**Exhibit10.07**

**EMPLOYMENT AGREEMENT**

 

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

 

The Board of Directors of Parent (the “Parent Board”) and the Board ofDirectors of the Company (the “Company Board” and, together with the ParentBoard, the “Boards”) recognize that the Executive will make a substantialcontribution to the growth and success of the Company.  The Boards desire to provide for theemployment of the Executive with the Company, and the Executive is willing tocommit himself to serve the Company, on the terms and conditions hereinprovided.  The Executive’s employment withthe Company is contingent on his execution of this Employment Agreement.

 

In order to effect the foregoing, the Company and the Executive wish toenter into an employment agreement on the terms and conditions set forthbelow.  Accordingly, in consideration ofthe premises and the respective covenants and agreements of the parties hereincontained, and intending to be legally bound hereby, the parties hereto agreeas follows:

 

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

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# 2.                                       Term.  The employment of the Executive by theCompany as provided in Section 1 will commence on the date hereof and endon December 31, 2007, unless further extended or sooner terminated ashereinafter provided.  The Company shallhave the right, but not the obligation, to extend or renew the term of thisAgreement by one year by providing the Executive with written notice of extensionon or before October 31, 2005.  Forpurposes of this Agreement, “Term” shall mean the actual duration of Executive’semployment hereunder, taking into account any extension of such employment ortermination of employment pursuant to Section 6.

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# 3.                                       Position and Duties.  The Executive shall serve as the ExecutiveVice President, Chief Financial Officer and Treasurer of the Company and shallhave such responsibilities, duties and authority as he may have as of the datehereof and as may from time to time be assigned to the Executive by the ChiefFinancial Officer of the Parent, the Chief Executive Officer of the Company orthe Chief Executive Officer of the Parent (the “Parent CEO”) that areconsistent with such responsibilities, duties and authority.  The Executive shall devote substantially allof his working time and efforts to the business and affairs of the Company;provided, that nothing in this Agreement shall preclude Executive from servingas a director or trustee in any other firm or from pursuing personal realestate investments and other personal investments, as long as such activitiesdo not interfere with Executive’s performance of his duties hereunder orviolate Section 8 or 9 of this Agreement.

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

 

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# 5.                                       Compensation and Related Matters.

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## (a)                                  Base Salary.  The Company shall pay the Executive a basesalary annually (the “Base Salary”), which shall be payable in periodicinstallments according to the Company’s normal payroll practices.  The initial Base Salary shall be$187,500.  During the Term, the ParentBoard or the Compensation Committee of the Parent Board (the “CompensationCommittee”) shall, after taking into account the recommendations of the ChiefExecutive Officer of Parent, review the Base Salary at least once a year todetermine whether the Base Salary should be increased effective the following January 1.  The amount of any increase shall bedetermined 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 theamount established and adjusted from time to time pursuant to this Section 5(a).

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

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

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### (i)                                     2004 Stock Incentive Plan OptionGrants.  Option awards under the Stock Incentive Planwill have an exercise price per share equal to the closing price of Parent’scommon stock on the trading day immediately preceding the date of grant, willhave a term of ten (10) years and will vest and become exercisable with respectto 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 willbe 100% vested in all outstanding option awards, including the unvested portionof such awards, and shall be permitted to exercise all vested option awardsonly 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 “GoodReason” (as defined herein), following a Change in Control (as defined in theStock Incentive Plan), (ii) a termination by the Company without Cause (asdefined herein), (iii) a termination by the Executive for Good Reason (asdefined herein), (iv) the Executive’s death, or (v) the Disability (as definedbelow) of the Executive, and that the Executive will forfeit all unvestedoptions if he is terminated for Cause or he terminates his employment hereunderfor other than Good Reason.

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### (ii)                                  2004 Stock Incentive PlanRestricted Stock Awards.  The Stock Incentive Plan provides for theissuance of shares of Parent common stock as restricted common stock (“RestrictedStock Grants”) to the extent that such shares of common stock are availablethereunder.  Restricted Stock Grantsawarded to the Executive shall be subject to forfeiture restrictions that willterminate with respect to 1/4 of the awarded shares on the first, second, thirdand fourth anniversaries of the date of the issuance; *provided, further*, that the Executive willbe 100% vested and all restrictions on each outstanding Restricted Stock Grantwill lapse upon (i) termination of the Executive’s employment by the Company orthe 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) atermination by Parent or the Company without Cause (as defined herein), (iii) atermination by the Executive for Good Reason (as defined herein), (iv) theExecutive’s death, or (v) the Disability (as defined below) of the Executive,and that the Executive will forfeit all shares with respect to which theforfeiture restrictions have not terminated if he is terminated for Cause or heresigns for other than Good Reason.  Thecommon stock issued as Restricted Stock Grants will have voting and dividendrights.

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## (d)                                 Benefits.

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

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

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### (iii)                               Employee Benefits.

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(A)                              Participation inEmployee Benefit Plans.  Subject tothe terms of any applicable plans, policies or programs, the Executive and hisspouse and eligible dependents, if any, and their respective designatedbeneficiaries where applicable, will be eligible for and entitled toparticipate in any Company sponsored employee benefit plans or Parent sponsoredemployee benefit plans applicable to employees of the Company, including butnot 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 fromtime to time, on a basis no less favorable than that applicable to otherexecutives of the Company.

 

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

 

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

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

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### (vi)                              Expenses, Office and SecretarialSupport.  The Executive shall be entitled toreimbursement of all reasonable expenses, in accordance with the Company’spolicy as in effect from time to time and on a basis no less favorable thanthat applicable to other executives of the Company, including, withoutlimitation, telephone, reasonable travel and reasonable entertainment expensesincurred by the Executive in connection with the business of the Company,promptly upon the presentation by the Executive of appropriatedocumentation.  The Executive shall alsobe entitled to appropriate office space, administrative support, and such otherfacilities and services as are suitable to the Executive’s positions andadequate for the performance of the Executive’s duties.

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### (vii)                           Reimbursement of CertainProfessional Fees.  The Company shall reimburse, at the requestof the Executive, reasonable fees for professional organizations reasonablyrelated to the life and health insurance businesses.

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# 6.                                       Termination.  The Executive’s employment hereunder may beterminated without any breach of this Agreement only under the followingcircumstances:

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## (a)                                  Death.  The Executive’s employment hereunder shallterminate upon his death.

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## (b)                                 Disability.  If, in the written opinion of a qualifiedphysician reasonably agreed to by the Company and the Executive, the Executiveshall become unable to perform his duties hereunder due to Disability, theParent 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, toperform the essential functions of the Executive’s job, after consideration ofthe availability of reasonable accommodations, for more than 180 total calendardays during any period of 12 consecutive months.

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## (c)                                  For Cause.  Parent or the Company may terminate theExecutive’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 byParent or the Company that the Executive (i) has committed fraud ormisappropriated, stolen or embezzled funds or property from the Company or anaffiliate of the Company or secured or attempted to secure personally anyprofit 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 toappeal, or entered a plea of guilty or “*nolo contendre*”to, a felony which is likely to cause material harm to the Company’s (or anyaffiliate of the Company) business, customer or supplier relations, financialcondition 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 dutieshereunder, (iv) has knowingly violated or breached any material law orregulation to the material detriment of the Company or any affiliates of theCompany or its business, or (v) has breached any non-competition,non-disclosure or non-solicitation agreement between Executive, Parent and/orthe Company which causes or is reasonably likely to cause material harm to theCompany or any of its affiliates.  Forpurposes of this provision, no act or failure to act, on the part of theExecutive, shall be considered “willful” unless it is done, or omitted to bedone, by the Executive in bad faith or without reasonable belief that hisaction or omission was in the best interests of the Company and its affiliates.

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

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## (e)                                  Termination by the Executive.

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

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### (ii)                                  For purposes of this Agreement, “GoodReason” shall mean (A) a failure by the Company to comply with any materialprovision of this Agreement (other than the Company’s payment obligationsreferred 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 theCompany, (B) the assignment to the Executive of any material dutiesinconsistent with the Executive’s position with the Company or a substantialadverse alteration in the nature or status of the Executive’s responsibilitieswithout the consent of the Executive, (C) without the consent of the Executive,a material reduction in employee benefits other than a reduction generallyapplicable to similarly situated executives of the Company, (D) without theconsent of the Executive, relocation of the Company’s principal place ofbusiness 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 IncentiveBonus to which he is entitled under the Bonus Plan or hereunder which failurehas not been cured within ten (10) days after notice of such noncompliance hasbeen given by the Executive to Parent or the Company or any failure of theCompensation Committee to approve a Bonus Plan for any fiscal year.

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## (f)                                    Any termination of the Executive’semployment by Parent or the Company or by the Executive (other than terminationpursuant to subsection (a) or (b) of this Section 6) shall becommunicated by written Notice of Termination to the other party hereto inaccordance with Section 13.  Forpurposes of this Agreement, a “Notice of Termination” shall mean a notice whichshall indicate the specific termination provision in this Agreement relied uponand shall

 

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## set forth in reasonable detail the facts andcircumstances claimed to provide a basis for termination of the Executive’semployment under the provision so indicated.

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## (g)                                 “Date of Termination” shall mean(i) if the Executive’s employment is terminated by his death, the date of hisdeath, (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 byParent or the Company, (iii) if the Executive’s employment is terminatedpursuant to subsection (c) above, the date specified in the Notice ofTermination, and (iv) if the Executive’s employment is terminated for any otherreason, the date sixty (60) days following the date on which a Notice of Terminationis given.

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# 7.                                       Compensation Upon Termination,Death or During Disability.

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

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

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

 

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## reasonable and customary expenses incurred bythe Executive in performing services hereunder prior to the Date of Terminationin accordance with Section 6(d), and the Company shall have no furtherobligations to the Executive under this Agreement.

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## (d)                                 Termination by the Companywithout Cause (other than for death or Disability) or Termination by theExecutive for Good Reason.  If Parent or the Company shall terminate theExecutive’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:

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### (i)                                     the Company shall pay theExecutive any earned and accrued but unpaid installment of Base Salary throughthe Date of Termination at the rate in effect at the time Notice of Terminationis given and all other unpaid and pro rata amounts to which the Executive isentitled as of the Date of Termination under any compensation or bonus plan orprogram of Parent or the Company applicable to the Executive, including withoutlimitation, the approved annual Bonus Plan for the year in which the Date ofTermination occurs and all accrued but unused vacation time, such payments tobe made in a lump sum on or before the tenth day following the Date ofTermination;

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

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

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### (iv)                              The obligations of Parent andthe 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 ageneral release of claims in form and substance reasonably satisfactory toParent.

 

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# 8.                                       Nondisclosure.  During the Executive’s employment with theCompany and for a period of twenty-four (24) months following the Executive’sDate of Termination, the Executive shall hold in a fiduciary capacity for thebenefit 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 theExecutive during the Executive’s employment by the Company or any of itsaffiliated companies and which shall not be or become public knowledge (otherthan by acts by the Executive or representatives of the Executive in violationof this Agreement).  After termination ofthe Executive’s employment with the Company, the Executive shall not, withoutthe prior written consent of Parent or the Company or as may otherwise berequired by law or legal process, communicate or divulge any such information,knowledge or data to anyone other than Parent and the Company and those designatedby them.  The agreement made in this Section 8shall be in addition to, and not in limitation or derogation of, anyobligations otherwise imposed by law or by separate agreement upon theExecutive in respect of confidential information of the Company and itsaffiliates.

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

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## (a)                                  Executive hereby acknowledgesand agrees that his employment with the Company places him in a position oftrust 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 andknowledge, his engaging in any business that competes in the principal line ofbusiness as the Company will cause the Company and its affiliates significantand irreparable harm.

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## (b)                                 In consideration of thecompensation and benefits extended to him under this Agreement, Executiveagrees that, during the term of Executive’s employment by the Company and for aperiod thereafter equal to the Severance Period, the Executive shall not, forany reason whatsoever, directly or indirectly, for himself or herself or onbehalf of or in conjunction with any other Person with whom the Executive worksor is affiliated:

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

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### (ii)                                  solicit, induce or attempt toinduce or hire any Person who is, at the Date of Termination, or has been withinsix (6) months prior to the Date of Termination, an actual customer, client,business partner, or a prospective customer, client, business partner of theCompany 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 theCompany or its affiliates, (B) enticing or attempting to entice such Person todo business with Executive or any affiliate of Executive, or (C) in any way interferingwith the relationship between such Person and the Company or its affiliates; or

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### (iii)                               solicit, induce or attempt toinduce any Person who is or that is, at the time of the Date of Termination, orhas 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 orits affiliates, for the purpose or with the intent of (A) inducing orattempting to induce such Person to cease doing business with the Company or itsaffiliates or (B) in any way interfering with the relationship between suchPerson and the Company or its affiliates.

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## (c)                                  In the event the SeverancePeriod 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 periodof 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 theSeverance Period or the Date of Termination, as the case may be, subject topaying consideration to the Executive for such extended period in cash in anamount equal to the Executive’s Base Salary in effect on the Date ofTermination, payable monthly in arrears. The Company shall provide written notice to the Executive at least 60days prior to the second anniversary of the Date of Termination of the Company’selection to extend the restrictive covenants as provided herein.

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## (d)                                 Because of the difficulty ofmeasuring economic losses to the Company as a result of a breach of theforegoing covenants, and because of the immediate and irreparable damage thatcould be caused to the Company and its affiliates for which it would have noother 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 damagesavailable to the Company at law, in equity or under this Agreement, shall beenforced by the Company in the event of the breach or threatened breach byExecutive, by injunctions and/or restraining orders.

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

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

 

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## (g)                                 All of the covenants in this Section 9shall be construed as an agreement independent of any other provision in thisAgreement, and the existence of any claim or cause of action of Executiveagainst the Company whether predicated on this Agreement or otherwise shall notconstitute a defense to the enforcement by the Company of such covenants.  It is specifically agreed that the durationof the period during which the agreements and covenants of Executive made inthis Section 9 shall be effective shall be computed by excluding from suchcomputation any time during which Executive is in violation of any provision ofthis Section 9.

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

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

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# 11.                                 Additional Payments by theCompany.

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

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

 

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## by the Company or Executive.  If the Accounting Firm determines that anyExcise Tax is payable by Executive, the Company will pay the required Gross-UpPayment to Executive no later than five calendar days prior to the due date forExecutive’s income tax return on which the Excise Tax is included.  If the Accounting Firm determines that noExcise Tax is payable by Executive, it will, at the same time as it makes suchdetermination, furnish Executive with an opinion that he has substantialauthority not to report any Excise Tax on his federal, state, local income orother tax return.  Any determination bythe Accounting Firm as to the amount of the Gross-Up Payment will be bindingupon the Company and Executive.  As aresult of the uncertainty in the application of Section 4999 of the Code(or any successor provision thereto) and the possibility of similar uncertaintyregarding applicable state or local tax law at the time of any determination bythe Accounting Firm hereunder, it is possible that Gross-Up Payments which willnot 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 orfails to pursue its remedies pursuant to Section 11(f) hereof andExecutive thereafter is required to make a payment of any Excise Tax, Executiveshall so notify the Company, which will direct the Accounting Firm to determinethe amount of the Underpayment that has occurred and to submit itsdetermination and detailed supporting calculations to both the Company andExecutive as promptly as possible.  Anysuch Underpayment will be promptly paid by the Company to, or for the benefitof, Executive within five business days after receipt of such determination andcalculations.

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

##  

## (d)                                 The federal, state and localincome or other tax returns filed by Executive will be prepared and filed on aconsistent basis with the determination of the Accounting Firm with respect tothe Excise Tax payable by Executive.  Tothe extent the Excise Tax has not been previously withheld from amounts paid tothe Executive, Executive will make proper payment of the amount of any ExciseTax, and at the request of the Company, provide to the Company true and correctcopies (with any amendments) of his federal income tax return as filed with theInternal Revenue Service and corresponding state and local tax returns, ifrelevant, as filed with the applicable taxing authority, and such otherdocuments reasonably requested by the Company, evidencing such payment.  If prior to the filing of Executive’s federalincome tax return, or corresponding state or local tax return, if relevant, theAccounting Firm determines that the amount of the Gross-Up Payment should bereduced, Executive will within five business days pay to the Company the amountof such reduction.

##  

## (e)                                  The fees and expenses of theAccounting Firm for its services in connection with the determinations andcalculations contemplated by Sections 11(b) and 11(d) hereof will be borne bythe Company.  If such fees and expensesare initially advanced by Executive, the Company will reimburse Executive thefull amount of such fees and expenses within five business days after receiptfrom Executive of a statement therefore and reasonable evidence of his paymentthereof.

 

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

##  

### (i)                                     provide the Company with anywritten records or documents in his possession relating to such claimreasonably requested by the Company;

###  

### (ii)                                  take such action in connectionwith contesting such claim as the Company reasonably requests in writing fromtime to time, including without limitation accepting legal representation withrespect to such claim by an attorney competent in respect of the subject matterand reasonably selected by the Company;

###  

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

###  

### (iv)                              permit the Company toparticipate in any proceedings relating to such claim; provided, however, thatthe Company will bear and pay directly all costs and expenses (includinginterest and penalties) incurred in connection with such contest and willindemnify and hold harmless Executive, on an after-tax basis, for and against anyExcise Tax or income tax, including interest and penalties with respectthereto, imposed as a result of such representation and payment of costs andexpenses.  Without limiting the foregoingprovisions of this Section 11(f), the Company will control all proceedingstaken 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 administrativeappeals, proceedings, hearings and conferences with the taxing authority inrespect of such claim (provided that Executive may participate therein at hisown cost and expense) and may, at its option, either direct Executive to paythe tax claimed and sue for a refund or contest the claim in any permissiblemanner, and Executive agrees to prosecute such contest to a determinationbefore any administrative tribunal, in a court of initial jurisdiction and inone 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 arefund, the Company will advance the amount of such payment to Executive on aninterest-free basis and will indemnify and hold Executive harmless, on anafter-tax basis, from any Excise Tax or income tax, including interest orpenalties with respect thereto, imposed with respect to such advance; andprovided further, however, that any extension of the statute of limitationsrelating to payment of taxes for the taxable year of Executive with respect towhich the contested amount is claimed to be due is limited solely to suchcontested amount.  Furthermore, theCompany’s control of any such contested claim will be limited to issues withrespect to which a Gross-Up Payment would be payable hereunder and

 

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### 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 taxingauthority.

###  

## (g)                                 If, after the receipt byExecutive of an amount advanced by the Company pursuant to Section 11(f)hereof, Executive receives any refund with respect to such claim, Executivewill (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 withany interest paid or credited thereon after any taxes applicable thereto). If,after the receipt by Executive of an amount advanced by the Company pursuant toSection 11(f) hereof, a determination is made that Executive will not beentitled to any refund with respect to such claim and the Company does notnotify Executive in writing of its intent to contest such denial or refundprior to the expiration of 30 calendar days after such determination, then suchadvance will be forgiven and will not be required to be repaid and the amountof such advance will offset, to the extent thereof, the amount of Gross-UpPayment required to be paid pursuant to this Section 11. If, after thereceipt by Executive of a Gross-Up Payment but before the payment by Executiveof the Excise Tax, it is determined by the Accounting Firm that the Excise Taxpayable by Executive is less than the amount originally computed by theAccounting Firm and consequently that the amount of the Gross-Up Payment islarger than that required by this Section 11, Executive shall promptlyrefund to the Company the amount by which the Gross-Up Payment initially madeto Executive exceeds the Gross-Up Payment required under this Section 11.

##  

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

#  

# 13.                                 Notices. For the purposes of this Agreement, notices, demands and all othercommunications provided for in this Agreement shall be in writing and shall bedeemed 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 ExecutiveOfficer

FAX:  (952) 474-8676

 

With a copy to:

 

Hunton & Williams LLP

RiverfrontPlaza, East Tower

951E. Byrd Street

Richmond,Virginia 23219

Attention:  Daniel M. LeBey, Esq.

FAX:  (804) 788-8218

 

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

 

# 14.                                 Miscellaneous.  No provisions of this Agreement may bemodified, waived or discharged unless such waiver, modification or discharge isagreed to in writing signed by the Executive and such officer of Parent or theCompany as may be specifically designated by the Parent Board.  No waiver by either party hereto at any timeof any breach by the other party hereto of, or compliance with, any conditionor provision of this Agreement to be performed by such other party shall bedeemed a waiver of similar or dissimilar provisions or conditions at the sameor at any prior or subsequent time.  Noagreements or representations, oral or otherwise, express or implied, withrespect to the subject matter hereof have been made by either party which arenot set forth expressly in this Agreement. The validity, interpretation, construction and performance of thisAgreement shall be governed by the laws of the Commonwealth of Virginia withoutregard to its conflicts of law principles.

#  

## (a)                                  Validity.  The invalidity or unenforceability of anyprovision or provisions of this Agreement shall not affect the validity orenforceability of any other provision of this Agreement, which shall remain infull force and effect.

##  

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

##  

## (c)                                  Disputes.  Any dispute or controversy arising under orin connection with this Agreement shall, at the Executive’s sole discretion, besettled exclusively by such judicial remedies as the Executive may seek topursue or by arbitration conducted before a panel of three arbitrators inMinneapolis, Minnesota in accordance with the rules of the American ArbitrationAssociation then in effect; provided, however, that Parent or the Company shallbe entitled to seek a restraining order or injunction in any court of competentjurisdiction with respect to any violation or threatened violation of theprovisions of Sections 8 or 9 of this Agreement and the

 

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## Executive hereby consents that suchrestraining order or injunction may be granted without the necessity of Parentor the Company’s posting any bond. Judgment may be entered on the arbitrator’s award in any court havingjurisdiction.  The expenses ofarbitration shall be borne by the Company.

##  

## (d)                                 Indemnification.  The Company shall indemnify and hold theExecutive harmless to the maximum extent permitted by the laws of theCommonwealth of Virginia (and the law of any other appropriate jurisdictionafter any reincorporation of the Company) against judgments, fines, amountspaid in settlement and reasonable expenses, including attorneys’ fees incurredby Executive, in connection with the defense of, or as a result of any actionor proceeding (or any appeal from any action or proceeding) in which Executiveis made or is threatened to be made a party by reason of the fact that he is orwas an officer or trustee of the Company, regardless of whether such action orproceeding is one brought by or in the right of the Company to procure ajudgment in its favor (or other than by or in the right of the Company); *provided, however*, that thisindemnification provision shall not apply to any action or proceeding relatingto a dispute between the Company and the Executive based on any alleged breachor violation of this Agreement.

##  

## (e)                                  Entire Agreement.  This Agreement sets forth the entireagreement of the parties hereto in respect of the subject matter containedherein and supersedes all prior agreements, promises, covenants, arrangements,communications, representations or warranties, whether oral or written, by anyofficer, employee or representative of any party hereto; and any prioragreement of the parties hereto in respect of the subject matter containedherein.

##  

[Signatures on following page]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement on thedate 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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