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**Exhibit 10.02**

 

**EMPLOYMENT AGREEMENT**

 

AGREEMENT made this 21st day of March, 2005,between KMG America Corporation, a Virginia corporation (the “Company”) andJames E. Nelson (the “Executive”).

 

The Board of Directors of the Company (the “Board”)recognize that the Executive will make a substantial contribution to the growthand success of the Company.  The Boarddesires to provide for the employment of the Executive with the Company, andthe Executive is willing to commit himself to serve the Company, on the termsand conditions herein provided.  TheExecutive’s employment with the Company is contingent on his execution of thisEmployment Agreement.

 

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

 

# 2.             Term.  The employment of the Executive by theCompany as provided in Section 1 will commence on the date hereof and end onDecember 31, 2007, unless further extended or sooner terminated as hereinafterprovided.  The Company shall have theright, but not the obligation, to extend or renew the term of this Agreement byone year by providing the Executive with written notice of extension on orbefore October 31, 2005.  For purposes ofthis Agreement, “Term” shall mean the actual duration of Executive’s employmenthereunder, taking into account any extension of such employment or terminationof employment pursuant to Section 6.

 

# 3.             Position and Duties.  The Executive shall serve as Senior VicePresident, General Counsel and Secretary of Company and shall have suchresponsibilities, duties and authority as he may have as of the date hereof andas may from time to time be assigned to the Executive by the Chief ExecutiveOfficer of the Company (the “CEO”) that are consistent with suchresponsibilities, duties and authority, including serving as an officer oremployee of any affiliate of the Company that the CEO deems appropriate.  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.

 

# 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

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# Minneapolis/St.Paul, Minnesota, except for required travel on the Company’s business to anextent substantially consistent with present business travel obligations.

 

# 5.             Compensationand Related Matters.

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## (a)           BaseSalary.  The Company shall pay theExecutive a base salary annually (the “Base Salary”), which shall be payable inperiodic installments according to the Company’s normal payroll practices.  The initial Base Salary shall be$200,000.  During the Term, the Board orthe Compensation Committee of the Board (the “Compensation Committee”) shall,after taking into account the recommendations of the CEO, review the BaseSalary at least once a year to determine whether the Base Salary should beincreased effective the following January 1. The amount of any increase shall be determined before March 31 of eachyear 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 Section5(a).

 

## (b)           Annual Cash Incentive Awards.  The Executive shall be eligible toparticipate in the Company’s annual cash incentive bonus plan adopted by theCompensation Committee for 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 Board, if required, but not to exceed 100% of the Executive’sthen current Base Salary.  If theExecutive or the Company, as the case may be, fails to satisfy the performancecriteria contained in such Bonus Plan for a fiscal year, the CompensationCommittee may determine whether any Incentive Bonus shall be payable toExecutive for that year, subject to ratification by the Board, ifrequired.  Beginning January 1, 2005, theBonus Plan shall contain both individual and group goals established by theCompensation Committee.  The annualIncentive Bonus shall be paid to the Executive no later than thirty (30) daysafter the date the Compensation Committee determines whether the criteria inthe 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).

 

## (c)           Stock Based Awards.  The Company has established the 2004 StockIncentive Plan (“Stock Incentive Plan”) for the benefit of the employees of theCompany 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.

 

### (i)            2004 Stock Incentive Plan OptionGrants.  Option awards under theStock Incentive Plan will have an exercise price per share equal to the closingprice of Company’s common stock on the trading day immediately preceding thedate of grant, will have a term of ten (10) years and will vest and becomeexercisable with respect to 1/4 of the underlying shares of Company commonstock on the first, second, third and fourth anniversaries, respectively, ofthe date of grant; *provided, however,*that the 

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### Executive will be 100% vested inall outstanding option awards, including the unvested portion of such awards,and shall be permitted to exercise all vested option awards only during the90-day period following such accelerated vesting upon (i) termination of theExecutive’s employment by the Company or the Board, other than a terminationfor “Cause” pursuant to Section 6(c) or any resignation by the Executivewithout “Good Reason” (as defined herein), following a Change in Control (asdefined in the Stock Incentive Plan), (ii) a termination by the Company withoutCause (as defined herein), (iii) a termination by the Executive for Good Reason(as defined herein), (iv) the Executive’s death, or (v) the Disability (asdefined below) of the Executive, and that the Executive will forfeit allunvested options if he is terminated for Cause or he terminates his employmenthereunder for other than Good Reason. Effective as of March 24, the Company shall grant the Executive optionsto purchase 35,000 shares of the Company’s common stock under the StockIncentive Plan with an exercise price equal to the closing price per share ofthe Company’s common stock on March 24, 2005, subject to the vesting provisionsdescribed above.

 

### (ii)           2004 Stock Incentive Plan RestrictedStock Awards.  The Stock IncentivePlan provides for the issuance of shares of Company common stock as restrictedcommon stock (“Restricted Stock Grants”) to the extent that such shares ofcommon stock are available thereunder. Restricted Stock Grants awarded to the Executive shall be subject toforfeiture restrictions that will terminate with respect to 1/4 of the awardedshares on the first, second, third and fourth anniversaries of the date of theissuance; *provided, further*, thatthe Executive will be 100% vested and all restrictions on each outstandingRestricted Stock Grant will lapse upon (i) termination of the Executive’semployment 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 (as definedherein), (iv) the Executive’s death, or (v) the Disability (as defined below)of the Executive, and that the Executive will forfeit all shares with respectto which the forfeiture restrictions have not terminated if he is terminatedfor Cause or he resigns for other than Good Reason.  The common stock issued as Restricted StockGrants will have voting and dividend rights.

 

## (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.

 

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

 

### (iii)          Employee Benefits.

 

 

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(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, ifany, and their respective designated beneficiaries where applicable, will beeligible for and entitled to participate in any Company sponsored employeebenefit plans applicable to employees of the Company, including but not limitedto benefits such as group health, dental, accident, disability insurance, grouplife insurance, and a 401(k) plan, as such benefits may be offered from time totime, on a basis no less favorable than that applicable to other executives ofthe Company.

 

(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.

 

### (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.

 

### (vi)          Expenses, Office and SecretarialSupport.  The Executive shall beentitled to reimbursement of all reasonable expenses, in accordance with theCompany’s policy as in effect from time to time and on a basis no lessfavorable than that applicable to other executives of the Company, including,without limitation, telephone, reasonable travel and reasonable entertainmentexpenses incurred by the Executive in connection with the business of theCompany, 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.

 

### (vii)         Reimbursement of CertainProfessional Fees and Other Dues. The Company shall reimburse, at the request of the Executive, reasonablefees for professional organizations reasonably related to the life and healthinsurance businesses, and shall reimburse financial advisory fees of $5,000 peryear during the Term.

 

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

 

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

 

## (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, theCompany may terminate the Executive’s employment hereunder.  As used in this Agreement, the term “Disability”shall mean inability of the Executive, due to 

 

 

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## physical ormental condition, to perform the essential functions of the Executive’s job,after consideration of the availability of reasonable accommodations, for morethan 180 total calendar days during any period of 12 consecutive months.

 

## (c)           For Cause.  The Company may terminate the Executive’semployment hereunder for Cause.  Forpurposes of this Agreement, the Company shall have “Cause” to terminate theExecutive’s employment hereunder upon a determination by the Company that theExecutive (i) has committed fraud or misappropriated, stolen or embezzledfunds or property from the Company or an affiliate of the Company or secured orattempted to secure personally any profit in connection with any transactionentered into on behalf of the Company or any affiliate of the Company,(ii) has been convicted of a felony in a final non-appealable judgment, orentered 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 the Company, willfully failed to perform (other thanby reason of illness or temporary disability ) his material duties hereunder,(iv) has knowingly violated or breached any material law or regulation to thematerial detriment of the Company or any affiliates of the Company or itsbusiness, or (v) has breached any non-competition, non-disclosure ornon-solicitation agreement between Executive, and the Company which causes oris reasonably likely to cause material harm to the Company or any of itsaffiliates.  For purposes of thisprovision, no act or failure to act, on the part of the Executive, shall beconsidered “willful” unless it is done, or omitted to be done, by the Executivein bad faith or without reasonable belief that his action or omission was inthe best interests of the Company and its affiliates.

 

## (d)           Without Cause.  The Company may at any time terminate theExecutive’s employment hereunder without Cause.

 

## (e)           Terminationby 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.

 

### (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 Minneapolis/St. Paul, Minnesota,or (E) any failure by the Company to pay the Executive Base Salary or anyIncentive Bonus to which he is entitled under the Bonus Plan or hereunder whichfailure has not been cured within ten (10) days after notice of suchnoncompliance has been

 

 

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### given by the Executive to theCompany or any failure of the Compensation Committee to approve a Bonus Planfor any fiscal year.

 

## (f)            Any termination of the Executive’semployment by the Company or by the Executive (other than termination pursuantto subsection (a) or (b) of this Section 6) shall be communicated by writtenNotice of Termination to the other party hereto in accordance with Section13.  For purposes of this Agreement, a “Noticeof Termination” shall mean a notice which shall indicate the specifictermination provision in this Agreement relied upon and shall set forth inreasonable detail the facts and circumstances claimed to provide a basis fortermination 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 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 bythe Company, (iii) if the Executive’s employment is terminated pursuant tosubsection (c) above, the date specified in the Notice of Termination, and (iv)if the Executive’s employment is terminated for any other reason, the datesixty (60) days following the date on which a Notice of Termination is given.

 

# 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 towhich the 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 bythe Company to the Executive shall become fully vested, unrestricted andexercisable as of the Date of Termination. All vested options shall remainexercisable by the Executive or his agent until 90 days after the Date ofTermination and shall then expire and no longer be exercisable.

 

## (b)           Death.  If the Executive’s employment is terminatedby his death pursuant to Section 6(a) hereof, the Company shall within ten (10)days following the date of the Executive’s death, pay to the Executive’sdesignated beneficiary(ies) any earned and accrued but unpaid installment ofBase Salary through the date of death, an amount equal to the Executive’sannual Base Salary for the year in which the termination took place, and anamount equal to the Executive’s target Bonus for the year in which thetermination took place, together with any other amounts to which the Executiveis entitled pursuant to death benefit plans, programs and policies.  In addition, all stock options, restrictedstock awards and any other equity awards granted by Parent to the Executiveshall become fully vested, unrestricted and exercisable as of 

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## the Date ofTermination. All vested options shall remain exercisable by the Executive’sestate or designated beneficiary(ies) until 90 days after the Date ofTermination and shall then expire and no longer be exercisable.

 

## (c)           Cause or other than Good Reason.  If the Executive’s employment shall beterminated by the Company for Cause or by the Executive for other than GoodReason, the Company shall pay the Executive his full Base Salary through theDate of Termination at the rate in effect at the time Notice of Termination isgiven and reimburse the Executive for all reasonable and customary expensesincurred by the Executive in performing services hereunder prior to the Date ofTermination in accordance with Section 6(d), and the Company shall have nofurther obligations to the Executive under this Agreement.

 

## (d)           Termination by the Company withoutCause (other than for death or Disability) or Termination by the Executive forGood Reason.  If  the Company shall terminate the Executive’semployment 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 Executiveany earned and accrued but unpaid installment of Base Salary through the Dateof Termination at the rate in effect at the time Notice of Termination is givenand all other unpaid and pro rata amounts to which the Executive is entitled asof the Date of Termination under any compensation or bonus plan or program ofthe Company applicable to the Executive, including without limitation, theapproved annual Bonus Plan for the year in which the Date of Termination occursand all accrued but unused vacation time, such payments to be made in a lumpsum on or before the tenth day following the Date of Termination;

 

### (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 the Company to theExecutive shall become fully vested, unrestricted and exercisable as of theDate of Termination;

 

### (iii)          In the case of a termination of theExecutive’s employment by the Company without Cause or for Disability, or bythe Executive for Good Reason, the Company shall pay the full cost for theExecutive to participate in the health insurance plan in which the Executivewas enrolled immediately prior to the Date of Termination for a period ofeighteen (18) months, provided that the Executive’s continued participation ispossible under the general terms and provisions of such plans andprograms.  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

 

 

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### similar to those which theExecutive would otherwise have been entitled to receive under such plan fromwhich his continued participation is barred; and

 

### (iv)          The obligations of the Company to makeany payments to Executive required under Section 7(d)(ii) hereof shall beconditioned on the execution and delivery by the Executive of a general releaseof claims in form and substance reasonably satisfactory to the Company.

 

# 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 the Company all secret or confidential information, knowledge ordata relating to the Company or any of its affiliated companies, and theirrespective businesses, which shall have been obtained by the Executive duringthe Executive’s employment by the Company or any of its affiliated companiesand which shall not be or become public knowledge (other than by acts by theExecutive or representatives of the Executive in violation of thisAgreement).  After termination of theExecutive’s employment with the Company, the Executive shall not, without theprior written consent of the Company or as may otherwise be required by law orlegal process, communicate or divulge any such information, knowledge or datato anyone other than the Company and those designated by them.  The agreement made in this Section 8 shall bein addition to, and not in limitation or derogation of, any obligationsotherwise imposed by law or by separate agreement upon the Executive in respectof confidential information of the Company and its affiliates.

 

# 9.             Non-Competition andNon-Solicitation.  During theExecutive’s employment with the Company and for a period thereafter equal tothe Severance Period, the Executive shall not, for himself or herself or onbehalf 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 statewhere the Company or its affiliates are doing business or have plans forcommencing business as of the Date of Termination.  The Executive’s passive ownership of lessthan five percent (5%) of the securities of a public company shall not betreated as an action in competition with the Company and its affiliates.

 

## (a)           Executive hereby acknowledges andagrees that his employment with the Company places him in a position of trustand confidence with respect to the business operations, customers, prospectsand 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.

 

## (b)           In consideration of the compensationand benefits extended to him under this Agreement, Executive agrees that,during the term of Executive’s employment by the Company and for a periodthereafter equal to the Severance Period, the Executive shall not, for anyreason whatsoever, directly or indirectly, for himself or herself or on behalfof or in conjunction with any other Person with whom the Executive works or isaffiliated:

 

 

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

 

### (ii)           solicit, induce or attempt to induceor 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 theCompany or its affiliates, for the purpose or with the intent of (A) inducingor attempting to induce such Person to cease doing business with the Company orits affiliates, (B) enticing or attempting to entice such Person to do businesswith Executive or any affiliate of Executive, or (C) in any way interferingwith the relationship between such Person and the Company or its affiliates; or

 

### (iii)          solicit, induce or attempt to induceany Person who is or that is, at the time of the Date of Termination, or hasbeen 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 orits affiliates or (B) in any way interfering with the relationship between suchPerson and the Company or its affiliates.

 

## (c)           In the event the Severance Period isless than 12 months, or in the event there is no Severance Period, the Companyshall have the right, but not the obligation, to extend the period of timeduring which the restrictive covenants set forth in clauses (a) and (b) aboveshall remain in effect for up to 24 additional months following the SeverancePeriod or the Date of Termination, as the case may be, subject to payingconsideration to the Executive for such extended period in cash in an amountequal to the Executive’s Base Salary in effect on the Date of Termination,payable monthly in arrears.  The Companyshall provide written notice to the Executive at least 60 days prior to thesecond anniversary of the Date of Termination of the Company’s election toextend the restrictive covenants as provided herein.

 

## (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 thisSection 9, in addition to and not in limitation of any other rights, remediesor 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 threatenedbreach by Executive, by injunctions and/or restraining orders.

 

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

 

 

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## (f)            The covenants in this Section 9 areseverable and separate, and the unenforceability of any specific covenant shallnot 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.

 

## (g)           All of the covenants in this Section9 shall 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.

 

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

 

# 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,*the Company may assign this Agreement to any successor toits business, including but not limited to in connection with any subsequentmerger, consolidation, sale of all or substantially all of the assets or stockof the Company or similar transaction involving the Company or a successorcorporation.

 

# 11.           AdditionalPayments by the Company.

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## (a)           Ifit is determined (as hereafter provided) that any payment or distribution bythe Company to or for the benefit of the Executive, whether paid or payable ordistributed or distributable pursuant to the terms of this Agreement orotherwise pursuant to or by reason of any other agreement, policy, plan,program or arrangement, including without limitation any option, shareappreciation right or similar right, or the lapse or termination of anyrestriction 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 anysuccessor provision thereto) or to any similar tax imposed by state or locallaw, or any interest or penalties with respect to such excise tax (such tax ortaxes, together with any such interest and penalties, are hereaftercollectively referred to as the “Excise Tax”), then Executive will be entitledto receive an additional payment or payments (a “Gross-Up Payment”) in anamount such that, after payment by Executive of all taxes (including anyinterest or penalties imposed with respect to such taxes), including any ExciseTax, imposed upon the Gross-Up Payment, Executive retains an amount of theGross-Up Payment equal to the Excise Tax imposed upon the Payments.

 

## (b)           All determinations required to be made under this Section11, including whether an Excise Tax is payable by Executive and the amount ofsuch Excise Tax and whether a Gross-Up 

 

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## Payment isrequired and the amount of such Gross-Up Payment, will be made by the Company’sthen current outside auditors; provided that if that firm is unwilling orunable to provide such services, another accounting firm may be selected by theCompany (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 by the Company orExecutive.  If the Accounting Firmdetermines that any Excise Tax is payable by Executive, the Company will paythe required Gross-Up Payment to Executive no later than five calendar daysprior to the due date for Executive’s income tax return on which the Excise Taxis included.  If the Accounting Firmdetermines that no Excise Tax is payable by Executive, it will, at the sametime as it makes such determination, furnish Executive with an opinion that hehas substantial authority not to report any Excise Tax on his federal, state,local income or other tax return.  Anydetermination by the Accounting Firm as to the amount of the Gross-Up Paymentwill be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of theCode (or any successor provision thereto) and the possibility of similaruncertainty regarding applicable state or local tax law at the time of anydetermination by the Accounting Firm hereunder, it is possible that Gross-UpPayments which will not have been made by the Company should have been made (an“Underpayment”), consistent with the calculations required to be madehereunder.  In the event that the Companyexhausts or fails 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 and Executiveas promptly as possible.  Any suchUnderpayment will be promptly paid by the Company to, or for the benefit of,Executive within five business days after receipt of such determination andcalculations.

 

## (c)           The Company and Executive will eachprovide 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 local incomeor 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.

 

 

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## (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.

 

## (f)            Executive will notify the Company inwriting of any claim by the Internal Revenue Service that, if successful, wouldrequire the payment by the Company of a Gross-Up Payment.  Such notification will be given as promptlyas practicable but no later than ten (10) business days after Executiveactually receives notice of such claim and Executive will further apprise theCompany of the nature of such claim and the date on which such claim isrequested 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 any writtenrecords or documents in his possession relatingto such claim reasonably requested by the Company;

 

### (ii)           take such action in connection withcontesting such claim as the Company reasonably requests in writing from timeto 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 in goodfaith in order effectively to contest such claim; and

 

### (iv)          permit the Company to participate inany proceedings relating to such claim; provided, however, that the Companywill bear and pay directly all costs and expenses (including interest andpenalties) incurred in connection with such contest and will indemnify and holdharmless Executive, on an after-tax basis, for and against any Excise Tax orincome tax, including interest and penalties with respect thereto, imposed as aresult of such representation and payment of costs and expenses.  Without limiting the foregoing provisions ofthis Section 11(f), the Company will control all proceedings taken inconnection 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 

###  

###  

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### income tax, including interestor penalties 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 Executivewill be entitled to settle or contest, as the case may be, any other issueraised by the Internal Revenue Service or any other taxing authority.

 

## (g)           If, after the receipt by Executive ofan amount advanced by the Company pursuant to Section 11(f) hereof, Executivereceives any refund with respect to such claim, Executive will (subject to theCompany’s complying with the requirements of Section 11(f)) hereof) promptlypay to the Company the amount of such refund (together with any interest paidor credited thereon after any taxes applicable thereto). If, after the receiptby 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 anyrefund with respect to such claim and the Company does not notify Executive inwriting of its intent to contest such denial or refund prior to the expirationof 30 calendar days after such determination, then such advance will beforgiven and will not be required to be repaid and the amount of such advancewill offset, to the extent thereof, the amount of Gross-Up Payment required tobe paid pursuant to this Section 11. If, after the receipt by Executive of aGross-Up Payment but before the payment by Executive of the Excise Tax, it isdetermined by the Accounting Firm that the Excise Tax payable by Executive isless than the amount originally computed by the Accounting Firm andconsequently that the amount of the Gross-Up Payment is larger than thatrequired by this Section 11, Executive shall promptly refund to the Company theamount by which the Gross-Up Payment initially made to Executive exceeds theGross-Up Payment required under this Section 11.

 

# 12.           Continued Performance.  Provisions of this Agreement shall surviveany termination 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 the Company to make payments to or on behalf of the Executiveunder Section 7 is expressly conditioned upon the Executive’s continuedperformance of the Executive’s obligations under Sections 8 and 9 for the timeperiods stated in Sections 8 and 9.  TheExecutive recognizes that, except to the extent, if any, provided in Section 7,the Executive will earn no compensation from the Company after the Date ofTermination.

 

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

 

 

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If to the Executive:

 

JamesE. Nelson

2328150th Avenue N.W.

Andover,Minnesota  55304

 

If to the Company:

 

c/oKMG AMERICA CORPORATION

12600Whitewater Drive

Suite150

Minnetonka, Minnesota 55343

Attention:  Chief Executive Officer

FAX:  (952) 930-4802

 

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

 

orto such other address as any party may have furnished to the others in writingin accordance herewith, except that notices of change of address shall beeffective 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 the Company asmay be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the otherparty hereto of, or compliance with, any condition or provision of thisAgreement to be performed by such other party shall be deemed a waiver ofsimilar or dissimilar provisions or conditions at the same or at any prior orsubsequent time.  No agreements orrepresentations, oral or otherwise, express or implied, with respect to the subjectmatter hereof have been made by either party which are not set forth expresslyin this Agreement.  The validity,interpretation, construction and performance of this Agreement shall begoverned by the laws of the Commonwealth of Virginia without regard to itsconflicts 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.

 

 

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## (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 the Company shall beentitled 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 Executive herebyconsents that such restraining order or injunction may be granted without thenecessity of  the Company’s posting anybond.  Judgment may be entered on thearbitrator’s award in any court having jurisdiction.  The expenses of arbitration shall be borne bythe 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.

 

[Signatureson following page]

 

 

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

 
|    |            |                    |                                                      |
|---------|-----------------|-------------------------|-----------------------------------------------------------|
|    |            | KMG AMERICA CORPORATION |
| Attest: |            |                    |
|    |            |                    |                                                      |
| By:     | /s/ Gail Buysse |                    | By:                                                       | /s/ Kenneth U. Kuk |   |
|    |            |                    | Name: Kenneth U. Kuk                                      |
|    |            |                    | Title: Chairman, President  & Chief Executive Officer |
|    |            |                    |                                                      |
| Attest: | JAMES E. NELSON |
|    |            |                    |                                                      |
| By:     | /s/ Gail Buysse |                    |                                                      | /s/ James E. Nelson |   |
|         |                 |                         |                                                           |  |  |  |

 

 

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