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Exhibit 10.7    
    


 
 

EXECUTION COPY    
    


 
 

AIRPLANE USE AND REIMBURSEMENT AGREEMENT    
    


        This Airplane Use and Reimbursement Agreement (this "Agreement") is entered into as of November 18, 2004 by
and between Bernard L. Schwartz, an individual ("Executive"), and K&F Industries, Inc., a Delaware corporation (the
"Company"). 


        WHEREAS,
Executive and the Company desire that Executive provide for certain arrangements relating to the use and operation of that certain 1988 Gulfstream G-IV Aircraft
(Federal Aviation Administration ("FAA") Registration Mark N200LC) (the "Airplane"), which is currently
leased by the Company pursuant to that certain Aircraft Lease Agreement, dated as of November 4, 2003 (the "Airplane Lease"), by and between the
Company and AVN Air, LLC (the "Lessor"). 



        NOW,
THEREFORE, in consideration of the foregoing premises, the mutual agreement set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows: 


        1.     Use of Airplane.



        (a)   Subject
to the terms and conditions set forth herein, during the Term (as defined in Section 1(b) below), Executive shall be entitled to the full and exclusive
use of the Airplane. 


        (b)   The
term of this Agreement (the "Term") shall begin immediately following the effective date of the closing of the
purchase of all of the outstanding capital stock of the Company (the "Sale Transaction") in accordance with that certain Stock Purchase Agreement, dated
as of October 15, 2004, by and among the Company, AAKF Acquisition, Inc., a Delaware corporation ("Aurora"), and the stockholders named on
Exhibit A therein, and end on November 3, 2008, subject to Section 2 hereof. 




        2.     Termination of Airplane Lease and Term.



        (a)   Cancellation
Option Elected by Executive. Notwithstanding any other provision herein, Executive is entitled to give the Company notice of his election to cause the
Airplane Lease to be canceled in accordance with the "Cancellation Option" under Section 18 of the Airplane Lease. Such notice will be effective only if delivered in writing to the Company by
no later than January 15, 2005. Upon delivery of such notice, the Company shall have the right, but not the obligation, to cancel the Airplane Lease under Section 18 of the Airplane
Lease; provided that (i) if the Company elects to not so cancel the Airplane Lease, the "Term" shall then expire as of midnight, May 4, 2005 and the Company shall be responsible for all
costs, expenses, liabilities, obligations or indebtedness related to the Airplane Lease, in each case to the extent incurred after May 4, 2005; and (ii) if the Company elects to so
cancel the Airplane Lease, the "Term" shall end when the Lessor accepts possession of the Airplane from the Company in accordance with the terms of the Airplane Lease. 


        (b)   Cancellation
Option Elected by the Company. Notwithstanding any other provision herein, the Company is entitled to give Executive notice of its election to cause the
Airplane Lease to be canceled in accordance with the "Cancellation Option" under Section 18 of the Airplane Lease. Such notice will be effective only if delivered in writing to Executive by no
later than January 15, 2005. If the Company so elects to cancel the Airplane Lease, then the "Term" shall end when the Lessor accepts possession of the Airplane from the Company in accordance
with the terms of the Airplane Lease. 


        (c)   Termination
Option Elected by Executive. Notwithstanding any other provision herein, after February 4, 2005, Executive is entitled to give the Company notice of
his election to cause the Airplane Lease to be terminated in accordance with the "Early Termination" provisions of 








 




Section 17
of the Airplane Lease. Any such notice shall specify a termination date by which Executive intends the Company to terminate the Airplane Lease (the "Section 17 Termination
Date"), which shall be at least 105 days from the date such notice is delivered. Upon delivery of such notice, the Company shall have the right, but not the obligation, to terminate the
Airplane Lease under Section 17 of the Airplane Lease; provided that (i) if the Company elects to not so terminate the Airplane Lease, the "Term" shall then expire as of midnight on the
Section 17 Termination Date and the Company shall be responsible for all costs, expenses, liabilities, obligations or indebtedness related to the Airplane Lease, in each case to the extent
incurred after the Section 17 Termination Date; and (ii) if the Company elects to so terminate the Airplane Lease, the "Term" shall end when the Lessor accepts possession of the Airplane
from the Company or the Airplane is otherwise sold in accordance with the terms of the Airplane Lease. 


        (d)   Termination
Option Elected by the Company. Notwithstanding any other provision herein, after February 4, 2005, the Company is entitled to give Executive notice of
its election to cause the Airplane Lease to be terminated in accordance with the "Early Termination" under Section 17 of the Airplane Lease. The Company will deliver such notice, if any, to
Executive at least 15 days prior to submitting to the Lessor the termination notice contemplated by Section 17 of the Airplane Lease. If the Company so elects to terminate the Airplane
Lease, then the "Term" shall end when the Lessor accepts possession of the Airplane from the Company or the Airplane is otherwise sold in accordance with the terms of the Airplane Lease. 




        3.     Compliance with Airplane Lease.


        Subject
to Section 2 hereof, during the Term, (a) the Company shall not terminate the Airplane Lease and (b) Executive shall perform, cause to be performed, or
direct the Company to perform, all of the Company's obligations under the Airplane Lease, including the payment of all amounts payable by the Company thereunder. Subject to Section 2 hereof,
the Company agrees to take promptly any actions with respect to the performance of the Airplane Lease as Executive may reasonably request (including without limitation maintaining the existence and
operations of the corporate subsidiary of the Company previously established to operate the Airplane), but Executive shall be solely responsible for the Company's compliance with the Airplane Lease
and shall promptly reimburse the Company for its costs and expenses relating to any requests made by Executive pursuant to this Agreement. 


        4.     Payment of All Aircraft Liabilities.



        (a)   Regardless
of the nature or frequency of Executive's use of the Airplane, Executive shall be solely and exclusively responsible for the use, operation and control
(subject to Section 3 hereof) of the Airplane and the payment of any and all costs, expenses, liabilities, obligations or indebtedness relating to the Airplane (collectively,
"Airplane Liabilities"), including, without limitation, as set forth below: 



        (i)    Executive
shall make, or reimburse the Company for, all payments owed by the Company pursuant to the Airplane Lease, including all Rent (as defined in the Airplane
Lease) and any termination and/or severance fees payable by the Company as a result of the termination of the Airplane Lease, including any Termination Value (as defined in the Airplane Lease) or
other amounts owed by the Company pursuant to Section 17 of the Airplane Lease (except as contemplated by Section 2(a) or 2(c) hereof); 


        (ii)   Executive
shall pay, or reimburse the Company for, all operating costs associated with the use of the Airplane and incurred during the Term, including, without
limitation, costs of pilots, cabin personnel, mechanics, and other ground support personnel (the foregoing collectively, the "Flight Crew"), fuel, oil,
lubricants, landing and navigation fees, airport charges, passenger service and any and all other expenses of any kind or nature, arising 




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directly
or indirectly in connection with or related to the use, housing, storage, movement and operation of the Airplane during the Term; 


        (iii)  Executive
shall be responsible for, or reimburse the Company for, all repairs or maintenance of the Airplane during the Term; the term "repairs" shall include all
necessary service, repairs, tests, and maintenance (both routine and extraordinary) of the Airplane as appropriate to maintain the Airplane in accordance with applicable law; 


        (iv)  During
the Term, Executive shall maintain or cause to be maintained all aircraft documents required by the terms of the Airplane Lease, the FAA, the Airplane
manufacturer, the engine manufacturer, and the manufacturers of component parts, and said aircraft documents shall be maintained in a current, accurate, and complete manner and shall be available at
all reasonable times for examination and inspection by the Company; 


        (v)   Executive
shall file, or promptly furnish to the Company, such information with respect to his use of the Airplane as shall be required to enable the Company to file all
reports required by any Governmental Authority relating to the Company's lease of Airplane; 


        (vi)  Executive,
at his sole expense, shall locate and retain (either through direct employment or contracting with an independent contractor for flight services) a
duly-qualified Flight Crew; all members of the Flight Crew shall be fully competent and experienced, duly licensed, and qualified in accordance with the requirements of applicable law, all
insurance policies covering the Airplane and the Airplane Lease; all members of the Flight Crew who are pilots shall be fully trained in accordance with an FAA-approved training program,
including initial and recurrent training and, where appropriate, contractor-provided simulator training; and Executive shall be responsible for, or reimburse the Company for, all costs and expenses
relating to the Flight Crew during the Term, including any compensation, severance or other expenses or liabilities; and 


        (vii) Executive
shall provide for, or reimburse the Company for, all insurance with respect to the Airplane during the Term, the engines and the Flight Crew, as applicable,
in such amounts and covering such risks as are currently held by the Company with respect to the Airplane or, if greater, as are required under the Airplane Lease. 




        (b)   To
the extent that the Company is required to pay any of the Airplane Liabilities pursuant to the terms of the Airplane Lease or otherwise, Executive will reimburse the
Company for any such Airplane Liabilities on a monthly basis. The Company shall have the right to offset against Executive's compensation under the Employment Agreement, dated as of the date hereof,
by and between Executive and the Company, any amounts owed to it by Executive pursuant to this Agreement. During the Term, the Company shall not incur any expenses or costs relating to the Airplane
without the consent of Executive (which shall not be unreasonably withheld) unless expressly required by the terms of the Airplane Lease. 



        (c)   Any
cost or expense reimbursement owed by Executive to the Company hereunder shall be net of any income actually received by the Company in respect of the operation of
the Airplane. 


        (d)   In
the event that the Lessor asserts or determines that any of the Sale Transaction, this Agreement or either party's actions hereunder violates the Lease, or
constitutes an event of default thereunder, including, without limitation, pursuant to Section 12(a)(x) thereof, Executive shall be responsible for any and all costs, fees, expenses or
liabilities incurred by the Company as are the result of such violation or default and shall promptly reimburse the Company with respect thereto. 



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        5.     Indemnification by Executive.



        (a)   Executive
shall save, defend, indemnify and hold harmless the Company and its Affiliates and their respective officers, directors, employees, attorneys and agents and
the successors and assigns of each of the foregoing from and against any and all losses, damages, liabilities, claims, interest, awards, judgments, penalties, costs and expenses (including attorneys'
fees, costs and other out-of-pocket expenses incurred in investigating, prosecuting, preparing for the prosecution or defense of or defending the foregoing) asserted against,
incurred, sustained or suffered by any of the foregoing as a result of or arising out of the Airplane, including without limitation, the Airplane Liabilities. 


        (b)   Any
payment by Executive pursuant to Section 5(a) in respect of any indemnifiable event shall be net of any insurance or other proceeds recovered by the Company
in respect of such claim. In the event that an insurance or other recovery is received by the Company with respect to any such indemnifiable event for which the Company has previously been indemnified
by Executive hereunder, then the Company shall promptly make a refund to Executive in an amount equal to the lesser of (i) the total amount of such insurance recovery (net of collection
expenses) and (ii) the amount previously paid by Executive as indemnification for such indemnifiable event. 




        6.     Right to Inspection.


        The
Company and its agents shall have the right to inspect the Airplane or any related aircraft documents at any reasonable time, upon giving Executive reasonable notice, to ascertain
the condition of the Airplane and to satisfy the Company that the Airplane is being properly repaired and maintained in accordance with the requirements of this Agreement. All required repairs shall
be performed as soon as practicable after such inspection. 


        7.     Definitions. For purposes of this Agreement, the following terms shall have the definitions set forth below: 


        "Affiliate" shall mean any Person which directly, or indirectly through one or more intermediaries, Controls, or is Controlled by, or is
under common Control with, the Company. The parties hereto agree that each of the Aurora Entities shall be deemed to be Affiliates of the Company for purposes of this Agreement. 


        "Aurora Entities" means Aurora Equity Partners L.P., a Delaware limited partnership, Aurora Equity Partners II L.P., a Delaware limited
partnership, Aurora Overseas Equity Partners I, L.P., a Cayman Islands exempted limited partnership, and Aurora Overseas Equity Partners II, L.P., a Cayman Islands exempted limited partnership. 


        "Control" means, with respect to any Person, the possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. 


        "Governmental Authority" shall mean the government of any nation or state, city, locality or other political subdivision of any thereof,
any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, regulation or compliance, and any corporation or other entity owned or
controlled through stock or capital ownership of otherwise, by any of the foregoing. 



        "Person" shall mean any individual, firm, corporation, limited liability company, partnership, trust, incorporated or unincorporated
association, joint venture, joint stock company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. 


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        8.     Miscellaneous.



        (a)   Notices. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of personal
delivery (including personal delivery by telecopy or telex) or the third day after mailing by first class to the recipient at the address indicated below: 



To
the Company: 


K&F
Industries, Inc.

c/o Aurora Capital Group

10877 Wilshire Boulevard

Suite 2100

Los Angeles, CA 90024

Attention: Richard K. Roeder

Telecopier: (310) 824-2791 


with
copies, which shall not constitute notice, to: 


Aurora
Capital Group

10877 Wilshire Boulevard

Suite 2100

Los Angeles, CA 90024

Attention: Richard K. Roeder

Facsimile: (310) 277-5591 




and:




Gibson,
Dunn & Crutcher LLP

333 South Grand Avenue

Los Angeles, CA 90071-3197

Attention: Bruce D. Meyer, Esq.

Facsimile: (213) 229-7520 




To
Executive: 



Bernard
L. Schwartz

944 Fifth Avenue, 8th Floor

New York, New York 10021

Telecopier: (212) 288-0705 


With
a copy to: 


Neil
Novikoff, Esq.

Willkie Farr & Gallagher LLP

787 Seventh Avenue

New York, New York 10019

Facsimile: (212) 728-8111 





or
to such other address or to the attention of such other Person as the recipient party will have specified by prior written notice to the sending party. 



        (b)   Severability. Any provision of this Agreement which is deemed invalid, illegal or unenforceable in any jurisdiction
shall, as to that jurisdiction and subject to this paragraph be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions
hereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal, or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal
or unenforceable because its scope is considered excessive, such 



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covenant
shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable. 


        (c)   Entire Agreement. This document constitutes the final, complete, and exclusive embodiment of the entire agreement and
understanding between the parties related to the subject matter hereof and
supersedes and preempts any prior or contemporaneous understandings, agreements, or representations by or between the parties, written or oral. 


        (d)   Counterparts. This Agreement may be executed on separate counterparts, any one of which need not contain signatures of
more than one party, but all of which taken together will constitute one and the same agreement. 


        (e)   Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive,
the Company and their respective successors and assigns, except that Executive may not assign any of his duties hereunder and he may not assign any of his rights hereunder without the prior written
consent of the Company. 


        (f)    Amendments. No amendments or other modifications to this Agreement may be made except by a writing signed by all parties.
No amendment or waiver of this Agreement requires the consent of any individual, partnership, corporation or other entity not a party to this Agreement. Nothing in this Agreement, express or implied,
is intended to confer upon any third person any rights or remedies under or by reason of this Agreement. 


        (g)   Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF. Each of the parties hereto agrees that any legal action or proceeding with respect to this Agreement may be brought in the Courts
of the State of New York, County of New York or the United States District Court for the Southern District of New York and, by execution and delivery of this Agreement, each party hereto irrevocably
submits itself in respect of its property, generally and unconditionally, to the non-exclusive jurisdiction of the aforesaid courts in any legal action or proceeding arising out of this
Agreement. Each of the parties hereto hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or
in connection with this Agreement brought in the courts referred to in the preceding sentence. Each party hereby consents to process being served in any such action or proceeding by the mailing of a
copy thereof to the address set forth in Section 6(a) hereof and agrees that such service upon receipt shall constitute good and sufficient service of process or notice thereof. Nothing in this
Section 6(g) shall affect or eliminate any right to serve process in any other matter permitted by law. 


        (h)   Survivorship. The provisions of this Agreement necessary to carry out the intention of the parties as expressed herein
shall survive the termination or expiration of this Agreement. In particular, the provisions of Section 4, 5, 7 and 8 shall survive the expiration or termination of the Term and of this
Agreement. 


        (i)    Waiver. Except as provided herein, the waiver by either party of the other party's prompt and complete performance, or
breach or violation, of any provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation, and the failure by any party hereto to
exercise any right or remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of such right or remedy by such party upon the occurrence of any subsequent
breach or violation. 


        (j)    Captions. The captions of this Agreement are for convenience and reference only and in no way define, describe, extend or
limit the scope or intent of this Agreement or the intent of any provision hereof. 



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        (k)   Construction. The parties acknowledge that this Agreement is the result of arm's-length negotiations between
sophisticated parties each afforded representation by legal counsel. Each and every provision of this Agreement shall be construed as though both parties participated equally in the drafting of the
same, and any rule of construction that a document shall be construed against the drafting party shall not be applicable to this Agreement. 


        (l)    Withholdings. The Company may withhold from any amounts payable to Executive under this Agreement an amount sufficient to
satisfy the minimum requirements set by applicable law to be withheld therefrom for withholding and payroll taxes, if any. All amounts withheld to satisfy the requirements of applicable law, if any,
will be deemed to have been paid to Executive for purposes of this Agreement. 



[signature page follows]


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        IN
WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first set forth above. 



	 	 	/s/  BERNARD L. SCHWARTZ      
 Bernard L. Schwartz
	

 	
 	

K&F Industries, Inc.
	

 	
 	

By:	
 	

/s/  KENNETH M. SCHWARTZ      

	 	 	 	 	Name:	 	Kenneth M. Schwartz
	 	 	 	 	Title:	 	Chief Executive Officer, President and Director




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QuickLinks



Exhibit 10.7

EXECUTION COPY


AIRPLANE USE AND REIMBURSEMENT AGREEMENT