Exhibit
10.7


AMENDED AND
RESTATED

EMPLOYMENT AGREEMENT


This Amended and Restated Employment Agreement (“Agreement”)
made and entered into as of the 31st day of May, 2006, by and between AAR
CORP., a Delaware corporation (“Company”), and David P. Storch (“Employee”).


WHEREAS, Employee is currently an elected director of
the Company and holds the position of Chairman of the Board, President and
Chief Executive Officer; and


WHEREAS, the Company currently employs Employee
pursuant to a certain Amended and Restated Employment Agreement dated June 1,
1998, as amended by amendment dated July 10, 2001 (“Original Agreement”);
and


WHEREAS, the Company and Employee desire to further
amend the Original Agreement as herein set forth to reflect certain mutually
agreed changes to the terms and conditions thereof; and


WHEREAS, for their mutual convenience, the Company and
Employee desire to restate the Original Agreement, as so amended, in its
entirety.


NOW, THEREFORE, in
consideration of the mutual agreements herein set forth, the parties hereto
agree as follows:


1.             Employment. The Company
hereby continues to employ Employee and Employee hereby accepts continued
employment by the Company, upon the terms and subject to the conditions
hereinafter set forth.


2.             Term. The term of this
Agreement shall commence as of the date hereof and, unless earlier terminated
as hereinafter provided, shall end on May 31, 2010.


The Chairman of the
Compensation Committee of the Board of Directors of the Company will schedule a
meeting with Employee at a mutually convenient time prior to June 15, 2009
to discuss extension of the term of this Agreement. If the Company and Employee
mutually desire to extend the term of the Agreement, the parties will promptly
thereafter commence negotiations with the goal of reaching agreement not later
than 180 days prior to the expiration date of the Agreement.


If the Company does not
offer to extend the term of this Agreement for any reason, other than
circumstances that would constitute Cause under Section 7(a), the Company
and Employee may mutually agree, within thirty days after the end of the term,
to continue Employee’s employment as an at-will employee. If Employee
continues as an at-will employee, he shall have the right upon his subsequent
termination of employment to a severance benefit equal to the benefit provided
under Section 7(c). If, within such thirty day period, the Company and
Employee do not mutually agree to continue Employee’s employment as an at-will
employee, Employee shall receive a severance benefit equal to the benefit
provided under Section 7(c) at the end of such thirty day period, or
such longer period as required by Section 409A of the Internal Revenue
Code of 1986, as amended (the “Code”).









 



3.             Duties.


(a)           Employee shall have the title, duties
and responsibilities of Chairman of the Board, President and Chief Executive
Officer and such other titles, duties and responsibilities as may from time to
time be assigned by the Board of Directors that are consistent with such duties
and responsibilities.


(b)           Employee agrees to do and perform all
such acts and duties faithfully and diligently and to furnish such services as
the Board of Directors may from time to time direct, and do and perform all
acts in the ordinary course of business of the Company (within such limits as
the Company may prescribe) necessary and conducive to the best interest of the
Company.


(c)           Employee agrees to devote his full
time, energy and skill to the business of the Company and to the promotion of
the best interests of the Company and the performance of his duties as Chairman
of the Board, President and Chief Executive Officer of the Company and in such
other capacities as he may be elected; provided that Employee shall not (to the
extent not inconsistent with Sections 3(d), 8(a) and 8(b) below)
be prevented from (i) serving as a director of any corporation consented
to in advance by resolution of the Board of Directors of the Company, (ii) engaging
in charitable, religious, civic or other non-profit community activities,
or (iii) investing his personal assets in such form or manner as will not
require any substantial services on his part in the operation or affairs of the
business in which such investments are made which would detract from or
interfere or cause a conflict of interest with performance of his duties
hereunder.


(d)           Employee agrees to observe policies
and procedures of the Company in effect from time to time applicable to
employees of the Company including, without limitation, policies with respect
to employee loyalty and prohibited conflicts of interest.


4.             Compensation. The Company
shall pay to Employee, for all services to be performed by Employee an annual
base salary (“Base Salary”) at the rate of Seven Hundred Seventeen Thousand One
Hundred Sixty-Eight Dollars ($717,168.00) per fiscal year, or such
greater amount as may be authorized by the Compensation Committee of the Board
of Directors of the Company, in its sole discretion, upon annual review during
the term of employment, payable in periodic installments in accordance with the
Company’s payroll practice in effect from time to time and prorated for any
portion of a fiscal year (Company’s fiscal year currently being the period from
June 1 of each year through May 31 of the following year).


5.             Incentive Bonus Payments. In
addition to the Base Salary described above, Employee will continue to
participate in and receive payments under such incentive bonus programs as the
Company, in its sole discretion, may authorize from time to time for Employee
and other executive officers of the Company; provided, however, Employee will
be entitled to the following during the term of this Agreement:


(a)           Annual Discretionary Incentive
Bonus Opportunity. Employee will have a graduated annual, cash incentive
bonus opportunity of up to 100% of Base 



 2
 






 



Salary for performance at or below target and up to an
additional 50% of Base Salary for performance in excess of target. Performance
will be measured against annual financial targets approved by the Compensation
Committee of the Board of Directors of the Company which, in the Committee’s
discretion, may be intended to qualify the cash incentive bonus as performance-based
compensation under Code Section 162(m). Actual bonus amounts paid will be
determined as follows:


(i)            For performance below 80% of target,
no bonus will be payable.


(ii)           For performance from 80% to 100% of
target, a bonus equal to 70% to 100% of Base Salary will be payable,
pro rata based on performance level achieved from 80% to 100% of target.


(iii)          For performance from 100% to 120% of
target, a bonus equal to 100% to 150% of Base Salary will be payable,
pro rata based on performance level achieved from 100% to 120% of target. No
additional bonus amount will be payable for performance above 120% of target.


The incentive bonus
payable under this Section 5(a) will be paid in cash within 2 and 1/2
months of the end of each fiscal year.


(b)           Long Term Incentive Bonus Awards.
Employee will receive performance restricted stock awards in accordance with
and subject to the terms of Appendix (i) hereto, which is incorporated
herein by reference which, in the Compensation Committee’s discretion, may be
intended to qualify as performance-based compensation under Section 162(m) of
the Code. Notwithstanding the preceding sentence, Employee will not receive any
award under this Section 5(b) unless he is in compliance, at the time
of such award, with the Company’s stock ownership requirement for the Chief
Executive Officer of the Company in effect at the time of such award.


6.             Vacation and Fringe Benefits;
Executive Perquisites.


(a)           Employee will accrue vacation in
accordance with the Company’s policy in effect from time to time for other
executive officers; provided that no decrease in vacation benefits from those
available on the date hereof shall be applicable to Employee during the term
hereof. Employee shall be entitled to participate, according to eligibility
provisions of each, in such medical, life and disability insurance programs,
profit sharing plans, retirement plans, executive financial planning programs,
and other fringe benefit plans as may be in effect from time to time during the
term hereof and available to other executive officers of the Company.
Notwithstanding any other provisions of this Agreement, upon retirement from
the Company on or after reaching age 55, Employee (and Employee’s
dependents) shall be entitled to participate, for Employee’s (and Employee’s
dependents’) lifetime, in the Company’s medical, hospitalization and dental
health and welfare benefit plans, and any executive health programs then in
effect, on the same terms and in amounts and of the same type(s) generally
made available to any actively employed executive officer of the Company;
provided, however, that such participation shall not be available from and
after the date 



 3
 






 



Employee first becomes eligible for health benefit
plans provided by another employer of Employee.


(b)           In addition, during the term of this
Agreement and any extension thereof, Employee shall be entitled to the
following additional perquisites:


(i)            personal use (including
transportation of accompanying dependent family members) of any corporate
business aircraft owned or chartered by the Company for Company business
purposes from time to time, subject to payment of the standard industry fare
level (“SFL”) for each passenger as published by the Internal Revenue Service
from time to time (or as may be required pursuant to any superseding IRS rules or
regulations or SEC accounting requirements in effect from time to time);


(ii)           automobile allowance of $12,300 per
calendar year;


(iii)          reimbursement of membership dues, fees
and charges for club services or use of facilities (including personal charges
not exceeding $10,000 annually, but excluding charges for private parties and
individual personal expense items exceeding $300) in the Lake Shore Country
Club, Medinah Country Club, and the Standard Club;


(iv)          reimbursement of membership dues,
fees, charges, and travel and related expenses incurred in connection with
meeting attendance and organization activities of  such professional clubs/organizations of
which he is a member that are appropriate and conducive to the performance of
his duties (including but not limited to Executive Club of Chicago, Economics
Club of Chicago, the Wings Club, the Young President’s Organization (“YPO”)/World
Presidents Organization (“WPO”));


(v)           reimbursement of travel and related
expenses in connection with services to and participation in meetings of not-for-profit
educational organization Boards of which he is a member (including but not
limited to the Board of Trustees of Ithaca College);


(vi)          professional financial planning and
income tax preparation assistance expenses actually incurred in an amount not
to exceed $15,000 per calendar year;


(vii)         participation in the Company’s
executive annual physical and preventative health program in effect from time
to time; and


(viii)        payment of reasonable legal fees related
to the review and negotiation of this Agreement.


7.             Termination.


(a)           The Company may terminate this
Agreement at any time for Cause. Any such termination will be by majority
action of all of the independent directors of the Board of Directors taken at a
regular or specially called meeting of the Board, upon a minimum of
10 days written notice thereof to Employee, with termination 



 4
 






 



of this Agreement listed as an agenda item. Employee
will be given a reasonable opportunity to be heard at such meeting with his
attorney present if Employee desires.


The term “Cause” means:


(i)            Employee engages, during the
performance of his duties hereunder, in material acts or omissions constituting
dishonesty, intentional breach of fiduciary obligation or intentional
wrongdoing or malfeasance; or


(ii)           Employee intentionally disobeys or
disregards a material, lawful and proper direction of the Board; or


(iii)          Employee materially breaches the
Agreement and such breach by its nature, is incapable of being cured, or such
breach remains uncured for more than 30 days following receipt by Employee
of written notice from the Company specifying the nature of the breach and
demanding the cure thereof. For purposes of this clause (iii), a material
breach of the Agreement that involves inattention by Employee to his duties
under the Agreement shall be deemed a breach capable of cure.


Without limiting the
generality of the foregoing, the following shall not constitute Cause for the
termination of this Agreement:


(i)            any personal or policy disagreement
between Employee and the Company or any member of the Board, or


(ii)           any action taken by Employee in
connection with his duties hereunder, or any failure to act, if Employee acted
or failed to act in good faith and in a manner he reasonably believed to be in
and not opposed to the best interest of the Company and he had no reasonable
cause to believe his conduct was unlawful; or


(iii)          termination of employment of Employee
for unsatisfactory performance (including failure to meet financial goals).


A finding of termination
for Cause shall be made by resolution adopted by the independent directors of
the Board of Directors, setting forth the particulars thereof.


Upon termination of this
Agreement by the Company for Cause, Employee will be eligible to receive (A) his
Base Salary for the period ending on his termination date, (B) payment for
unused vacation days, as determined in accordance with the Company’s policy as
in effect at that time, and (C) such other payments, rights and benefits
for which Employee may be eligible pursuant to any Company employee benefit
plan or pursuant to any other agreement or arrangement between Employee and the
Company.


(b)           Employee may terminate this Agreement
at any time without Good Reason, upon a minimum of 30 days written notice
thereof to the Company. The term “Good Reason” means:



 5
 






 



(i)            a material reduction in the nature
or scope of Employee’s duties, responsibilities, authority, power or functions,
or a material reduction in Employee’s compensation (including benefits) from
then-current levels; or


(ii)           a good faith determination by
Employee that as the result of a material change in employment circumstances,
he is unable to carry out his duties and responsibilities contemplated by this
Agreement in a manner consistent with the practices, standards, values or
philosophy of the Company; or


(iii)          a material breach of this Agreement by
the Company and such breach by its nature, is incapable of being cured, or such
breach remains uncured for more than 30 days following receipt by the
Company of written notice from Employee specifying the nature of the breach and
demanding the cure thereof; or


(iv)          a relocation of the primary place of
employment of at least 50 miles.


Upon termination of this
Agreement by Employee without Good Reason, Employee will be eligible to receive
(A) his Base Salary for the period ending on his termination date, (B) payment
for unused vacation days, as determined in accordance with the Company’s policy
as in effect at that time, and (C) such other payments, rights and
benefits for which Employee may be eligible pursuant to any Company employee
benefit plan or pursuant to any other agreement or arrangement between Employee
and the Company.


(c)           The Company may terminate this
Agreement at any time prior to a Change in Control of the Company, as defined
in Section 10(d), without Cause, upon a minimum of 30 days written
notice thereof to Employee. Upon termination of this Agreement pursuant to this
Section 7(c), the Company will pay to Employee, (i) monthly for
36 months, an amount equal to Employee’s regular monthly Base Salary at
the time of termination plus (ii) a lump sum equal to three times Employee’s
average annual cash bonus under Section 5(a) for the preceding
three fiscal years of the Company; provided, however, all such payment
obligations shall terminate immediately upon any material breach by Employee of
Section 8(a) of this Agreement or any breach by Employee of Section 8(b) of
this Agreement. Upon termination of this Agreement by the Company without
Cause, no further compensation or benefits shall accrue or be payable to
Employee under this Agreement except for (i) the payments provided for
above, (ii) any Base Salary, bonus or other benefits which have accrued to
Employee prior to the date of any such termination, and (iii) such other
payments, rights and benefits for which Employee may be eligible pursuant to
any Company employee benefit plan or pursuant to any other agreement or
arrangement between Employee and the Company.


(d)           Employee may terminate this Agreement
at any time for Good Reason, as defined in Section 7(b) above, upon a
minimum of 30 days written notice thereof to the Company. Upon termination
of this Agreement by Employee for Good Reason, the Company will pay to
Employee, (i) monthly for 36 months, an amount equal to Employee’s
regular monthly Base Salary at the time of termination plus (ii) a lump
sum equal to three times Employee’s average annual cash bonus under 



 6
 






 



Section 5(a) for the preceding
three fiscal years of the Company; provided all such payment obligations
shall terminate immediately upon any breach by Employee of Section 8 of
this Agreement. Upon termination of this Agreement by Employee pursuant to this
Section 7(d), no further compensation or benefits shall accrue or be
payable to Employee under this Agreement except for (i) the payments
provided for above, (ii) any compensation, bonus or other benefits which
have accrued to Employee prior to the date of any such termination, and (iii) such
other payments, rights and benefits for which Employee may be eligible pursuant
to any Company employee benefit plan or pursuant to any other agreement or
arrangement between Employee and the Company.


This Agreement shall
automatically terminate upon the death of Employee during the term. Upon
termination of this Agreement due to death, Employee’s beneficiary, designated
by written instrument delivered to the Company (or, if no beneficiary is
designated or survives Employee, to the duly appointed representative of his
estate) will be eligible to receive (A) his Base Salary for the period
ending on his termination date, (B) payment for unused vacation days, as
determined in accordance with the Company’s policy as in effect at that time,
and (C) such other payments, rights and benefits for which Employee may be
eligible pursuant to any Company employee benefit plan or pursuant to any other
agreement or arrangement between Employee and the Company. Death benefits
payable under any of the Company’s benefit plans in which Employee was a
participant at the time of his death shall be payable in accordance with the
terms of such plans.


(e)           The Company or Employee may terminate
this Agreement at any time because of the Disability of Employee. “Disability”
shall mean a physical or mental condition which has prevented Employee from
substantially performing his duties under this Agreement for a period of
180 days and which is expected to continue to render Employee unable to
substantially perform his duties for the remaining term of this Agreement on a
full-time basis. The Company will make reasonable accommodation for any
handicap of Employee as may be required by applicable law.


In the event of
termination by the Company for Disability, a finding shall be made by
resolution adopted by the independent directors of the Board of Directors of
the Company, setting forth the particulars of the Disability. The Company may
require the submission of such medical evidence as to the condition of Employee
as it may deem necessary in order to arrive at its determination of its
position as to the occurrence of a Disability. Employee will be provided with
reasonable opportunity to present additional medical evidence as to the medical
condition of Employee for consideration prior to the independent directors of
the Board of Directors making their determination of their position as to the
occurrence of a Disability.


Upon termination of this
Agreement for Disability, Employee will continue to be eligible to participate
in the Company’s medical, dental and life insurance programs available to
executive officers in accordance with their terms applicable to employees for a
period of three years from the date of such termination of this Agreement.
Further, in the event of termination of this Agreement pursuant to this Section 7(e),
Employee will be eligible to receive (A) his Base Salary for the period
ending on his termination date, (B) payment for unused vacation days, as
determined in accordance with the 





 7
 






 



Company’s policy as in
effect at that time, and (C) such other payments, rights and benefits for
which Employee may be eligible pursuant to any Company employee benefit plan or
pursuant to any other agreement or arrangement between Employee and the
Company.


8.             Confidential
Information and Restriction of Competition.


(a)           Employee
acknowledges that his employment hereunder will place him in a position of
utmost trust and confidence and that he will have access to non-public
information concerning the operation of the business of the Company and any
affiliated companies as to which Employee provided services or had access to
confidential information (hereinafter referred to in this Section as the “Affiliated
Companies”), including, but not limited to, manufacturing methods,
developments, secret processes, know-how, costs, prices and pricing
methods, sources of supply, customer information, financial information, and
personnel information (the “Confidential Information”). Employee acknowledges
that the Confidential Information is among the Company’s and the Affiliates’
most valuable assets and that the value of such information may be destroyed by
unauthorized use or disclosure. All such Confidential Information imparted to
or learned by Employee in the course of his employment (whether acquired before
or after the date hereof) will be deemed to be confidential and will not be
used or disclosed by Employee, except to the extent necessary to perform his
duties and, in no event, disclosed to anyone outside the employ of the
Affiliated Companies and their authorized consultants and advisors, unless
express written authorization to use or disclose such information has been given
by the Company. If Employee ceases to be employed by the Company for any
reason, he shall not take with him any documents or other papers containing or
reflecting Confidential Information or any other Company property, and Employee
shall return all documents and files (whether in electronic or paper form) and
other Company property to the Company immediately upon cessation of his
employment.


(b)           Employee agrees that during the term
hereof and for a period of two years after voluntary termination of employment
hereunder by Employee or termination of employment hereunder by the Company
pursuant to Section 7 above, he shall not, without the express written
consent of the Company, either alone or as a consultant to, or partner,
employee, officer, director, agent, or stockholder of any organization, entity
or business, or otherwise, directly or indirectly (i) take or convert for
Employee’s personal gain or benefit or for the benefit of any third party, any
business opportunity(ies) relating to the Company’s actual or planned business,
of which Employee becomes aware during or as a result of his employment, (ii) directly
or indirectly, engage in any Prohibited Activities in competition with the
Company or any Affiliated Company’s business, (iii) own, purchase, organize
or take preparatory steps for the organization of, or build, design, finance,
acquire, lease, operate, mortgage, invest in, provide services directly or
indirectly related to Prohibited Activities to, or otherwise engage in, any
business in competition with or otherwise similar to the Company’s or any
Affiliated Company’s business, (iv) solicit in connection with any
activity which is competitive with any of the businesses of the Company or any
Affiliated Company, any customers or suppliers of the Company or any Affiliated
Company with whom Employee had contact on behalf of the Company during his
employment, or induce or attempt to induce any such customer or supplier to
terminate or materially 



 8
 






 



change its relationship with Employer; or (v) hire,
or solicit or interview for employment, any sales, marketing or management
employee of the Company or any Affiliated Company with respect to whom Employee
had contact, supervisory responsibility, or access to non-public information. Prohibited
Activities are the maintenance, repair and overhaul of aircraft, aircraft
components, aircraft engines and aircraft engine components; the manufacture of
aircraft parts or components, aircraft engine parts or components, and military
rapid deployment products of the type manufactured by the Company; the
financing, buying, selling, trading, brokering and leasing of aircraft,
aircraft engines and components; inventory and logistics management; and rapid
deployment of military and defense-related products of the type manufactured by
the Company. Covenants (ii) and (iii) above shall be
geographically limited to the following territory:  within 100 miles of any location within the
United States of America, or any other country, where the Company or any
Affiliated Company did business during the last six months of Employee’s
employment with the Company. The Company and Employee acknowledge the
reasonableness of these covenants not to compete and non-solicitation. Nothing
herein shall prohibit Employee from being the legal or equitable holder of not
more than 5% of the outstanding capital stock of any publicly held corporation
which may be in direct or indirect competition with the Company or any
Affiliated Company. Notwithstanding any other provision of this Agreement, this
Section 8(b) shall be void if the Company terminates this Agreement
for Cause or fails to provide severance payments or benefits as required under
this Agreement .


(c)           If at any time, any clause or portion
of this Section 8 shall be deemed invalid or unenforceable by the laws of
the jurisdiction in which it is to be enforced by reason of being vague or
unreasonable as to duration, geographic scope, nature of activities restricted,
or for any other reason, this provision shall be considered divisible as to
such portions and the foregoing restrictions shall become and be immediately
amended to include only such duration, scope or restriction and such event as
shall be deemed reasonable and enforceable by the court or other body having
jurisdiction to enforce this Agreement; and the parties hereto agree that the
restrictions, as so amended, shall be valid and binding as though the invalid
or unenforceable portion had not been involved herein.


(d)           Employee acknowledges and agrees that
the Company would be irreparably harmed by violations of this Section 8
and in recognition thereof, the Company shall be entitled to an injunction or
other decree of specific performance with respect to any violation thereof
(without any bond or other security being required) in addition to other
available legal and equitable remedies.


(e)           This Section 8 shall survive any
termination of this Agreement and any termination of Employee’s employment. The
time period associated with each covenant herein shall be tolled (shall not
run) for so long as Employee is in breach of that covenant.


9.             Changes in Business. The
Company, acting through its Board of Directors, will at all times have complete
control over the Company’s business. Without limiting the generality of the
foregoing, the Company may at any time or times change or discontinue any or
all of its present or future operations, may close or move any one or more of
its divisions or offices, may undertake any new servicing or sales operation, 



 9
 






 



may sell any one or more of its divisions or offices
to any company not controlled, directly or indirectly, by the Company or may
take any and all other steps which its Board of Directors, in its exclusive
judgment, shall deem desirable, and Employee shall have no claim or recourse by
reason of such action. Provided, however, no such action shall result in the
reduction of Employee’s Base Salary or other benefits provided for hereunder;
provided, further that if the Company discontinues operations, a discretionary
bonus may or may not be granted, however, Employee will be entitled to a
pro rata share of any non-discretionary incentive bonus through the
date of discontinuance. Said pro rata bonus will be calculated by the
Chief Financial Officer of the Company whose determination will be final.


10.           Change
in Control.


(a)           In
the event:


(i)            a
Change in Control of the Company occurs, and


(ii)           at any time during the 24 month
period commencing on the date of the Change in Control the Company terminates
Employee’s employment for other than Cause or Disability, or Employee
terminates his employment for Good Reason, in either case by 30 days
written notice to the other party (including the particulars thereof), and
having given the other party the opportunity to be heard with respect thereto,
or Employee’s employment with the Company terminates for any reason other than
Disability or death during the 30-day period commencing on the expiration
of the aforementioned 24 month period, then:


(A)          The Company shall promptly pay to
Employee a lump sum cash payment in an amount equal to the sum of (1) all
Base Salary earned through the date of termination, (2) any annual cash
bonus under Section 5(a) earned by Employee for the fiscal year of
the Company most recently ended prior to the date of termination to the extent
unpaid on the date of termination, (3) a pro rata portion of the
annual cash bonus under Section 5(a), Employee would have earned had he
been employed by the Company on the last day of the fiscal year in which the
date of termination occurs (as if all performance targets had been met) that is
applicable to the period commencing on the first day of such fiscal year and
ending on the date of termination, and (4) any and all other benefits and
amounts earned by Employee prior to the date of termination to the extent unpaid.


(B)           The Company shall pay to Employee in
a lump sum, within 90 days after the date of his termination, a cash
payment in an amount equal to three times Employee’s total cash compensation
(Base Salary plus annual cash bonus under Section 5(a)) for either the
fiscal year of the Company most recently ended prior to the date of
termination, or the preceding fiscal year, whichever is the highest total
compensation.


(C)           Employee and his dependents shall
continue to be covered by, and receive employee welfare and executive fringe
benefits in accordance with the terms of, all of the Company’s benefit plans
and executive fringe benefit programs for three years following the date of
termination, and at no less than the 



 10
 






 



levels he and his dependents were receiving
immediately prior to the Change in Control. Employee’s dependents shall be
entitled to continued benefits coverage pursuant to the preceding sentence for
the balance of such three year period in the event of Employee’s death during
such period. The period during which Employee and his dependents are entitled
to continuation of group health plan coverage pursuant to Code Section 4980B,
and Part 6 of Title I of the Employee Retirement Income Security Act of
1974, as amended, shall commence on the date next following the expiration of
the aforementioned three year period.


(D)          Employee shall receive an additional
retirement benefit, over and above that which Employee would normally be
entitled to under the AAR CORP. Retirement Savings Plan and the AAR CORP. Supplemental
Key Employee Retirement Plan, equal to the amount attributable to Company
contributions that Employee would have earned under each such plan had he
authorized the same elective contribution he had elected during the immediately
preceding calendar year, if applicable, and had he accumulated three additional
continuous years of service. Such amount shall be paid to Employee in a cash
lump sum payment upon a termination of employment which triggers Change in
Control termination of employment benefits hereunder. In such event, the
Company shall concurrently pay Employee a gross-up bonus in an amount
equal to any federal, state and local income taxes (including FICA or any
similar taxes) payable by Employee on such lump sum payment and such gross-up
bonus.


(E)           The Company, at its expense, shall
provide Employee with outplacement services of a nationally recognized
outplacement firm of Employee’s choosing until the earlier of Employee’s
attainment of employment or the date eighteen months from the date of
Employee’s termination of employment; provided, however, that the cost of such
outplacement services shall not exceed 3.5% of the cash payment due to Employee
pursuant to Section 10(a) (ii) (B) above.


(b)           The amounts paid to Employee under
this Change in Control provision applicable to Employee shall be considered
severance pay in consideration of past services Employee has rendered to the
Company and in consideration of Employee’s continued service from the date
hereof to entitlement to those payments.


(c)           In the event that a Change in Control
has occurred, both for purposes of this Agreement and for purposes of the AAR
CORP. Stock Benefit Plan, as amended (“Plan”), whether or not such Change in
Control has the prior written approval of a majority of the Continuing
Directors (as defined in the Plan), and notwithstanding any conditions or
restrictions related to any Award granted to Employee under the Plan, (i) all
performance opportunity restricted stock shares eligible for award hereunder
shall be immediately awarded according to the performance matrix set forth in
Appendix (i) of this Agreement based on the higher of target or
actual performance through the effective date of a Change in Control using the
latest data then available to determine goals applicable for the partial
performance period, and all restrictions thereon shall be immediately released,
and (ii) all outstanding option grants, limited rights and restricted
stock awards granted or awarded under the Plan which have not then become
vested or exercisable or which remain restricted, shall immediately become
vested or exercisable and restrictions will lapse, as the case may be, and any
such options shall 



 11
 






 



remain exercisable for the full remaining life of the
option(s) whether or not Employee’s employment continues.


(d)           For purposes of this provision,
Change in Control means the earliest of:


(i)            any person (as such term is used in Section 13(d) of
the Securities Exchange Act of 1934, as amended (“Exchange Act”)), has acquired
(other than directly from the Company) beneficial ownership (as that term is
defined in Rule 13d-3 under the Exchange Act), of more than 35% of
the outstanding capital stock of the Company entitled to vote for the election
of directors; or


(ii)           the effective time of (A) a merger
or consolidation or other business combination of the Company with one or more
other corporations as a result of which the holders of the outstanding voting
stock of the Company immediately prior to such business combination hold less
than 60% of the voting stock of the surviving or resulting corporation, or (B) a
transfer of substantially all of the assets of the Company other than to an
entity of which the Company owns at least 80% of the voting stock; or


(iii)          the election, over any 12-month
period, to the Board of Directors of the Company without the recommendation or
approval of the incumbent Board of Directors of the Company, of the directors
constituting a majority of the number of directors of the Company then in
office.


(e)           The Company shall promptly pay
Employee a gross-up bonus in an amount equal to (A) all excise taxes
payable under Section 280G of the Internal Revenue Code on any amounts
constituting “golden parachute” payments, plus (B) any federal, state, and
local income taxes and excise taxes (including FICA) payable by Employee on
such gross-up bonus in order to put Employee in the same position he
would have been in if the excise tax provision (Section 280G) did not
apply.


11.           Legal Fees. The Company will
pay reasonable legal/attorney’s fees (including court costs and other costs of
litigation) incurred by Employee in connection with enforcement of any right or
benefit under this Agreement, if Employee prevails in whole or in part, in a
court of final jurisdiction or pursuant to final and binding arbitration, in an
enforcement action against the Company. In the event Employee prevails in part,
the Company’s obligation hereunder shall be computed on a pro rata basis.


12.           Section 409A Compliance. It
is intended that any compensation income to Employee provided pursuant to this
Agreement or other agreements or arrangements contemplated by this Agreement
(including, without limitation, any equity awards, retirement benefits, bonus
payments and severance benefits) will not be subject to interest and additional
tax under Code Section 409A. The provisions of the Agreement and all other
Company agreements or arrangements applicable to Employee will be interpreted
and construed in favor of their meeting any applicable requirements of Code Section 409A.
The Company, in its reasonable discretion, may amend (including retroactively)
this Agreement and any such other agreements or arrangements in order to
conform with Code Section 409A, including amending to facilitate the
ability of Employee to avoid the imposition of interest and additional tax
under Code 



 12
 






 



Section 409A. If the Company takes any action, or
fails to take any action, with respect to this Agreement or any Company benefit
plan or arrangement, and such action or failure to act causes (to the knowledge
of the Company) any compensation income to Employee to (i) be subject to
Code Section 409A, or (ii) fail to comply in any respect with Code Section 409A,
without the written consent of Employee, then the Company shall promptly pay
Employee a gross-up bonus in an amount equal to (A) all taxes and
penalties assessed under Code Section 409A on any such compensation income
imposed as a result of such action or failure to act, plus (B) any
federal, state, and local income taxes and penalties (including FICA) payable
by Employee on such gross-up bonus, in order to put Employee in the same
position he would have been in if the tax provisions and penalties of Code Section 409A
did not apply.


13.           Survival. Sections 6(a) and 11
of this Agreement shall survive and continue in full force and effect in
accordance with their terms notwithstanding the termination of this Agreement.


14.           Notices. Any notice or other
instrument or thing required or permitted to be given, served or delivered to
any of the parties hereto shall be delivered personally or deposited in the
United States mail, with proper postage prepaid, telegram, teletype, cable or
facsimile transmission to the addresses listed below:


(a)           If to the Company, to:


AAR CORP.

1100 N. Wood Dale Road

Wood Dale, Illinois 60191

Attention: Compensation Committee Chairman


With
a copy to:


AAR CORP.

1100 N. Wood Dale Road

Wood Dale, Illinois 60191

Attention:  General Counsel


(b)           If to Employee, to:


David P. Storch

1270 Linden Avenue

Highland Park, IL 60035


or to such other address
as either party may from time to time designate by notice to the other. Each
notice shall be effective when such notice and any required copy are delivered
to the applicable address.


15.           Non-Assignment.


(a)           The Company shall not assign this Agreement
or any rights or obligations hereunder without the prior written consent of
Employee, and any attempted unpermitted assignment shall be null and void and
without further effect; provided, 



 13
 






 



however, that, upon the sale or transfer of all or
substantially all of the assets of the Company, or upon the merger by the
Company into or the combination with another corporation or other business
entity, or upon the liquidation or dissolution of the Company, this Agreement
will inure to the benefit of and be binding upon the person, firm or
corporation purchasing such assets, or the corporation surviving such merger or
consolidation, or the shareholder effecting such liquidation or dissolution, as
the case may be. After any such transaction, the term Company in this Agreement
shall refer to the entity which conducts the business now conducted by the
Company. The provisions of this Agreement shall be binding upon and inure to
the benefit of the estate and beneficiaries of Employee and upon and to the
benefit of the permitted successors and assigns of the parties hereto.


(b)           Employee agrees on behalf of himself,
his heirs, executors and administrators, and any other person or person
claiming any benefit under him by virtue of this Agreement, that this Agreement
and all rights, interests and benefits hereunder shall not be assigned,
transferred, pledged or hypothecated in any way by Employee or by any
beneficiary, heir, executor, administrator or other person claiming under
Employee by virtue of this Agreement and shall not be subject to execution,
attachment or similar process. Any attempted assigned, transfer, pledge or
hypothecation or any other disposition of this Agreement or of such rights,
interests and benefits contrary to the foregoing provisions or the levy or any
execution, attachment or similar process thereon shall be null and void and
without further effect.


16.           Severability. If any term,
clause or provision contained herein is declared or held invalid by any court
of competent jurisdiction, such declaration or holding shall not affect the
validity of any other term, clause or provision herein contained.


17.           Construction. Careful scrutiny
has been given to this Agreement by the Company, Employee, and their respective
legal counsel. Accordingly, the rule of construction that the ambiguities
of the contract shall be resolved against the party which caused the contract
to be drafted shall have no application in the construction or interpretation
of this Agreement or any clause or provision hereof.


18.           Entire Agreement. This
Agreement as amended and restated herein and the other agreements referred to
herein set forth the entire understanding of the parties and supersede all
prior agreements, arrangements and communications, whether oral or written,
pertaining to the subject matter hereof. This Agreement shall not be modified
or amended except by the mutual written agreement of the Company and Employee.


19.           Waiver. No provision of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing signed by Employee and an authorized
officer of the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time.



 14
 






 



20.           Arbitration. Any controversy
or claim arising out of this Agreement, or breach hereof, shall be settled by
arbitration in accordance with the laws of the State of Illinois by three
arbitrators. Within 15 days after either party notifies the other party,
in writing, of an intention to commence arbitration, the Company shall appoint
one arbitrator and Employee shall appoint one arbitrator. The third arbitrator
shall be appointed by the first two arbitrators within ten days of their
appointment. If the third arbitrator cannot be agreed upon, the third
arbitrator shall be appointed by the American Arbitration
Association. The arbitration shall be conducted in accordance with the rules of
the American Arbitration Association, except with respect to the selection of
arbitrators. The arbitrator’s determination shall be final and binding upon all
parties and judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof.


21.           Governing Law. The validity,
interpretation, construction and performance of this Agreement shall be
governed by and construed in accordance with the laws of the State of Illinois
without regard to its conflicts of law principles.


22.           Tax Withholding. All payments
hereunder shall be made net of any applicable federal, state and local tax
withholding.


23.           Execution. This Agreement may
be executed in multiple counterparts, each of which shall be deemed an original
and which shall constitute but one and the same Agreement.



 15
 






 



WITNESS
the due execution of this Agreement by the parties hereto as of the day and
year first above written.


Employer:


	
  AAR CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ James G. Brocksmith, Jr.

  	
   

  
	
   

  	
  James G. Brocksmith, Jr.,

  
	
   

  	
  Chairman — Compensation Committee of

  
	
   

  	
  The Board of Directors

  
	
   

  	
   

  
	
   

  	
   

  
	
  AAR CORP.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Timothy J. Romenesko

  	
   

  
	
   

  	
  Timothy J. Romenesko

  
	
   

  	
  Vice President and Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
  Employee:

  
	
   

  	
   

  
	
  /s/ David P. Storch

  	
   

  
	
  David P. Storch

  	
   

  
				



 



 16















David P.
Storch Employment Agreement

Appendix (i)


 


AAR CORP. Long-Term Incentive Plan

for David P. Storch

June 1, 2006 - May 31, 2010


Responsibility and Authority


The Compensation
Committee of the Board of Directors (“Committee”) will be responsible for the
administration of Employee’s long-term incentive compensation
arrangements. Any interpretation or adjustments of the Plan will be by the
Committee, whose decision is final.


Overall Structure of the Plan


·                  Long-Term
Incentive Plan compensation for Employee will consist of:


An annual award
opportunity with compensation amount at plan of $600,000 worth of performance-based
restricted stock for each of the Company’s (i) Net Income for the each
fiscal year within a Performance Period and (ii) Return on Invested
Capital for each fiscal year within a Performance Period. The number of shares
available to be granted with respect to each year of a Performance Period will
be determined at the beginning of each such Performance Period by dividing
$600,000 by the fair market value of one share of Company stock on that date,
based on the New York Stock Exchange closing price for such date. An additional
award opportunity of up to 50% of the total two-year award is available
based on the combined achievement against these two goals for each Performance
Period. The number of shares actually awarded will be determined by the annual
performance targets (as determined by the Committee, in its discretion) up to
the full amount of the opportunity. All performance restricted stock awards
hereunder will be granted pursuant to the AAR Corp. Stock Benefit Plan, and
shall be reflected in a written performance restricted stock award agreement to
be signed by the Employee prior to the award becoming final.


·                  The first “Performance
Period begins June 1, 2006 and ends May 31, 2008. The second
Performance Period begins June 1, 2008 and ends May 31, 2010.


·                  If at any
time during any performance period, the Company’s closing stock price is 50%
higher than the price at the beginning of that performance period for
20 consecutive trading days, all performance restricted stock opportunity
shares (including the additional 50% opportunity) will be awarded immediately.



 17
 








·                  Except in
the event performance awards hereunder are triggered as a result of achieving
the stock price goal described immediately above, actual shares awarded will be
based on goals recommended by management and approved by the Board of Directors
in accordance with the following performance matrix:


	
  Performance Target Achieved*

  	
   

  	
   

  	
   

  	
  Percentage of

  Target Shares

  Awarded

  	
   

  
	
  Below Threshold

  	
   

  	
  0

  	
  %

  
	
  Threshold (80%
  of performance goal)

  	
   

  	
  50

  	
  %

  
	
  Target (100% of
  performance goal)

  	
   

  	
  100

  	
  %

  



 






*The
performance goals will be achieved if either the Company’s Net Income or Return
on Invested Capital for the performance period meets the targets set by the
Board of Directors. Results between the amounts shown on the schedule will be
computed by linear interpolation. Performance goals for each Performance Period
shall be determined prior to or within the first 90 days of the commencement of
said Performance Period.


·                  If actual
performance is at least above threshold for each year of a Performance Period,
the total award will be increased by 50% of the shares earned with respect to
that performance criteria.


·                  The
following example is intended to illustrate the mechanics of this Plan:


Pro Forma Performance Period One


	
   

  	
   

  	
  Target shares

  for each of the

  next two years - 

  determined as of

  June 1, 2006*

  	
   

  	
  June 1, 2007

  Grant**

  	
   

  	
  June 1, 2008

  Grant**

  	
   

  	
  Two-Year

  Total

  	
   

  
	
  Net Income award

  	
   

  	
  20,000/year

  	
   

  	
  20,000 shares

  	
   

  	
  20,000 shares

  	
   

  	
  40,000 shares

  	
   

  
	
  Return on
  Invested Capital award

  	
   

  	
  20,000/year

  	
   

  	
  20,000 shares

  	
   

  	
  20,000 shares

  	
   

  	
  40,000 shares

  	
   

  
	
  Total “earned”
  award

  	
   

  	
   

  	
   

  	
  40,000 shares

  	
   

  	
  40,000 shares

  	
   

  	
  80,000 shares

  	
   

  
	
  Two year
  achievement premium for Net Income

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  20,000 shares

  	
   

  	
  20,000 shares

  	
   

  
	
  Two year
  achievement premium for ROIC

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  20,000 shares

  	
   

  	
  20,000 shares

  	
   

  
	
  Total shares
  awarded

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  120,000 shares

  	
   

  



 






*                    Assuming a
stock price of $30 per share on June 1, 2006.


**   Assuming performance at 100% of target.
Grants are made in restricted shares subject to terms and conditions set
pursuant to the AAR Corp. Stock Benefit Plan.



 18
 








·      No
shares will be awarded in either category (Net Income or Return on Invested
Capital) if the Company’s financial year result for net income in that year is
negative (i.e., there is a net loss for that year).


·                  At the
discretion of the Committee, transactions which significantly alter the capital
structure of the Company may be excluded from the measurement period (in whole
or in part) in a manner determined by the Committee.


·                  Definitions:


Net Income means “consolidated
net income of the Company net of special charges and extraordinary items.”


Return on Invested
Capital means “consolidated return on Invested Capital, calculated as follows:


Net income plus tax
affected interest expense divided by average Invested Capital (total debt plus
equity).”



 19