- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1998 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 Former name, former address and former fiscal year, if changed since last report. 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 / / (APPLICABLE ONLY TO CORPORATE ISSUERS) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. $1.00 par value, 27,533,109 shares outstanding as of NOVEMBER 30, 1998. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
AAR CORP. AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q NOVEMBER 30, 1998 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE --------- <S> <C> <C> PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets............................................... 3 Condensed Consolidated Statements of Income......................................... 4 Condensed Consolidated Statements of Cash Flows..................................... 5 Condensed Consolidated Statements of Comprehensive Income........................... 6 Notes to Condensed Consolidated Financial Statements................................ 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 10-13 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................................. 14 Item 6. Exhibits and Reports on Form 8-K Exhibits............................................................................ 14 Reports on Form 8-K................................................................. 14 SIGNATURE PAGE....................................................................................... 15 </TABLE> 2
PART I, ITEM 1 - FINANCIAL STATEMENTS AAR CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF NOVEMBER 30, 1998 AND MAY 31, 1998 (000S OMITTED) <TABLE> <CAPTION> MAY 31, 1998 ------------- (DERIVED FROM NOVEMBER 30, AUDITED 1998 FINANCIAL --------------- STATEMENTS) (UNAUDITED) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents....................................................... $ 27,091 $ 17,222 Accounts receivable, less allowances of $4,045 and $3,157 respectively.......... 178,975 163,359 Inventories..................................................................... 276,449 229,930 Equipment on or available for short-term lease.................................. 35,311 33,495 Deferred tax assets, deposits and other......................................... 29,674 24,394 --------------- ------------- Total current assets.......................................................... 547,500 468,400 --------------- ------------- Property, plant and equipment, net................................................ 91,856 82,905 Other assets: Investments in leveraged leases................................................. 26,733 36,533 Equipment on long-term leases................................................... -- 24,611 Cost in excess of underlying net assets of acquired companies................... 35,683 26,565 Joint ventures, retirement benefits, notes receivable and other................. 35,644 31,545 --------------- ------------- 98,060 119,254 --------------- ------------- $ 737,416 $ 670,559 --------------- ------------- --------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt............................................ $ 257 $ 237 Accounts payable................................................................ 161,958 112,980 Accrued liabilities............................................................. 30,578 29,614 Accrued taxes on income......................................................... 7,393 6,317 --------------- ------------- Total current liabilities..................................................... 200,186 149,148 --------------- ------------- Long-term debt, less current maturities........................................... 178,927 177,509 Deferred tax liabilities.......................................................... 40,488 36,850 Retirement benefit obligation and other liabilities............................... 3,029 6,202 --------------- ------------- 222,444 220,561 --------------- ------------- Stockholders' equity: Preferred stock, $1.00 par value, authorized 250 shares, none issued............ -- -- Common stock, $1.00 par value, authorized 80,000 shares; issued 28,897 and 28,832 shares, respectively................................................... 28,897 28,832 Capital surplus................................................................. 142,323 140,898 Retained earnings............................................................... 167,193 152,233 Treasury stock, 1,343 and 1,128 shares at cost, respectively.................... (20,425) (16,470) Accumulated other comprehensive income (expense): Cumulative translation adjustments............................................ (3,202) (4,643) --------------- ------------- 314,786 300,850 --------------- ------------- $ 737,416 $ 670,559 --------------- ------------- --------------- ------------- </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements 3
AAR CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997 (UNAUDITED) (000S OMITTED EXCEPT PER SHARE DATA) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ---------------------- ---------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Net sales....................................................... $ 228,798 $ 180,156 $ 444,696 $ 351,062 ---------- ---------- ---------- ---------- Costs and operating expenses: Cost of sales................................................. 186,058 146,101 360,907 285,079 Selling, general and administrative........................... 23,839 19,139 46,849 38,173 ---------- ---------- ---------- ---------- 209,897 165,240 407,756 323,252 Operating income................................................ 18,901 14,916 36,940 27,810 Interest expense................................................ (4,611) (3,057) (8,873) (5,816) Interest income................................................. 108 157 137 476 ---------- ---------- ---------- ---------- Income before provision for income taxes........................ 14,398 12,016 28,204 22,470 Provision for income taxes...................................... 4,363 3,605 8,546 6,749 ---------- ---------- ---------- ---------- Net income...................................................... $ 10,035 $ 8,411 $ 19,658 $ 15,721 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income per share - Basic.................................... $ .36 $ .31 $ .71 $ .57 Net income per share - Diluted.................................. $ .36 $ .30 $ .70 $ .56 Weighted average common shares outstanding - Basic....................................................... 27,570 27,529 27,642 27,509 Weighted average common shares outstanding - Diluted..................................................... 28,042 28,109 28,210 28,067 Dividends paid and declared per share of common stock........... $ .085 $ .08 $ .17 $ .16 </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 4
AAR CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997 (UNAUDITED) (000S OMITTED) <TABLE> <CAPTION> SIX MONTHS ENDED NOVEMBER 30, ---------------------- 1998 1997 ---------- ---------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................................. $ 19,658 $ 15,721 Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization........................................................ 8,430 7,251 Change in certain assets and liabilities: Accounts receivable................................................................ (18,657) (8,964) Inventories........................................................................ (49,333) (24,185) Equipment on or available for short term lease..................................... 2,038 (10,478) Retirement benefit obligation, deferred taxes, deposits and other.................. 1,729 (1,865) Accounts payable and other liabilities............................................. 49,361 9,598 Accrued liabilities and taxes on income............................................ (7,615) (4,980) ---------- ---------- Net cash provided from (used in) operating activities.................................. 5,611 (17,902) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment expenditures, net........................................ (16,262) (6,326) Acquisitions, less cash acquired....................................................... (6,000) (18,973) Proceeds from sale of business......................................................... 11,685 -- Investment in equipment on long-term leases and leveraged leases....................... 30,689 (8,723) Notes receivable and other............................................................. (7,541) (4,023) ---------- ---------- Net cash provided from (used in) investing activities.................................. 12,571 (38,045) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in borrowings................................................................... (123) 14,032 Cash dividends......................................................................... (4,697) (4,405) Purchases of treasury stock............................................................ (3,520) -- Proceeds from exercise of stock options and other...................................... 30 1,573 ---------- ---------- Net cash provided from (used in) financing activities.................................. (8,310) 11,200 ---------- ---------- Effect of exchange rate changes on cash.................................................. (3) 32 ---------- ---------- Increase (decrease) in cash and cash equivalents......................................... 9,869 (44,715) Cash and cash equivalents, beginning of period........................................... 17,222 51,705 ---------- ---------- Cash and cash equivalents, end of period................................................. $ 27,091 $ 6,990 ---------- ---------- ---------- ---------- </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5
AAR CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1997 (000S OMITTED) <TABLE> <CAPTION> SIX MONTHS ENDED NOVEMBER 30, ---------------------- 1998 1997 ---------- ---------- <S> <C> <C> Net income............................................................................... $ 19,658 $ 15,721 Other comprehensive income (loss): Foreign currency translation........................................................... 1,441 (1,534) ---------- ---------- Total Comprehensive Income............................................................... $ 21,099 $ 14,187 ---------- ---------- ---------- ---------- </TABLE> The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 6
AAR CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 1998 (000S OMITTED) NOTE A -- BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of AAR CORP. ("the Company") and its subsidiaries after elimination of intercompany accounts and transactions. Turbine Engine Asset Management, L.L.C. (TEAM), a joint venture, was formed in the fiscal year ending May 31, 1998 ("fiscal year") to distribute certain engine parts to aviation customers worldwide. During the first quarter of fiscal 1999, Aviation Inventory Management Co. L.L.C. (AIMCO), a joint venture, was formed. AIMCO offers customers an alternative to owning aircraft rotable spares. The Company's investment in the joint ventures are being accounted for under the equity method of accounting. During the second quarter of fiscal 1999, the Company divested substantially all of the assets and liabilities of its floor maintenance products manufacturing subsidiary. Proceeds of $11.7 million received from the sale of this business approximated the Company's net value. These statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of May 31, 1998 has been derived from audited financial statements. To prepare the financial statements in conformity with generally accepted accounting principles, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of management of the Company, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of AAR CORP. and its subsidiaries as of November 30, 1998 and the condensed consolidated results of operations, for the three and six-month periods ended November 30, 1998 and 1997 and condensed consolidated statement of cash flows and comprehensive income for the six-month periods ended November 30, 1998 and 1997. The results of operations for such interim periods are not necessarily indicative of the results for the full year. NOTE B -- INVENTORY The summary of inventories is as follows: <TABLE> <CAPTION> NOVEMBER 30, MAY 31, 1998 1998 --------------- ----------- <S> <C> <C> Raw materials and parts......................................... $ 48,998 $ 46,573 Work-in-process................................................. 17,178 15,787 Purchased aircraft, parts, engines and components held for sale.......................................................... 210,273 166,140 Finished goods.................................................. -- 1,430 --------------- ----------- $ 276,449 $ 229,930 --------------- ----------- --------------- ----------- </TABLE> 7
AAR CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 1998 -- (CONTINUED) (000S OMITTED) NOTE C -- SUPPLEMENTAL CASH FLOWS INFORMATION Supplemental information on cash flows: <TABLE> <CAPTION> SIX MONTHS ENDED NOVEMBER 30, -------------------- 1998 1997 --------- --------- <S> <C> <C> Interest paid............................................................ $ 8,285 $ 5,703 Income taxes paid........................................................ 2,975 2,850 Income tax refunds received.............................................. 370 215 </TABLE> NOTE D -- COMMON STOCK AND EARNINGS PER SHARE OF COMMON STOCK The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options. The following table provides a reconciliation of the computations of basic and diluted earnings per share information for the three and six-month periods ended November 30, 1998 and 1997. <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ENDED ENDED NOVEMBER 30, NOVEMBER 30, -------------------- -------------------- 1998 1997 1998 1997 --------- --------- --------- --------- <S> <C> <C> <C> <C> Basic EPS Net income................................... $ 10,035 $ 8,411 $ 19,658 $ 15,721 Common shares outstanding.................... 27,570 27,529 27,642 27,509 --------- --------- --------- --------- Basic earnings per share..................... .36 .31 .71 .57 --------- --------- --------- --------- --------- --------- --------- --------- Diluted EPS Net income................................... $ 10,035 $ 8,411 $ 19,658 $ 15,721 Common shares outstanding.................... 27,570 27,529 27,642 27,509 Additional shares due to hypothetical exercise of stock options.................. 472 580 568 558 --------- --------- --------- --------- 28,042 28,109 28,210 28,067 --------- --------- --------- --------- Diluted earnings per share................... $ .36 $ .30 $ .70 $ .56 --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> 8
AAR CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 1998 -- (CONTINUED) (000S OMITTED) NOTE D -- COMMON STOCK AND EARNINGS PER SHARE OF COMMON STOCK (CONTINUED) In January, 1998 the Board of Directors declared a three-for-two stock split which was paid February 23, 1998 to stockholders 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%. All prior year common shares outstanding and earnings per share amounts have been restated to reflect the three-for-two stock split. NOTE E -- NEW 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 (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company adopted the provisions of SFAS No. 130 during the three-month period ended August 31, 1998. 9
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AAR CORP. AND SUBSIDIARIES RESULTS OF OPERATIONS (000S OMITTED EXCEPT PERCENT DATA) Three and Six-Month Period Ended November 30, 1998 (as compared with the same period of the prior year) The Company reports its activities in one business segment: Aviation Services. The table below sets forth consolidated net sales for the Company's classes of similar products and services within this segment for the three and six months ended November 30, 1998 and 1997. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ------------------------ ------------------------ 1998 1997 1998 1997 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Net Sales: Aircraft and Engines.................. $ 98,271 $ 76,943 $ 188,340 $ 156,724 Airframe and Accessories.............. 96,969 74,535 189,884 144,601 Manufacturing......................... 33,558 28,678 66,472 49,737 ----------- ----------- ----------- ----------- $ 228,798 $ 180,156 $ 444,696 $ 351,062 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- </TABLE> Three-Month Period Ended November 30, 1998 (as compared with the same period of the prior year) Consolidated net sales for the second quarter of the Company's fiscal year ending May 31, 1999 (fiscal 1999) increased $48.6 million or 27.0% over the same period in the prior fiscal year. Net sales increased in all three of the Company's classes of similar products and services reflecting strong demand for the Company's products and services and the impact of acquisitions. Aircraft and Engine sales increased $21.3 million or 27.7% reflecting growth in the engine parts and aircraft sales and leasing businesses, partially offset by the unfavorable impact of certain engine part sales which were recorded by Turbine Engine Asset Management L.L.C. (an unconsolidated joint venture company) during the second quarter of fiscal 1999, but which were recorded by Aircraft and Engines during the second quarter of fiscal 1998. Net sales in Airframe and Accessories increased $22.4 million or 30.0% during the second quarter of fiscal 1999 reflecting the inclusion of sales from AVSCO, which was acquired December 31, 1997, and higher demand for the Company's aircraft maintenance and certain large component overhaul services. Net sales in Manufacturing increased $4.9 million or 17.0%, reflecting the inclusion of sales from ATR, which was acquired in October 1997, and higher sales of cargo loading handling systems. Consolidated gross profit increased $8.7 million or 25.5% over the prior year period due to increased consolidated net sales, partially offset by a slight decrease in the consolidated gross profit margin to 18.7% from 18.9%. The reduction in the consolidated gross profit margin was primarily attributable to the mix of inventories sold and lower margins in the Company's new parts distribution business as a result of business interruptions from new systems integration. Consolidated operating income increased $4.0 million or 26.7% compared to the prior year period as a result of increased consolidated net sales, partially offset by higher 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 impact of acquisitions and higher marketing support and personnel costs. Consolidated net income increased $1.6 million or 19.3% over the prior year period due primarily to the factors discussed above. 10
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AAR CORP. AND SUBSIDIARIES RESULTS OF OPERATIONS (000S OMITTED EXCEPT RATIOS) Six-Month Period Ended November 30, 1998 (as compared with the same period of the prior year) Consolidated net sales for the first half of fiscal 1999 increased $93.6 million or 26.7% over the prior year six month period reflecting increased demand for the Company's products and services and the impact of acquisitions. Aircraft and Engine sales increased $31.6 million or 20.2% principally due to higher sales in the Company's engine parts business. Airframe and Accessories sales increased $45.3 million or 31.3% reflecting the inclusion of sales from the AVSCO acquisition and higher demand for the Company's aircraft maintenance and certain large component overhaul services. Net sales in Manufacturing increased $16.7 million or 33.6% due to the inclusion of sales from the ATR acquisition, and higher demand for products supporting the United States Government's rapid deployment program and cargo loading handling systems. Consolidated gross profit increased $17.8 million or 27.0% over the prior year period due to increased consolidated net sales. The Company's consolidated gross profit margin remained unchanged at 18.8% for the six month period ended November 30, 1998. Consolidated operating income increased $9.1 million or 32.8% compared to the prior year period as a result of increased consolidated net sales, partially offset by higher 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 impact of acquisitions and higher marketing support and personnel costs. Consolidated net income increased $3.9 million or 25.0% over the prior year period due primarily to the factors discussed above. 11
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AAR CORP. AND SUBSIDIARIES FINANCIAL CONDITION (000S OMITTED EXCEPT RATIOS) At November 30, 1998 At November 30, 1998, the Company's liquidity and capital resources included cash of $27.1 million and working capital of $347.3 million. At November 30, 1998, the Company's ratio of long-term debt to capitalization was 36.2%, down from 37.1% at May 31, 1998. The Company continues to maintain its available external sources of financing including $186.3 million of unused bank lines, a universal shelf registration 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, and an accounts receivable securitization program where the Company may sell an interest in a defined pool of accounts receivable up to $35 million. During the six month period ended November 30, 1998, the Company generated $5.6 million of cash from operations compared to using $17.9 million of cash in operations during the six month period ended November 30, 1997. The increase in cash generated from operations was principally due to the timing of the payment of accounts payable and higher net income during the six-month period ended November 30, 1998. During the six month period ended November 30, 1998, the Company's investing activities generated $12.6 million of cash compared to using $38.0 million of cash during the six month period ended November 30, 1997. The increase in cash provided from investing activities was attributable to cash received from the divestiture of the Company's floor maintenance products manufacturing subsidiary of $11.7 million, and proceeds from the sale of equipment on long-term lease and the sale of an equity interest in a leveraged lease, offset by an increase in capital expenditures related to systems enhancements and facility expansions. During the six month period ended November 30, 1998, the Company's financing activities used $8.3 million of cash reflecting the payment of cash dividends and the purchase of $3.5 million of the Company's stock. The Company believes that its cash and cash equivalents and available sources of financing 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 financial conditions, ratios, and lines of credit follows: <TABLE> <CAPTION> NOVEMBER 30, MAY 31, DESCRIPTION 1998 1998 - ------------------------------------------------------------------------------------ --------------- ----------- <S> <C> <C> Working capital..................................................................... $ 347,314 $ 319,252 Current ratio....................................................................... 2.7:1 3.1:1 Bank credit lines: Borrowings outstanding............................................................ $ -- $ -- Available but unused lines........................................................ 186,290 190,970 --------------- ----------- Total credit lines.................................................................. $ 186,290 $ 190,970 --------------- ----------- --------------- ----------- Long-term debt, less current maturities............................................. $ 178,927 $ 177,509 Ratio of long-term debt to capitalization........................................... 36.2% 37.1% </TABLE> - ------------------- * See "Forward Looking Statements" section of this item. 12
PART I, ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AAR CORP. AND SUBSIDIARIES FINANCIAL CONDITION (000S OMITTED EXCEPT RATIOS) 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 recently acquired new parts distribution business, the Company's manufacturing businesses and the Company's overhaul businesses. The capital outlay associated with the replacement systems, which are scheduled to be in place by June 1999, is expected to be approximately $10,400 of which approximately $4,800 and $3,300 was paid during the six month period ended November 30, 1998 and the twelve month period ended May 31, 1998, respectively.* The Company is developing alternate plans in the event the new systems are not successfully implemented within the planned time frame. The Company has conducted a preliminary Year 2000 compliance review of its internal systems which are not being replaced. At this time, the Company believes that its existing major financial systems are Year 2000 compliant.* In addition to the cost of the business application systems being implemented 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 and other technical support systems (the "sub-systems"). The Company is in the process of completing an inventory of the sub-systems, as well as the compliance status of the sub-systems. At this time, the Company believes that the cost to bring the sub-systems which are not Year 2000 compliant to compliance will be less than $1,000.* As part of its continuing review, the Company is communicating 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.* As any Year 2000 compliance failure risk is specifically identified, appropriate action will be taken to develop alternative contingency plans. FORWARD-LOOKING STATEMENTS Certain of the statements contained herein, including those under "Year 2000" above that are identified with an asterisk (*), are forward looking and are based on the beliefs of Company management as well as assumptions and estimates made based on information currently available to the Company. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. It is not reasonably possible to itemize the many factors and specific events that might cause the actual results to differ from the expected results; however, they may include replacement system implementation problems, unidentified Year 2000 problems, failure of third parties to be Year 2000 compliant, economic and aviation/aerospace market stability and Company profitability. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those described. - ------------------------ * See "Forward Looking Statements" section of this item. 13
PART II -- OTHER INFORMATION AAR CORP. AND SUBSIDIARIES NOVEMBER 30, 1998 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company was held on October 14, 1998. The following item was acted upon: Election of three Class II directors to serve until the 2001 Annual Meeting of Stockholders. Three directors were nominated for election. Directors nominated who receive the majority of votes cast are elected as directors. Those directors and the voting results were as follows: <TABLE> <CAPTION> VOTES VOTES BROKER "FOR" "ABSTAINED" "NON-VOTES" ------------- ---------------- ----------------- <S> <C> <C> <C> Edward D. Jannotta........................... 25,163,939 270,615 -- Lee B. Stern................................. 25,265,125 169,429 -- Richard D. Tabery............................ 25,273,577 160,977 -- </TABLE> No other matters were presented to the Company's shareholders for action at the Annual Meeting of Stockholders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS <TABLE> <CAPTION> ITEM - ---------------------------------- <S> <C> <C> 10. Material Contracts 10.1 Fifth Amendment to AAR Corp. Stock Benefit Plan dated December 16, 1998. 27. Financial Data Schedule 27.1 Financial Data Schedule for the Registrant's six-month interim period ended November 30, 1998. </TABLE> (B) REPORTS ON FORM 8-K FOR QUARTER ENDED NOVEMBER 30, 1998: The Company filed no reports on Form 8-K during the three months ended November 30, 1998. 14
SIGNATURE Pursuant to the requirements 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: January 13, 1999 /s/ TIMOTHY J. ROMENESKO -------------------------------------- Timothy J. Romenesko VICE PRESIDENT, CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER AND OFFICER DULY AUTHORIZED TO SIGN ON BEHALF OF REGISTRANT) 15