Exhibit 4.1


 


EXECUTION COPY


 




 


 





AAR CORP.


 


 


(a Delaware corporation)


 


 


Convertible Senior Notes due
2026


 


 


 


PURCHASE AGREEMENT


 


 


Dated:  January 26, 2006


 




 





 

















 


AAR CORP.

(a Delaware corporation)


 


$125,000,000

Convertible Senior Notes due 2026


 


PURCHASE AGREEMENT


 


January 26, 2006


 


MERRILL LYNCH & CO.

Merrill Lynch, Pierce, Fenner & Smith


Incorporated


as Representative of the several Initial Purchasers

4 World Financial Center

New York, New York  10080


 


Ladies and Gentlemen:


 


AAR CORP., a Delaware corporation (the “Company”),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated (“Merrill Lynch”) and the other
Initial Purchasers named in Schedule A hereto (collectively, the “Initial
Purchasers,” which term shall also include any initial purchaser substituted as
hereinafter provided in Section 11 hereof), for whom Merrill Lynch is
acting as representative (in such capacity, the “Representative”), with respect
to the issue and sale by the Company and the purchase by the Initial
Purchasers, acting severally and not jointly, of the respective principal
amounts set forth in said Schedule A of $125,000,000 aggregate principal
amount of the Company’s Convertible Senior Notes due 2026 (the “Initial
Securities”), and with respect to the grant by the Company to the Initial
Purchasers of the option described in Section 2(b) hereof to purchase
all or any part of an additional $25,000,000 aggregate principal amount of
Convertible Senior Notes due 2026 (the “Option Securities” and together with
the Initial Securities, the “Securities”). 
The Securities are to be issued pursuant to an indenture to be dated as
of February 1, 2006 (the “Indenture”) between the Company and U.S. Bank
National Association, as trustee (the “Trustee”).


 


The Securities are convertible, subject to
certain conditions as described in the Final Offering Memorandum (as defined
below), prior to maturity (unless previously redeemed or otherwise purchased)
into cash or a combination of cash and shares of common stock, par value $1.00
per share, of the Company (the “Common Stock”) in accordance with the terms of
the Securities and the Indenture, as described in Schedule B hereto.  Securities issued in book-entry form will be
issued to Cede & Co. as nominee of The Depository Trust Company (“DTC”)
pursuant to a letter agreement, to be dated as of the Initial Closing Time (as
defined in Section 2(c)) (the “DTC Agreement”), among the Company, the
Trustee and DTC.


 


The Company understands that the Initial
Purchasers propose to make an offering of the Securities on the terms and in
the manner set forth herein and agrees that the Initial Purchasers may resell,
subject to the conditions set forth herein, all or a portion of the Securities
to


 

















 


purchasers (“Subsequent
Purchasers”) at any time after this Agreement has been executed and
delivered.  The Securities are to be sold
to the Initial Purchasers and resold by the Initial Purchasers without being
registered under the Securities Act of 1933, as amended (the “1933 Act”), in reliance
upon exemptions therefrom.  Pursuant to
the terms of the Securities and the Indenture, investors that acquire
Securities may only resell or otherwise transfer such Securities if such
Securities are hereafter registered under the 1933 Act or if an exemption from
the registration requirements of the 1933 Act is available (including the
exemption afforded by Rule 144A (“Rule 144A”) of the rules and
regulations promulgated under the 1933 Act by the Securities and Exchange
Commission (the “Commission”)).  On or
prior to the Initial Closing Time, the Company will enter into an agreement
with the Initial Purchasers (the “Registration Rights Agreement”), pursuant to
which, subject to the conditions set forth therein, the Company will be
required to file and use its reasonable efforts to have declared effective a
registration statement (the “Registration Statement”) under the 1933 Act to
register resales of the Securities and the shares of Common Stock issuable upon
conversion thereof.


 


Section 1.               Representations
and Warranties by the Company.


 


(a)  Representations
and Warranties.  The Company
represents and warrants to the Initial Purchasers as of the date hereof and as
of the Closing Time referred to in Section 2(c) hereof, and agrees
with the Initial Purchasers, as follows:


 


(i)            The
Company has prepared and delivered to each Initial Purchaser copies of a
preliminary offering memorandum dated January 26, 2006 (the “Preliminary
Offering Memorandum”) and has prepared and will deliver to each Initial
Purchaser, the next succeeding day, copies of a final offering memorandum dated
January 26, 2006 (the “Final Offering Memorandum”), each for use by each
Initial Purchaser in connection with its solicitation of purchases of, or
offering of, the Securities.  “Offering Memorandum”
means, with respect to any date or time referred to in this Agreement, the most
recent offering memorandum (whether the Preliminary Offering Memorandum or the
Final Offering Memorandum, or any amendment or supplement to either such
document), including exhibits thereto and any documents incorporated therein by
reference, which has been prepared and delivered by the Company to the Initial
Purchasers in connection with their solicitation of purchases of, or offering
of, the Securities.  All references in
this Agreement to financial statements and schedules and other information
which is “contained,” “included” or “stated” in the Offering Memorandum (or
other references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which are incorporated
by reference in the Offering Memorandum; and all references in this Agreement
to amendments or supplements to the Offering Memorandum shall be deemed to mean
and include the filing of any document under the Securities Exchange Act of
1934 (the “Exchange Act”) which is incorporated by reference in the Offering
Memorandum.


 


As of the
Applicable Time (as defined below), neither (x) the Offering Memorandum as of
the Applicable Time as supplemented by the final pricing term sheet, in the
form attached hereto as Schedule B (the “Pricing Supplement”), that has
been prepared and delivered by the Company to the Initial Purchasers in
connection with their solicitation of offers to purchase Securities, all considered
together (collectively, the


 


2

















 


“Disclosure Package”), nor (y) any individual
Supplemental Offering Materials (as defined below), when read together with the
Disclosure Package, included any untrue statement of a material fact or omitted
to state any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading.


 


“Applicable
Time” means 8:30 a.m. (Eastern time) on January 27, 2006 or such
other time as agreed by the Company and the Representative.


 


“Supplemental
Offering Materials” means any “written communication” (within the meaning of
the rules and regulations under the Securities Act of 1933, as amended
(the “Act”)) prepared by or on behalf of the Company, or used or referred to by
the Company, that constitutes an offer to sell or a solicitation of an offer to
buy the Securities other than the Offering Memorandum or amendments or
supplements thereto (including the Pricing Supplement), including, without
limitation, any road show relating to the Securities that constitutes such a
written communication.


 


As of its
issue date and as of the Closing Time, the Final Offering Memorandum will not
include an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  The documents incorporated or deemed to be
incorporated by reference in the Offering Memorandum at the time they were or
hereafter are filed with the Commission complied and will comply in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the Commission thereunder (the “1934 Act Regulations”), and,
when read together with the other information in the Offering Memorandum, at
the time the Offering Memorandum was issued and at the Closing Time, did not
and will not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading.  The
representations and warranties in this subsection shall not apply to
statements in or omissions from the Disclosure Package or the Final Offering
Memorandum made in reliance upon and in conformity with written information
furnished to the Company by any Initial Purchaser through the Representative
expressly for use therein.


 


(ii)           Neither
the Company nor any of its subsidiaries has sustained since the date of the latest
audited financial statements included in the Disclosure Package and the
Offering Memorandum, any material loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Disclosure Package and the
Final Offering Memorandum; and, since the respective dates as of which
information is given in the Disclosure Package and the Final Offering
Memorandum, there has not been any change in the capital stock or long term
debt of the Company or any of its subsidiaries (other than stock option
transactions, normal debt payments and other such transactions in the normal
course of business) or any material adverse change, or any development that
would reasonably be expected to involve a prospective material adverse change,
in or affecting the general affairs, management, financial position,
stockholders’ equity or results of operations of


 


3

















 


the Company and its subsidiaries (a “material
adverse change”), otherwise than as set forth or contemplated in the Disclosure
Package and the Final Offering Memorandum.


 


(iii)          The
financial statements, together with the related schedules and notes, included
in the Disclosure Package and the Final Offering Memorandum present fairly the
financial position of the Company and its consolidated subsidiaries at the
dates indicated and the statement of operations, stockholders’ equity and cash
flows of the Company and its consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity with
generally accepted accounting principles (“GAAP”) applied on a consistent basis
throughout the periods involved.  The
supporting schedules, if any, included in the Disclosure Package and the Final
Offering Memorandum present fairly in accordance with GAAP the information
required to be stated therein.  The
selected financial data and the summary financial information included in the
Disclosure Package and the Final Offering Memorandum present fairly the
information shown therein and have been compiled on a basis consistent with
that of the audited financial statements included in the Disclosure Package and
the Final Offering Memorandum.


 


(iv)          The
Company and its significant subsidiaries (within the meaning of Section 1-02(w)
of Regulation S-X under the Act) (each such significant subsidiary, a “Significant
Subsidiary”), have good and marketable title in fee simple to all real property
and good and marketable title to all personal property owned by them, in each
case free and clear of all liens, encumbrances and defects except such as are
described in the Disclosure Package and the Final Offering Memorandum or such
as do not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company and
its Significant Subsidiaries; and any real property and buildings held under
lease by the Company and its Significant Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its Significant Subsidiaries.


 


(v)           The
Company has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the Delaware, with power and authority
(corporate and other) to own its properties and through its subsidiaries
conduct its business as described in the Disclosure Package and the Final
Offering Memorandum, and has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, or is subject to no material
liability or disability by reason of the failure to be so qualified in any such
jurisdiction.


 


(vi)          Each
subsidiary of the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation with power and authority (corporate and other) to own its
properties, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any business so
as to require such qualification, or is subject to no


 


4

















 


material liability or disability by reason of
the failure to be so qualified in any such jurisdiction.


 


(vii)         The
Company has an authorized capitalization as set forth in the Disclosure Package
and the Final Offering Memorandum, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and issued and are
fully paid and non assessable; the shares of Common Stock initially issuable
upon conversion of the Securities have been duly and validly authorized and
reserved for issuance and, when issued and delivered against payment therefor
in accordance with the provisions of the Securities and the Indenture referred
to below, will be duly and validly issued, fully paid and non assessable and
will conform to the description of the Common Stock contained in the Disclosure
Package and the Final Offering Memorandum; and all of the issued shares of
capital stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non assessable and (except for
directors’ qualifying shares) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims.


 


(viii)        The
Securities have been duly authorized and, when issued and delivered pursuant to
this Agreement, will have been duly executed, authenticated, issued and
delivered and will constitute valid and legally binding obligations of the
Company entitled to the benefits provided by the Indenture between the Company
and the Trustee, under which they are to be issued; the Securities will rank
equal in right of payment with all of the Company’s other unsecured and
unsubordinated indebtedness. The Indenture has been duly authorized and
assuming the authorization, execution and delivery by the Trustee, when
executed and delivered by the Company and the Trustee, the Indenture will
constitute a valid and binding instrument, enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization
and other laws of general applicability relating to or affecting creditors’
rights and to general equity principles; and the Securities and the Indenture
will conform to the descriptions thereof in the Disclosure Package and the
Final Offering Memorandum.


 


(ix)           This
Agreement has been duly authorized, executed and delivered by the Company; and
the Registration Rights Agreement has been duly authorized and, assuming due
authorization, execution and delivery by the Initial Purchasers, when executed
and delivered by the Company, will constitute a valid and binding instrument of
the Company, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors’ rights and to general
equity principles.


 


(x)            None
of the transactions contemplated by this Agreement (including, without
limitation, the use of the proceeds from the sale of the Securities) will
violate or result in a violation of Section 7 of the Exchange Act, or any
regulation promulgated thereunder, including, without limitation, Regulations
G, T, U, and X of the Board of Governors of the Federal Reserve System.


 


(xi)           Prior
to the date hereof, neither the Company nor any of its affiliates has taken any
action which is designed to or which has constituted or which might have been


 


5

















 


expected to cause or result in stabilization
or manipulation of the price of any security of the Company in connection with
the offering of the Securities.


 


(xii)          The
issue and sale of the Securities and the compliance by the Company with all of
the provisions of the Securities, the Indenture, the Registration Rights
Agreement and this Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject, nor
will such action result in any violation of the provisions of the Certificate
of Incorporation or By-laws of the Company or any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their properties; and no
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the issue
and sale of the Securities or the consummation by the Company of the
transactions contemplated by this Agreement, the Registration Rights Agreement
or the Indenture, except such consents, approvals, authorizations,
registrations or qualifications as may be required under state securities or
Blue Sky laws in connection with the purchase and distribution of the
Securities by the Initial Purchasers.


 


(xiii)         Neither
the Company nor any of its subsidiaries is in violation of its Certificate of
Incorporation or By-laws or in default in the performance or observance of any
material obligation, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be bound.


 


(xiv)        The
statements set forth in the Offering Memorandum under the caption “Description
of the Notes” and “Description of Capital Stock”, insofar as they purport to
constitute a summary of the terms of the Securities and the Common Stock, under
the caption “Material United States Federal Income Tax Consequences”, and under
the caption “Plan of Distribution”, insofar as they purport to describe the
provisions of the laws and documents referred to therein, accurately summarize
or describe in all material respect the matters referred to therein.


 


(xv)         Other
than as set forth in the Disclosure Package and the Final Offering Memorandum,
there are no legal or governmental proceedings pending to which the Company or
any of its Significant Subsidiaries is a party or of which any property of the
Company or any of its Significant Subsidiaries is the subject which, if
determined adversely to the Company or any of its Significant Subsidiaries,
would individually or in the aggregate have a material adverse effect on the
current or future financial position, stockholders’ equity or results of
operations of the Company and its subsidiaries or on the power or ability of
the Company to perform its obligations under this Agreement, the Indenture, the
Registration Rights Agreement or the Securities or to consummate the
transactions contemplated herein and therein; and, to the best of the Company’s


 


6

















 


knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others.


 


(xvi)        The
Company and its Significant Subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants (“Environmental
Laws”), (ii) have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except as described in the
Disclosure Package and the Final Offering Memorandum and except where such
noncompliance with Environmental Laws, failure to receive required permits, licenses
or other approvals or failure to comply with the terms and conditions of such
permits, licenses or approvals would not, singly or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as a whole.


 


(xvii)       There
are no costs or liabilities associated with Environmental Laws (including,
without limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities
and any potential liabilities to third parties) which are not described in the
Disclosure Package and Final Offering Memorandum or which would, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.


 


(xviii)      When
the Securities are issued and delivered pursuant to this Agreement, the
Securities will not be of the same class (within the meaning of Rule 144A
under the Act) as securities which are listed on a national securities exchange
registered under Section 6 of the Exchange Act or quoted in a U.S.
automated inter-dealer quotation system.


 


(xix)         The
Company is subject to Section 13 or 15(d) of the Exchange Act.


 


(xx)          The
Company is not, and after giving effect to the offering and sale of the
Securities, will not be an “investment company”, as such term is defined in the
United States Investment Company Act of 1940, as amended (the “Investment
Company Act”).


 


(xxi)         Neither
the Company nor any person acting on its behalf (other than the Initial
Purchasers, as to whom the Company makes no representation) has offered or sold
the Securities by means of any general solicitation or general advertising
within the meaning of Rule 502(c) under the 1933 Act.


 


(xxii)        Within
the preceding six months, neither the Company nor any other person acting on
behalf of the Company has offered or sold to any person any Securities, or any
securities of the same or a similar class as the Securities, other than
Securities offered or sold to the Initial Purchasers hereunder.  The Company will take reasonable precautions
designed to provide assurance that any offer or sale, direct or indirect, in
the United States or to any U.S. person (as defined in Rule 902 under the
1933 Act) of any


 


7

















 


Securities or any substantially similar
security issued by the Company, within six months subsequent to the date on
which the distribution of the Securities has been completed (as notified to the
Company by the Representative), is made under restrictions and other
circumstances reasonably designed not to affect the status of the offer and
sale of the Securities in the United States and to U.S. persons contemplated by
this Agreement as transactions exempt from the registration provisions of the
1933 Act.


 


(xxiii)       To
the Company’s knowledge, KPMG LLP who have certified certain financial
statements of the Company and its subsidiaries, is an independent registered
public accounting firm as required by the 1933 Act and the rules and
regulations of the Commission thereunder.


 


(xxiv)       It
is not necessary in connection with the offer, sale and delivery of the
Securities to the Initial Purchasers in the manner contemplated by this
Agreement to register the Securities under the 1933 Act or to qualify the
Indenture under the Trust Indenture Act of 1939, as amended.


 


(xxv)        The
Company and each of its subsidiaries maintain a system of internal accounting
controls sufficient to provide reasonable assurance that (A) transactions
are executed in accordance with management’s general or specific
authorizations; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (C) access to
assets is permitted only in accordance with management’s general or specific
authorization; and (D) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.  Except
as described in the Disclosure Package and the Final Offering Memorandum, since
the end of the Company’s most recent audited fiscal year, there has been (1) no
material weakness in the Company’s internal control over financial reporting
(whether or not remediated) and (2) no change in the Company’s internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial reporting.


 


The Company
and its consolidated subsidiaries employ disclosure controls and procedures
that are designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the 1934 Act is recorded,
processed, summarized and reported, within the time periods specified in the
Commission’s rules and forms, and is accumulated and communicated to the
Company’s management, including its principal executive officer or officers and
principal financial officer or officers, as appropriate, to allow timely
decisions regarding disclosure.


 


(xxvi)       The
Company and its subsidiaries possess such permits, licenses, approvals,
consents and other authorizations (collectively, “Governmental Licenses”)
issued by the appropriate federal, state, local or foreign regulatory agencies
or bodies necessary to conduct the business now operated by them, except where
the failure so to possess would not, singly or in the aggregate, result in a
material adverse change; the Company and its subsidiaries are in compliance
with the terms and conditions of all such Governmental Licenses, except where
the failure so to comply would not, singly or in the aggregate, result in a
material adverse change; all of the Governmental Licenses are valid


 


8

















 


and in full force and effect, except where
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not, singly or in
the aggregate, result in a material adverse change; and neither the Company nor
any of its subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a material adverse change.


 


(xxvii)      There
is and has been no failure on the part of the Company or, to the knowledge of
the Company, any of the Company’s directors or officers, in their capacities as
such, to comply in all material respects with any provision of the
Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated in
connection therewith (the “Sarbanes-Oxley Act”), including Section 402
related to loans and Sections 302 and 906 related to certifications.


 


(xxviii)     To
the knowledge of the directors and officers of the Company, neither the Company
nor any director, officer, agent, employee, affiliate or other person acting on
behalf of the Company or any of its subsidiaries has taken any action, directly
or indirectly, that would result in a violation of the Foreign Corrupt
Practices Act of 1977, as amended, and the rules and regulations
thereunder (the “FCPA”), including, without limitation, making use of the mails
or any means or instrumentality of interstate commerce corruptly in furtherance
of an offer, payment, promise to pay or authorization of the payment of any
money, or other property, gift, promise to give, or authorization of the giving
of anything of value to any “foreign official” (as such term is defined in the
FCPA) or any foreign political party or official thereof or any candidate for
foreign political office, in contravention of the FCPA and the Company and, to
the knowledge of the Company, its affiliates have conducted their businesses in
compliance with the FCPA and have instituted and maintain policies and
procedures designed to ensure, and which are reasonably expected to continue to
ensure, continued compliance therewith.


 


(xxix)       The
operations of the Company are and have been conducted at all times in
compliance with applicable financial recordkeeping and reporting requirements
of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the
money laundering statutes of all jurisdictions, the rules and regulations
thereunder and any related or similar rules, regulations or guidelines, issued,
administered or enforced by any governmental agency (collectively, the “Money
Laundering Laws”) and no action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the Company
with respect to the Money Laundering Laws is pending or, to the best knowledge
of the Company, threatened.


 


(b)  Officer’s
Certificates.  Any certificate
signed by any officer of the Company or any of its subsidiaries delivered to
the Representative or to counsel for the Initial Purchasers shall be deemed a
representation and warranty by the Company to each Initial Purchaser as to the
matters covered thereby.


 


9

















 


Section 2.               Sale
and Delivery to Initial Purchasers; Closing.


 


(a)  Initial
Securities.  On the basis of
the representations, warranties and agreements herein contained and subject to
the terms and conditions herein set forth, the Company agrees to sell to each
Initial Purchaser, severally and not jointly, and each Initial Purchaser,
severally and not jointly, agrees to purchase from the Company, at a purchase
price of 96.75% of the principal amount thereof, $125,000,000 aggregate
principal amount of Initial Securities set forth in Schedule A opposite
the name of such Initial Purchaser, plus any additional principal amount of
Securities which such Initial Purchaser may become obligated to purchase
pursuant to the provisions of Section 11 hereof.


 


(b)  Option
Securities.  In addition, on
the basis of the representations, warranties and agreements herein contained
and subject to the terms and conditions herein set forth, the Company hereby
grants an option to the Initial Purchasers to purchase up to an additional
$25,000,000 aggregate principal amount of Option Securities at a purchase price
of 96.75% of the principal amount thereof, plus accrued and unpaid interest
from the Initial Closing Time to, but excluding, the Option Closing Time.  The option hereby granted will expire 30 days
after the date hereof and may be exercised at any time (but not more than once)
upon notice by the Representative to the Company setting forth the number of
Option Securities as to which each Initial Purchaser is then exercising the
option and the time and date of payment and delivery for such Option
Securities.  Any such time and date of
delivery (the “Option Closing Time”) shall be determined by the Representative
but shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Initial Closing Time, as hereinafter
defined.


 


(c)  Payment.  Payment of the purchase price for, and
delivery of certificates for, the Initial Securities shall be made at the office
of Shearman & Sterling LLP, 599 Lexington Avenue, New York, New York
10022, or at such other place as shall be agreed upon by the Representative and
the Company, at 9:00 A.M. (Eastern time) on the fourth business day after
the date hereof (unless postponed in accordance with the provisions of Section 11),
or such other time not later than ten business days after such date as shall be
agreed upon by the Representative and the Company (such time and date of
payment and delivery being herein called the “Initial Closing Time” and the
Initial Closing Time and the Option Closing Time, each being the applicable “Closing
Time”).


 


In addition, in the event that the Initial
Purchasers have exercised its option to purchase all or any of the Option
Securities, payment of the purchase price for, and delivery of one or more
global certificates for, such Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Representative and the Company, on the Option Closing Time as specified in the
notice from the Representative to the Company.


 


Payment shall be made to the Company by wire
transfer of immediately available funds to a bank account designated by the
Company, against delivery to the Representative for the respective accounts of
the Initial Purchasers of certificates for the Securities to be purchased by
them.  It is understood that each Initial
Purchaser has authorized the Representative, for its account, to accept delivery
of, receipt for, and make payment of the purchase price for, the Securities
which it has agreed to purchase.  Merrill
Lynch, individually and not as representative of the Initial Purchasers, may
(but shall not be obligated to) make payment of the purchase price


 


10

















 


for the Securities to be purchased by any Initial Purchaser whose funds
have not been received by Closing Time, but such payment shall not relieve such
Initial Purchaser from its obligations hereunder.


 


(d)  Denominations;
Registration.  Global
certificates for the Initial Securities and the Option Securities, if any,
shall be registered in the name of Cede & Co., as nominee of DTC, and
shall be in such denominations ($1,000 or integral multiples of $1,000 in
excess thereof) as the Representative may request in writing at least one full
business day before the Initial Closing Time or the Option Closing Time, as the
case may be.  The global certificates
representing the Initial Securities and the Option Securities, if any, shall be
made available for examination and packaging by the Initial Purchasers in The
City of New York not later than 10:00 A.M. on the last business day prior
to the Initial Closing Time or the Option Closing Time, as the case may be.


 


Section 3.               Covenants
of the Company.  The Company
covenants with each Initial Purchaser as follows:


 


(a)  Offering
Memorandum.  The Company, as
promptly as possible, will furnish to each Initial Purchaser, without charge,
such number of copies of the Offering Memorandum and any amendments and
supplements thereto and documents incorporated by reference therein as such
Initial Purchaser may reasonably request.


 


(b)  Notice
and Effect of Material Events. 
The Company will immediately notify each Initial Purchaser, and confirm
such notice in writing, of (x) any filing made by the Company of information
relating to the offering of the Securities with any securities exchange or any
other regulatory body in the United States or any other jurisdiction, and (y)
prior to the completion of the placement of the Securities by the Initial
Purchasers as evidenced by a notice in writing from the Initial Purchasers to
the Company, any material changes in or affecting the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise which (i) make
any statement in the Disclosure Package, any Offering Memorandum or any
Supplemental Offering Materials false or misleading or (ii) are not
disclosed in the Disclosure Package or the Offering Memorandum.  In such event or if during such time any
event shall occur as a result of which it is necessary, in the reasonable
opinion of any of the Company, its counsel, the Initial Purchasers or counsel
for the Initial Purchasers, to amend or supplement the Offering Memorandum in
order that the Offering Memorandum not include any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances then
existing, the Company will forthwith amend or supplement the Offering
Memorandum by preparing and furnishing to each Initial Purchaser an amendment
or amendments of, or a supplement or supplements to, the Offering Memorandum
(in form and substance satisfactory in the reasonable opinion of counsel for
the Initial Purchasers) so that, as so amended or supplemented, the Offering
Memorandum will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances existing at the time it is delivered to a Subsequent
Purchaser, not misleading.


 


(c)  Amendment
and Supplements to the Offering Memorandum; Preparation of Pricing Supplement;
Supplemental Offering Materials. 
The Company will advise each Initial Purchaser


 


11

















 


promptly of any proposal to amend or supplement the Offering Memorandum
and will not effect such amendment or supplement without the consent of the
Initial Purchasers.  Neither the consent
of the Initial Purchasers, nor the Initial Purchasers’ delivery of any such
amendment or supplement, shall constitute a waiver of any of the conditions set
forth in Section 5 hereof.  The
Company will prepare the Pricing Supplement, in form and substance satisfactory
to the Representative, and shall furnish prior to the Applicable Time to each
Initial Purchaser, without charge, as many copies of the Pricing Supplement as
such Initial Purchaser may reasonably request. 
The Company represents and agrees that, unless it obtains the prior
consent of the Representative, it has not made and will not make any offer
relating to the Securities by means of any Supplemental Offering Materials.


 


(d)  Qualification
of Securities for Offer and Sale. 
Promptly from time to time the Company will take such action as the
Initial Purchasers may reasonably request to qualify the Securities and the
shares of Common Stock issuable upon conversion thereof for offering and sale
under the applicable securities laws of such states and other jurisdictions as
the Initial Purchasers may designate and to maintain such qualifications in
effect as long as required for the sale of the Securities; provided that in
connection therewith the Company shall not be required to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified or to file any
general consent to service of process in any jurisdiction.


 


(e)  DTC.  The Company will cooperate with the Initial
Purchasers and use its reasonable best efforts to permit the Securities to be
eligible for clearance and settlement through the facilities of DTC.


 


(f)  Use
of Proceeds.  The Company will
use the net proceeds received by it from the sale of the Securities in the
manner specified in the Disclosure Package and the Final Offering Memorandum
under “Use of Proceeds.”


 


(g)  Restriction
on Sale of Securities.  During
a period of 60 days from the date of the Final Offering Memorandum, the Company
will not, without the prior written consent of Merrill Lynch, directly or
indirectly, (i) issue, sell, offer or agree to sell, grant any option for
the sale of, or otherwise dispose of, any other debt securities of the Company
or securities of the Company that are convertible into, or exchangeable for,
the offered Securities or such other debt securities, (ii) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
lend or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
or exchangeable for Common Stock, or file any registration statement under the
1933 Act with respect to any of the foregoing or (iii) enter into any swap
or other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, any of the economic consequence of ownership of the
Common Stock, or any securities convertible into or exchangeable or exercisable
for or exchangeable for Common Stock, whether any such swap or transaction
described in clause (ii) or (iii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise.  The foregoing sentence shall not apply to (A) the
Securities to be sold hereunder or the Common Stock to be delivered upon
conversion thereof, (B) the resale registration statement to be filed by
the Company pursuant to the Registration Rights Agreement relating to the resale
of the Securities and the shares of Common Stock or any other registration
statement filed pursuant to registration


 


12

















 


rights described in the Disclosure Package and the Final Offering
Memorandum and (C) shares of Common Stock to be issued pursuant to the
Company’s existing employee stock option plans (including reload options)
existing on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date hereof.


 


(h)  PORTAL
Designation.  The Company will
use its reasonable best efforts to permit the Securities to be designated
PORTAL securities in accordance with the rules and regulations adopted by
the National Association of Securities Dealers, Inc. (“NASD”) relating to
trading in the PORTAL Market.


 


(i)  Listing
on Securities Exchange.  The
Company will use its reasonable best efforts to cause all shares of Common
Stock issuable upon conversion of the Securities to be listed on the New York
Stock Exchange or on a “national securities exchange” registered under Section 6
of the 1934 Act.


 


(j)  Reporting Requirements.  Until the offering of the Securities is
complete, the Company will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by the
1934 Act and the 1934 Act Regulations.


 


Section 4.               Payment
of Expenses.


 


(a)  Expenses.  The Company will pay all expenses incident to
the performance of its obligations under this Agreement, including: (i) the
fees, disbursements and expenses of the Company’s counsel and accountants in
connection with the issue of the Securities and the shares of Common Stock
issuable upon conversion of the Securities and all other expenses in connection
with the preparation, printing and any filing of the Disclosure Package and any
Offering Memorandum and any amendments and supplements thereto and the mailing
and delivering of copies thereof to the Initial Purchasers and dealers; (ii) the
cost of printing or producing this Agreement, the Indenture, the Registration
Rights Agreement, the Blue Sky and Legal Investment Memoranda, closing
documents (including any compilations thereof) and any other documents in
connection with the offering, purchase, sale and delivery of the Securities; (iii) all
expenses in connection with the qualification of the Securities and the shares
of Common Stock issuable upon conversion of the Securities for offering and
sale under state securities laws as provided in Section 3(d) hereof,
including the fees and disbursements of counsel for the Initial Purchasers in
connection with such qualification and in connection with the Blue Sky and
legal investment surveys; (iv) any fees charged by securities rating
services for rating the Securities; (v) the cost of preparing the
Securities; (vi) the fees and expenses of the Trustee and any agent of the
Trustee and the fees and disbursements of counsel for the Trustee in connection
with the Indenture and the Securities; (vii) any cost incurred in
connection with the designation of the Securities for trading in PORTAL and the
listing of the shares of Common Stock issuable upon conversion of the
Securities and (viii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section; provided, however, that the Initial Purchasers
shall reimburse the Company for up to an aggregate of $937,500 of its
reasonably documented offering expenses. 
It is understood, however, that, except as provided in this Section, and
Sections 7 and 8 hereof, the Initial Purchasers will pay all of its own costs
and expenses, including the fees of its counsel, transfer


 


13

















 


taxes on resale of any of the Securities by them, and any advertising
expenses connected with any offers they may make.


 


(b)  Termination
of Agreement.  If this
Agreement is terminated by the Representative in accordance with the provisions
of Section 5 or Section 10(a)(i) hereof, the Company shall
reimburse the Initial Purchasers for their reasonable out-of-pocket expenses,
including the reasonable fees and disbursements of counsel for the Initial
Purchasers.


 


Section 5.               Conditions
of Initial Purchasers’ Obligations. 
The obligations of several Initial Purchasers hereunder are subject to
the accuracy of the representations and warranties of the Company contained in Section 1
hereof or in certificates of any officer of the Company or any of its
subsidiaries delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:


 


(a)  Opinion
of Counsel for Company.  At
the applicable Closing Time, the Initial Purchasers shall have received (1) the
favorable opinion, dated as of such Closing Time, of Schiff Hardin LLP, counsel
for the Company, in form and substance satisfactory to counsel for the Initial
Purchasers, to the effect set forth in Exhibit A(1) hereto and to
such further effect as counsel to the Initial Purchasers may reasonably request
and (2) the favorable opinion, dated as of such Closing Time, of Howard A.
Pulsifer, Esq., General Counsel for the Company, in form and substance
satisfactory to counsel for the Initial Purchasers, to the effect set forth in Exhibit A(2) hereto
and to such further effect as counsel to the Initial Purchasers may reasonably
request.  Such counsel may also state
that, insofar as such opinion involves factual matters, they have relied, to
the extent they deem proper, upon certificates of officers of the Company and
its subsidiaries and certificates of public officials.


 


(b)  Opinion
of Counsel for Initial Purchasers. 
At Closing Time, the Initial Purchasers shall have received the
favorable opinion, dated as of Closing Time, of Shearman & Sterling
LLP, counsel for the Initial Purchasers, with respect to the matters set forth
in (i), (ii), (iv) through (vii), inclusive, (xiii) and the penultimate
paragraph of Exhibit A(1) hereto. 
In giving such opinion such counsel may rely, as to all matters governed
by the laws of jurisdictions other than the law of the State of New York, the
federal law of the United States and the General Corporation Law of the State
of Delaware, upon the opinions of counsel satisfactory to the Representative.  Such counsel may also state that, insofar as
such opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its subsidiaries
and certificates of public officials.


 


(c)  Officers’
Certificate.  At the
applicable Closing Time, there shall not have been, since the date hereof or
since the date as of which information is given in the Final Offering
Memorandum (exclusive of any amendments or supplements thereto subsequent to
the date of this Agreement), any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representative shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of such Closing Time, to the effect that (i) there
has been no such material adverse change, (ii) the


 


14

















 


representations and warranties in Section 1 hereof are true and
correct with the same force and effect as though expressly made at and as of
such Closing Time, and (iii) the Company has complied with all agreements
and satisfied all conditions on its part to be performed or satisfied at or
prior to such Closing Time.


 


(d)  Accountants’
Comfort Letter.  At the time
of the execution of this Agreement, the Representative shall have received from
KPMP LLP a letter dated such date, in form and substance satisfactory to the
Representative, together with signed or reproduced copies of such letter for
each of the other Initial Purchasers, containing statements and information of
the type ordinarily included in accountants’ “comfort letters” to Initial
Purchasers with respect to the financial statements and certain financial
information contained in the Offering Memorandum.


 


(e)  Bring-down
Comfort Letter.  At the
applicable Closing Time, the Representative shall have received from KPMG LLP a
letter, dated as of such Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (d) of
this Section, except that the specified date referred to shall be a date not
more than three business days prior to such Closing Time.


 


(f)  Credit
Ratings.  On or after the date
hereof (i) no downgrading shall have occurred in the rating accorded the
Company’s debt securities by any “nationally recognized statistical rating
organization,” as that term is defined by the Commission for purposes of Rule 436(g)(2) under
the Act, and (ii) no such organization shall have publicly announced that
it has under surveillance or review, with possible negative implications, its
rating of any of the Company’s debt securities.


 


(g)  PORTAL.  At the Initial Closing Time, the Securities
shall have been designated for trading on PORTAL.


 


(h)  Lock-up
Agreements.  On the date of
this Agreement, the Representative shall have received “lock-up letters,” in
form and substance satisfactory to it, from named executive officers and
directors of the Company, and such letters shall be in full force and effect at
the Closing Time.


 


(i)  Indenture
and Registration Rights Agreement. 
At or prior to the Initial Closing Time, the Company and the Trustee
shall have executed and delivered the Indenture, and the Company and the
Representative, on behalf of the Initial Purchasers, shall have executed and
delivered the Registration Rights Agreement, each in a form satisfactory to the
Representative.


 


(j)  Approval of Listing.  At the Initial Closing Time, the shares of
Common Stock issuable upon conversion of the Securities shall have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.


 


(k)  Additional Documents.  At the applicable Closing Time, counsel for
the Initial Purchasers shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the


 


15

















 


Company in connection with the issuance and sale of the Securities as
herein contemplated shall be satisfactory in form and substance to the
Representative and counsel for the Initial Purchasers.


 


(l)  Termination of Agreement.  If any condition specified in this Section shall
not have been fulfilled when and as required to be fulfilled, this Agreement
may be terminated by the Representative by notice to the Company at any time at
or prior to the applicable Closing Time, and such termination shall be without
liability of any party to any other party except as provided in Section 4
and except that Sections 1, 7, 8 and 9 shall survive any such termination and
remain in full force and effect.


 


Section 6.               Subsequent
Offers and Resales of the Securities.


 


(a)  Offer
and Sale Procedures.  Each of
the Initial Purchasers and the Company hereby establish and agree to observe
the following procedures in connection with the offer and sale of the
Securities:


 


(i)            Offers
and Sales.  Offers and sales of the
Securities shall only be made to persons whom the offeror or seller reasonably
believes to be qualified institutional buyers, as defined in Rule 144A
under the 1933 Act (“Qualified Institutional Buyers”).


 


(ii)           No
General Solicitation.  No general
solicitation or general advertising (within the meaning of Rule 502(c) under
the 1933 Act) will be used in the United States in connection with the offering
or sale of the Securities.


 


(iii)          Purchases
by Non-Bank Fiduciaries.  In the case
of a non-bank Subsequent Purchaser of a Security acting as a fiduciary for one
or more third parties, each third party shall, in the judgment of the Initial
Purchaser, be a Qualified Institutional Buyer.


 


(iv)          Subsequent
Purchaser Notification.  Each Initial
Purchaser will take reasonable steps to inform, and cause each of its U.S.
Affiliates to take reasonable steps to inform, persons acquiring Securities
from such Initial Purchaser or affiliate, as the case may be, in the United
States that the Securities (A) have not been and will not be registered
under the 1933 Act, (B) are being sold to them without registration under
the 1933 Act in reliance on Rule 144A or in accordance with another
exemption from registration under the 1933 Act, as the case may be, and (C) may
not be offered, sold or otherwise transferred except (1) to the Company, (2) outside
the United States in accordance with Regulation S under the 1933 Act, or (3) inside
the United States in accordance with (x) Rule 144A to a person whom the
seller reasonably believes is a Qualified Institutional Buyer that is
purchasing such Securities for its own account or for the account of a
Qualified Institutional Buyer to whom notice is given that the offer, sale or
transfer is being made in reliance on Rule 144A or (y) pursuant to another
available exemption from registration under the 1933 Act.


 


(v)           Minimum
Principal Amount.  No sale of the
Securities to any one Subsequent Purchaser will be for less than U.S. $1,000
principal amount and no Security will be issued in a smaller principal amount.  If the Subsequent Purchaser is a non-bank


 


16

















 


fiduciary acting on behalf of others, each
person for whom it is acting must purchase at least U.S. $1,000 principal
amount of the Securities.


 


(b)  Covenants
of the Company.  The Company
covenants with each Initial Purchaser as follows:


 


(i)            Integration.  The Company agrees that it will not and will
cause its Affiliates not to, directly or indirectly, solicit any offer to buy,
sell or make any offer or sale of, or otherwise negotiate in respect of,
securities of the Company of any class if, as a result of the doctrine of “integration”
referred to in Rule 502 under the 1933 Act, such offer or sale would
render invalid (for the purpose of (i) the sale of the Securities by the
Company to the Initial Purchasers, (ii) the resale of the Securities by
the Initial Purchasers to Subsequent Purchasers or (iii) the resale of the
Securities by such Subsequent Purchasers to others) the exemption from the
registration requirements of the 1933 Act provided by Section 4(2) thereof
or by Rule 144A thereunder or otherwise.


 


(ii)           Rule 144A
Information.  The Company agrees
that, in order to render the offered Securities eligible for resale pursuant to
Rule 144A under the 1933 Act, while any of the offered Securities remain
outstanding, it will make available, upon request, to any holder of offered
Securities or prospective purchasers of Securities the information specified in
Rule 144A(d)(4), unless the Company furnishes information to the
Commission pursuant to Section 13 or 15(d) of the 1934 Act.


 


(iii)          Restriction
on Repurchases.  Until the expiration
of two years after the original issuance of the offered Securities, the Company
will not, and will cause its Affiliates not to, resell any offered Securities
which are “restricted securities” (as such term is defined under Rule 144(a)(3) under
the 1933 Act), whether as beneficial owner or otherwise (except as agent acting
as a securities broker on behalf of and for the account of customers in the
ordinary course of business in unsolicited broker’s transactions).


 


(c)  Qualified
Institutional Buyer.  Each
Initial Purchaser, severally and not jointly, represents and warrants to, and
agrees with, the Company that it is a Qualified Institutional Buyer and an “accredited
investor” within the meaning of Rule 501(a) under the 1933 Act (an “Accredited
Investor”).


 


Section 7.               Indemnification.


 


(a)  Indemnification
of Initial Purchasers.  The
Company agrees to indemnify and hold harmless each Initial Purchaser, its
affiliates, as such term is defined in Rule 501(b) under the 1933 Act
(each, an “Affiliate”), its selling agents and each person, if any, who
controls any Initial Purchaser within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:


 


(i)            against
any and all loss, liability, claim, damage and expense whatsoever, as incurred,
arising out of any untrue statement or alleged untrue statement of a material
fact contained in any Preliminary Offering Memorandum, the Disclosure Package,
the Final Offering Memorandum (or any amendment or supplement thereto) or any
Supplemental Offering Materials, or the omission or alleged omission therefrom
of a


 


17

















 


material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;


 


(ii)           against
any and all loss, liability, claim, damage and expense whatsoever, as incurred,
to the extent of the aggregate amount paid in settlement of any litigation, or
any investigation or proceeding by any governmental agency or body, commenced
or threatened, or of any claim whatsoever based upon any such untrue statement
or omission, or any such alleged untrue statement or omission; provided that
(subject to Section 7(d) below) any such settlement is effected with
the written consent of the Company; and


 


(iii)          against
any and all expense whatsoever, as incurred (including the fees and
disbursements of counsel chosen by Merrill Lynch), reasonably incurred in
investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or omission,
or any such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;


 


provided, however,
that this indemnity agreement shall not apply to any loss, liability, claim,
damage or expense to the extent arising out of any untrue statement or omission
or alleged untrue statement or omission made in reliance upon and in conformity
with written information furnished to the Company by any Initial Purchaser
through Merrill Lynch expressly for use in any Preliminary Offering Memorandum,
the Disclosure Package, the Final Offering Memorandum (or any amendment or
supplement thereto) or in any Supplemental Offering Materials.


 


(b)  Indemnification
of Company.  Each Initial
Purchaser severally agrees to indemnify and hold harmless the Company and each
person, if any, who controls the Company within the meaning of Section 15
of the 1933 Act or Section 20 of the 1934 Act against any and all loss,
liability, claim, damage and expense described in the indemnity contained in
subsection (a) of this Section, as incurred, but only with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in any preliminary offering memorandum, the Disclosure Package, the Final
Offering Memorandum or any Supplemental Offering Materials in reliance upon and
in conformity with written information furnished to the Company by such Initial
Purchaser through Merrill Lynch expressly for use therein.


 


(c)  Actions
against Parties; Notification. 
Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability which it may have
otherwise than on account of this indemnity agreement.  In the case of parties indemnified pursuant
to Section 7(a) above, counsel to the indemnified parties shall be
selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 7(b) above,
counsel to the indemnified parties shall be selected by the Company.  An indemnifying party may participate at its
own expense in the defense of any such action;


 


18

















 


provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified party)
also be counsel to the indemnified party. 
In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to any local counsel) separate
from their own counsel for all indemnified parties in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances.  No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section or Section 8 hereof
(whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any indemnified party.


 


(d)  Settlement
without Consent if Failure to Reimburse.  If at any time an indemnified party shall
have requested an indemnifying party to reimburse the indemnified party for
fees and expenses of counsel, such indemnifying party agrees that it shall be
liable for any settlement of the nature contemplated by Section 7(a)(ii) effected
without its written consent if (i) such settlement is entered into more
than 45 days after receipt by such indemnifying party of the aforesaid request,
(ii) such indemnifying party shall have received notice of the terms of
such settlement at least 30 days prior to such settlement being entered into
and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.


 


Section 8.               Contribution.  If the indemnification provided for in Section 7
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Initial Purchasers on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided
by clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i) above
but also the relative fault of the Company on the one hand and of the Initial
Purchasers on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as
well as any other relevant equitable considerations.


 


The relative benefits received by the Company
on the one hand and the Initial Purchasers on the other hand in connection with
the offering of the Securities pursuant to this Agreement shall be deemed to be
in the same respective proportions as the total net proceeds from the offering
of the Securities pursuant to this Agreement (before deducting expenses)
received by the Company and the total underwriting discount received by the
Initial Purchasers, bear to the aggregate initial offering price of the
Securities.


 


19

















 


The relative fault of the Company on the one
hand and the Initial Purchasers on the other hand shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company or by the Initial Purchasers
and the parties’ relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.


 


The Company and the Initial Purchasers agree
that it would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation (even if the Initial Purchasers were treated
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this Section.  The aggregate amount of losses, liabilities,
claims, damages and expenses incurred by an indemnified party and referred to
above in this Section shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue or alleged untrue statement or
omission or alleged omission.


 


Notwithstanding the provisions of this
Section, no Initial Purchaser shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities purchased
and sold by it hereunder exceeds the amount of any damages which such Initial
Purchaser has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission.


 


No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.


 


For purposes of this Section, each person, if
any, who controls an Initial Purchaser within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act and each Initial Purchaser’s
Affiliates and selling agents shall have the same rights to contribution as
such Initial Purchaser, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company.  The Initial Purchasers’ respective
obligations to contribute pursuant to this Section are several in
proportion to the principal amount of Securities set forth opposite their
respective names in Schedule A hereto and not joint.


 


Section 9.               Representations,
Warranties and Agreements to Survive. 
All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto shall remain operative and in full force
and effect, regardless of (i) any investigation made by or on behalf of
any Initial Purchaser or its Affiliates or selling agents, any person
controlling any Initial Purchaser, its officers or directors or any person
controlling the Company and (ii) delivery of and payment for the
Securities.


 


20

















 


Section 10.             Termination
of Agreement.


 


(a)  Termination;
General.  The Representative
may terminate this Agreement, by notice to the Company, at any time at or prior
to the applicable Closing Time (i) if there has been, since the time of
execution of this Agreement or since the date as of which information is given
in the Preliminary Offering Memorandum, the Disclosure Package or the Final
Offering Memorandum (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement), any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii) if
there has occurred any material adverse change in the financial markets in the
United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which
is such as to make it, in the judgment of the Representative, impracticable or
inadvisable to market the Securities or to enforce contracts for the sale of
the Securities, or (iii) if trading in any securities of the Company has
been suspended or materially limited by the Commission or the New York Stock
Exchange, or if trading generally on the American Stock Exchange or the New
York Stock Exchange or in the NASDAQ System has been suspended or materially limited,
or minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the National Association of Securities Dealers, Inc.
or any other governmental authority, or (iv) a material disruption has
occurred in commercial banking or securities settlement or clearance services
in the United States, or (v) if a banking moratorium has been declared by
either Federal or New York authorities.


 


(b)  Liabilities.  If this Agreement is terminated pursuant to
this Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further
that Sections 1, 7, 8 and 9 shall survive such termination and remain in full
force and effect.


 


Section 11.             Default
by One or More of the Initial Purchasers. 
If one or more of the Initial Purchasers shall fail at the applicable
Closing Time to purchase the Securities which it or they are obligated to purchase
under this Agreement (the “Defaulted Securities”), the Representative shall
have the right, within 24 hours thereafter, to make arrangements for one or
more of the non-defaulting Initial Purchasers, or any other initial purchasers,
to purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Representative shall not have completed such arrangements within such 24-hour
period, then:


 


(a)           if
the number of Defaulted Securities does not exceed 10% of the aggregate
principal amount of the Securities to be purchased hereunder, each of the
non-defaulting Initial Purchasers shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Initial Purchasers, or


 


21

















 


(b)           if
the number of Defaulted Securities exceeds 10% of the aggregate principal
amount of the Securities to be purchased hereunder, this Agreement shall
terminate without liability on the part of any non-defaulting Initial
Purchaser.


 


No action taken pursuant to this Section shall
relieve any defaulting Initial Purchaser from liability in respect of its
default.


 


In the event of any such default which does
not result in a termination of this Agreement, either the Representative or the
Company shall have the right to postpone the applicable Closing Time for a
period not exceeding seven days in order to effect any required changes in the
Offering Memorandum or in any other documents or arrangements.  As used herein, the term “Initial Purchaser”
includes any person substituted for an Initial Purchaser under this Section.


 


Section 12.             Tax
Disclosure.  Notwithstanding any
other provision of this Agreement, immediately upon commencement of discussions
with respect to the transactions contemplated hereby, the Company (and each
employee, representative or other agent of the Company) may disclose to any and
all persons, without limitation of any kind, the tax treatment and tax
structure of the transactions contemplated by this Agreement and all materials
of any kind (including opinions or other tax analyses) that are provided to the
Company relating to such tax treatment and tax structure.  For purposes of the foregoing, the term “tax
treatment” is the purported or claimed federal income tax treatment of the
transactions contemplated hereby, and the term “tax structure” includes any
fact that may be relevant to understanding the purported or claimed federal
income tax treatment of the transactions contemplated hereby.


 


Section 13.             Notices.  All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication.  Notices to the Initial Purchasers shall be
directed to the Representative at 4 World Financial Center, New York, New York
10080, attention of John Fortson, Director, notices to the Company shall be
directed to it at One AAR Place, 1100 N. Wood Dale Road, Wood Dale, Illinois
60191, attention Secretary.


 


Section 14.             No
Advisory or Fiduciary Relationship. 
The Company acknowledges and agrees that (a) the purchase and sale
of the Securities pursuant to this Agreement, including the determination of
the offering price of the Securities and any related discounts and commissions,
is an arm’s-length commercial transaction between the Company, on the one hand,
and several Initial Purchasers on the other hand, (b) in connection with
the offering contemplated hereby and the process leading to such transaction
each Initial Purchaser is and has been acting solely as a principal and is not
the agent or fiduciary of the Company, or its stockholders, creditors,
employees or any other party, (c) no Initial Purchaser has assumed, or
will assume, an advisory or fiduciary responsibility in favor of the Company
with respect to the offering contemplated hereby or the process leading thereto
(irrespective of whether such Initial Purchaser has advised or is currently
advising the Company on other matters) and no Initial Purchaser has any
obligation to the Company with respect to the offering contemplated hereby
except the obligations expressly set forth in this Agreement, (d) the
Initial Purchasers and their respective affiliates may be engaged in a broad
range of transactions that involve interests that differ from those of each of
the Company, and (e) the Initial Purchasers have not provided any legal,
accounting, regulatory or tax advice with respect to the offering contemplated
hereby and the


 


22

















 


Company has consulted its own legal, accounting, regulatory and tax
advisors to the extent it deemed appropriate.


 


Section 15.             Integration.  This Agreement supersedes all prior
agreements and understandings (whether written or oral) between the Company and
the Initial Purchasers, or any of them with respect to the subject matter
hereof.


 


Section 16.             Parties.  This Agreement shall inure to the benefit of
and be binding upon the Initial Purchasers and the Company and their respective
successors.  Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person, firm or corporation, other than the Initial Purchasers and the Company
and their respective successors and the controlling persons and officers and
directors referred to in Sections 7 and 8 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained.  This Agreement and all conditions and
provisions hereof are intended to be for the sole and exclusive benefit of the
Initial Purchasers and the Company and their respective successors, and said
controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or
corporation.  No purchaser of Securities
from any Initial Purchaser shall be deemed to be a successor by reason merely
of such purchase.


 


Section 17.             GOVERNING
LAW.  THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.


 


Section 18.             TIME.  TIME SHALL BE OF THE ESSENCE OF THIS
AGREEMENT.  EXCEPT AS OTHERWISE SET FORTH
HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.


 


Section 19.             Counterparts.  This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.


 


Section 20.             Effect
of Headings.  The Section headings
herein are for convenience only and shall not affect the construction hereof.


 


23

















 


If the foregoing is in accordance with your
understanding of our agreement, please sign and return to the Company a
counterpart hereof, whereupon this instrument, along with all counterparts,
will become a binding agreement between the Initial Purchasers and the Company
in accordance with its terms.


 


	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  AAR CORP.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ TIMOTHY J. ROMENESKO

  	
   

  
	
   

  	
   

  	
  Name: Timothy J. Romenesko

  
	
   

  	
   

  	
  Title: Vice President

  
	
   

  	
   

  	
   

  
	
  CONFIRMED AND ACCEPTED,

  	
   

  
	
    as of the date first above
  written:

  	
   

  
	
   

  	
   

  
	
  MERRILL LYNCH & CO.

  	
   

  
	
   

  	
   

  
	
  MERRILL LYNCH, PIERCE, FENNER &
  SMITH

  	
   

  
	
   

  	
  INCORPORATED

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ JOHN C. FORTSON

  	
   

  	
   

  
	
   

  	
  Authorized Signatory

  	
   

  
								



 


For itself and as Representative of the other
Initial Purchasers named in Schedule A hereto.


 


24

















 


Exhibit A(1)


 


FORM OF OPINION OF SHIFF
HARDIN LLP

TO BE DELIVERED PURSUANT TO

SECTION 5(a)


 


(i)            The
Company has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the State of Delaware.


 


(ii)           The
Company has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Disclosure Package
and the Final Offering Memorandum and to enter into and perform its obligations
under the Purchase Agreement.


 


(iii)          The
authorized capital stock of the Company is as set forth in the Disclosure
Package and the Final Offering Memorandum;


 


(iv)          The
Purchase Agreement has been duly authorized, executed and delivered by the
Company.


 


(v)           The
Indenture has been duly authorized, executed and delivered by the Company and
(assuming the due authorization, execution and delivery thereof by the Trustee)
constitutes a valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms.


 


(vi)          The
Registration Rights Agreement has been authorized by the Company and, when
executed and delivered by the Company and the Representative, will constitute a
valid and binding agreement of the Company, enforceable against the Company in
accordance with its terms.


 


(vii)         The
Securities are in the form contemplated by the Indenture, have been duly
authorized by the Company and, when executed by the Company and authenticated
by the Trustee in the manner provided in the Indenture (assuming the due
authorization, execution and delivery of the Indenture by the Trustee) and
issued and delivered against payment of the purchase price therefor will
constitute valid and binding obligations of the Company, enforceable against
the Company in accordance with their terms, and will be entitled to the
benefits of the Indenture.


 


(viii)        Upon
issuance and delivery of the Securities in accordance with the Purchase
Agreement and the Indenture, the Securities will be convertible at the option
of the holder thereof into shares of Common Stock, cash or a combination of
cash and shares of Common Stock in accordance with the terms of the Securities
and the Indenture; the shares of Common Stock issuable upon conversion of the
Securities have been duly authorized and reserved for issuance upon such
conversion by all necessary corporate action and such shares, when issued upon
such conversion in accordance with the terms of the Securities, will be validly
issued and will be fully paid and non-assessable, and will conform to the
description of the Common Stock contained in the Disclosure Package and the
Final Offering Memorandum; no holder of such


 


A(1) - 1

















 


shares will be subject to personal liability by reason of being such a
holder; and the issuance of such shares upon such conversion will not be
subject to the preemptive or other similar rights of any security holder of the
Company.


 


(ix)           The
Securities, the Indenture and the Registration Right Agreement conform in all
material respects to the descriptions thereof contained in the Disclosure
Package and the Final Offering Memorandum.


 


(x)            The
documents incorporated by reference in the Offering Memorandum (other than the
financial statements and supporting schedules therein, as to which no opinion need
be rendered), when they were filed with the Commission complied as to form in
all material respects with the requirements of the 1934 Act and the rules and
regulations of the Commission thereunder.


 


(xi)           The
information in the Disclosure Package and in the Offering Memorandum under “Description
of the Notes”, “Description of Capital Stock”, “Material United States Federal
Income Tax Considerations” and “Plan of Distribution” and to the extent that it
constitutes matters of law, summaries of legal matters, the Company’s charter
and bylaws or legal proceedings, or legal conclusions, has been reviewed by us
and is correct in all material respects.


 


(xii)          No
filing with, or authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency,
domestic or foreign (other than such as may be required under the applicable
securities laws of the various jurisdictions in which the Securities will be
offered or sold, as to which we need express no opinion) is necessary or
required in connection with the due authorization, execution and delivery of
the Purchase Agreement or the due execution, delivery or performance of the
Indenture or the Registration Rights Agreement by the Company or for the offering,
issuance, sale or delivery of the Securities to the Initial Purchasers or the
resale by the Initial Purchasers in accordance with the terms of the Purchase
Agreement, except with respect to the Company’s obligations under the
Registration Rights Agreement, the filing of the registration statement with
the Commission under the 1933 Act and the Commission’s declaration of
effectiveness of such registration statement and the qualification of the
Indenture under Trust Indenture Act of 1939, as amended (the “1939 Act”).


 


(xiii)         It
is not necessary in connection with the offer, sale and delivery of the
Securities to the Initial Purchasers and to each Subsequent Purchaser in the
manner contemplated by the Purchase Agreement, the Disclosure Package and the
Final Offering Memorandum to register the Securities under the 1933 Act or to
qualify the Indenture under the Trust Indenture Act of 1939.


 


(xiv)        The
execution, delivery and performance of the Purchase Agreement, the Indenture,
the Securities and the Registration Rights Agreement and the consummation of
the transactions contemplated in the Purchase Agreement, the Disclosure Package
and the Final Offering Memorandum (including the use of the proceeds from the
sale of the Securities as described in the Disclosure Package and the Final
Offering Memorandum under the caption “Use Of Proceeds” and the issuance of the
shares of Common Stock upon conversion of any Securities) and compliance by the
Company with its obligations under the Purchase Agreement,


 


A(1) - 2

















 


the Indenture, the Securities and the Registration Rights Agreement do
not and will not, whether with or without the giving of notice or lapse of time
or both, conflict with or constitute a breach of, or default or Repayment Event
(as defined below) under or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any
subsidiary thereof pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or any other agreement or
instrument, filed as an exhibit to the Company’s Annual Report on Form 10-K
for the fiscal year ended May 31, 2005 or any subsequent Exchange Act
filing prior to the date of the Purchase Agreement, to which the Company or any
of its subsidiaries is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company or any subsidiary thereof
is subject (except for such conflicts, breaches, defaults or Repayment Events
or liens, charges or encumbrances that would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole), nor will such action
result in any violation of the provisions of the charter or by-laws of the
Company, or any applicable law, statute, rule, regulation, judgment, order,
writ or decree, known to us, of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or any of their respective properties, assets or operations.  “Repayment Event” means any event or
condition which gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder’s behalf) the right to
require the repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any of its subsidiaries.


 


(xv)         The
Company is not required, and upon the issuance and sale of the Securities as
herein contemplated and the application of the net proceeds therefrom as
described in the Disclosure Package and the Final Offering Memorandum will not
be required to, register as “investment company” under the 1940 Act.


 


Nothing has come to our attention that would
lead us to believe that (1) as of the Applicable Time, the Disclosure
Package (except for the financial statements and schedules and other financial
data included or incorporated by reference therein or omitted therefrom, as to
which we need make no statement) included any untrue statement of a material
fact or omitted to state any material fact necessary in order to make the
statements therein, in the light of circumstances under which they were made,
not misleading or (2) that the Offering Memorandum or any amendment or
supplement thereto (except for financial statements and schedules and other
financial data included or incorporated by reference therein or omitted
therefrom as to which we need make no statement), at the time the Offering
Memorandum was issued, at the time any such amended or supplemented Offering
Memorandum was issued or at Closing Time, included or includes an untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.


 


In rendering such opinion, such counsel may
rely, as to matters of fact (but not as to legal conclusions), to the extent
they deem proper, on certificates of responsible officers of the Company and
public officials.  Such opinion shall not
state that it is to be governed or qualified by, or that it is otherwise
subject to, any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991).


 


A(1) - 3

















 


Exhibit A(2)


 


FORM OF OPINION OF GENERAL
COUNSEL

FOR THE COMPANY PURSUANT TO

SECTION 5(a)


 


(i)            The
Company is duly qualified as a foreign corporation to transact business and is
in good standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing
would not result in a material adverse effect on the Company and its
subsidiaries, taken as a whole.


 


(ii)           The
shares of issued and outstanding capital stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; and none
of the outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any security holder of
the Company.


 


(iii)          Each
subsidiary of the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Disclosure Package
and the Final Offering Memorandum and is duly qualified as a foreign
corporation to transact business and is in good standing in each jurisdiction
in which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a material adverse effect on the
Company and its subsidiaries, taken as a whole; all of the issued and
outstanding capital stock of each subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable and, to the best of my
knowledge and information, is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity.


 


(iv)          There
is not pending or, to the best of my knowledge, threatened any action, suit,
proceeding, inquiry or investigation, to which the Company or any subsidiary is
a party, or to which the property of the Company or any subsidiary thereof is
subject, before or brought by any court or governmental agency or body, which
would reasonably be expected to result in a material adverse effect on the
Company and its subsidiaries, taken as a whole, or which would reasonably be
expected to materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in the Purchase Agreement or
the performance by the Company of its obligations thereunder or the
transactions contemplated by the Disclosure Package and the Final Offering
Memorandum.


 


(v)           Neither
the Company nor any of its subsidiaries is in violation of its charter or
by-laws or in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which or any of them may be bound, or to which any of the property
or assets of the Company or any of its subsidiaries is subject, except for such
defaults that would not result in a material adverse effect on the Company and
its subsidiaries, taken as a whole.


 


A(2) - 1

















 


SCHEDULE A


 


	
  Name of Initial Purchaser

  	
   

  	
  Principal

  Amount of

  Securities

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Merrill Lynch, Pierce, Fenner &
  Smith Incorporated

  	
   

  	
  $

  	
  100,000,000

  	
   

  
	
  Goldman, Sachs & Co.

  	
   

  	
  12,500,000

  	
   

  
	
  SG Cowen & Co., LLC

  	
   

  	
  12,500,000

  	
   

  
	
  Total

  	
   

  	
  $

  	
  125,000,000

  	
   

  



 


A-1

















 


SCHEDULE B


 


**APPROVED
FOR EXTERNAL USE**


**QIBS
ONLY**


 


~ Sole-Bookrun $125mm 144A Convertible Senior Notes due 2026 Pricing ~


 





 


AAR CORP.


(AIR/NYSE)


 


Gross
Proceeds: $125,000,000


Overallotment
Option: $25,000,000


 


144A
Convertible Senior Notes Pricing Terms:


Issuer: AAR CORP.


Ticker/Exchange:
AIR/NYSE


Offering
Size: $125,000,000


Overallotment
Option: $25,000,000


Issue
Price: $1,000.00


Maturity: February 1, 2026


Interest
Rate: 1.75% per annum


Conversion
Premium: 21.5%


Last Sale
(1/26/06): $24.22


Conversion
Price: $29.43


Conversion
Rate: 33.9789


Conversion
Rate Cap: 41.2881


Interest
Pay Dates: February 1 &
August 1 beginning August 1, 2006


Hard Call
Protection: Ending February 6,
2013


Put Dates: February 1, 2013, February 1, 2016
and February 1, 2021


Contingent
Conversion Trigger: 120%
of the conversion price (initially $35.32)


Registration:
144A with
Registration Rights


Dividend
Protection: Full
dividend protection via a conversion rate adjustment


 

















 


Make Whole Premium:


 


	
  Stock Price on

  	
   

  	
  Make Whole Premium (Increase in Applicable Conversion Rate)

  	
   

  
	
  Effective Date

  	
   

  	
  2/1/06

  	
   

  	
  2/1/07

  	
   

  	
  2/1/08

  	
   

  	
  2/1/09

  	
   

  	
  2/1/10

  	
   

  	
  2/1/11

  	
   

  	
  2/1/12

  	
   

  	
  2/6/13

  	
   

  
	
  $

  	
  24.22

  	
   

  	
   

  	
  7.30

  	
   

  	
  7.30

  	
   

  	
  7.30

  	
   

  	
  7.30

  	
   

  	
  7.30

  	
   

  	
  7.30

  	
   

  	
  7.30

  	
   

  	
  0.00

  	
   

  
	
  27.50

  	
   

  	
   

  	
  5.79

  	
   

  	
  5.66

  	
   

  	
  5.50

  	
   

  	
  5.30

  	
   

  	
  5.03

  	
   

  	
  4.64

  	
   

  	
  3.98

  	
   

  	
  0.00

  	
   

  
	
  30.00

  	
   

  	
   

  	
  4.94

  	
   

  	
  4.78

  	
   

  	
  4.55

  	
   

  	
  4.29

  	
   

  	
  3.94

  	
   

  	
  3.44

  	
   

  	
  2.62

  	
   

  	
  0.00

  	
   

  
	
  32.50

  	
   

  	
   

  	
  4.36

  	
   

  	
  4.10

  	
   

  	
  3.93

  	
   

  	
  3.64

  	
   

  	
  3.15

  	
   

  	
  2.61

  	
   

  	
  1.76

  	
   

  	
  0.00

  	
   

  
	
  35.00

  	
   

  	
   

  	
  3.78

  	
   

  	
  3.57

  	
   

  	
  3.30

  	
   

  	
  2.98

  	
   

  	
  2.57

  	
   

  	
  2.02

  	
   

  	
  1.21

  	
   

  	
  0.00

  	
   

  
	
  40.00

  	
   

  	
   

  	
  3.03

  	
   

  	
  2.81

  	
   

  	
  2.53

  	
   

  	
  2.22

  	
   

  	
  1.82

  	
   

  	
  1.32

  	
   

  	
  0.66

  	
   

  	
  0.00

  	
   

  
	
  50.00

  	
   

  	
   

  	
  2.15

  	
   

  	
  1.95

  	
   

  	
  1.71

  	
   

  	
  1.44

  	
   

  	
  1.11

  	
   

  	
  0.75

  	
   

  	
  0.35

  	
   

  	
  0.00

  	
   

  
	
  60.00

  	
   

  	
   

  	
  1.67

  	
   

  	
  1.50

  	
   

  	
  1.29

  	
   

  	
  1.07

  	
   

  	
  0.82

  	
   

  	
  0.56

  	
   

  	
  0.28

  	
   

  	
  0.00

  	
   

  
	
  70.00

  	
   

  	
   

  	
  1.38

  	
   

  	
  1.24

  	
   

  	
  1.06

  	
   

  	
  0.88

  	
   

  	
  0.68

  	
   

  	
  0.46

  	
   

  	
  0.24

  	
   

  	
  0.00

  	
   

  
	
  80.00

  	
   

  	
   

  	
  1.19

  	
   

  	
  1.06

  	
   

  	
  0.91

  	
   

  	
  0.75

  	
   

  	
  0.58

  	
   

  	
  0.40

  	
   

  	
  0.21

  	
   

  	
  0.00

  	
   

  



 


(No adjustment to the applicable conversion
rate below $24.22 or above $80.00)


 


Trade Date:
1/26/06


Settlement
Date: 2/01/06


144A CUSIP:
000361 AG 0


 


Sole-Bookrunner:
Merrill Lynch & Co.


Co-Lead
Managers: Goldman, Sachs & Co. and SG Cowen & Co.


 


AAR is a diversified provider of products and
services to the worldwide aviation/aerospace and defense industries.


 


**QIBS
ONLY**


**APPROVED
FOR EXTERNAL USE**


 


This communication is intended for the sole
use of the person to whom it is provided by us. 
This offering is being conducted in the U.S. pursuant to Rule 144A
of the Securities Act 1933, as amended, and may therefore only be offered to
QIBs.


 


A written offering memorandum may be obtained
from your Merrill Lynch sales representative, from Merrill Lynch, Pierce, Fenner &
Smith Incorporated, 4 World Financial Center, FL 05, New York, NY 10080 or, in
Canada, from Merrill Lynch Canada Inc., 181 Bay Street-Suite 400, Toronto,
Ontario M4T 2A9.