Item 1.01. Entry into a Material Definitive Agreement.
On July 30, 2020, AAR Aircraft Services, Inc., Aviation Maintenance
Staffing, Inc., and AAR Landing Gear LLC, direct and indirect wholly-owned subsidiaries (the “Subsidiaries”) of AAR
CORP. (the “Company”), entered into a Payroll Support Program Agreement (the “PSP Agreement”) with the
U.S. Department of the Treasury (“Treasury”) with respect to the grant program (the “Payroll Support Program”)
under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). On April 3, 2020, the Company applied for
$136,446,791.00 of payroll support under the Payroll Support Program.
Payroll Support Program Agreement
Pursuant to the PSP Agreement, the Subsidiaries expect to receive
from Treasury $57,180,647.00 in the aggregate. The funding is expected to be disbursed in two installments: 75% ($42,885,485.00)
on the closing date (the “Initial Disbursement”), which was received on July 30, 2020 (the “Closing Date”),
and one additional disbursement of 25% on August 31, 2020.
In connection with the receipt of financial assistance
under the Payroll Support Program, the Subsidiaries are required to comply with the relevant provisions of the CARES Act,
including the requirement that the funding be used exclusively for the continuation of payment of employee wages, salaries
and benefits. The Subsidiaries will also be subject to certain restrictions, including, but not limited to, limitations on
involuntary terminations and furloughs and reductions in the pay rate of employees earning wages or salaries (as well as
reductions in benefits) from the signing date of the PSP Agreement through September 30, 2020. In addition, the Subsidiaries
and the Company are required to eliminate the payment of dividends and the repurchase of shares through September 30, 2021,
and are subject to certain limitations on employee compensation through March 24, 2022.
Promissory Note
As compensation to Treasury for the provision of financial
assistance under the PSP Agreement, the Company issued Treasury a promissory note that is guaranteed by certain of the
Company’s subsidiaries, including the Subsidiaries (the “Promissory Note”). In connection with the Initial
Disbursement, the Promissory Note was issued at an initial principal amount of $2,369,613.00. Upon the subsequent
disbursement of payroll support to the Subsidiaries, the principal amount of the Promissory Note will be increased in an
amount equal to 44% of any disbursement in excess of $37,500,000.00, up to a principal amount of $8,659,485.00. The
Promissory Note will bear interest at a rate per annum equal to the sum of (i) 1.00% until the fifth anniversary of the
Closing Date, and the applicable secured overnight financing rate plus 2.00% thereafter until the tenth anniversary of the
Closing Date (the “Maturity Date”), which is payable in cash, plus (ii) 3.0% until the fifth anniversary of the
Closing Date, and increasing by 1.0% each anniversary thereafter until the Maturity Date (the “PIK Interest
Rate”), which may be paid either in cash or in kind. If the Company does not elect to pay such PIK Interest Rate amount
in cash, the principal amount of the Promissory Note will be increased by such amount. The Company may, at any time, make
voluntary prepayments of amounts due under the Promissory Note without penalty or premium.
The Promissory Note is the Company’s senior unsecured
obligation. It contains certain events of default, including cross-default with respect to acceleration or failure to pay at maturity
other material indebtedness. Subject to certain grace periods, upon the occurrence of an event of default, the outstanding obligations
under the Promissory Note may, and in certain circumstances will automatically, be accelerated and become due and payable immediately.