Exhibit
10.07


EMPLOYMENT AGREEMENT


 


AGREEMENT made this 21st day of December, 2004, among KMG America
Corporation, a Virginia corporation (“Parent”), Kanawha Insurance Company, a
South Carolina corporation (the “Company”) and Robert E. Matthews (the “Executive”).


 


The Board of Directors of Parent (the “Parent Board”) and the Board of
Directors of the Company (the “Company Board” and, together with the Parent
Board, the “Boards”) recognize that the Executive will make a substantial
contribution to the growth and success of the Company.  The Boards desire to provide for the
employment of the Executive with the Company, and the Executive is willing to
commit himself to serve the Company, on the terms and conditions herein
provided.  The Executive’s employment with
the Company is contingent on his execution of this Employment Agreement.


 


In order to effect the foregoing, the Company and the Executive wish to
enter into an employment agreement on the terms and conditions set forth
below.  Accordingly, in consideration of
the premises and the respective covenants and agreements of the parties herein
contained, and intending to be legally bound hereby, the parties hereto agree
as follows:


 


1.                                       Employment.  The Company hereby agrees to employ the
Executive, and the Executive hereby agrees to serve the Company, on the terms
and conditions set forth herein.


 


2.                                       Term.  The employment of the Executive by the
Company as provided in Section 1 will commence on the date hereof and end
on December 31, 2007, unless further extended or sooner terminated as
hereinafter provided.  The Company shall
have the right, but not the obligation, to extend or renew the term of this
Agreement by one year by providing the Executive with written notice of extension
on or before October 31, 2005.  For
purposes of this Agreement, “Term” shall mean the actual duration of Executive’s
employment hereunder, taking into account any extension of such employment or
termination of employment pursuant to Section 6.


 


3.                                       Position and Duties.  The Executive shall serve as the Executive
Vice President, Chief Financial Officer and Treasurer of the Company and shall
have such responsibilities, duties and authority as he may have as of the date
hereof and as may from time to time be assigned to the Executive by the Chief
Financial Officer of the Parent, the Chief Executive Officer of the Company or
the Chief Executive Officer of the Parent (the “Parent CEO”) that are
consistent with such responsibilities, duties and authority.  The Executive shall devote substantially all
of his working time and efforts to the business and affairs of the Company;
provided, that nothing in this Agreement shall preclude Executive from serving
as a director or trustee in any other firm or from pursuing personal real
estate investments and other personal investments, as long as such activities
do not interfere with Executive’s performance of his duties hereunder or
violate Section 8 or 9 of this Agreement.


 


4.                                       Place of Performance.  In connection with the Executive’s employment
by the Company, the Executive shall be based at the principal executive offices
of the Company in Lancaster, South Carolina, except for required travel on the
Company’s business to an extent substantially consistent with present business
travel obligations.


 





















 


5.                                       Compensation and Related Matters.


 


(a)                                  Base Salary.  The Company shall pay the Executive a base
salary annually (the “Base Salary”), which shall be payable in periodic
installments according to the Company’s normal payroll practices.  The initial Base Salary shall be
$187,500.  During the Term, the Parent
Board or the Compensation Committee of the Parent Board (the “Compensation
Committee”) shall, after taking into account the recommendations of the Chief
Executive Officer of Parent, review the Base Salary at least once a year to
determine whether the Base Salary should be increased effective the following January 1.  The amount of any increase shall be
determined before March 31 of each year and shall be retroactive to January 1.  The Base Salary, including any increases,
shall not be decreased during the Term. 
For purposes of this Agreement, the term “Base Salary” shall mean the
amount established and adjusted from time to time pursuant to this Section 5(a).


 


(b)                                 Annual Cash Incentive Awards.  The Executive shall be eligible to
participate in the annual cash incentive bonus plan adopted by the Compensation
Committee for the Company each fiscal year during the Term of this Agreement
(the “Bonus Plan”), subject to the terms and conditions of the Bonus Plan.  If the Executive or the Company, as the case
may be, satisfies the performance criteria contained in such Bonus Plan for a
fiscal year, he shall receive an annual cash incentive bonus (the “Incentive
Bonus”) in an amount determined by the Compensation Committee and subject to
ratification by the Parent Board, if required, but not to exceed 100% of the
Executive’s then current Base Salary.  If
the Executive or the Company, as the case may be, fails to satisfy the
performance criteria contained in such Bonus Plan for a fiscal year, the
Compensation Committee may determine whether any Incentive Bonus shall be
payable to Executive for that year, subject to ratification by the Parent
Board, if required.  Beginning January 1,
2005, the Bonus Plan shall contain both individual and group goals established
by the Compensation Committee.  The
annual Incentive Bonus shall be paid to the Executive no later than thirty (30)
days after the date the Compensation Committee determines whether the criteria
in the Bonus Plan for such fiscal year were satisfied.  For purposes of this Agreement, the term “Incentive
Bonus” shall mean the amount established pursuant to this Section 5(b).


 


(c)                                  Stock Based Awards.  The Parent has established the 2004 Stock
Incentive Plan (“Stock Incentive Plan”) for the benefit of the employees of the
Parent and its subsidiaries.  Subject to
the terms and conditions of the Stock Incentive Plan, the Executive shall be
eligible to participate in the Stock Incentive Plan, and shall be eligible to
receive annual stock option and/or restricted stock awards under the Stock
Incentive Plan.  The Compensation
Committee shall approve any such awards made to the Executive pursuant to the
Stock Incentive Plan.


 


(i)                                     2004 Stock Incentive Plan Option
Grants.  Option awards under the Stock Incentive Plan
will have an exercise price per share equal to the closing price of Parent’s
common stock on the trading day immediately preceding the date of grant, will
have a term of ten (10) years and will vest and become exercisable with respect
to 1/4 of the underlying shares of Company common stock on the first, second,
third and fourth anniversaries, respectively, of the date of grant; provided, however, that the Executive will
be 100% vested in all outstanding option awards, including the unvested portion
of such awards, and shall be permitted to exercise all vested option awards
only during the 90-day period following such accelerated vesting upon (i)
termination of the Executive’s


 


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employment by the Company or the Board, other than a termination for “Cause”
pursuant to Section 6(c) or any resignation by the Executive without “Good
Reason” (as defined herein), following a Change in Control (as defined in the
Stock Incentive Plan), (ii) a termination by the Company without Cause (as
defined herein), (iii) a termination by the Executive for Good Reason (as
defined herein), (iv) the Executive’s death, or (v) the Disability (as defined
below) of the Executive, and that the Executive will forfeit all unvested
options if he is terminated for Cause or he terminates his employment hereunder
for other than Good Reason.


 


(ii)                                  2004 Stock Incentive Plan
Restricted Stock Awards.  The Stock Incentive Plan provides for the
issuance of shares of Parent common stock as restricted common stock (“Restricted
Stock Grants”) to the extent that such shares of common stock are available
thereunder.  Restricted Stock Grants
awarded to the Executive shall be subject to forfeiture restrictions that will
terminate with respect to 1/4 of the awarded shares on the first, second, third
and fourth anniversaries of the date of the issuance; provided, further, that the Executive will
be 100% vested and all restrictions on each outstanding Restricted Stock Grant
will lapse upon (i) termination of the Executive’s employment by the Company or
the Board, other than a termination for “Cause” pursuant to Section 6(c)
or any resignation by the Executive without “Good Reason” (as defined herein),
following a Change in Control (as defined in the Stock Incentive Plan), (ii) a
termination by Parent or the Company without Cause (as defined herein), (iii) a
termination by the Executive for Good Reason (as defined herein), (iv) the
Executive’s death, or (v) the Disability (as defined below) of the Executive,
and that the Executive will forfeit all shares with respect to which the
forfeiture restrictions have not terminated if he is terminated for Cause or he
resigns for other than Good Reason.  The
common stock issued as Restricted Stock Grants will have voting and dividend
rights.


 


(d)                                 Benefits.


 


(i)                                     Vacation.  The Executive shall be entitled to four (4)
weeks of paid vacation per full calendar year. The Executive shall be entitled
to cash in lieu of any unused vacation time. 
The Executive shall not be entitled to carry over any unused vacation
time from year to year.


 


(ii)                                  Sick and Personal Days.  The Executive shall be entitled to sick and
personal days in accordance with the policies of the Company.


 


(iii)                               Employee Benefits.


 


(A)                              Participation in
Employee Benefit Plans.  Subject to
the terms of any applicable plans, policies or programs, the Executive and his
spouse and eligible dependents, if any, and their respective designated
beneficiaries where applicable, will be eligible for and entitled to
participate in any Company sponsored employee benefit plans or Parent sponsored
employee benefit plans applicable to employees of the Company, including but
not limited to benefits such as group health, dental, accident, disability insurance,
group life insurance, and a 401(k) plan, as such benefits may be offered from
time to time, on a basis no less favorable than that applicable to other
executives of the Company.


 


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(B)                                Disability Insurance.  The Company will, during the Term, maintain a
renewable long-term Disability plan that, subject to the terms of such plan and
any applicable plans, policies or programs, provides for payment of not less
than 60% of the Executive’s Base Salary.


 


(iv)                              Directors and Officers Insurance.  During the Term and for a period of 24 months
thereafter, the Executive shall be entitled to director and officer insurance
coverage for his acts and omissions while an officer and director of the
Company on a basis no less favorable to him than the coverage provided to
current officers and directors.


 


(v)                                 Key Man Life Insurance.  The Company may purchase on the life of the
Executive up to $3.0 million of key man life insurance with the Company as the
beneficiary of the death benefit.


 


(vi)                              Expenses, Office and Secretarial
Support.  The Executive shall be entitled to
reimbursement of all reasonable expenses, in accordance with the Company’s
policy as in effect from time to time and on a basis no less favorable than
that applicable to other executives of the Company, including, without
limitation, telephone, reasonable travel and reasonable entertainment expenses
incurred by the Executive in connection with the business of the Company,
promptly upon the presentation by the Executive of appropriate
documentation.  The Executive shall also
be entitled to appropriate office space, administrative support, and such other
facilities and services as are suitable to the Executive’s positions and
adequate for the performance of the Executive’s duties.


 


(vii)                           Reimbursement of Certain
Professional Fees.  The Company shall reimburse, at the request
of the Executive, reasonable fees for professional organizations reasonably
related to the life and health insurance businesses.


 


6.                                       Termination.  The Executive’s employment hereunder may be
terminated without any breach of this Agreement only under the following
circumstances:


 


(a)                                  Death.  The Executive’s employment hereunder shall
terminate upon his death.


 


(b)                                 Disability.  If, in the written opinion of a qualified
physician reasonably agreed to by the Company and the Executive, the Executive
shall become unable to perform his duties hereunder due to Disability, the
Parent or the Company may terminate the Executive’s employment hereunder.  As used in this Agreement, the term “Disability”
shall mean inability of the Executive, due to physical or mental condition, to
perform the essential functions of the Executive’s job, after consideration of
the availability of reasonable accommodations, for more than 180 total calendar
days during any period of 12 consecutive months.


 


(c)                                  For Cause.  Parent or the Company may terminate the
Executive’s employment hereunder for Cause. 
For purposes of this Agreement, Parent or the Company shall have “Cause”
to terminate the Executive’s employment hereunder upon a determination by
Parent or the Company that the Executive (i) has committed fraud or
misappropriated, stolen or embezzled funds or property from the Company or an
affiliate of the Company or secured or attempted to secure personally any
profit in connection with any transaction entered into on behalf of the


 


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Company or any affiliate of the Company,
(ii) has been convicted of a felony in a final judgment not subject to
appeal, or entered a plea of guilty or “nolo contendre”
to, a felony which is likely to cause material harm to the Company’s (or any
affiliate of the Company) business, customer or supplier relations, financial
condition or prospects, (iii) has, notwithstanding not less than 30 days’
prior written notice from Parent or the Company, willfully failed to perform
(other than by reason of illness or temporary disability ) his material duties
hereunder, (iv) has knowingly violated or breached any material law or
regulation to the material detriment of the Company or any affiliates of the
Company or its business, or (v) has breached any non-competition,
non-disclosure or non-solicitation agreement between Executive, Parent and/or
the Company which causes or is reasonably likely to cause material harm to the
Company or any of its affiliates.  For
purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that his
action or omission was in the best interests of the Company and its affiliates.


 


(d)                                 Without Cause.  Parent or the Company may at any time
terminate the Executive’s employment hereunder without Cause.


 


(e)                                  Termination by the Executive.


 


(i)                                     The Executive may terminate his
employment hereunder (A) for Good Reason or (B) at any time after the date
hereof by giving sixty (60) days prior notice of his intention to terminate.


 


(ii)                                  For purposes of this Agreement, “Good
Reason” shall mean (A) a failure by the Company to comply with any material
provision of this Agreement (other than the Company’s payment obligations
referred to in clause (E) below) which has not been cured within thirty (30)
days after notice of such noncompliance has been given by the Executive to the
Company, (B) the assignment to the Executive of any material duties
inconsistent with the Executive’s position with the Company or a substantial
adverse alteration in the nature or status of the Executive’s responsibilities
without the consent of the Executive, (C) without the consent of the Executive,
a material reduction in employee benefits other than a reduction generally
applicable to similarly situated executives of the Company, (D) without the
consent of the Executive, relocation of the Company’s principal place of
business outside a fifty (50) mile radius of Lancaster, South Carolina, or (E)
any failure by the Company to pay the Executive Base Salary or any Incentive
Bonus to which he is entitled under the Bonus Plan or hereunder which failure
has not been cured within ten (10) days after notice of such noncompliance has
been given by the Executive to Parent or the Company or any failure of the
Compensation Committee to approve a Bonus Plan for any fiscal year.


 


(f)                                    Any termination of the Executive’s
employment by Parent or the Company or by the Executive (other than termination
pursuant to subsection (a) or (b) of this Section 6) shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section 13.  For
purposes of this Agreement, a “Notice of Termination” shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall


 


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set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive’s
employment under the provision so indicated.


 


(g)                                 “Date of Termination” shall mean
(i) if the Executive’s employment is terminated by his death, the date of his
death, (ii) if the Executive’s employment is terminated pursuant to subsection (b)
above, the date as of which the physician’s written opinion is received by
Parent or the Company, (iii) if the Executive’s employment is terminated
pursuant to subsection (c) above, the date specified in the Notice of
Termination, and (iv) if the Executive’s employment is terminated for any other
reason, the date sixty (60) days following the date on which a Notice of Termination
is given.


 


7.                                       Compensation Upon Termination,
Death or During Disability.


 


(a)                                  Disability.  During any period that the Executive fails to
perform his duties hereunder as a result of his incapacity due to a physical or
mental condition (“disability period”), the Executive shall continue to receive
his full Base Salary at the rate then in effect for such disability period (and
shall not be eligible for payments under the disability plans, programs and
policies maintained by Parent or the Company or in connection with employment
by the Company (“Disability Plans”)) until his employment is terminated
pursuant to Section 6(b) hereof, and upon such termination, the Executive
shall, within ten (10) days of such termination, be entitled to all amounts to which
the Executive is entitled pursuant to the Disability Plans.  The Executive’s rights under any long-term
Disability Plan shall be determined in accordance with the provisions of such
plan, but in no event will Parent or the Company maintain a long-term
Disability plan that provides for payment of less than 60% of the Executive’s
Base Salary.  In addition, upon the
Executive’s termination in accordance with Section 6(b) hereof, all stock
options, restricted stock grants awards and any other equity awards granted by
Parent to the Executive shall become fully vested, unrestricted and exercisable
as of the Date of Termination. All vested options shall remain exercisable by
the Executive or his agent until 90 days after the Date of Termination and
shall then expire and no longer be exercisable.


 


(b)                                 Death.  If the Executive’s employment is terminated
by his death pursuant to Section 6(a) hereof, Parent or the Company shall
within ten (10) days following the date of the Executive’s death, pay to the
Executive’s designated beneficiary(ies) any earned and accrued but unpaid
installment of Base Salary through the date of death, an amount equal to the
Executive’s annual Base Salary for the year in which the termination took
place, and an amount equal to the Executive’s target Bonus for the year in
which the termination took place, together with any other amounts to which the
Executive is entitled pursuant to death benefit plans, programs and
policies.  In addition, all stock options,
restricted stock awards and any other equity awards granted by Parent to the
Executive shall become fully vested, unrestricted and exercisable as of the
Date of Termination. All vested options shall remain exercisable by the
Executive’s estate or designated beneficiary(ies) until 90 days after the Date
of Termination and shall then expire and no longer be exercisable.


 


(c)                                  Cause or other than Good Reason.  If the Executive’s employment shall be
terminated by Parent or the Company for Cause or by the Executive for other
than Good Reason, the Company shall pay the Executive his full Base Salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given and reimburse the Executive for all


 


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reasonable and customary expenses incurred by
the Executive in performing services hereunder prior to the Date of Termination
in accordance with Section 6(d), and the Company shall have no further
obligations to the Executive under this Agreement.


 


(d)                                 Termination by the Company
without Cause (other than for death or Disability) or Termination by the
Executive for Good Reason.  If Parent or the Company shall terminate the
Executive’s employment other than for death, Disability pursuant to Section 6(b)
or Cause, or the Executive shall terminate his employment for Good Reason,
then:


 


(i)                                     the Company shall pay the
Executive any earned and accrued but unpaid installment of Base Salary through
the Date of Termination at the rate in effect at the time Notice of Termination
is given and all other unpaid and pro rata amounts to which the Executive is
entitled as of the Date of Termination under any compensation or bonus plan or
program of Parent or the Company applicable to the Executive, including without
limitation, the approved annual Bonus Plan for the year in which the Date of
Termination occurs and all accrued but unused vacation time, such payments to
be made in a lump sum on or before the tenth day following the Date of
Termination;


 


(ii)                                  in lieu of any further salary
payments to the Executive for periods subsequent to the Date of Termination,
the Company shall pay as liquidated damages to the Executive an amount equal to
the product of (A) the sum of (1) the Executive’s Base Salary in effect as of
the Date of Termination and (2) the average Annual Bonus that the Executive
earned in the most recent two fiscal years, and (B) the quotient of the number
of whole months remaining in the term of this Agreement as of the Date of
Termination (such period is sometimes referred to herein as the “Severance
Period”) divided by twelve (12); such payment to be made in a lump sum on or
before the tenth day following the Date of Termination.  In addition, all stock options, restricted
stock awards and any other equity awards granted by Parent or the Company to
the Executive shall become fully vested, unrestricted and exercisable as of the
Date of Termination;


 


(iii)                               In the case of a termination of
the Executive’s employment by Parent or the Company without Cause or for
Disability, or by the Executive for Good Reason, the Company shall pay the full
cost for the Executive to participate in the health insurance plan in which the
Executive was enrolled immediately prior to the Date of Termination for a
period of eighteen (18) months, provided that the Executive’s continued
participation is possible under the general terms and provisions of such plans
and programs.  In the event that the
Executive’s participation in any such plan or program is barred, the Company
shall arrange to provide the Executive with benefits substantially similar to
those which the Executive would otherwise have been entitled to receive under
such plan from which his continued participation is barred; and


 


(iv)                              The obligations of Parent and
the Company to make any payments to Executive required under Section 7(d)(ii)
hereof shall be conditioned on the execution and delivery by the Executive of a
general release of claims in form and substance reasonably satisfactory to
Parent.


 


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8.                                       Nondisclosure.  During the Executive’s employment with the
Company and for a period of twenty-four (24) months following the Executive’s
Date of Termination, the Executive shall hold in a fiduciary capacity for the
benefit of Parent and the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the
Executive during the Executive’s employment by the Company or any of its
affiliated companies and which shall not be or become public knowledge (other
than by acts by the Executive or representatives of the Executive in violation
of this Agreement).  After termination of
the Executive’s employment with the Company, the Executive shall not, without
the prior written consent of Parent or the Company or as may otherwise be
required by law or legal process, communicate or divulge any such information,
knowledge or data to anyone other than Parent and the Company and those designated
by them.  The agreement made in this Section 8
shall be in addition to, and not in limitation or derogation of, any
obligations otherwise imposed by law or by separate agreement upon the
Executive in respect of confidential information of the Company and its
affiliates.


 


9.                                       Non-Competition and
Non-Solicitation.  During the Executive’s employment with the
Company and for a period thereafter equal to the Severance Period, the
Executive shall not, for himself or herself or on behalf of or in conjunction
with any other person, persons, company, firm, partnership, corporation,
business, group or other entity (each, a “Person”), work in the principal line
of business engaged in, or planned to be engaged in, by the Company and its
affiliates at the Date of Termination within any state where the Company or its
affiliates are doing business or have plans for commencing business as of the
Date of Termination.  The Executive’s
passive ownership of less than five percent (5%) of the securities of a public
company shall not be treated as an action in competition with the Company and
its affiliates.


 


(a)                                  Executive hereby acknowledges
and agrees that his employment with the Company places him in a position of
trust and confidence with respect to the business operations, customers,
prospects and personnel of the Company and its affiliates.  He agrees that, due to his position and
knowledge, his engaging in any business that competes in the principal line of
business as the Company will cause the Company and its affiliates significant
and irreparable harm.


 


(b)                                 In consideration of the
compensation and benefits extended to him under this Agreement, Executive
agrees that, during the term of Executive’s employment by the Company and for a
period thereafter equal to the Severance Period, the Executive shall not, for
any reason whatsoever, directly or indirectly, for himself or herself or on
behalf of or in conjunction with any other Person with whom the Executive works
or is affiliated:


 


(i)                                     solicit and/or hire any Person
who is on the Date of Termination, or has been within six (6) months prior to
the Date of Termination, an employee of the Company or its affiliates;


 


(ii)                                  solicit, induce or attempt to
induce or hire any Person who is, at the Date of Termination, or has been within
six (6) months prior to the Date of Termination, an actual customer, client,
business partner, or a prospective customer, client, business partner of the
Company or its affiliates, for the purpose or with the intent of (A) inducing 


 


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or attempting to induce such Person to cease doing business with the
Company or its affiliates, (B) enticing or attempting to entice such Person to
do business with Executive or any affiliate of Executive, or (C) in any way interfering
with the relationship between such Person and the Company or its affiliates; or


 


(iii)                               solicit, induce or attempt to
induce any Person who is or that is, at the time of the Date of Termination, or
has been within six (6) months prior to the Date of Termination, a supplier,
licensee or consultant of, or provider of goods or services to the Company or
its affiliates, for the purpose or with the intent of (A) inducing or
attempting to induce such Person to cease doing business with the Company or its
affiliates or (B) in any way interfering with the relationship between such
Person and the Company or its affiliates.


 


(c)                                  In the event the Severance
Period is less than 12 months, or in the event there is no Severance Period,
the Company shall have the right, but not the obligation, to extend the period
of time during which the restrictive covenants set forth in clauses (a) and (b)
above shall remain in effect for up to 24 additional months following the
Severance Period or the Date of Termination, as the case may be, subject to
paying consideration to the Executive for such extended period in cash in an
amount equal to the Executive’s Base Salary in effect on the Date of
Termination, payable monthly in arrears. 
The Company shall provide written notice to the Executive at least 60
days prior to the second anniversary of the Date of Termination of the Company’s
election to extend the restrictive covenants as provided herein.


 


(d)                                 Because of the difficulty of
measuring economic losses to the Company as a result of a breach of the
foregoing covenants, and because of the immediate and irreparable damage that
could be caused to the Company and its affiliates for which it would have no
other adequate remedy, Executive agrees that the foregoing covenants in this Section 9,
in addition to and not in limitation of any other rights, remedies or damages
available to the Company at law, in equity or under this Agreement, shall be
enforced by the Company in the event of the breach or threatened breach by
Executive, by injunctions and/or restraining orders.


 


(e)                                  It is agreed by the parties that
the covenants contained in this Section 9 impose a fair and reasonable
restraint on Executive in light of the activities and business of the Company
and its affiliates on the date of the execution of this Agreement and the
current plans of the Company and its affiliates; but it is also the intent of
the Company and Executive that such covenants be construed and enforced in
accordance with the changing activities, business and locations of the Company
and its affiliates throughout the term of these covenants.  Executive also acknowledges that this
restraint will not prevent him from earning a living in his chosen field of
work.


 


(f)                                    The covenants in this Section 9
are severable and separate, and the unenforceability of any specific covenant
shall not affect the provisions of any other covenant.  Moreover, in the event any court of competent
jurisdiction shall determine that the scope, time or territorial restrictions
set forth herein are unreasonable, then it is the intention of the parties that
such restrictions be enforced to the fullest extent that such court deems
reasonable, and the Agreement shall thereby be reformed to reflect the same.


 


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(g)                                 All of the covenants in this Section 9
shall be construed as an agreement independent of any other provision in this
Agreement, and the existence of any claim or cause of action of Executive
against the Company whether predicated on this Agreement or otherwise shall not
constitute a defense to the enforcement by the Company of such covenants.  It is specifically agreed that the duration
of the period during which the agreements and covenants of Executive made in
this Section 9 shall be effective shall be computed by excluding from such
computation any time during which Executive is in violation of any provision of
this Section 9.


 


(h)                                 Notwithstanding any of the
foregoing, if any applicable law, judicial ruling or order shall reduce the
time period during which Executive shall be prohibited from engaging in any
competitive activity described in Section 9 hereof, the period of time for
which Executive shall be prohibited pursuant to Section 9 hereof shall be
the maximum time permitted by law.


 


10.                                 Successors; Binding Agreement.  This Agreement shall be binding upon and
inure to the benefit of successors and permitted assigns of the parties.  This Agreement may not be assigned, nor may
performance of any duty hereunder be delegated, by either party without the
prior written consent of the other; provided,
however, Parent and the Company may assign this Agreement to any
successor to its business, including but not limited to in connection with any
subsequent merger, consolidation, sale of all or substantially all of the
assets or stock of Parent or the Company or similar transaction involving
Parent or the Company or a successor corporation.


 


11.                                 Additional Payments by the
Company.


 


(a)                                  If it is determined (as
hereafter provided) that any payment or distribution by Parent or the Company
to or for the benefit of the Executive, whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise pursuant
to or by reason of any other agreement, policy, plan, program or arrangement,
including without limitation any option, share appreciation right or similar
right, or the lapse or termination of any restriction on or the vesting or
exercisability of any of the foregoing (a “Payment”), would be subject to the
excise tax imposed by Section 4999 of the Code (or any successor provision
thereto) or to any similar tax imposed by state or local law, or any interest
or penalties with respect to such excise tax (such tax or taxes, together with
any such interest and penalties, are hereafter collectively referred to as the “Excise
Tax”), then Executive will be entitled to receive an additional payment or
payments (a “Gross-Up Payment”) in an amount such that, after payment by
Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including any Excise Tax, imposed upon the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payments.


 


(b)                                 All determinations required to
be made under this Section 11, including whether an Excise Tax is payable
by Executive and the amount of such Excise Tax and whether a Gross-Up Payment
is required and the amount of such Gross-Up Payment, will be made by the
Company’s then current outside auditors; provided that if that firm is
unwilling or unable to provide such services, another accounting firm may be
selected by the Company (such accounting firm the “Accounting Firm”).  The Company will direct the Accounting Firm
to submit its determination and detailed supporting calculations to both the
Company and Executive within 30 calendar days after the date of the change in
control or the date of Executive’s termination of employment, if applicable,
and any other such time or times as may be requested


 


10





















 


by the Company or Executive.  If the Accounting Firm determines that any
Excise Tax is payable by Executive, the Company will pay the required Gross-Up
Payment to Executive no later than five calendar days prior to the due date for
Executive’s income tax return on which the Excise Tax is included.  If the Accounting Firm determines that no
Excise Tax is payable by Executive, it will, at the same time as it makes such
determination, furnish Executive with an opinion that he has substantial
authority not to report any Excise Tax on his federal, state, local income or
other tax return.  Any determination by
the Accounting Firm as to the amount of the Gross-Up Payment will be binding
upon the Company and Executive.  As a
result of the uncertainty in the application of Section 4999 of the Code
(or any successor provision thereto) and the possibility of similar uncertainty
regarding applicable state or local tax law at the time of any determination by
the Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not have been made by the Company should have been made (an “Underpayment”),
consistent with the calculations required to be made hereunder.  In the event that the Company exhausts or
fails to pursue its remedies pursuant to Section 11(f) hereof and
Executive thereafter is required to make a payment of any Excise Tax, Executive
shall so notify the Company, which will direct the Accounting Firm to determine
the amount of the Underpayment that has occurred and to submit its
determination and detailed supporting calculations to both the Company and
Executive as promptly as possible.  Any
such Underpayment will be promptly paid by the Company to, or for the benefit
of, Executive within five business days after receipt of such determination and
calculations.


 


(c)                                  The Company and Executive will
each provide the Accounting Firm access to and copies of any books, records and
documents in the possession of the Company or Executive, as the case may be,
reasonably requested by the Accounting Firm, and otherwise cooperate with the
Accounting Firm in connection with the preparation and issuance of the
determination contemplated by Section 11(b) hereof.


 


(d)                                 The federal, state and local
income or other tax returns filed by Executive will be prepared and filed on a
consistent basis with the determination of the Accounting Firm with respect to
the Excise Tax payable by Executive.  To
the extent the Excise Tax has not been previously withheld from amounts paid to
the Executive, Executive will make proper payment of the amount of any Excise
Tax, and at the request of the Company, provide to the Company true and correct
copies (with any amendments) of his federal income tax return as filed with the
Internal Revenue Service and corresponding state and local tax returns, if
relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment.  If prior to the filing of Executive’s federal
income tax return, or corresponding state or local tax return, if relevant, the
Accounting Firm determines that the amount of the Gross-Up Payment should be
reduced, Executive will within five business days pay to the Company the amount
of such reduction.


 


(e)                                  The fees and expenses of the
Accounting Firm for its services in connection with the determinations and
calculations contemplated by Sections 11(b) and 11(d) hereof will be borne by
the Company.  If such fees and expenses
are initially advanced by Executive, the Company will reimburse Executive the
full amount of such fees and expenses within five business days after receipt
from Executive of a statement therefore and reasonable evidence of his payment
thereof.


 


11





















 


(f)                                    Executive will notify the
Company in writing of any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company of a Gross-Up
Payment.  Such notification will be given
as promptly as practicable but no later than ten (10) business days after
Executive actually receives notice of such claim and Executive will further
apprise the Company of the nature of such claim and the date on which such
claim is requested to be paid (in each case, to the extent known by Executive).  Executive will not pay such claim prior to
the earlier of (x) the expiration of the 30-calendar-day period following the
date on which he gives such notice to the Company and (y) the date that any
payment of amount with respect to such claim is due.  If the Company notifies Executive in writing
prior to the expiration of such period that it desires to contest such claim,
Executive will:


 


(i)                                     provide the Company with any
written records or documents in his possession relating to such claim
reasonably requested by the Company;


 


(ii)                                  take such action in connection
with contesting such claim as the Company reasonably requests in writing from
time to time, including without limitation accepting legal representation with
respect to such claim by an attorney competent in respect of the subject matter
and reasonably selected by the Company;


 


(iii)                               cooperate with the Company in
good faith in order effectively to contest such claim; and


 


(iv)                              permit the Company to
participate in any proceedings relating to such claim; provided, however, that
the Company will bear and pay directly all costs and expenses (including
interest and penalties) incurred in connection with such contest and will
indemnify and hold harmless Executive, on an after-tax basis, for and against any
Excise Tax or income tax, including interest and penalties with respect
thereto, imposed as a result of such representation and payment of costs and
expenses.  Without limiting the foregoing
provisions of this Section 11(f), the Company will control all proceedings
taken in connection with the contest of any claim contemplated by this Section 11(f)
and, at its sole option, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing authority in
respect of such claim (provided that Executive may participate therein at his
own cost and expense) and may, at its option, either direct Executive to pay
the tax claimed and sue for a refund or contest the claim in any permissible
manner, and Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company will determine; provided, however,
that if the Company directs Executive to pay the tax claimed and sue for a
refund, the Company will advance the amount of such payment to Executive on an
interest-free basis and will indemnify and hold Executive harmless, on an
after-tax basis, from any Excise Tax or income tax, including interest or
penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of Executive with respect to
which the contested amount is claimed to be due is limited solely to such
contested amount.  Furthermore, the
Company’s control of any such contested claim will be limited to issues with
respect to which a Gross-Up Payment would be payable hereunder and


 


12





















 


Executive will be entitled to settle or contest, as the case may be,
any other issue raised by the Internal Revenue Service or any other taxing
authority.


 


(g)                                 If, after the receipt by
Executive of an amount advanced by the Company pursuant to Section 11(f)
hereof, Executive receives any refund with respect to such claim, Executive
will (subject to the Company’s complying with the requirements of Section 11(f))
hereof) promptly pay to the Company the amount of such refund (together with
any interest paid or credited thereon after any taxes applicable thereto). If,
after the receipt by Executive of an amount advanced by the Company pursuant to
Section 11(f) hereof, a determination is made that Executive will not be
entitled to any refund with respect to such claim and the Company does not
notify Executive in writing of its intent to contest such denial or refund
prior to the expiration of 30 calendar days after such determination, then such
advance will be forgiven and will not be required to be repaid and the amount
of such advance will offset, to the extent thereof, the amount of Gross-Up
Payment required to be paid pursuant to this Section 11. If, after the
receipt by Executive of a Gross-Up Payment but before the payment by Executive
of the Excise Tax, it is determined by the Accounting Firm that the Excise Tax
payable by Executive is less than the amount originally computed by the
Accounting Firm and consequently that the amount of the Gross-Up Payment is
larger than that required by this Section 11, Executive shall promptly
refund to the Company the amount by which the Gross-Up Payment initially made
to Executive exceeds the Gross-Up Payment required under this Section 11.


 


12.                                 Continued Performance.  Provisions of this Agreement shall survive any
termination of Executive’s employment hereunder if so provided herein or if
necessary or desirable fully to accomplish the purposes of such provisions,
including, without limitation, the obligations of the Executive under the terms
and conditions of Sections 8 and 9.  Any
obligation of Parent or the Company to make payments to or on behalf of the
Executive under Section 7 is expressly conditioned upon the Executive’s
continued performance of the Executive’s obligations under Sections 8 and 9 for
the time periods stated in Sections 8 and 9. 
The Executive recognizes that, except to the extent, if any, provided in
Section 7, the Executive will earn no compensation from Parent or the
Company after the Date of Termination.


 


13.                                 Notices. 
For the purposes of this Agreement, notices, demands and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States certified or registered mail, return receipt requested,
postage prepaid, addressed as follows:


 


If to the Executive:


 


Robert E. Matthews


c/o KANAWHA INSURANCE COMPANY


210 South White Street


Lancaster, South Carolina 29721


FAX:  (803) 283-5350


 


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If to Parent or the Company:


 


c/o KMG AMERICA CORPORATION


6306 Maple Ridge


Excelsior, Minnesota 55331


Attention:  Chief Executive
Officer


FAX:  (952) 474-8676


 


With a copy to:


 


Hunton & Williams LLP


Riverfront
Plaza, East Tower


951
E. Byrd Street


Richmond,
Virginia 23219


Attention:  Daniel M. LeBey, Esq.


FAX:  (804) 788-8218


 


or to such other address as any party may
have furnished to the others in writing in accordance herewith, except that
notices of change of address shall be effective only upon receipt.


 


14.                                 Miscellaneous.  No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and such officer of Parent or the
Company as may be specifically designated by the Parent Board.  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.  No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. 
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the Commonwealth of Virginia without
regard to its conflicts of law principles.


 


(a)                                  Validity.  The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect.


 


(b)                                 Counterparts.  This Agreement may be executed in one or more
counterparts, each of which shall deemed to be in an original but all of which
together will constitute one and the same instrument.


 


(c)                                  Disputes.  Any dispute or controversy arising under or
in connection with this Agreement shall, at the Executive’s sole discretion, be
settled exclusively by such judicial remedies as the Executive may seek to
pursue or by arbitration conducted before a panel of three arbitrators in
Minneapolis, Minnesota in accordance with the rules of the American Arbitration
Association then in effect; provided, however, that Parent or the Company shall
be entitled to seek a restraining order or injunction in any court of competent
jurisdiction with respect to any violation or threatened violation of the
provisions of Sections 8 or 9 of this Agreement and the


 


14





















 


Executive hereby consents that such
restraining order or injunction may be granted without the necessity of Parent
or the Company’s posting any bond. 
Judgment may be entered on the arbitrator’s award in any court having
jurisdiction.  The expenses of
arbitration shall be borne by the Company.


 


(d)                                 Indemnification.  The Company shall indemnify and hold the
Executive harmless to the maximum extent permitted by the laws of the
Commonwealth of Virginia (and the law of any other appropriate jurisdiction
after any reincorporation of the Company) against judgments, fines, amounts
paid in settlement and reasonable expenses, including attorneys’ fees incurred
by Executive, in connection with the defense of, or as a result of any action
or proceeding (or any appeal from any action or proceeding) in which Executive
is made or is threatened to be made a party by reason of the fact that he is or
was an officer or trustee of the Company, regardless of whether such action or
proceeding is one brought by or in the right of the Company to procure a
judgment in its favor (or other than by or in the right of the Company); provided, however, that this
indemnification provision shall not apply to any action or proceeding relating
to a dispute between the Company and the Executive based on any alleged breach
or violation of this Agreement.


 


(e)                                  Entire Agreement.  This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto; and any prior
agreement of the parties hereto in respect of the subject matter contained
herein.


 


[Signatures on following page]


 


15





















 


IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.


 


	
   

  	
   

  	
  KMG AMERICA CORPORATION

  
	
   

  	
   

  	
   

  	
   

  
	
  Attest:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Scott H. DeLong III

  	
   

  	
  By:

  	
  /s/ Kenneth U. Kuk

  	
   

  
	
   

  	
   

  	
  Name: Kenneth U. Kuk

  
	
   

  	
   

  	
  Title:
  Chairman, President & Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  KANAWHA INSURANCE COMPANY

  
	
   

  	
   

  	
   

  	
   

  
	
  Attest:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Scott H. DeLong III

  	
   

  	
  By:

  	
  /s/ Stanley D. Johnson

  	
   

  
	
   

  	
   

  	
  Name: Stanley D. Johnson

  
	
   

  	
   

  	
  Title: President & Chief Executive
  Officer

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ROBERT E. MATTHEWS

  
	
  Attest:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Alfred L. Ferguson

  	
   

  	
  /s/ Robert E. Matthews

  	
   

  
							



 


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