Exhibit 10.1

 

EMPLOYMENT AGREEMENT

 

AGREEMENT, effective as of February 1, 2004 by and between Max L. Lukens (the
“Executive”) and Stewart & Stevenson Services, Inc., a Texas corporation (the
“Company”).

 

WHEREAS, the Board of Directors of the Company (the “Board”) desires initially
to retain the Executive as the President and Chief Executive Officer of the
Company and thereafter as an advisor, and  to encourage the attention and
dedication to the Company of the Executive as a member of the Company’s
management, in the best interests of the Company and its shareholders;

 

WHEREAS, the Executive is willing to commit himself to serve the Company, on the
terms and conditions herein provided; and

 

WHEREAS, the Company and the Executive desire to set forth in this Agreement the
terms and conditions of the Executive’s employment; and

 

WHEREAS, the Company and the Executive have simultaneously herewith executed a
Severance Agreement effective as of February 1, 2004 (the “Severance
Agreement”);

 

NOW, THEREFORE, in consideration of the premises and the respective covenants
and agreements of the parties herein contained, and intending to be legally
bound hereby, the parties hereto agree as follows:

 

1.                                       Employment; Term.  The Company hereby
agrees to employ the Executive, and the Executive hereby accepts such
employment, on the terms and conditions hereinafter set forth.  The period of
employment of the Executive by the Company hereunder (the “Employment Period”)
shall commence on the date first written above (the “Effective Date”) and shall
end on the Executive’s Date of Termination (as defined in Section 7(b) hereof). 
The term of this Agreement (the “Term”) shall begin on the Effective Date and
shall end on the fourth anniversary thereof.  The period beginning on the
Effective Date and ending on the second anniversary thereof is herein referred
to as the “Base Term”, and the period beginning on the day following such second
anniversary and ending on the fourth anniversary of the Effective Date is herein
referred to as the “Ancillary Term”.

 

2.                                       Position and Duties.  As of the
Effective Date and for the Base Term, the Executive shall be employed by the
Company  as President and Chief Executive Officer of the Company, in which
capacity the Executive shall perform the usual and customary duties of such
office, which shall be those normally inherent in such capacity in U.S. publicly
held corporations of similar size and character.

 

During the Ancillary Term the Executive shall serve the Company as an advisor to
the senior executives of the Company with respect to strategy, management
development and other matters consistent with the Executive’s experience and
expertise and consistent with the Executive’s having completed the Base Term as
Chief Executive Officer of the Company.

 

The Executive agrees and acknowledges that, in connection with his employment
relationship with the Company, the Executive owes fiduciary duties to the
Company and will act accordingly.

 

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During the Base Term, the Executive agrees to devote substantially his full
time, attention and energies to the Company’s business and agrees to faithfully
and diligently endeavor to the best of his ability to further the best interests
of the Company.  The Executive shall not engage in any other business activity,
whether or not such business activity is pursued for gain, profit or other
pecuniary advantage.  Subject to the covenants of Section 9 herein, this shall
not be construed as preventing the Executive from investing his own assets in
such form or manner as will not require his services in the daily operations of
the affairs of the companies in which such investments are made.  Further,
subject to Section 9 herein, the Executive may serve as a director of other
companies so long as such service is not detrimental to the Company and does not
interfere with his service to the Company and so long as such service does not
present the Executive with a conflict of interest.

 

During the Ancillary Term, the Executive agrees at such times as requested (with
such requests to be commercially reasonable) to advise the senior executives of
the Company; provided however, the parties agree that the Executive shall not be
required to provide services for more than fifteen days per year (including time
in which Executive serves as a director).  The parties may, by mutual agreement,
increase the time Executive shall provide such services during the Ancillary
Term.

 

In keeping with the Executive’s fiduciary duties to the Company, the Executive
agrees that he shall not knowingly, directly or indirectly, become involved in
any Conflict of Interest, or upon discovery thereof, allow such a conflict to
continue.  Moreover, the Executive agrees that he shall promptly disclose to the
Board any facts known to him which might involve any reasonable possibility of a
Conflict of Interest.  For purposes of this paragraph,  Conflict of Interest on
the part of the Executive shall be defined as:  (a) ownership of a material
interest in, acting in any material capacity for, or accepting directly or
indirectly any material payments, services or loans from a supplier, contractor,
subcontractor, customer or other entity with which the Company does business;
(b) misuse of information or facilities to which the Executive has access in a
manner which will be materially detrimental to the Company’s interest; (c)
disclosure or other misuse of Confidential Information (as defined in
Section 9); (d) acquiring or trading in, directly or indirectly, other
properties or interests material to the design, manufacture or marketing of
products designed, manufactured or marketed by the Company; (e) the
appropriation to the Executive or the diversion to others, directly or
indirectly, of any material opportunity in which it is known or could reasonably
be anticipated that the Company would be interested; or (f) the ownership,
directly or indirectly, of a material interest in an enterprise in competition
with the Company or its dealers and distributors or acting as a director,
officer, partner, consultant, employee or agent of any enterprise which is in
competition with the Company or its dealers or distributors.

 

3.                                       Place of Performance.  In connection
with the Executive’s employment by the Company, the Executive’s principal
business address shall be at the Company’s current principal executive offices
in Houston, Texas (the “Principal Place of Employment”) or in such other place
as the Executive and the Company may agree.

 

4.                                       Compensation and Related Matters.

 

(a)                                  Base Salary.  During the Base Term, the
Company shall pay the Executive an annual base salary (“Base Salary”), payable
in approximately equal installments in

 

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accordance with the Company’s customary payroll practices.  The Base Salary
shall be $750,000.  The Base Salary may not be decreased during the Base Term. 
During the Base Term, the Executive shall not be eligible for any equity
compensation provided for or afforded to members of the Board of Directors as
such.

 

(b)                                 Bonuses.  At the end of the Base Term, the
Executive shall be eligible for a discretionary bonus taking into account the
following criteria:

 

(i)                                     return during the Base Period on net
capital employed in the Company’s businesses on a consolidated basis;

 

(ii)                                  the Company’s earnings per share during
the Base Period;

 

(iii)                               the Company’s revenues during the Base
Period; and

 

(iv)                              the development of the Company’s management
team so as to facilitate a succession plan to come into effect after the Base
Period.

 

Any bonus earned pursuant to this Agreement shall be paid as promptly as
possible after the end of the Base Period.   The Executive shall be eligible for
a bonus of up to 100 (for target level performance) percent of his aggregate
Base Salary during the Base Period (up to $1,500,000) but the actual amount
thereof shall, in any event, be dependent upon the assessment of the members of
the Compensation Committee and other members of the Board who are independent
directors, in good faith, of his performance and contribution to the Company
during the Base Period taking the above factors into account.

 

(c)                                  Ancillary Term Compensation.  During the
Ancillary Term, the Executive, shall not be eligible for any equity compensation
provided for or afforded to members of the Board of Directors as such.  During
the Ancillary Term, the Company shall pay the Executive an annual salary of
$35,000, payable in approximately equal installments in accordance with the
Company’s customary payroll practices.    In the event the parties by mutual
agreement increase the time the Executive shall provide services from that
provided in Section 2, the Company shall pay the Executive an additional $6,250
per day for such services. The compensation to be paid to the Executive for his
services during the Ancillary Term is herein referred to as the “Ancillary Term
Compensation”.

 

(d)                                 Stock Option.  On January 3, 2005 the
Executive will be granted an option to purchase 100,000 shares of the Company’s
common stock under the Stewart & Stevenson Services, Inc. 1988 Nonstatutory
Stock Option Plan, as amended and restated effective as of June 10, 1997 (the
“1988 Option Plan”), which shall be subject to the terms and conditions thereof
and of the stock option agreement with respect thereto as contemplated by the
1998 Option Plan.  The option agreement for such option shall contain the same
terms as are specified in the Executive’s option agreement dated March 31, 2004;
provided however that the per share exercise price applicable to such option
shall be the fair market value of a share of the Company’s common stock on
January 3, 2005 (determined in accordance with the terms of the 1988 Option
Plan) and such option shall be fully exercisable on the first anniversary of the
date of grant of such option.

 

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(e)                                  Expenses.  The Company shall promptly
reimburse the Executive for all reasonable (taking into account the character of
the office of Chief Executive) business expenses incurred during the Employment
Period by the Executive in performing services hereunder, including all expenses
of travel and living expenses while away from home on business or at the request
of and in the service of the Company, provided that such expenses are incurred
and accounted for in accordance with the policies and procedures established by
the Company.

 

(f)                                    Other Benefits.  During the Employment
Period, the Executive shall be entitled to participate in all of the employee
benefit plans and arrangements, other than equity compensation and bonus plans,
made available by the Company to its other senior executive officers, subject to
and on a basis consistent with the terms, conditions and overall administration
of such plans and arrangements, and shall be entitled to all perquisites and
special benefits suitable to the character of the Chief Executive Officer while
acting as Chief Executive Officer.  Notwithstanding the foregoing, the Company
shall have the right to change, amend or discontinue any benefit plan, program,
or perquisite, so long as such changes are similarly applicable to senior
executive officers of the Company generally.

 

(g)                                 Vacation.  During the Employment Period, the
Executive shall be entitled to vacation in accordance with reasonable and
customary vacation practice for chief executive offices of New York Stock
Exchange listed companies of a size similar to the Company’s size.

 

(h)                                 Services Furnished.  During the Employment
Period, the Executive shall at all times be provided with office space, clerical
assistance and such other facilities and services as are suitable to his then
position.

 

5.                                       Offices.  Subject to Sections 2, 3 and
4 hereof, during the Base Term the Executive agrees to serve without additional
compensation, if elected or appointed thereto, as a director of any of the
Company’s subsidiaries and as a member of any committees of the board of
directors of any such corporations, and in one or more executive positions of
any of the Company’s subsidiaries, provided that the Executive is indemnified
for serving in any and all such capacities on a basis no less favorable than is
currently, or may be, provided to any other director or officer of the Company,
any of its subsidiaries or in connection with any such executive position, as
the case may be.

 

6.                                       Termination.  The Employment Period
shall end in the event of a termination of the Executive’s employment in
accordance with any of the provisions of Section 6 or 7, and the Term shall
expire in the event of a termination of Executive’s employment by the Company
for Cause or by the Executive without Good Reason, in each case, on the
Executive’s Date of Termination.

 

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

 

(b)                                 Disability.  If, as a result of the
Executive’s incapacity due to physical or mental illness, the Executive shall
have been absent from the full-time performance of his duties hereunder for the
entire period of ninety (90) days in the aggregate during any period of twelve
(12) consecutive months or it is reasonably expected that such disability will
exist for more than such period of time, and within thirty (30) days after
written Notice of Termination (as defined in Section 7) is given (which notice
may be given during such ninety (90) day period) shall not

 

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have returned to the performance of his duties hereunder on a full-time basis,
the Company may terminate the Executive’s employment hereunder for “Disability.”

 

During any period that the Executive fails to perform his duties hereunder as a
result of incapacity due to physical or mental illness (“Disability Period”),
the Executive shall continue to receive his Base Salary or his Ancillary Term
Compensation, as the case may be, at the rate in effect at the beginning of such
period as well as all other payments and benefits set forth in Section 4 hereof,
reduced by any payments made to the Executive during the Disability Period under
the disability benefit plans of the Company then in effect or under the Social
Security disability insurance program.

 

(c)                                  Cause.  The Company may terminate the
Executive’s employment hereunder for Cause.  For purposes of this Agreement, the
Company shall have “Cause” to terminate the Executive’s employment hereunder
upon the occurrence of any of the following events:

 

(i)                                     the commission by the Executive of an
act of fraud, embezzlement, theft or other criminal act constituting a felony;

 

(ii)                                  the willful and continued failure by the
Executive to substantially perform the Executive’s duties with the Company
(other than any such failure resulting from the Executive’s incapacity due to
physical or mental illness or any such actual or anticipated failure after
issuance of a Notice of Termination for Good Reason by the Executive) after a
written demand for substantial performance is delivered to the Executive by the
Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive’s
duties; or

 

(iii)                               the willful engaging by the Executive in
conduct which is demonstrably and materially injurious to the Company or its
subsidiaries, monetarily or otherwise.

 

provided, that, the Executive shall have thirty (30) business days from the date
on which the Executive receives the Company’s Notice of Termination for Cause
under clause (ii) or (iii) above to remedy any such occurrence otherwise
constituting Cause under such clause (ii) or (iii).  For purposes of clauses
(ii) and (iii) of this definition, no act, or failure to act, on the Executive’s
part shall be deemed to be “willful” unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the Executive’s
act, or failure to act, was in the best interest of the Company.

 

Cause shall not exist unless and until the Company has delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of a
majority of the entire membership of the Board at a meeting of the Board called
and held for such purpose (after reasonable notice to the Executive and an
opportunity for the Executive, together with his counsel, to be heard before the
Board), finding in the good faith opinion of the Board on clear and convincing
evidence there is Cause as set forth in this Section 6(c), specifying the
material particulars thereof and, if applicable, determining that such Cause has
not been remedied within the applicable 30-day time frame specified in
Section 6(c).

 

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(d)                                 Good Reason.  The Executive may terminate
his employment hereunder for “Good Reason.”  Good Reason for the Executive’s
termination of employment shall mean the occurrence, without the Executive’s
prior written consent, of any one or more of the following;

 

(i)                                     the assignment to the Executive of any
duties inconsistent with the Executive’s position (including status, office,
title and reporting requirements), authorities, duties or other responsibilities
as contemplated by Section 2 of this Agreement;

 

(ii)                                  the relocation of the Principal Place of
Employment to a location more than fifty (50) miles from the Principal Place of
Employment;

 

(iii)                               a material reduction in any element of the
Executive’s compensation as set forth in Section 4 hereof, other than in
connection with a Company-wide reduction of such benefits; or

 

(iv)                              a material breach by the Company of any
provision of this Agreement;

 

provided, in any case, that the Company shall have thirty (30) business days
from the date on which the Company receives the Executive’s Notice of
Termination for Good Reason to remedy any such occurrence otherwise constituting
Good Reason.

 

(e)                                  Without reliance upon Section 6(b), 6(c) or
6(d), either party hereto may terminate this Agreement during the Base Term at
any time by giving the other no less than thirty (30) days’ and no more than
sixty (60) days’ prior written notice, in accordance with Section 7 hereof, of
such party’s intent to so terminate this Agreement.

 

7.                                       Termination Procedure.

 

(a)                                  Notice of Termination.  Any termination of
the Executive’s employment by the Company or by the Executive (other than
termination pursuant to Section 6(a) hereof) shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section 12
hereof.  For purposes of this Agreement, a “Notice of Termination” shall mean a
notice that shall indicate the specific termination provision in this Agreement
relied upon and if Section 6(b), 6(c) or 6(d) is relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive’s employment under the provision so indicated.

 

(b)                                 Date of Termination.  “Date of Termination”
shall mean (i) if the Executive’s employment is terminated pursuant to
Section 6(a) above, the date of the Executive’s death, (ii) if the Executive’s
employment is terminated pursuant to Section 6(b) above, thirty (30) days after
the date Notice of Termination is given (provided that the Executive shall not
have returned to the performance of his duties on a full-time basis during such
thirty (30) day period), (iii) if the Executive’s employment is terminated
pursuant to Section 6(c)(i) above, the date specified in the Notice of
Termination, (iv) if the Executive’s employment is terminated pursuant to
Section 6(c)(ii) or (iii) above, thirty (30) days after the date on which a
Notice of Termination is given, (v) if the Executive’s employment is terminated
for any other reason, the date specified in the Notice of Termination, which
date shall be not earlier than thirty

 

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(30) days following the date on which Notice of Termination is given and not
later than sixty (60) days following the date on which Notice of Termination is
given; provided, however, that, if within ten (10) days after any Notice of
Termination under Section 6(b),(c) or (d) is given the party receiving such
Notice of Termination notifies the other party that a dispute exists concerning
such termination, the Date of Termination shall be the date on which the dispute
is finally determined, either by mutual written agreement of the parties, by a
binding and final arbitration award or by a final judgment, order or decree of a
court of competent jurisdiction (the time for appeal therefrom having expired
and no appeal having been perfected).

 

(c)                                  Compensation During Dispute.  If a
purported termination occurs during the Term, and such termination is disputed
in accordance with subsection (b) of this Section 7, the Company shall continue
to pay the Executive the full compensation in effect when the notice giving rise
to the dispute was given (including, but not limited to, Base Salary, if
applicable) and continue the Executive as a participant in all compensation,
benefit and insurance plans in which the Executive was participating when the
notice giving rise to the dispute was given, until the Date of Termination,
determined in accordance with subsection (b) of this Section 7.  Amounts paid
under this Section 7(c) are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement.

 

8.                                       Compensation upon Termination or During
Disability.

 

(a)                                  Accrued Obligation Defined.  For purposes
of this Agreement, payment of the “Accrued Obligation” shall mean payment by the
Company to the Executive (or his designated beneficiary or legal representative,
as applicable), when due, of all vested benefits to which the Executive is
entitled under the terms of the employee benefit plans in which the Executive is
a participant as of the Date of Termination and a lump sum amount in cash equal
to the sum of (i) the Executive’s Base Salary or Ancillary Term Compensation, as
the case may be, through the Date of Termination, (ii) any accrued vacation pay
and (iii) any other amounts due the Executive as of the Date of Termination, in
each case to the extent not theretofore paid.

 

(b)                                 Disability; Death.  Upon termination of the
Executive’s employment pursuant to Sections 6(a) or (b) hereof, the Company
shall within thirty (30) days pay to the Executive (or his designated
beneficiary or legal representative, if applicable) (i) the Accrued Obligation,
and (ii) a lump sum amount, in cash, in cash, equal to a pro rata portion to the
Date of Termination of the aggregate value of the contingent bonus award
contemplated by Section 4(b) of the Employment Agreement, calculated as to such
award by multiplying the award that the Executive would have earned as of the
last day of the Base Period (as defined in the Employment Agreement), assuming
the achievement, at the expected value target level, of the performance goals
established with respect to such award, by the fraction obtained by dividing the
number of full days during the Base Period through the Date of Termination by
the total number of days contained in the Base Period.

 

(c)                                  By the Company for Cause.  If during the
Term the Executive’s employment is terminated by the Company pursuant to
Section 6(c) hereof, the Company shall pay to the Executive the Accrued
Obligation within thirty (30) days following the Date of Termination.  Following
such payment, the Company shall have no further obligations to the Executive
other than as may be required by law or the terms of an employee benefit plan of
the Company.

 

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(d)                                 By the Executive Without Good Reason.  If
during the Term the Executive terminates his employment for any reason other
than Good Reason, the Company shall pay to the Executive the Accrued Obligation
within thirty (30) days following the Date of Termination.  Following such
payment, the Company shall have no further obligations to the Executive other
than as may be required by law or the terms of an employee benefit plan or stock
option plan of the Company.

 

(e)                                  By the Company Without Cause or by the
Executive for Good Reason.  If during the Term the Executive’s employment is
terminated by the Company other than for Cause, death or Disability or if the
Executive terminates his employment for Good Reason, then

 

(i)                                     the Company shall pay the Executive the
Accrued Obligation;

 

(ii)                                  the Company shall continue to pay to the
Executive his Base Salary or Ancillary Term Compensation (at the rate in effect
as of the Date of Termination) for the remainder of the Base Term or the
Ancillary Term, as the case may be, payable consistent with the Company’s normal
payroll practices.

 

(iii)                               all equity-based awards then held by
Executive shall become fully vested and exercisable as of the Notice of
Termination;

 

(iv)                              the Company shall continue to provide to the
Executive the benefits described in Section 4(f), to the extent contractually
and legally permitted, provided that such benefits shall be reduced to the
extent benefits of the same type are received by, or made available at no
greater cost to, the Executive under any group plan, whether by reason of new
employment, participation in a spouse’s plan or otherwise, during such period,
and provided, further, that the Executive shall have the obligation to notify
the Company that he is entitled to receive such benefits;

 

(v)                                 the committee (as defined in the Stewart &
Stevenson Services, Inc.1988 Nonstatutory Stock Option Plan) shall deem
Executive’s termination of employment as a retirement under the Stewart &
Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan;

 

(vi)                              the Company shall pay to the Executive a lump
sum amount, in cash, equal to the aggregate value of the contingent bonus award
contemplated by Section 4(b) that the Executive would have earned as of the last
day of the Base Period, assuming the achievement, at the expected value target
level, of the performance goals established with respect to such award; and

 

(vii)                           if the Executive’s employment is terminated
before he has been granted the stock option contemplated by Section 4(d), then
in lieu of granting such stock option the Company shall pay to the Executive a
lump sum payment, in cash, equal to the Black-Scholes value, as reasonably
determined by the Company as of March 31, 2004, of an option to purchase 100,000
shares of the Company’s common stock, assuming for this purpose the option was
granted on March 31, 2004, the per share exercise price under the option is $
14.62, the option has the same terms and conditions as applied to the option
granted by the Company to the Executive on March 31, 2004 (other than the number
of shares subject to the option), and the option remains outstanding for the
full ten year

 

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term; and utilizing the risk free interest rate, dividend yield, and expected
volatility assumptions used by the Company for purposes of valuing stock options
for its 2003 fiscal year as reflected in its fiscal year 2003 Form 10-K filed
with the Securities and Exchange Commission.

 

The Company agrees that, if the Executive’s employment with the Company
terminates during the Term, the Executive is not required to seek other
employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to this Section 8.  Further, except with
respect to the benefits provided pursuant to clause (iv) above, the amount of
any payment or benefit provided for in this Agreement shall not be reduced by
any compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.  Satisfaction of the
obligations to the Executive under Sections 8(b) and 8(e) of this Agreement is
contingent upon the Executive’s (or, if applicable, his designated beneficiary
or legal representative’s) execution of a release substantially in the form of
Exhibit A hereto.

 

9.                                       Confidential Information;
Non-Competition; Non-Solicitation.

 

(a)                                  Confidential Information.  The Executive
shall hold in a fiduciary capacity for the benefit of the Company all trade
secrets,  and information, knowledge or data relating to the Company and its
businesses treated as confidential by the Company, which shall have been
obtained by the Executive during the Executive’s employment by the Company and
which shall not have been or hereafter become public knowledge (other than by
acts by the Executive or representatives of the Executive in violation of this
Agreement) (hereinafter being collectively referred to as “Confidential
Information”).  The Executive shall not, without the prior written consent of
the Company or as may otherwise be required by law or legal process, communicate
or divulge any such trade secrets, information, knowledge or data to anyone
other than the Company and those designated by the Company.  Any termination of
the Executive’s employment or of this Agreement shall have no effect on the
continuing operation of this Section 9(a).  The Executive agrees to return all
Confidential Information, including all photocopies, extracts and summaries
thereof, and any such information stored electronically on tapes, computer disks
or in any other manner to the Company at any time upon request by the Company
and upon the termination of his employment hereunder for any reason.

 

(b)                                 Non-Competition.  During the Employment
Period and for a period of  one  (1) year following the Date of Termination
(such period following the Employment Period, the “Restricted Period”), the
Executive shall not engage in Competition, as defined below, with the Company;
provided, that it shall not be a violation of this Section 9(b) for the
Executive to become the registered or beneficial owner of up to one percent (1%)
of any class of the capital stock of a corporation registered under the
Securities Exchange Act of 1934, as amended, provided that the Executive does
not actively participate in the business of such corporation until such time as
this covenant expires.

 

For purposes of this Agreement, Competition by the Executive shall mean the
Executive’s engaging in, or otherwise directly or indirectly being employed by
or acting as a consultant or lender to, or being a director, officer, employee,
principal, agent, stockholder, member, owner or partner of, or permitting his
name to be used in connection with the activities

 

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of any other business or organization which competes, directly or indirectly,
with the business of the Company as the same shall be constituted at any time
during the Employment Period.

 

(c)                                  Non-Solicitation.  During the Restricted
Period, the Executive agrees that he will not, directly or indirectly, for his
benefit or for the benefit of any other person, firm or entity, do any of the
following:

 

(i)                                     solicit from any customer doing business
with the Company as of the Date of Termination, business of the same or of a
similar nature to the business of the Company with such customer;

 

(ii)                                  solicit from any known potential customer
of the Company business of the same or of a similar nature to that which has
been the subject of a known written or oral bid, offer or proposal by the
Company, or of substantial preparation with a view to making such a bid,
proposal or offer, within six (6) months prior to such Date of Termination;

 

(iii)                               solicit the employment or services of, or
hire, any person who was known to be employed by or was a known consultant to
the Company upon the Date of Termination, or within six (6) months prior
thereto; or

 

(iv)                              otherwise knowingly interfere with the
business or affairs of the Company.

 

The Executive and the Company agree and acknowledge that the Company has a
substantial and legitimate interest in protecting the Company’s Confidential
Information and goodwill.  The Executive and the Company further agree and
acknowledge that the provisions of this Section 9 are reasonably necessary to
protect the Company’s legitimate business interests and are designed to protect
the Company’s Confidential Information and goodwill.

 

The Executive agrees that the scope of the restrictions as to time, geographic
area, and scope of activity in this Section 9 are reasonably necessary for the
protection of the Company’s legitimate business interests and are not oppressive
or injurious to the public interest.  The Executive agrees that in the event of
a breach or threatened breach of any of the provisions of this Section 9 the
Company shall, notwithstanding Section 14 hereof, be entitled to injunctive
relief against the Executive’s activities to the extent allowed by law.  The
Executive further agrees that any breach or threatened breach of any of the
provisions of Section 9(a) would cause irreparable injury to the Company for
which it would have no adequate remedy at law.

 

(d)                                 Publicity.  The Executive agrees that the
Company may use, and hereby grants the Company the nonexclusive and worldwide
right to use, the Executive’s name, picture, likeness, photograph, signature or
any other attribute of the Executive’s persona (all of such attributes are
hereafter collectively referred to as “Persona”) in any media for any
advertising, publicity or other purpose at any time during the Restricted
Period.  The Executive agrees that such use of his Persona will not result in
any invasion or violation of any privacy or property rights the Executive may
have; and the Executive agrees that he will receive no additional compensation
for the use of his Persona.  The Executive further agrees that any negatives,
prints or other material for printing or reproduction purposes prepared in
connection with the use of his Persona by the Company shall be and are the sole
property of the Company.

 

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10.                                 Indemnification; Legal Fees.  The Company
shall indemnify the Executive to the fullest extent permitted by the laws of the
Company’s state of incorporation in effect at that time, or certificate of
incorporation and by-laws of the Company, whichever affords the greater
protection to the Executive, for any judgments, penalties, fines, settlements
and reasonable expenses (including, without limitation, reasonable attorneys’
fees and costs) incurred by the Executive in connection with any action, suit or
proceeding, threatened or pending, to which he may be made a party by reason of
his being a director, officer or advisor, as contemplated hereby, whether
incurred during or after the Term.  The Executive will be entitled to any
insurance policies the Company may elect to maintain generally for the benefit
of its officers, directors or advisors against all costs, charges and expenses
incurred in connection with any action, suit or proceeding, threatened or
pending,  to which he may be made a party by reason of being a director or
officer of the Company.

 

11.                                 Successors; Binding Agreement.

 

(a)                                  Company’s Successors.  This Agreement shall
be binding upon the Company and any successor thereof (whether direct or
indirect, by purchase, merger, consolidation or otherwise).  As used in this
Agreement, “Company” shall mean the Company as hereinbefore defined and any
successor to its business and/or assets or any entity which otherwise becomes
bound by all the terms and provisions of this Agreement by operation of law or
by contract.

 

(b)                                 Executive’s Successors.  This Agreement and
all rights of the Executive hereunder shall inure to the benefit of and be
enforceable by the Executive’s personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.  If the
Executive should die while any amounts are payable to him hereunder, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive’s devisee, legatee or other designee
or, if there is no such designee, to the Executive’s estate.

 

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

 

If the Executive:

 

Max L. Lukens
3415 Albans
Houston, Texas   77005

 

If to the Company:

 

Stewart & Stevenson Services, Inc.
2707 North Loop West
Houston, TX 77008-1088
Attention:      Secretary

 

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

 

13.                                 Amendment or Modification; Waiver.  No
provisions of this Agreement may be modified, waived or discharged unless such
waiver, modification or discharge is agreed to in writing signed by the
Executive and such officer of the Company as may be specifically designated by
the Board or the Compensation Committee of the Board.  No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time.  No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in Agreement.

 

14.                                 Arbitration.  Any dispute or controversy
arising out of or relating to this Agreement, including without limitation, any
and all disputes, claims (whether in tort, contract, statutory or otherwise),
breaches or disagreements concerning the interpretation or application of the
provisions of this Agreement shall be resolved by arbitration before a panel of
three arbitrators and administered by the American Arbitration Association
(“AAA”) under its Commercial Arbitration Rules then in effect.   Within ten (10)
business days of the initiation of an arbitration hereunder, the Company and the
Executive will each separately designate an arbitrator, and within twenty (20)
business days of selection, the appointed arbitrators will appoint a neutral
arbitrator.  All arbitrators shall be members of the National Panel of
Commercial Arbitrators maintained by the AAA.  The arbitrators shall issue their
written decision (including a statement of finding of facts) within thirty (30)
days from the date of the close of the arbitration hearing.  The decision of the
arbitrators selected hereunder will be final and binding on both parties.  This
arbitration provision is expressly made pursuant to and shall be governed by the
Federal Arbitration Act, 9 U.S.C. Sections 1-16 (or replacement or successor
statute).  Pursuant to Section 9 of the Federal Arbitration Act, the Company and
the Executive agree that a judgment of the United States District Court for the
Southern District of Texas may be entered upon the award made pursuant to the
arbitration.  The Company shall pay to the Executive all reasonable legal fees
and expenses, when incurred by the Executive, in contesting or disputing any
termination of employment or seeking to obtain or enforce any right, payment or
benefit provided by this Agreement, regardless of outcome, unless a final
decision is rendered that such claim was not brought by the Executive in good
faith.

 

15.                                 Governing Law.  The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Texas without regard to its conflicts of law
principles.

 

16.                                 Miscellaneous.  All references to sections
of any statute shall be deemed also to refer to any successor provisions to such
sections.  The obligations of the parties under Sections 4, 8, 9, 10, 11, 12,
14, 15, 16, 17, 18,  and 19 hereof shall survive the expiration of the Term to
the extent they may be applicable by their terms.  The compensation and benefits
payable to the Executive or his beneficiary under Section 8 of this Agreement
shall be in lieu of any other severance benefits to which the Executive may
otherwise be entitled upon his termination of employment under any severance
plan, program, policy, practice or arrangement of the Company other than the
Severance Agreement, and the Executive shall not be entitled to receive any

 

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benefits under Section 8(e) hereof if he has become eligible to receive benefits
under the Severance Agreement.

 

17.                                 Severability.  The invalidity or
unenforceability of any provision or provisions of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
which shall remain in full force and effect throughout the Term.  Should any one
or more of the provisions of this Agreement be held to be excessive or
unreasonable as to duration, geographical scope or activity, then that provision
shall be construed by limiting and reducing it so as to be reasonable and
enforceable to the extent compatible with the applicable law.

 

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

 

19.                                 Entire Agreement.  This Agreement sets forth
the entire agreement of the parties hereto in respect of the subject matter
contained herein and, as of the Effective Date, supersedes all prior agreements,
promises, covenants, arrangements, communications, representations or
warranties, whether oral or written, by any officer, employee or representative
of any party hereto; provided, however, that the Severance Agreement shall not
be superseded hereby but shall remain in full force and effect.

 

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

 

 

 

STEWART & STEVENSON SERVICES, INC.

 

 

 

 

 

By

/s/ Carl B. King

 

 

Carl B. King

 

 

Senior Vice President, Secretary,
and General Counsel

 

 

 

 

 

EXECUTIVE:

 

 

 

 

 

/s/ Max L. Lukens

 

Max L. Lukens

 

3415 Albans
Houston, Texas 77005

 

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EXHIBIT A

 

RELEASE

 

The Executive hereby irrevocably and unconditionally releases, acquits and
forever discharges the Company and its affiliated companies and their directors,
officers, employees and representatives, (collectively “Releasees”), from any
and all claims, liabilities, obligations, damages, causes of action, demands,
costs, losses and/or expenses (including attorneys’ fees) of any nature
whatsoever, whether known or unknown, including, but not limited to, rights
arising out of alleged violations of any contracts, express or implied, any
covenant of good faith and fair dealing, express or implied, or any tort, or any
legal restrictions on the Company’s right to terminate employees, or any
federal, state or other governmental statute, regulation, or ordinance,
including, without limitation, Title VII of the Civil Rights Act of 1964, and
the Federal Age Discrimination in Employment Act, which the Executive claims to
have against any of the Releasees.  In addition, the Executive waives all rights
and benefits afforded by any state laws which provide in substance that a
general release does not extend to claims which a person does not know or
suspect to exist in his favor at the time of executing the release which, if
known by him, must have materially affected the Executive’s settlement with the
other person.  The only exception to the foregoing are claims and rights that
may arise after the date of execution of this Release.

 

The Executive represents and acknowledges that in executing this Release he does
not rely and has not relied upon any representation or statement, oral or
written, not set forth herein or in the Agreement made by any of the Releasees
or by any of the Releasees’ agents, representatives or attorneys with regard to
the subject matter, basis or effect of this Release, the Agreement or otherwise.

 

The Executive represents and agrees that he fully understands his right to
discuss all aspects of this Release with his private attorney, that to the
extent, if any, that he desires, he has availed himself of this right, that he
has carefully read and fully understands all of the provisions of this Release
and that he is voluntarily entering into this Release.

 

AGREED AND ACCEPTED, on this           day of                               ,
20   .

 

 

 

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