**Exhibit 10.2**

 

**SEVERANCE AGREEMENT**

 

THISAGREEMENT, effective as of February 1, 2004, is made by and betweenStewart & Stevenson Services, Inc., a Texas corporation (the “Company”),and Max L. Lukens (the “Executive”).

 

WHEREAS,the Company considers it essential to the best interests of its stockholders tofoster the continued employment of key management personnel; and

 

WHEREAS,the Board recognizes that, as is the case with many publicly held corporations,the possibility of a Change in Control exists and that such possibility, andthe uncertainty and questions which it may raise among management, may resultin the departure or distraction of management personnel to the detriment of theCompany and its stockholders; and

 

WHEREAS,the Board has determined that appropriate steps should be taken to reinforceand encourage the continued attention and dedication of members of theCompany’s management, including the Executive, to their assigned duties withoutdistraction in the face of potentially disturbing circumstances arising fromthe possibility of a Change in Control;

 

NOW,THEREFORE, in consideration of the premises and the mutual covenants hereincontained, the Company and the Executive hereby agree as follows:

 

1.                                       Defined Terms.  Thedefinitions of capitalized terms used in this Agreement are provided in thelast Section hereof.

 

2.                                       Term of Agreement.  TheTerm of this Agreement shall commence on the date hereof and shall continue ineffect through February 1, 2006.

 

# 3.                                       Company’s Covenants Summarized.  In orderto induce the Executive to remain in the employ of the Company and inconsideration of the Executive’s covenants set forth in Section 3 hereof,the Company agrees, under the conditions described herein, to pay the Executivethe Severance Payments and the other payments and benefits describedherein.  Except as provided inSection 8.1 hereof, no Severance Payments shall be payable under thisAgreement unless there shall have been (or, under the terms of the secondsentence of Section 5.1 hereof, there shall be deemed to have been) atermination of the Executive’s employment with the Company following a Changein Control and during the Term.  ThisAgreement shall not be construed as creating an express or implied contract ofemployment and, except as otherwise agreed in writing between the Executive andthe Company, the Executive shall not have any rights to be retained in theemploy of the Company.

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# 4.                                       Compensation Other Than Severance Payments.

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## 4.1                                 Following a Change in Control and during theTerm, during any period that the Executive fails to perform the Executive’sduties with the Company as a result of incapacity due to physical or mentalillness, the Company shall pay the Executive’s full salary to the Executive atthe rate in effect at the commencement of any such period, together with allcompensation and benefits payable to the Executive under the terms of anycompensation or

 

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benefit plan, program or arrangement maintained by the Company duringsuch period, until the Executive’s employment is terminated by the Company forDisability.

 

## 4.2                                 If the Executive’s employment shall beterminated for any reason following a Change in Control and during the Term,the Company shall pay the Executive’s full salary to the Executive through theDate of Termination at the rate in effect immediately prior to the Date ofTermination or, if higher, the rate in effect immediately prior to the firstoccurrence of an event or circumstance constituting Good Reason, together withall compensation and benefits payable to the Executive through the Date ofTermination under the terms of the Company’s compensation and benefit plans,programs or arrangements as in effect immediately prior to the Date ofTermination or, if more favorable to the Executive, as in effect immediatelyprior to the first occurrence of an event or circumstance constituting GoodReason.

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## 4.3                                 If the Executive’s employment shall beterminated for any reason following a Change in Control and during the Term,the Company shall pay to the Executive the Executive’s normal post-terminationcompensation and benefits as such payments become due in accordance withwritten plans.  Such post-terminationcompensation and benefits shall be determined under, and paid in accordancewith, the Company’s retirement, insurance and other compensation or benefitplans, programs and arrangements as in effect immediately prior to the Date ofTermination or, if more favorable to the Executive, as in effect immediatelyprior to the occurrence of the first event or circumstance constituting GoodReason.

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## 4.4                                 Upon the occurrence of a Change in Controlall options to acquire shares of Company stock, all shares of restrictedCompany stock and all other equity incentives held by the Executive under anyplan of the Company (including, but not limited to, the Company’s various stockoption plans) shall become immediately vested, exercisable and nonforfeitableand all conditions thereof (including, but not limited to, any required holdingperiods) shall be deemed to have been satisfied.

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# 5.                                       Severance Payments.

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## 5.1                                 If the Executive’s employment is terminatedfollowing a Change in Control and during the Term, other than (A) by theCompany for Cause, (B) by reason of death or Disability, or (C) by theExecutive without Good Reason, then, the Company shall pay the Executive theamounts, and provide the Executive the benefits, described in thisSection 5.1 (“Severance Payments”) and Section 5.2, in addition toany payments and benefits to which the Executive is entitled under Section 4hereof.  Solely for purposes ofdetermining whether termination occurred following a Change in Control pursuantto this Agreement (and without any implication that a Change in Control has infact occurred), the Executive’s employment shall be deemed to have been terminatedfollowing a Change in Control by the Company without Cause or by the Executivewith Good Reason, if (i) the Executive’s employment is terminated by theCompany without Cause prior to a Change in Control and such termination was atthe request, direction or suggestion, directly or indirectly, of a Person whohas entered into an agreement or with whom the Company contemplates will enterinto an agreement with the Company the consummation of which would constitute aChange in Control or, (ii) the Executive terminates his employment for GoodReason prior to a Change in Control and the circumstance or event whichconstitutes Good Reason occurs at the request, direction or suggestion of suchPerson

 

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described in clause (i).  Forpurposes of any determination regarding the applicability of the immediatelypreceding sentence, any position taken by the Executive shall be presumed to becorrect unless the Company establishes to the Committee by clear and convincingevidence that such position is not correct.

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### (A)                              In lieu of any further salary payments to theExecutive for periods subsequent to the Date of Termination and in lieu of anyseverance benefit otherwise payable to the Executive, the Company shall pay tothe Executive a lump sum severance payment, in cash, equal to $2,250,000.

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### (B)                                For the thirty-six (36) month periodimmediately following the Date of Termination, the Company shall arrange toprovide the Executive and his dependents life, disability, accident and healthinsurance benefits and perquisites (including, but not limited to, executivelife insurance, club memberships, financial planning and tax preparation,annual physical examination and charitable contributions), in each case, substantiallysimilar to those provided to the Executive and his dependents immediately priorto the Date of Termination or, if more favorable to the Executive, thoseprovided to the Executive and his dependents immediately prior to the firstoccurrence of an event or circumstance constituting Good Reason, at no greatercost to the Executive than the cost to the Executive immediately prior to suchdate or occurrence; provided, however, that, unless the Executive consents to adifferent method (after taking into account the effect of such method on thecalculation of “parachute payments” pursuant to Section 5.2 hereof), suchhealth insurance benefits shall be provided through a third-party insurer.  Benefits otherwise receivable by theExecutive pursuant to this Section 5.1(B) shall be reduced to the extentbenefits of the same type are received by the Executive under any individual orgroup policy or program, or made available to the Executive under a group planwhether by reason of the employment of the Executive or the employment of thespouse of the Executive, during the thirty-six (36) month period following theExecutive’s termination of employment (and any such benefits received by ormade available to the Executive shall be reported to the Company by the Executive);provided, however, that the Company shall reimburse the Executive for theexcess, if any, of the cost of such benefits to the Executive over such costimmediately prior to the Date of Termination or, if more favorable to theExecutive, the first occurrence of an event or circumstance constituting GoodReason.

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### (C)                                Notwithstanding any provision of that certainEmployment Agreement between the Company and the Executive effective as ofFebruary 1, 2004 (the “Employment Agreement”), the Company shall pay tothe Executive a lump sum amount, in cash, equal to the aggregate value of thecontingent bonus award contemplated by Section 4(b) of the EmploymentAgreement that the Executive would have earned as of the last day of the BasePeriod (as defined in the Employment Agreement), assuming the achievement, atthe expected value target level, of the performance goals established withrespect to such award.

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### (D)                               The committee (as defined by the Stewart& Stevenson Services, Inc. 1998 Nonstatutory Stock Option Plan) shall deemthe Executive’s termination of

 

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### employmentas a retirement for purposes of the Stewart & Stevenson Services, Inc. 1998Nonstatutory Stock Option Plan.

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### (E)                                 If a Change in Control occurs prior toJanuary 4, 2005 the Company shall pay to the Executive a lump sum payment,in cash, equal to the Black-Scholes value, as reasonably determined by theCompany as of March 31, 2004, of an option to purchase 100,000 shares ofthe Company’s common stock, assuming for this purpose the option was granted onMarch 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 grantedby the Company to the Executive on March 31, 2004 (other than the numberof shares subject to the option), and the option remains outstanding for thefull ten year term; and utilizing the risk free interest rate, dividend yield,and expected volatility assumptions used by the Company for purposes of valuingstock options for its 2003 fiscal year as reflected in its fiscal year 2003Form 10-K filed with the Securities and Exchange Commission.

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## 5.2                                 (A)                              Whether or not the Executive becomes entitled to the SeverancePayments, if any of the payments or benefits received or to be received by theExecutive in connection with a Change in Control or the Executive’s terminationof employment (whether pursuant to the terms of this Agreement or any otherplan, arrangement or agreement with the Company, any Person whose actionsresult in a Change in Control or any Person affiliated with the Company or suchPerson) (such payments or benefits, excluding the Gross-Up Payment, beinghereinafter referred to as the “Total Payments”) will be subject to the ExciseTax, the Company shall pay to the Executive an additional amount (the “Gross-UpPayment”) such that the net amount retained by the Executive, after deductionof any Excise Tax on the Total Payments and any federal, state and local incomeand employment taxes and Excise Tax upon the Gross-Up Payment, shall be equalto the Total Payments.

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(B)                                For purposes of determining whether any of the Total Payments will besubject to the Excise Tax and the amount of such Excise Tax, (i) all of theTotal Payments shall be treated as “parachute payments” (within the meaning ofsection 280G(b)(2) of the Code) unless, in the opinion of tax counsel(“Tax Counsel”) reasonably acceptable to the Executive and selected by theaccounting firm which was, immediately prior to the Change in Control, theCompany’s independent auditor (the “Auditor”), such payments or benefits (inwhole or in part) do not constitute parachute payments, including by reason ofsection 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments”within the meaning of section 280G(b)(1) of the Code shall be treated assubject to the Excise Tax unless, in the opinion of Tax Counsel, such excessparachute payments (in whole or in part) represent reasonable compensation forservices actually rendered (within the meaning of section 280G(b)(4)(B) ofthe Code) in excess of the Base Amount allocable to such reasonablecompensation, or are otherwise not subject to the Excise Tax, and (iii) thevalue of any noncash benefits or any deferred payment or benefit shall bedetermined by the Auditor in accordance with the principles ofsection 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, theExecutive shall be deemed to pay federal income tax at the highest marginalrate of federal income taxation in the calendar year in which the Gross-UpPayment is to be made and state and local income taxes at the highest marginalrate of

 

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taxationin the state and locality of the Executive’s residence on the Date ofTermination (or if there is no Date of Termination, then the date on which theGross-Up Payment is calculated for purposes of this Section 5.2), net ofthe maximum reduction in federal income taxes which could be obtained fromdeduction of such state and local taxes.

 

(C)                                In the event that the Excise Tax is finally determined to be less thanthe amount taken into account hereunder in calculating the Gross-Up Payment,the Executive shall repay to the Company, within five (5) business days followingthe time that the amount of such reduction in the Excise Tax is fullydetermined, the portion of the Gross-Up Payment”) attributable to suchreduction (plus that portion of the Gross-Up Payment attributable to the ExciseTax and federal, state and local income and employment taxes imposed on theGross-Up Payment being repaid by the Executive, to the extent that suchrepayment results in a reduction in the Excise Tax and a dollar-for-dollarreduction in the Executive’s taxable income and wages for purposes of federal,state and local income and employment taxes, plus interest on the amount ofsuch repayment at 120% of the rate provided in section 1274(b)(2)(B) ofthe Code.  In the event that the ExciseTax is determined to exceed the amount taken into account hereunder incalculating the Gross-Up Payment (including by reason of any payment theexistence or amount of which cannot be determined at the time of the Gross-UpPayment), the Company shall make an additional Gross-Up Payment in respect ofsuch excess (plus any interest, penalties or additions payable by the Executivewith respect to such excess) within five (5) business days following the timethat the amount of such excess is finally determined.  The Executive and the Company shall each reasonably cooperatewith the other in connection with any administrative or judicial proceedingsconcerning the existence or amount of liability for Excise Tax with respect tothe Total Payments.

 

## 5.3                                 The payments provided in subsection (A)and (C) of Section 5.1 hereof and in Section 5.2 hereof shall be madenot later than the fifth day following the Date of Termination; provided,however, that if the amounts of such payments cannot be finally determined onor before such day, the Company shall pay to the Executive on such day anestimate, as determined in good faith by the Executive or, in the case ofpayments under Section 5.2 hereof, in accordance with Section 5.2hereof, of the minimum amount of such payments to which the Executive isclearly entitled and shall pay the remainder of such payments (together withinterest on the unpaid remainder (or on all such payments to the extent theCompany fails to make such payments when due) at 120% of the rate provided insection 1274(b)(2)(B) of the Code) as soon as the amount thereof can bedetermined but in no event later than the thirtieth (30th) day after the Dateof Termination.  In the event that theamount of the estimated payments exceeds the amount subsequently determined tohave been due, such excess shall constitute a loan by the Company to theExecutive, payable on the fifth (5th) business day after demand by the Company(together with interest at 120% of the rate provided insection 1274(b)(2)(B) of the Code), but only to the extent such amount hasnot been paid by the Executive pursuant to Section 5.2(C) above.  At the time that payments are made underthis Agreement, the Company shall provide the Executive with a writtenstatement setting forth the manner in which such payments were calculated andthe basis for such calculations including, without limitation, any opinions orother advice the Company has received from Tax Counsel, the Auditor or otheradvisors or

 

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consultants (and any such opinions or advice which are in writing shallbe attached to the statement).

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## 5.4                                 If the Executive’s employment with theCompany is terminated following a Change in Control and during the Term, theCompany shall pay to the Executive all legal fees and expenses incurred by theExecutive in disputing in good faith any issue hereunder relating to thetermination of the Executive’s employment, in seeking in good faith to obtainor enforce any benefit or right provided by this Agreement or in connectionwith any tax audit or proceeding to the extent attributable to the applicationof section 4999 of the Code to any payment or benefit providedhereunder.  Such payments shall be madewithin five (5) business days after delivery of the Executive’s writtenrequests for payment accompanied with such evidence of fees and expensesincurred as the Company reasonably may require.

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# 6.                                       Termination Procedures and CompensationDuring Dispute.

 

## 6.1                                 Notice of Termination. After a Change in Control and during the Term, any purported terminationof the Executive’s employment (other than by reason of death) shall becommunicated by written Notice of Termination from one party hereto to theother party hereto in accordance with Section 9 hereof.  For purposes of this Agreement, a “Notice ofTermination” shall mean a notice which shall indicate the specific terminationprovision in this Agreement relied upon and shall set forth in reasonabledetail the facts and circumstances claimed to provide a basis for terminationof the Executive’s employment under the provision so indicated.  Further, a Notice of Termination for Causeis required to include a copy of a resolution duly adopted by the affirmativevote of not less than three-quarters (3/4) of the Committee at a meeting of theCommittee which was called and held for the purpose of considering suchtermination (after reasonable notice to the Executive and an opportunity forthe Executive, together with the Executive’s counsel, to be heard before theCommittee) finding on clear and convincing evidence and the good faith opinionof the Committee, the Executive’s employment was terminated for Cause, andspecifying the particulars thereof in detail.

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## 6.2                                 Date of Termination. “Date of Termination,” with respect to any purported termination of theExecutive’s employment after a Change in Control and during the Term, shallmean (i) if the Executive’s employment is terminated for Disability, thirty(30) days after Notice of Termination is given (provided that the Executiveshall not have returned to the full-time performance of the Executive’s dutiesduring such thirty (30) day period), and (ii) if the Executive’s employment isterminated for any other reason, the date specified in the Notice ofTermination (which, in the case of a termination for Cause and, in the case ofa termination by the Executive, shall not be less than fifteen (15) days normore than sixty (60) days, respectively, from the date such Notice ofTermination is given).

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## 6.3                                 Dispute Concerning Termination.  Ifwithin fifteen (15) days after any Notice of Termination is given following aChange in Control, or, if later, prior to the Date of Termination (asdetermined without regard to this Section 6.3), the party receiving suchNotice of Termination notifies the other party that a dispute exists concerningthe termination, the Date of Termination shall be extended until the earlier of(i) the date on which the Term ends or (ii) the date on which the dispute isfinally resolved, either by mutual written agreement of the parties or by afinal judgment, order or decree of an arbitrator or a court of competentjurisdiction

 

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(which is not appealable or with respect to which the time for appealtherefrom has expired and no appeal has been perfected); provided, however,that the Date of Termination shall be extended by a notice of dispute only ifsuch notice is given in good faith and the party giving notice pursues theresolution of such dispute with reasonable diligence.

 

## 6.4                                 Compensation During Dispute.  Ifa purported termination occurs following a Change in Control and during theTerm and the Date of Termination is extended in accordance withSection 6.3 hereof, the Company shall continue to pay the Executive thefull compensation in effect when the notice giving rise to the dispute wasgiven (including, but not limited to, salary) and continue the Executive as aparticipant in all compensation, benefit and insurance plans in which theExecutive was participating when the notice giving rise to the dispute wasgiven or those plans in which the Executive was participating immediately priorto the first occurrence of an event or circumstance giving rise to the Noticeof Termination, if more favorable to the Executive, until the Date ofTermination, as determined in accordance with Section 6.3 hereof.  Amounts paid under this Section 6.4 arein addition to all other amounts due under this Agreement (other than those dueunder Section 4.2 hereof) and shall not be offset against or reduce anyother amounts due under this Agreement.

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# 7.                                       No Mitigation.  TheCompany agrees that, if the Executive’s employment with the Company terminatesduring the Term, the Executive is not required to seek other employment or toattempt in any way to reduce any amounts payable to the Executive by theCompany pursuant to Sections 4, 5 or 6.4 hereof.  Further, the amount of any payment or benefit provided for inthis Agreement (other than Section 5.1(B) hereof but including (but notlimited to) Section 6.4 hereof) shall not be reduced by any compensationearned by the Executive as the result of employment by another employer, byretirement benefits, by offset against any amount claimed to be owed by theExecutive to the Company, or otherwise.

 

# 8.                                       Successors; Binding Agreement.

 

## 8.1                                 In addition to any obligations imposed by lawupon any successor to the Company, the Company will require any successor(whether direct or indirect, by purchase, merger, consolidation or otherwise)to all or substantially all of the business and/or assets of the Company toexpressly assume and agree to perform this Agreement in the same manner and tothe same extent that the Company would be required to perform it if no suchsuccession had taken place.  Failure ofthe Company to obtain such assumption and agreement prior to the effectivenessof any such succession shall be a breach of this Agreement and shall entitlethe Executive to compensation from the Company in the same amount and on thesame terms as the Executive would be entitled to hereunder if the Executivewere to terminate the Executive’s employment for Good Reason after a Change inControl, except that, for purposes of implementing the foregoing, the date onwhich any such succession becomes effective shall be deemed the Date ofTermination.

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## 8.2                                 This Agreement shall inure to the benefit ofand be enforceable by the Executive’s personal or legal representatives,executors, administrators, successors, heirs, distributees, devisees andlegatees.  If the Executive shall diewhile any amount would still be payable to the Executive hereunder (other thanamounts which, by their terms, terminate upon the death of the Executive) ifthe Executive had continued to live, all such amounts, unless

 

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otherwise provided herein, shall be paid in accordance with the termsof this Agreement to the executors, personal representatives or administratorsof the Executive’s estate.

 

# 9.                                       Notices.  For the purpose of thisAgreement, notices and all other communications provided for in the Agreementshall be in writing and shall be deemed to have been duly given when deliveredor mailed by United States registered mail, return receipt requested, postageprepaid, addressed, if to the Executive, to the address inserted below the Executive’ssignature on the final page hereof and, if to the Company, to the address setforth below, or to such other address as either party may have furnished to theother in writing in accordance herewith, except that notice of change ofaddress shall be effective only upon actual receipt:

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To the Company:

 

Stewart& Stevenson Services, Inc.2707 North Loop WestHouston, Texas   77008-1088

 

Attention:  Secretary

 

# 10.                                 Miscellaneous.  Noprovision of this Agreement may be modified, waived or discharged unless suchwaiver, modification or discharge is agreed to in writing and signed by theExecutive and such officer as may be specifically designated by theCommittee.  No waiver by either partyhereto at any time of any breach by the other party hereto of, or of any lackof compliance with, any condition or provision of this Agreement to beperformed by such other party shall be deemed a waiver of similar or dissimilarprovisions or conditions at the same or at any prior or subsequent time.  This Agreement supersedes any otheragreements or representations, oral or otherwise, express or implied, withrespect to the subject matter hereof which have been made by either party,provided, however, that this Agreement shall supersede any agreement settingforth the terms and conditions of the Executive’s employment with the Companyonly in the event that the Executive’s employment with the Company isterminated on or following a Change in Control, by the Company other than forCause or by the Executive other than for Good Reason; and provided further thatall agreements otherwise superseded by this Agreement shall be automaticallyreinstated with full force and effect to the extent this Agreement isterminated.  The validity, interpretation,construction and performance of this Agreement shall be governed by the laws ofthe State of Texas.  All references tosections of the Exchange Act or the Code shall be deemed also to refer to anysuccessor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicablewithholding required under federal, state or local law and any additionalwithholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreementwhich by their nature may require either partial or total performance after theexpiration of the Term (including, without limitation, those under Sections 5and 6 hereof) shall survive such expiration.

 

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# 11.                                 Validity.  The invalidity or unenforceabilityof any provision of this Agreement shall not affect the validity orenforceability of any other provision of this Agreement, which shall remain infull force and effect.

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# 12.                                 Counterparts. This Agreement may be executed in several counterparts, each of whichshall be deemed to be an original but all of which together will constitute oneand the same instrument.

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# 13.                                 Settlement of Disputes; Arbitration.

 

## 13.1                           All claims by the Executive for benefitsunder this Agreement shall be directed to and determined by the Committee andshall be in writing.  Any denial by theCommittee of a claim for benefits under this Agreement shall be delivered tothe Executive in writing within thirty (30) days after written notice of theclaim is provided to the Company in accordance with Section 10 and shallset forth the specific reasons for the denial and the specific provisions ofthis Agreement relied upon.  TheCommittee shall afford a reasonable opportunity to the Executive for a reviewof the decision denying a claim and shall further allow the Executive to appealto the Committee a decision of the Committee within sixty (60) days afternotification by the Committee that the Executive’s claim has been denied.

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## 13.2                           Any further dispute or controversy arisingout of or relating to this Agreement, including without limitation, any and alldisputes, claims (whether in tort, contract, statutory or otherwise), breachesor disagreements concerning the interpretation or application of the provisionsof this Agreement shall be resolved by arbitration before a panel of threearbitrators and administered by the American Arbitration Association (“AAA”)under its Commercial Arbitration Rules then in effect.  No arbitration proceeding relating to thisAgreement may be initiated by either the Company or the Executive unless theclaims review and appeals procedures specified in Section 13.1 have beenexhausted.  Within ten (10) businessdays of the initiation of an arbitration hereunder, the Company and theExecutive will each separately designate an arbitrator, and within twenty (20)business days of selection, the appointed arbitrators will appoint a neutralarbitrator.  All arbitrators shall bemembers of the National Panel of Commercial Arbitrators maintained by theAAA.  The arbitrators shall issue theirwritten 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 selectedhereunder will be final and binding on both parties.  This arbitration provision is expressly made pursuant to andshall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16 (orreplacement or successor statute). Pursuant to Section 9 of the Federal Arbitration Act, the Companyand the Executive agree that a judgment of the United States District Court forthe Southern District of Texas may be entered upon the award made pursuant tothe arbitration.

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# 14.                                 Definitions.  For purposes of thisAgreement, the following terms shall have the meanings indicated below:

 

### (A)                              “Affiliate” shall have the meaning set forthin Rule 12b-2 promulgated under Section 12 of the Exchange Act.

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### (B)                                “Auditor” shall have the meaning set forth inSection 5.2 hereof.

 

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### (C)                                “Base Amount” shall have the meaning setforth in section 280G(b)(3) of the Code.

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### (D)                               “Beneficial Owner” shall have the meaning setforth in Rule 13d-3 under the Exchange Act.

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### (E)                                 “Board” shall mean the Board of Directors ofthe Company.

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### (F)                                 “Cause” for termination by the Company of theExecutive’s employment shall mean (i) the willful and continued failure by theExecutive to substantially perform the Executive’s duties with the Company(other than any such failure resulting from the Executive’s incapacity due tophysical or mental illness or any such actual or anticipated failure after theissuance of a Notice of Termination for Good Reason by the Executive pursuantto Section 6.1 hereof) after a written demand for substantial performanceis delivered to the Executive by the Board, which demand specificallyidentifies the manner in which the Board believes that the Executive has notsubstantially performed the Executive’s duties, or (ii) the willful engaging bythe Executive in conduct which is demonstrably and materially injurious to theCompany or its subsidiaries, monetarily or otherwise.  For purposes of clauses (i) and (ii) of this definition, (x) noact, or failure to act, on the Executive’s part shall be deemed “willful”unless done, or omitted to be done, by the Executive not in good faith andwithout reasonable belief that the Executive’s act, or failure to act, was inthe best interest of the Company and (y) the Executive has received writtennotice from the Company of the specific conduct asserted as Cause fortermination and has thirty (30) business days to remedy any such occurrenceotherwise constituting Cause.

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### (G)                                A “Change in Control” shall be deemed to haveoccurred if the event set forth in any one of the following paragraphs shallhave occurred:

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#### (I)                                    any Person is or becomes the BeneficialOwner, directly or indirectly, of securities of the Company (not including inthe securities beneficially owned by such Person any securities acquireddirectly from the Company or its affiliates) representing 35% or more of thecombined voting power of the Company’s then outstanding securities, excludingany Person who becomes such a Beneficial Owner in connection with a transactiondescribed in clause (i) of paragraph (III) below; or

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#### (II)                                the following individuals cease for anyreason to constitute a majority of the number of directors then serving:individuals who, on the date hereof, constitute the Board and any new director(other than a director whose initial assumption of office is in connection withan actual or threatened election contest relating to the election of directorsof the Company) whose appointment or election by the Board or nomination forelection by the Company’s stockholders was approved or recommended by a vote ofat least two-thirds (2/3) of the directors then still in office who either weredirectors on the date hereof or whose appointment, election or nomination forelection was previously so approved or recommended; or

 

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#### (III)                            there is consummated a merger orconsolidation of the Company or any direct or indirect subsidiary of theCompany with any other corporation, other than (i) a merger or consolidationthat would result in the voting securities of the Company outstandingimmediately prior to such merger or consolidation continuing to represent(either by remaining outstanding or by being converted into voting securitiesof the surviving entity or any parent thereof), in combination with theownership of any trustee or other fiduciary holding securities under anemployee benefit plan of the Company or any subsidiary of the Company, at least51% of the combined voting power of the securities of the Company or its parentoutstanding immediately after such merger or consolidation, or (ii) a merger orconsolidation effected to implement a recapitalization of the Company (orsimilar transaction) in which no Person is or becomes the Beneficial Owner,directly or indirectly, of securities of the Company (not including in the securitiesBeneficially Owned by such Person any securities acquired directly from theCompany or its Affiliates other than in connection with the acquisition by theCompany or its Affiliates of a business) representing at least 51% or more ofthe combined voting power of the Company’s then outstanding securities; or

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#### (IV)                            the stockholders of the Company approve aplan of complete liquidation or dissolution of the Company or there isconsummated an agreement for the sale or disposition by the Company of all orsubstantially all of the Company’s assets, other than a sale or disposition bythe Company of all or substantially all of the Company’s assets to an entity,at least 51% of the combined voting power of the voting securities of which areowned by stockholders of the Company in substantially the same proportions astheir ownership of the Company immediately prior to such sale.  For purposes of this Agreement, it iscontemplated that a sale of substantially all of the assets of the Companyshall not be deemed to occur unless at least 75% of the book value (as statedin the Company’s most recent audited financial statements) of the Company’stotal assets is disposed of in a single transaction.

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Notwithstandingthe foregoing, a “Change in Control” shall not be deemed to have occurred byvirtue of the consummation of any transaction or series of integratedtransactions immediately following which the record holders of the common stockof the Company immediately prior to such transaction or series of transactionscontinue to have substantially the same proportionate ownership in an entitywhich owns all or substantially all of the assets of the Company immediatelyfollowing such transaction or series of transactions.

 

### (H)                               “Code” shall mean the Internal Revenue Codeof 1986, as amended from time to time.

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### (I)                                    “Committee” shall mean (i) the individuals(not fewer than three in number) who, on the date six months before a Change inControl, constitute the Compensation Committee of the Board, plus (ii) in theevent that fewer than three individuals are available from the group specifiedin clause (i) above for any reason, such

 

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### individualsas may be appointed by the individual or individuals so available (including forthis purpose any individual or individuals previously so appointed under thisclause (ii)); provided, however, that the maximum number of individualsconstituting the Committee shall not exceed six (6).

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### (J)                                   “Company” shall mean Stewart & StevensonServices, Inc. and, except in determining under Section 15(G) hereofwhether or not any Change in Control of the Company has occurred, shall includeany successor to its business and/or assets which assumes and agrees to performthis Agreement by operation of law, or otherwise.

###  

### (K)                               “Date of Termination” shall have the meaningset forth in Section 6.2 hereof.

###  

### (L)                                 “Disability” shall be deemed the reason forthe termination by the Company of the Executive’s employment, if, as a resultof the Executive’s incapacity due to physical or mental illness, the Executiveshall have been absent from the full-time performance of the Executive’s dutieswith the Company for a period of six (6) consecutive months, the Company shallhave given the Executive a Notice of Termination for Disability, and, withinthirty (30) days after such Notice of Termination is given, the Executive shallnot have returned to the full-time performance of the Executive’s duties.

###  

### (M)                            “Exchange Act” shall mean the SecuritiesExchange Act of 1934, as amended from time to time.

###  

### (N)                               “Excise Tax” shall mean any excise taximposed under section 4999 of the Code.

###  

### (O)                               “Executive” shall mean the individual namedin the first paragraph of this Agreement.

###  

### (P)                                 “Extension Date” shall have the meaning setforth in Section 2 hereof.

###  

### (Q)                               “Good Reason” for termination by theExecutive of the Executive’s employment shall mean the occurrence (without theExecutive’s express written consent) after any Change in Control, or prior to aChange in Control under the circumstances described in clause (ii) of thesecond sentence of Section 5.1 hereof of any one of the following acts bythe Company, or failures by the Company to act, unless, in the case of any actor failure to act described in paragraph (I), (V), (VI) or (VII) below, suchact or failure to act is corrected prior to the Date of Termination specifiedin the Notice of Termination given in respect thereof:

###  

#### (I)                                    the assignment to the Executive of any dutiesinconsistent with the Executive’s status as a senior executive officer of theCompany or a substantial adverse alteration in the nature or status of theExecutive’s responsibilities from those in effect immediately prior to theChange in Control;

 

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#### (II)                                a reduction by the Company in the Executive’sannual base salary as in effect on the date hereof or as the same may beincreased from time to time except for across-the-board salary reductionssimilarly affecting all senior executives of the Company and all seniorexecutives of any Person in control of the Company;

####  

#### (III)                            the relocation of the Executive’s principalplace of employment to a location more than 50 miles from the Executive’sprincipal place of employment immediately prior to the Change in Control or theCompany’s requiring the Executive to be based anywhere other than suchprincipal place of employment (or permitted relocation thereof) except forrequired travel on the Company’s business to an extent substantially consistentwith the Executive’s present business travel obligations;

####  

#### (IV)                            the failure by the Company to pay to theExecutive any portion of the Executive’s current compensation except pursuantto an across-the-board compensation deferral similarly affecting all seniorexecutives of the Company and all senior executives of any Person in control ofthe Company, or to pay to the Executive any portion of an installment ofdeferred compensation under any deferred compensation program of the Company,within seven (7) days of the date such compensation is due;

####  

#### (V)                                the failure by the Company to continue ineffect any compensation plan in which the Executive participates immediatelyprior to the Change in Control which is material to the Executive’s totalcompensation, including but not limited to the Company’s stock option plans orany substitute plans adopted prior to the Change in Control, unless anequitable arrangement (embodied in an ongoing substitute or alternative plan)has been made with respect to such plan, or the failure by the Company to continuethe Executive’s participation therein (or in such substitute or alternativeplan) on a basis not materially less favorable, both in terms of the amount ortiming of payment of benefits provided and the level of the Executive’sparticipation relative to other participants, as existed immediately prior tothe Change in Control;

####  

#### (VI)                            the failure by the Company to continue toprovide the Executive with benefits substantially similar to those enjoyed bythe Executive under any of the Company’s pension, savings, life insurance,medical, health and accident, or disability plans in which the Executive wasparticipating immediately prior to the Change in Control (except for across theboard changes similarly affecting all senior executives of the Company and allsenior executives of any Person in control of the Company), the taking of anyother action by the Company which would directly or indirectly materiallyreduce any of such benefits or deprive the Executive of any material fringebenefit or perquisite enjoyed by the Executive at the time of the Change inControl, or the failure by the Company to provide the Executive with the numberof paid vacation days to which the Executive is entitled on the basis of yearsof service with the Company in

 

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#### accordancewith the Company’s normal vacation policy in effect at the time of the Changein Control; or

####  

#### (VII)                        any purported termination of the Executive’semployment which is not effected pursuant to a Notice of Termination satisfyingthe requirements of Section 6.1 hereof; for purposes of this Agreement, nosuch purported termination shall be effective.

####  

The Executive’s right to terminate the Executive’s employment for GoodReason shall not be affected by the Executive’s incapacity due to physical ormental illness.  The Executive’scontinued employment shall not constitute consent to, or a waiver of rightswith respect to, any act or failure to act constituting Good Reason hereunder.

 

For purposes of any determination regarding the existence of GoodReason, any claim by the Executive that Good Reason exists shall be presumed tobe correct unless the Company establishes to the Committee by clear andconvincing evidence that Good Reason does not exist.

 

### (R)                                “Gross-Up Payment” shall have the meaning setforth in Section 5.2 hereof.

###  

### (S)                                 “Notice of Termination” shall have themeaning set forth in Section 6.1 hereof.

###  

### (T)                                “Person” shall have the meaning given inSection 3(a)(9) of the Exchange Act, as modified and used in Sections13(d) and 14(d) thereof, except that such term shall not include (i) theCompany or any of its subsidiaries, (ii) a trustee or other fiduciary holdingsecurities under an employee benefit plan of the Company or any of itsAffiliates, (iii) an underwriter temporarily holding securities pursuant to anoffering of such securities, or (iv)a corporation owned, directly orindirectly, by the stockholders of the Company in substantially the sameproportions as their ownership of stock of the Company.

###  

### (U)                               “Plan” shall have the meaning set forth inSection 5.1 hereof.

###  

### (V)                                “Severance Payments” shall have the meaningset forth in Section 5.1 hereof.

###  

### (W)                           “Tax Counsel” shall have the meaning setforth in Section 5.2 hereof.

###  

### (X)                               “Term” shall mean the period of timedescribed in Section 2 hereof.

###  

### (Y)                                “Total Payments” shall mean those payments sodescribed in Section 5.2 hereof.

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement asof the date above first 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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