Article III, Section 1 of this corporation's by-laws, the directors chosen to succeed those directors whose terms then expire shall be identified as being of the same class as the directors they succeed and shall be elected for a term expiring at the third succeeding annual meeting of stockholders or thereafter when their respective successors in each case are elected and qualified, subject to prior death, resignation, retirement, disqualification, or removal for cause. If 9 the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class a nearly as possible, but in no case will a decrease in the number of directors shorten the term of any incumbent director. Any one or more directors may be removed from office at a meeting of stockholders called expressly for that purpose but only for cause and only by the affirmative vote of holders of at least 80% of the total voting power of all shares then entitled to vote for the election of directors, considered for purposes of this article TENTH as one class. A director whose removal is proposed shall receive reasonable notice and have a reasonable opportunity to present reasons for his or her retention. Any vacancy occurring on the Board of Directors, including any vacancy resulting from an increase in the number of directors, may be filled only by a majority of the members of the Board of Directors then in office, although less than a quorum, or by a sole remaining director. Any director so chosen shall hold office for a term that coincides with the remaining term of the class to which he or she has been elected. The by-laws of this Corporation may be amended, altered or repealed and new by-laws not inconsistent with any provision of the certificate of incorporation may be made (1) by the affirmative vote of a majority of the members of the Board of Directors then in office, or (2) by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this Corporation entitled to vote in the election of directors, considered for purposes of this Article TENTH as one class. The provisions set forth in this Article TENTH may not be amended, altered or repealed in any respect, unless such action is approved by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this Corporation entitled to vote in the election of directors, considered for purposes of this Article TENTH as one class. The voting requirements contained in this Article TENTH shall be in addition to the voting requirements imposed by law or by any other provisions of this certificate of incorporation. ELEVENTH: No action shall be taken by the stockholders of this Corporation except at an annual or special meeting of stockholders, and stockholders may not act by written consent. Special meetings of stockholders may be called only by the Chairman of the Board or a majority of the Board of Directors then in office. The provisions set forth in this Article ELEVENTH may not be amended, altered or repealed in any respect, unless such action is approved by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this Corporation entitled to vote in the election of directors, considered for purposes of this Article ELEVENTH as one class. The voting requirements contained in this Article ELEVENTH shall be in addition to the voting requirements imposed by law or by any other provisions of this certificate of incorporation. 10 TWELFTH: A. In addition to any affirmative vote which may be otherwise required, and except as otherwise expressly provided in this Article TWELFTH, any Business Transaction shall require the affirmative vote of holders of at least that number of the voting shares which equals the sum of (i) the number of Voting Shares beneficially owned by all Related Parties that have an interest in the Business Transaction, plus (ii) 80% of the remaining number of Voting Shares that are not beneficially owned by all such Related Parties. B. The provisions of this Article TWELFTH shall not be applicable to any Business Transaction if: 1. The Business Transaction was approved by a majority of the Board of Directors prior to the acquisition of 10% or more of the Voting Shares by any Related Party that has an interest in the Business Transaction; or 2. A majority of those members of the Board of Directors who are not themselves Related Party Directors has approved the Business Transaction. C. For purposes of this Article TWELFTH: 1. "Business Transaction" shall mean: (a) any merger or consolidation of this corporation or any Subsidiary with or into any Related Party or any Associate of a Related Party; (b) any sale, lease, exchange, mortgage, pledge, transfer, or other disposition (in one or a series of transactions) of all or any Substantial Part of the consolidated assets of this Corporation to or with any Related Party or any Associate of a Related Party; (c) any issuance, sale, exchange, transfer, or other disposition by this Corporation or any Subsidiary (in one or a series of related transactions) of any securities of this Corporation or any Subsidiary to or with any Related Party or any Associate of a Related Party; (d) any spin-off, split-up, reclassification of securities (including any reverse stock split), recapitalization, reorganization, liquidation, dissolution, merger, or consolidation of this Corporation with any Subsidiary, or any other transaction (whether or not to or with or otherwise involving a Related Party) which has the effect, directly or indirectly, of increasing the proportionate interest of any Related Party or any Associate of a Related Party in the equity securities or assets of this Corporation or any Subsidiary; or 11 (e) adoption of any plan or proposal with respect to any of the foregoing. 2. A "person" shall include any individual, firm, corporation, partnership, group, trust, or other entity, organization, or association. 3. "Related Party" shall mean any person (other than this Corporation or a Subsidiary) who or which is the beneficial owner, directly or indirectly, of 10% or more of the Voting Shares: (a) in connection with determining the required vote by stockholders on any Business Transaction, as of any of the following dates: the record date for the determination of stockholders entitled to notice of or to vote on such Business Transaction or immediately prior to the consummation of any such transaction or the adoption of any plan or proposal with respect thereto; (b) in connection with determining the required vote by stockholders on any amendment, alteration or repeal of this Article TWELFTH pursuant to clauses (i) and (ii) of paragraph E, as of the record date for the determination of stockholders entitled to notice and to vote on such amendment, alteration or repeal; and (c) in connection with determining a "Related Party Director" in respect of any approval by the Board of Directors of the amendment, alteration or repeal of this article TWELFTH pursuant to paragraph E or in respect of any determination made by the Board of Directors pursuant to paragraph D, as of the date at which the vote on such recommendation or determination is being taken, or as close as is reasonably practicable to such date. 4. A person shall be the "beneficial owner" of any Voting Shares as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1Section 34 as in effect on July 26, 1983; provided, however, that a person shall, in any event, also be the beneficial owner of any Voting Shares: (a) which such person, or any of such person's Associates, beneficially owns, directly or indirectly; (b) which such person or any of such person's Associates, directly or indirectly, (i) has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement, or understanding; or upon the exercise of conversion rights, exchange rights, warrants, or options; or pursuant to the power to revoke a trust, discretionary account, or other arrangement; or otherwise; or (ii) has or shares the power, or has the right to acquire the exclusive or shared power, to vote pursuant to any agreement, arrangement, relationship, or understanding; or pursuant to the power to revoke a trust, discretionary account, or other arrangement; or otherwise; and (c) which are beneficially owned, directly or indirectly, by any other person with whom or which such first-mentioned person or any of its Associates has any 12 agreement, arrangement, or understanding, or is acting in concert, with respect to acquiring, holding, voting, or disposing of any Voting Shares. 5. An "Associate" of a specified person is (a) a person that, directly or indirectly (i) controls, or is controlled by, or is under common control with, the specified person, (ii) is the beneficial owner of 10% or more of any class of equity securities of the specified person, or (iii) has 10% or more of any class of its equity securities beneficially owned, directly or indirectly, by the specified person; (b) any person (other than this Corporation or a Subsidiary) of which the specified person is an officer, director, or other official and any officer, director, partner, or other official of the specified person; (c) any trust or estate in which the specified person serves as trustee or in a similar fiduciary capacity, or any trustee or similar fiduciary of the specified person; and (d) any relative or spouse of the specified person, or any relative of such spouse, who has the same house as the specified person or is an officer or director of any person (other than this Corporation or a Subsidiary), directly or indirectly, controlling or controlled by the specified person. 6. "Related Party Director" shall mean each director of this Corporation who (a) is a Related Party or an Associate of a Related Party; (b) has an Associate who is a Related Party or an Associate of a Related Party; (c) was nominated or proposed to be elected as a director of this Corporation by a Related Party or an Associate of a Related Party; or (d) is, or has been nominated or proposed to be elected as, an officer, director or employee of a Related Party or of an Associate of a Related Party. 7. "Subsidiary" shall mean any corporation of which a majority of any class of equity security is owned, directly or indirectly, by this Corporation; provided, however, that for the purposes of paragraph C.3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by this Corporation. 8. "Substantial Part" of the consolidated assets of this Corporation shall mean Assets of this Corporation and/or any Subsidiary having a book value (determined in accordance with generally accepted accounting principles) in excess of 10% of the book value (determined in accordance with generally accepted accounting principles) of the total consolidated assets of this Corporation, at the end of its most recent quarterly fiscal period ending prior to the time of the determination is made. 9. "Voting Shares" shall mean the outstanding shares of all classes of stock of this Corporation entitled to vote for the election of directors, considered for purposes of this Article TWELFTH as one class. "Voting Shares" shall include shares deemed owned through application of paragraph C.4 but shall not include any other Voting Shares which may be issuable pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. 13 D. On the basis of information known to them, a majority of those members of the Board of Directors who are not themselves Related Party Directors shall have the power and duty to make all determinations to be made under this Article TWELFTH, including whether (a) a transaction is a Business Transaction; (b) a person is a Related Party; (c) a person is an Associate of another person; (d) a Related Party or any Associate of a Related Party has an interest in a Business Transaction; (e) the assets subject to any Business Transaction constitute a Substantial Part of the consolidated assets of this Corporation; (f) a transaction has the effect of increasing the proportionate interest of any Related Party or any Associate of a Related Party in the equity securities or assets of this Corporation or any Subsidiary; or (g) a person has an agreement, arrangement, relationship, or understanding, or is acting in concert, with another as to the matters referred to in paragraph C.4. Any such determination shall be conclusive and binding for all purposes of this Article TWELFTH. E. In addition to any affirmative vote which may be otherwise required, any amendment, alteration, or repeal of this Article TWELFTH shall require the affirmative vote of the holders of at least that number of the Voting Shares which equals the sum of (i) the number of Voting Shares beneficially owned by any Related Party, plus (ii) 80% of the remaining number of Voting Shares that are not beneficially owned by any Related Party; provided that this paragraph E shall not apply to, and such vote shall not be required for, any amendment, alteration or repeal approved by at least 80% of those members of the Board of Directors who are not themselves Related Party Directors. F. Nothing contained in this Article TWELFTH shall be construed to relieve any Related Party from any fiduciary obligation imposed by law. THIRTEENTH: From time to time, any of the provisions of this certificate of incorporation may be amended, altered or repealed, and other provisions authorized by this certificate of incorporation and by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by this certificate of incorporation and by said laws. All rights at any time conferred upon the stockholders of this Corporation by this certificate of incorporation are granted subject to the provisions of this Article THIRTEENTH. Notwithstanding the foregoing, the provisions set forth in Articles TENTH, ELEVENTH and TWELFTH may not be amended, altered or repealed in any respect unless such amendment, alteration or repeal is approved as specified in each such respective Article. FOURTEENTH: No person who was or is a director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for breach of the duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law 14 is amended after the effective date of this Article to further eliminate or limit, or to authorize further elimination or limitation of, the personal liability of directors for breach of fiduciary duty as a director, then the personal liability of a director to this Corporation or its stockholders shall be eliminated or limited to the full extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect the elimination or limitation of the personal liability of a director for any act or omission occurring prior to the effective date of such repeal or modification. This provision shall not eliminate or limit the liability of a director for any act or omission occurring prior to the effective date of this Article. FIFTEENTH: A. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer (or, while serving as a director or officer of the Corporation, as an employee, agent or fiduciary) of another corporation, partnership, joint venture, trust or other enterprise, or with respect to any employee benefit plan (or its participants or beneficiaries), or by reason of any action alleged to have been taken or omitted by such person in any such capacity, against costs, charges and other expenses (including attorneys' fees) ("Expenses"), judgments, fines, taxes, penalties and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding and any appeal thereof if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding and any appeal thereof by judgment, order, settlement, conviction, or plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. B. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer (or, while serving as a director or officer of the Corporation, as an employee, agent or fiduciary) of another corporation, partnership, joint venture, trust or other enterprise, or with respect to any employee benefit plan (or its participants or beneficiaries), or by reason of any action alleged to have been taken or omitted by such person in any such capacity against Expenses actually and 15 reasonably incurred by him in connection with the investigation, defense or settlement of such action or suit and any appeal thereof if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity f or such Expenses which the Court of Chancery of Delaware or such other court shall deem proper. C. Notwithstanding any other provision of this Article FIFTEENTH, the Corporation shall indemnify and make advancement of Expenses to any person referred to in paragraph A or B of this Article FIFTEENTH to the full extent permitted under the laws of Delaware and any other applicable laws, as they now exist or as they may be amended in the future. D. To the extent that any person referred to in paragraph A or B of this Article FIFTEENTH has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding and any appeal thereof referred to therein or in defense of any claim, issue or matter therein, he shall be indemnified against Expenses actually and reasonably incurred by him in connection therewith. E. Any indemnification under paragraph A, B, C or D of this Article FIFTEENTH (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of any person referred to in paragraph A or B of this Article FIFTEENTH is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraph A or B of this Article FIFTEENTH. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. F. Expenses incurred by any person referred to in paragraph A or B of this Article FIFTEENTH in defending a civil or criminal action, suit or proceeding and any appeal thereof shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding and any appeal thereof upon receipt by the Corporation of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation. G. The determination of the entitlement of any person to indemnification under paragraph A, B, C or D of this Article FIFTEENTH or to advancement of Expenses under paragraph F of this Article FIFTEENTH shall be made 16 promptly, and in any event within sixty (60) days after the Corporation has received a written request for payment from or on behalf of a director or officer and payment of amounts due under such paragraphs shall be made immediately after such determination. If payment in full has not been made within sixty (60) days, the right to indemnification or advancement of Expenses provided by this Article. FIFTEENTH shall be enforceable by or on behalf of any person referred to in paragraph A or B of this Article FIFTEENTH in any court of competent jurisdiction. In addition to the other amounts due under this Article FIFTEENTH, Expenses incurred by or on behalf of any person referred to in paragraph A or B of this Article FIFTEENTH in successfully establishing his right to indemnification or advancement of Expenses, in whole or in part, in any such action (or settlement thereof) shall be paid by the Corporation. H. The indemnification and advancement of Expenses provided by this Article FIFTEENTH (1) shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of Expenses may be entitled under any law (common or statutory), by-law, agreement, vote of stockholders or disinterested directors or otherwise, and (2) shall continue as to a person referred to in paragraph A or B of this Article FIFTEENTH and shall inure to the benefit of the heirs, executors and administrators of such a person. I. All rights to indemnification and advancement of Expenses provided by this Article FIFTEENTH shall be deemed to be a contract between the Corporation and each person referred to in paragraph A or B of this Article FIFTEENTH at any time while this Article FIFTEENTH is in effect. Any repeal or modification of this Article FIFTEENTH or any repeal or modification of the relevant provisions of the Delaware General Corporation Law or any other applicable law shall not in any way diminish any rights to indemnification of or advance payments of Expenses to such person or the obligation of the Corporation. J. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director or officer of the Corporation or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise or with respect to any employee benefit plan (or its participants or beneficiaries), against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability. K. The Board of Directors may, by resolution, extend the indemnification and advancement of Expenses provisions of this Article FIFTEENTH to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was or has agreed to become an employee, 17 agent or fiduciary of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise or with respect to any employee benefit plan (or its participants or beneficiaries) of the Corporation or any such other enterprise, or by reason of any action alleged to have been taken or omitted by such person in any such capacity. L. For purposes of this Article FIFTEENTH, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries so that any person who is or was or has agreed to become a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving or has agreed to serve at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article FIFTEENTH with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. M. The invalidity or unenforceability of any provision of this Article FIFTEENTH shall not affect the validity or enforceability of the remaining provisions of this Article FIFTEENTH. Signed and attested to on January 9, 1985. --------------------------------- President ATTEST: - -------------------------------- Secretary (CORPORATE SEAL) 18 EX-3.2 3 EXHIBIT 3.2 Exhibit 3.2 AMENDED BY-LAWS* OF AAR CORP. A Delaware Corporation ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal office shall be at 229 South State Street, in the City of Dover, County of Kent, State of Delaware, and the name of the resident agent in charge thereof is THE PRENTICE-HALL CORPORATION SYSTEM, INC. SECTION 2. OTHER OFFICES. The corporation may also have an office or offices at such other place or places, within or without the State of Delaware, as the Board of Directors may from time to time designate or the business of the corporation require. ARTICLE II STOCKHOLDERS' MEETINGS SECTION 1. TIME. The annual meeting of the stock- holders of the corporation for the election of directors and the transaction of such other business as may properly come before such meeting shall be held each year on the second Wednesday in October at three o'clock P.M. (Chicago time), or if said day be a legal holiday, then on the next succeeding day not a legal holiday, or shall be held on such other time and date as shall be determined by the Board of Directors. A special meeting of the stockholders *as of January 13, 1997 shall be held on the date and at the time fixed by those persons authorized by the Certificate of Incorporation to call such meeting. SECTION 2. PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware. SECTION 3. CALL. Annual meetings may be called by the directors or by any officer instructed by the directors to call the meeting. SECTION 4. NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date and hour of the meeting. The notice of an annual meeting shall state that the meeting is called for the election of directors and for the transaction of other business which may properly come before the meeting, and shall (if any other action which could be taken at a special meeting is to be taken at such annual meeting), state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose or purposes for which the meeting is called. If any action is proposed to be taken which would, if taken, entitle stockholders to receive payment for their shares of stock, the notice shall include a statement of that purpose and to that effect. Except as otherwise provided by the General 2 Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than ten days nor more than sixty days before the date of the meeting, unless the lapse of the prescribed period of time shall have been waived, and directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States mail. If a meeting is adjourned to another time, not more than thirty days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice by him before or after the time stated therein. Attendance of a person at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice. SECTION 5. STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and 3 make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote in person or by proxy at any meeting of stockholders. SECTION 6. CONDUCT OF MEETING. Meetings of the stock- holders shall be presided over by one of the following officers in the order of seniority and if present and acting -- the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, Executive Vice President, a Vice President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The person presiding over the 4 meeting shall have authority to prescribe the agenda for the meeting and to control the length and order of discussion. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as Secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, the Chairman of the meeting shall appoint a secretary of the meeting. SECTION 7. PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney-in-fact. No proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A power may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. SECTION 8. INSPECTORS AND JUDGES. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election or judges of the vote, as the case may be, to act at the meeting or any adjournment thereof. If an inspector or inspectors or judge or judges are not appointed, the person 5 presiding at the meeting may, but need not, appoint one or more inspectors or judges. In case any person who may be appointed as an inspector or judge fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector or judge, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector or judges at such meeting with strict impartiality and according to the best of his ability. The inspectors or judges, if any, shall determine the shares of stock represented at the meeting, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors or judge or judges, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. SECTION 9. QUORUM. The holders of a majority of the outstanding shares of stock present or represented by proxy at any such meeting of stockholders shall constitute a quorum at such meeting for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum. 6 SECTION 10. VOTING. Each share of stock shall entitle the holder thereof to one vote. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power. In determining whether a proposal has been approved, shares abstaining or not voting but otherwise present at the meeting will not be counted as having been voted on the proposal. All elections of directors shall be written ballots. Voting by ballot shall not be required for any other corporate action except as otherwise provided by the General Corporation Law. ARTICLE III DIRECTORS SECTION 1. NUMBER AND QUORUM. a. The Board of Directors shall consist of between three and fifteen directors, with the exact number of directors to be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors then in office. b. A majority of the members of the Board of Directors acting at a meeting duly assembled, shall constitute a quorum for the transaction of business; provided, however, that, whenever the corporation is permitted by law to have only one director, then, and, in that event only, one director shall constitute a quorum. 7 If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting, without further notice from time to time until a quorum shall have been obtained. Except as otherwise provided by law, by the Certificate of Incorporation, or these by-laws, the act of the directors at a meeting at which a quorum is present shall be the act of the Board. Member or members of the Board of Directors shall be deemed present at a meeting if such person or persons are participating in the meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. SECTION 2. MEETINGS. Meetings of the Board of Directors shall be held at such place within or outside the State of Delaware as may from time to time be fixed by resolution of the Board of Directors, or as may be specified in the notice of the meeting. Regular meetings of the Board of Directors shall be held at such times as may from time to time be fixed by resolution of the Board of Directors, and special meetings may be held at any time upon the call of the Chairman of the Board or, in the absence of the Chairman of the Board, the President or any Vice President or the Secretary or any two directors by oral, telegraphic or written notice duly served on or sent or mailed to each director not less than two days before such meeting. A meeting of the Board of Directors may be held without notice immediately after the annual meeting of stockholders. Notice need not be given of 8 regular meetings of the Board of Directors. The notice of any meeting need not specify the purpose of the meeting. Any requirement of furnishing a notice shall be waived by any director who signs a written waiver of such notice before or after the time stated therein. Further, the attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 3. COMMITTEES. a. The Board of Directors shall appoint from among its members the following committees: audit, compensation, nominating and executive. These committees shall consist of such number, shall have such powers and duties, and the members thereof shall otherwise serve as shall from time to time be prescribed by the Board of Directors. b. The Board of Directors may, in its discretion, by the affirmative vote of a majority of the whole Board of Directors, appoint other committees which shall have and may exercise such powers and duties as shall be conferred or authorized by the resolutions appointing them. c. A majority of any committee appointed pursuant to the provisions of a. and b. above, if such committee be composed of more than two members, may determine its action and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any 9 time to fill vacancies in, to change the membership of, or to discharge any such committee. d. Any and all actions by any committee shall be reported to the Board of Directors at the board meeting succeeding such action. SECTION 4. DIVIDENDS. Subject always to the provisions of the law and the Certificate of Incorporation, the Board of Directors shall have full power to determine whether any, and if any, what part of any, funds legally available for the payment of dividends shall be declared in dividends and paid to stockholders; the division of the whole or any part of such funds of the corporation shall rest wholly within the lawful discretion of the Board of Directors, and it shall not be required at any time, against such discretion, to divide or pay any part of such funds among or to the stockholders as dividends or otherwise; and the Board of Directors may fix a sum which may be set aside or reserved over and above the capital paid in of the corporation as working capital for the corporation or as a reserve for any proper purpose, and from time to time may increase, diminish, and vary the same in its absolute judgment and discretion. SECTION 5. INTENTIONALLY OMITTED. SECTION 6. INFORMAL ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in 10 writing and the writing or writings are filed with the minutes or proceedings of the board or committee. ARTICLE IV OFFICERS SECTION 1. NUMBER. The Board of Directors, as soon as may be after the election thereof held in each year, shall elect a Chairman of the Board, President, Secretary, Chief Financial Officer, and Treasurer, and from time to time may appoint a Vice Chairman of the Board, one or more Vice Presidents and such Assistant Secretaries, Assistant Treasurers and such other officers, agents and employees as it may deem proper. Any two offices may be held by the same person. More than two offices other than the offices of Chairman of the Board or President and Secretary may be held by the same person. The Chairman, the Vice Chairman and the President may, but need not, be chosen from among the directors. The Treasurer shall report to the Chief Financial Officer if not also elected to the position of Chief Financial Officer. SECTION 2. TERM AND REMOVAL. The term of office of all officers shall be one year and until their respective successors are elected and qualify, but any officer may be removed from office, either with or without cause, at any time by the affirmative vote of a majority of the members of the Board of Directors then in office. A vacancy in any office arising from any 11 cause may be filled for the unexpired portion of the term by the Board of Directors. SECTION 3. POWERS AND DUTIES. The Chairman of the Board shall preside at all meetings of the Board of Directors, shall have such powers and perform such duties as are assigned to him by these by-laws, and shall have such other powers and perform such other duties as generally pertains to his office. In the absence or disability of the Chairman of the Board, the Vice Chairman of the Board, if one has been appointed, shall assume the duties, powers and position of the said Chairman. The President shall be the Chief Executive Officer of the corporation and, in the absence or disability of the Chairman of the Board and the Vice Chairman of the Board, if the latter has been appointed, the President shall assume the duties, powers and position of the said Chairman. The remaining officers of the corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors. The Vice President or Vice Presidents, the Assistant Secretary or Assistant Secretaries and the Assistant Treasurer or Assistant Treasurers shall, in the order of their respective seniorities, in the absence or disability of the President, Secretary or Treasurer, respectively, perform the duties of such officer and shall generally assist the President, Secretary or Treasurer, respectively; provided, however, and notwithstanding anything 12 hereinabove to the contrary, that if the Board of Directors designates a Vice President as an Executive Vice President, he shall perform the duties of the President in his absence or disability, regardless of the order of seniority of said Executive Vice President to the other Vice Presidents. SECTION 4. VOTING CORPORATION'S SECURITIES. Unless otherwise ordered by the Board of Directors, the Chairman of the Board, or in the event of his inability to act, the President, or in the event of his inability to act, the Vice President designated by the Board of Directors to act in the absence of the President, shall have full power and authority on behalf of the corporation to attend and to act and to vote at any meetings of security holders of corporations in which the corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities, and which as the owner thereof the corporation might have possessed and exercised, if present. The Board of Directors, by resolution from time to time, may confer like powers upon any other person or persons. ARTICLE V CERTIFICATES OF STOCK SECTION 1. FORM AND TRANSFERS. The interest of each stockholder of the corporation shall be evidenced by certificates for shares of stock, certifying the number of shares represented 13 thereby and in such form not inconsistent with the Certificate of Incorporation as the Board of Directors may from time to time prescribe. Upon compliance with any provisions restricting the transferability of shares that may be set forth in the Certificate of Incorporation, these by-laws, or any written agreement in respect thereof, transfers of shares of the capital stock of the corporation shall be made only on the books of the corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation, or with a transfer clerk or a transfer agent appointed as in Section 4 of this Article provided, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided that whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact, if known to the Secretary of the corporation, shall be so expressed in the entry of transfer. The Board may, from time to time, make such additional rules and regulations as it may deem expedient, not inconsistent with these by-laws, concerning the issue, transfer, and registration of certificates for shares of the capital stock of the corporation. 14 The certificates of stock shall be signed by or in the name of the company by the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by such named holder, and sealed with the seal of the corporation. Such seal may be a facsimile, engraved or printed. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the company with the same effect as if he were such officer, transfer agent or registrar at the date of issue. SECTION 2. RECORD DATE FOR STOCKHOLDERS. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to or dissent from any corporate action in writing without a meeting, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall not be 15 more than sixty days nor less than ten days before the date of such meting, nor more than sixty days prior to any other action. If no record date is fixed: (1) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and (3) the record date for determining stockholders for any other purpose shall be the close of business on the day on which the Board of Directors adopts the resolution relating thereto. When a determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders has been made as provided in this paragraph, such determination shall apply to any adjournment thereof; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 3. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. No certificates for shares of stock in the corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction or theft and on delivery to the corporation, if the Board of Directors shall so require, of a bond of indemnity in such amount (not exceeding twice the value of the 16 shares represented by such certificate), upon such terms and secured by such surety as the Board of Directors may in its discretion require. SECTION 4. TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. SECTION 5. EXAMINATION OF BOOKS BY STOCKHOLDERS. The Board shall have power to determine, from time to time, whether and to what extent and at what times and places and under what conditions and regulations the accounts and books and documents of the corporation, or any of them, shall be open to the inspection of the stockholders; and no stockholder shall have any right to inspect any account or book or document of the corporation. ARTICLE VI FISCAL YEAR The fiscal year of the corporation shall begin on the first day of June in each year and shall end on the last day of May next following, unless otherwise determined by the Board of Directors. 17 ARTICLE VII CORPORATE SEAL The corporate seal of the corporation shall be in such form as the Board of Directors shall prescribe. ARTICLE VIII AMENDMENTS The by-laws of this corporation may be amended, altered or repealed and new by-laws not inconsistent with any provision of the Certificate of Incorporation, as amended, may be made (i) by the affirmative vote of a majority of the members of the Board of Directors then in office, or (ii) by the affirmative vote of the holders of at least 80% of the total voting power of all shares of stock of this corporation entitled to vote in the election of directors, considered for purposes of this Article VIII as one class. artsbylw\aar.bl July 30, 1999 - 8:31PM 18 EX-10.2 4 EXHIBIT 10.2 Exhibit 10.2 AMENDMENT NO. 2 TO RESTATED AND AMENDED DEATH BENEFIT AGREEMENT DATED AUGUST 24, 1984 BY AND BETWEEN AAR CORP. AND IRA A. EICHNER THIS AMENDMENT NO. 2 made this 25th day of May, 1990 by and between AAR CORP., a Delaware corporation (the "Company") and Ira A. Eichner ("Eichner"). WHEREAS, the Company and Eichner entered into the Restated and Amended Death Benefit Agreement dated August 24, 1984 (the "Death Benefit Agreement"); and WHEREAS, the Company and Eichner heretofore amended the Death Benefit Agreement and now desire to further amend the Death Benefit Agreement as herein set forth to reflect a certain mutually agreed upon change to the terms and conditions thereof; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the Company and Eichner do hereby covenant and agree that the third sentence of subparagraph (d) of paragraph 2 of the Death Benefit Agreement shall read as follows: "During, or as soon as practicable after the end of, each calendar year ending after the date of death of Eichner, the Company shall pay to his designated beneficiary a bonus in cash equal to the aggregate of (1) the federal, state and local income taxes, if any, incurred by his designated beneficiary as a result of income generated by the Trust and (2) the federal, state and local income taxes incurred by his designated beneficiary as a result of such bonus." IN WITNESS WHEREOF, the Company has caused this Amendment No. 2 to be executed, and Eichner has hereunto set his hand, on the date first set forth above. AAR CORP. By: /s/ David P. Storch --------------------------------- David P. Storch /s/ Ira A. Eichner ------------------------------------ IRA A. EICHNER AMENDMENT NO. 3 TO RESTATED AND AMENDED DEATH BENEFIT AGREEMENT DATED AUGUST 24, 1984 BY AND BETWEEN AAR CORP. AND IRA A. EICHNER This AMENDMENT NO. 3 made this 9th day of October, 1996 by and between AAR CORP., a Delaware corporation (the "Company") and Ira A. Eichner ("Eichner"). WHEREAS, the Company and Eichner entered into the Restated and Amended Death Benefit Agreement dated August 24, 1984 (the "Death Benefit Agreement"); and WHEREAS, the Company and Eichner further amended the Death Benefit Agreement by amendments dated August 12, 1988 and May 25, 1990; and WHEREAS, the Company and Eichner desire to further amend the Death Benefit Agreement as hereinafter set forth to reflect certain mutually agreed upon changes to the terms and conditions thereof; NOW THEREFORE, in consideration of the premises and mutual covenants herein contained, the Company and Eichner do hereby covenant and agree as follows: 1. Clause (i) of subparagraph (e) of paragraph 2 of the Death Benefit Agreement is amended to read as follows: "(i) `Income Tax Offset' with respect to any annual death benefit payment made to Eichner's designated beneficiary from the Trust shall mean an assumed aggregate federal, state and local income tax rate for such year of 31.87%." 2. The following is added to paragraph 13 of the Death Benefit Agreement: In addition to the Trust referred to in the preceding provisions of this paragraph, the Company shall also enter into a trust agreement with a bank or trust company (with a combined capital and surplus in excess of $100 million dollars) located in the continental United States as trustee, whereby the Company shall agree to establish and contribute to a trust ("Trust No. 2") for the purpose of accumulating additional assets to assist it in fulfilling its obligations to Eichner and his designated beneficiary hereunder. The Company shall make an aggregate contribution to Trust No. 2 in calendar year 1996 in the amount of $1,652,000 which may be used by the trustee of Trust No. 2, to the extent necessary, to provide the death benefit payable to Eichner's designated beneficiary hereunder and other benefits payable under Eichner's Restated and Amended Employment Agreement dated August 1, 1985. From time to time, the Company shall make additional contributions to Trust No. 2 as shall be necessary to provide the death benefit payable to Eichner's designated beneficiary hereunder. At the time set forth in Trust No. 2, the trustee thereof shall transfer all of the assets of Trust No. 2 to the trustee of the Trust referred to in the preceding provisions of this paragraph and thereafter Trust No. 2 shall terminate. Each contribution to Trust No.2 to be made by the Company pursuant to this paragraph 13 shall be in an amount or amounts determined by the independent actuary, or firm of independent actuaries, regularly 2 employed to provide actuarial services to the Company. IN WITNESS WHEREOF, the Company has caused this Amendment No. 3 to be executed in its name by its duly authorized officer, and Eichner has hereunto set his hand, on this 31st day of October, 1996. AAR CORP. By: /s/ Howard A. Pulsifer ---------------------------------------- Howard A. Pulsifer, Vice President /s/ Ira A. Eichner ------------------------------------------- Ira A. Eichner 3 [AAR CORP. LOGO LETTERHEAD] May 27, 1999 Mr. Ira A. Eichner 301 Polmer Park Palm Beach, FL 33480 RE: Agreement to Terminate Restated and Amended Death Benefit Agreement dated October 24, 1984 (AAR Contract No. 00319) by and between AAR CORP. and Ira A. Eichner ("Agreement") Dear Mr. Eichner: Please refer to the above referenced Agreement between you and AAR CORP. Section 5 thereof provides for termination of the Agreement upon mutual agreement between the parties. This letter will evidence the parties' mutual desire, understanding an agreement that the subject contract be terminated effective as of May 31, 1999, it being agreed that provisions regarding notice in such contract, if any, are hereby waived by the parties hereto. Please confirm your acknowledgement and agreement to the foregoing termination by signing a copy hereof in the space provided below and returning it to the undersigned. The other original is for your file. Sincerely, AAR CORP. /s/ Howard A. Pulsifer - -------------------------------------- Howard A. Pulsifer Vice President, General Counsel & Secretary HAP:jk Read, acknowledged and agreed to this 30 day of May, 1999: /s/ Ira A. Eichner - ------------------------------------ Ira A. Eichner EX-10.4 5 EXHIBIT 10.4 Exhibit 10.4 AMENDMENT III TO TRUST AGREEMENT DATED AUGUST 12, 1988, BY AND AMONG AAR CORP., THE NORTHERN TRUST COMPANY AND IRA A.. EICHNER WHEREAS, AAR CORP., The Northern Trust Company and Ira A. Eichner (the "Parties") entered into a trust agreement dated August 12,1988 (the "Trust Agreement"); and WHEREAS, the Trust Agreement was amended by Amendment I thereto dated May 25,1990 and Amendment II thereto dated February 4,1994; and WHEREAS, the Parties reserve the right to amend the Trust Agreement and now deem it appropriate to further amend the Trust Agreement in certain respects; NOW THEREFORE, the following paragraph is added at the end of Section 2.2 to read as follows: The Trustee also shall accept a transfer of assets from the trustee of a trust agreement dated October 17, 1996 by and among AAR CORP., The Northern Trust Company and Ira A. Eichner ("Trust No. 2") consisting of contributions made by the Company to the trustee of Trust No. 2 to assist the Company in fulfilling its obligations under the Agreements, and earnings thereon. Such amount shall be transferred to the Trustee from the trustee of Trust No. 2 as soon as practicable after the Transfer Date described in Trust No. 2, and such amount when received by the Trustee hereunder shall be treated in the same manner as contributions made by the Company to the Trust pursuant to the provisions of Section 2.1 above and this Section 2.2. IN WITNESS WHEREOF, the Parties have caused this Amendment III to the Trust Agreement to be executed as of the 9th day of October, 1996. AAR CORP. By: /s/ Howard A. Pulsifer ---------------------------------------- Howard A. Pulsifer, Vice President THE NORTHERN TRUST COMPANY By: /s/ Eva Bernacki Vice President ---------------------------------------- /s/ Ira A. Eichner ------------------------------------- Ira A. Eichner AMENDMENT IV TO TRUST AGREEMENT DATED AUGUST 12, 1988, BY AND AMONG AAR CORP., THE NORTHERN TRUST COMPANY AND IRA A. EICHNER WHEREAS, AAR CORP., The Northern Trust Company and Ira A. Eichner (the "Parties") entered into a trust agreement dated August 12,1988 (the "Trust Agreement"); and WHEREAS, the Trust Agreement was amended by Amendment I thereto dated May 25,1990, Amendment II thereto dated February 4,1994, and Amendment III thereto dated October 9, 1996; and WHEREAS, the Parties reserved the right to amend the Trust Agreement and now deem it appropriate to further amend the Trust Agreement in certain respects; NOW THEREFORE, Section 3.1 is hereby amended to read as follows: "3.1 The Company will serve as the benefits determiner ("Benefits Determiner") to determine the manner and the amount of payments to be made to Eichner or, in the event of Eichner's death to his Beneficiary, under the Agreements until such time as a successor Benefits Determiner is retained by the Trustee as provided for below; provided, however, the Company will use a nationally recognized U.S. firm providing actuarial and benefit consulting services in the United States to provide actuarial services in connection with determination of benefits hereunder and to review and confirm final calculations for accuracy. Upon Eichner's written request made at any time after the commencement of Retirement Benefits under the agreements, the Trustee shall retain a successor Benefits Determiner and so notify the Company, provided that any successor Benefits Determiner shall be (i) jointly selected by the Trustee and Eichner (or Eichner's Beneficiary in the event of Eichner's death), (ii) a nationally recognized firm providing actuarial and benefit consulting services primarily in the United States, and (iii) independent of, and not providing services to, the Company or Eichner (or his Beneficiary). The Trustee shall from time to time, upon the direction of the Benefits Determiner, make distributions or payments out of the Trust Fund to Eichner or, in the event of his death, to his Beneficiary, in cash or in property in such manner and amounts as the Benefits Determiner deems necessary to satisfy the Company's obligation to provide the Benefits under the Agreements. The Company, or if the Company fails to do so within ten days after the receipt of a written request from the Trustee, Eichner (or Eichner's Beneficiary in the event of Eichner's death) shall provide the Benefits Determiner with sufficient information to determine the Benefits payable under the Agreements." IN WITNESS WHEREOF, the Parties have caused this Amendment IV to the Trust Agreement to be executed as of the 30 day of May, 1999. AAR CORP. By: /s/ Howard A. Pulsifer --------------------------------------- Howard A. Pulsifer, Vice President THE NORTHERN TRUST COMPANY By: --------------------------------------- /s/ Ira C. Eichner ------------------------------------- Ira A. Eichner EX-21.1 6 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF AAR CORP. (1)
STATE OF NAME OF CORPORATION INCORPORATION -------------------- -------------- AAR Aircraft Services, Inc. (2)................................ Oklahoma AAR Airframe & Accessories Group, Inc. (3)..................... Illinois AAR Allen Services, Inc. (4)................................... Illinois AAR Aircraft & Engine Group, Inc. (5).......................... Illinois AAR Engine Services, Inc. (6).................................. Illinois AAR Financial Services Corp.................................... Illinois AAR International, Inc. (7).................................... Illinois AAR Manufacturing Group, Inc. (8).............................. Illinois
- --------------------- (1) Subsidiaries required to be listed pursuant to Regulation S-K Item 601(b)(21). (2) Formerly know as AAR Aircraft Group, Inc. (3) Also does business under the names AAR Allen Aircraft, AAR Distribution, AAR Expendables, and AAR Defense Systems. Formerly known as AAR Allen Group, Inc. (4) Also does business under the names AAR Landing Gear, AAR Component Services, and Mars Aircraft Radio. (5) Also does business under the names AAR Aircraft Turbine Center, AAR Aircraft Sales and Leasing, and AAR Engine Sales & Leasing. Formerly known as AAR Engine Group, Inc. (6) Also does business under the name AAR Engine Component Services and AAR Energy Services. (7) Also does business under the names AAR Distribution, AAR Aircraft Component Services, AAR Engine Group International, and AAR Allen Group International. (8) Also does business under the names AAR Cargo Systems, AAR Cadillac Manufacturing, AAR Composites, AAR Craig Systems, and AAR Skydyne. AAR Manufacturing Group, Inc. was formerly known as AAR Brooks & Perkins Corp. EX-23.1 7 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF KPMG LLP The Board of Directors AAR CORP.: We consent to the incorporation by reference in Registration Statements Nos. 33-19767, 333-71067, 333-44693, 333-38671, 33-26783, 33-38042, 33-43839, 33-58456, 333-56023, 33-57753, 333-15327, 333-22175, 333-26093, 333-00205 and 002-002-95635 on Form S-8 and in Registration Statement No. 333-52853 on Form S-3 of AAR CORP. of our report dated June 23, 1999 relating to the consolidated balance sheets of AAR CORP. and subsidiaries as of May 31, 1999 and 1998 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended May 31, 1999, which report appears in the May 31, 1999 annual report on Form 10-K of AAR CORP. KPMG LLP Chicago, Illinois August 17, 1999 EX-27.1 8 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MAY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR MAY-31-1999 JUN-01-1998 MAY-31-1999 8,250 0 169,132 4,830 270,654 508,186 184,172 80,160 726,630 173,586 180,939 0 0 28,998 297,037 726,630 918,036 918,036 744,777 840,655 0 2,902 17,595 59,786 18,115 41,671 0 0 0 41,671 1.51 1.49 Provision for doubtful accounts is included in Total Costs and Expenses. Interest expense is presented net of $972 of interest income.
-----END PRIVACY-ENHANCED MESSAGE-----