**Exhibit 10.1**

 

**SEVERANCE AGREEMENT**

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THIS AGREEMENT, dated asof July 19, 2004, is made by and between Stewart & Stevenson Services,Inc., a Texas corporation (the “Company”),and                    (the“Executive”).

 

WHEREAS, the Companyconsiders it essential to the best interests of its stockholders to foster thecontinued employment of key management personnel; and

 

WHEREAS, the Boardrecognizes that, as is the case with many publicly held corporations, thepossibility of a Change in Control exists and that such possibility, and theuncertainty and questions which it may raise among management, may result inthe departure or distraction of management personnel to the detriment of theCompany and its stockholders; and

 

WHEREAS, the Board hasdetermined that appropriate steps should be taken to reinforce and encouragethe continued attention and dedication of members of the Company’s management,including the Executive, to their assigned duties without distraction in theface of potentially disturbing circumstances arising from the possibility of aChange in Control;

 

NOW, THEREFORE, inconsideration of the premises and the mutual covenants herein contained, theCompany and the Executive hereby agree as follows:

 

# 1.                                       DefinedTerms.  The definitions of capitalizedterms used in this Agreement are provided in the last Section hereof.

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# 2.                                       Termof Agreement.  The Term of thisAgreement shall commence on the date hereof and shall continue in effectthrough December 31, 2006; provided, however, that commencing on January 1,2005 and each January 1 thereafter (an “Extension Date”), the Term shallautomatically be extended for one additional year (i.e., resulting in atwo-year Term on the Extension Date) unless, not later than September 30of the year preceding the Extension Date, the Company or the Executive shallhave given notice not to extend the Term; and further provided, however, thatif a Change in Control shall have occurred during the Term, the Term shallexpire no earlier than twenty-four (24) months beyond the month in which suchChange in Control occurred.

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# 3.                                       Company’sCovenants Summarized.  In order toinduce 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.                                       CompensationOther Than Severance Payments.

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## 4.1                                 Followinga Change in Control and during the Term, during any period that the Executivefails to perform the Executive’s duties with the Company as a result ofincapacity due to physical or mental illness, the Company shall pay theExecutive’s full salary to the Executive at the rate in effect at thecommencement of any such period, together with all compensation and benefitspayable to the Executive under the terms of any compensation or benefit plan,program or arrangement maintained by the Company during such period, until theExecutive’s employment is terminated by the Company for Disability.

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## 4.2                                 Ifthe Executive’s employment shall be terminated for any reason following aChange in Control and during the Term, the Company shall pay the Executive’sfull salary to the Executive through the Date of Termination at the rate ineffect immediately prior to the Date of Termination or, if higher, the rate ineffect immediately prior to the first occurrence of an event or circumstanceconstituting Good Reason, together with all compensation and benefits payableto the Executive through the Date of Termination under the terms of theCompany’s compensation and benefit plans, programs or arrangements as in effectimmediately prior to the Date of Termination or, if more favorable to theExecutive, as in effect immediately prior to the first occurrence of an eventor circumstance constituting Good Reason.

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## 4.3                                 Ifthe Executive’s employment shall be terminated for any reason following aChange in Control and during the Term, the Company shall pay to the Executivethe Executive’s normal post-termination compensation and benefits as suchpayments become due in accordance with written plans.  Such post-termination compensation and benefits shall bedetermined under, and paid in accordance with, the Company’s retirement,insurance and other compensation or benefit plans, programs and arrangements asin effect immediately prior to the Date of Termination or, if more favorable tothe Executive, as in effect immediately prior to the occurrence of the firstevent or circumstance constituting Good Reason.

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## 4.4                                 Uponthe occurrence of a Change in Control all options to acquire shares of Companystock, all shares of restricted Company stock and all other equity or phantomequity incentives held by the Executive under any plan of the Company(including, but not limited to, the Company’s various stock option plans) shallbecome immediately vested, exercisable and nonforfeitable and all conditions thereof(including, but not limited to, any required holding periods) shall be deemedto have been satisfied.

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# 5.                                       SeverancePayments.

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## 5.1                                 Ifthe Executive’s employment is terminated following a Change in Control andduring the Term, other than (A) by the Company for Cause, (B) by reason ofdeath or Disability, or (C) by the Executive without Good Reason, then, theCompany shall pay the Executive the amounts, and provide the Executive thebenefits, described in this Section 5.1 (“Severance Payments”) and Section 5.2,in addition to any payments and benefits to which the Executive is entitledunder Section 4 hereof.  Solely forpurposes of determining whether termination occurred following a Change inControl pursuant to this Agreement (and without any implication that a Changein Control has in fact occurred), the Executive’s employment shall be deemed tohave been terminated following a Change in Control by the Company without Cause

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## or by the Executive with Good Reason, if (i) theExecutive’s employment is terminated by the Company without Cause prior to aChange in Control and such termination was at the request, direction orsuggestion, directly or indirectly, of a Person who has entered into an agreementor with whom the Company contemplates will enter into an agreement with theCompany the consummation of which would constitute a Change in Control or, (ii)the Executive terminates his employment for Good Reason prior to a Change inControl and the circumstance or event which constitutes Good Reason occurs atthe request, direction or suggestion of such Person described in clause(i).  For purposes of any determinationregarding the applicability of the immediately preceding sentence, any positiontaken by the Executive shall be presumed to be correct unless the Companyestablishes to the Committee by clear and convincing evidence that suchposition is not correct.

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### (A)                              Inlieu of any further salary payments to the Executive for periods subsequent tothe Date of Termination and in lieu of any severance benefit otherwise payableto the Executive, the Company shall pay to the Executive a lump sum severancepayment, in cash, equal to two times the sum of (i) the Executive’s base salaryas in effect immediately prior to the Date of Termination or, if higher, ineffect immediately prior to the first occurrence of an event or circumstanceconstituting Good Reason, and (ii) the average cash value of annual bonus(whether paid in cash or stock) earned by the Executive pursuant to any annualbonus or incentive plan maintained by the Company in respect of the threefiscal years ending immediately prior to the fiscal year in which occurs theDate of Termination or, if higher, immediately prior to the fiscal year in whichoccurs the first event or circumstance constituting Good Reason; provided, thatif the Executive has not participated in an annual bonus or incentive planmaintained by the Company for the entirety of such three-year period, theamount referred to in this clause (ii) shall be calculated using such lessernumber of bonuses as have been actually earned by the Executive in respect ofsuch lesser period.

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### (B)                                Forthe twenty-four (24) month period immediately following the Date ofTermination, the Company shall arrange to provide the Executive and hisdependents life, disability, accident and health insurance benefits andperquisites (including, but not limited to, executive life insurance, clubmemberships, financial planning and tax preparation, annual physicalexamination and charitable contributions), in each case, substantially similarto those provided to the Executive and his dependents immediately prior to theDate of Termination or, if more favorable to the Executive, those provided tothe Executive and his dependents immediately prior to the first occurrence ofan event or circumstance constituting Good Reason, at no greater cost to theExecutive than the cost to the Executive immediately prior to such date oroccurrence; 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

 

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### or made available to theExecutive shall be reported to the Company by the Executive); provided,however, that the Company shall reimburse the Executive for the excess, if any,of the cost of such benefits to the Executive over such cost immediately priorto the Date of Termination or, if more favorable to the Executive, the firstoccurrence of an event or circumstance constituting Good Reason.

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### (C)                                Notwithstandingany provision of the Company’s management incentive compensation plan (the“Annual Incentive Plan”), the Company shall pay to the Executive a lump sumamount, in cash, equal to the sum of (i) any unpaid incentive compensationwhich has been allocated or awarded to the Executive for a completed fiscalyear or other measuring period preceding the Date of Termination under theAnnual Incentive Plan and which, as of the Date of Termination, is contingentonly upon the continued employment of the Executive to a subsequent date, and(ii) a pro rata portion to the Date of Termination of the aggregate value ofall contingent incentive compensation awards to the Executive for all thenuncompleted periods under the Annual Incentive Plan, calculated as to each suchaward by multiplying the award that the Executive would have earned as of thelast day of the performance award period, assuming the achievement, at theexpected value target level, of the individual and corporate performance goalsestablished with respect to such award, by the fraction obtained by dividing thenumber of full months and any fractional portion of a month during suchperformance award period through the Date of Termination by the total number ofmonths contained in such performance award period; provided, however, that ifsuch termination of employment occurs during the same year in which the Changein Control occurs, the pro-rata bonus payment referred to in clause (ii) aboveshall be offset by any payments received under the Annual Incentive Plan inconnection with such Change in Control.

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### (D)                               TheCompany shall provide the Executive with outplacement services suitable to theExecutive’s position for a period of one year or, if earlier, until the firstacceptance by the Executive of an offer of employment.

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### (E)                                 TheExecutive shall have a fully nonforfeitable interest in the Executive’sbenefits accrued, if any, under the Stewart & Stevenson SupplementalRetirement Plan and the Stewart & Stevenson Supplemental ExecutiveRetirement Plan.

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## 5.2                                 (A)                              Whetheror not the Executive becomes entitled to the Severance Payments, if any of thepayments or benefits received or to be received by the Executive in connectionwith a Change in Control or the Executive’s termination of employment (whetherpursuant to the terms of this Agreement or any other plan, arrangement oragreement with the Company, any Person whose actions result in a Change inControl or any Person affiliated with the Company or such Person) (suchpayments or benefits, excluding the Gross-Up Payment, being hereinafterreferred to as the “Total Payments”) will be subject to the Excise Tax, theCompany 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)                                Forpurposes of determining whether any of the Total Payments will be subject tothe Excise Tax and the amount of such Excise Tax, (i) all of the Total Paymentsshall 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 taxation in the state and locality of the Executive’s residence on theDate of Termination (or if there is no Date of Termination, then the date onwhich the Gross-Up Payment is calculated for purposes of thisSection 5.2), net of the maximum reduction in federal income taxes whichcould be obtained from deduction of such state and local taxes.

 

(C)                                Inthe event that the Excise Tax is finally determined to be less than the amounttaken into account hereunder in calculating the Gross-Up Payment, the Executiveshall repay to the Company, within five (5) business days following the timethat the amount of such reduction in the Excise Tax is fully determined, theportion of the Gross-Up Payment”) attributable to such reduction (plus thatportion of the Gross-Up Payment attributable to the Excise Tax and federal,state and local income and employment taxes imposed on the Gross-Up Paymentbeing repaid by the Executive, to the extent that such repayment results in areduction in the Excise Tax and a dollar-for-dollar reduction in theExecutive’s taxable income and wages for purposes of federal, state and localincome and employment taxes, plus interest on the amount of such repayment at120% of the rate provided in section 1274(b)(2)(B) of the Code.  In the event that the Excise Tax isdetermined to exceed the amount taken into account hereunder in calculating theGross-Up Payment (including by reason of any payment the existence or amount ofwhich cannot be determined at the time of the Gross-Up Payment), the Companyshall make an additional Gross-Up Payment in respect of such excess (plus anyinterest, penalties or additions payable by the Executive with respect to suchexcess) within five (5) business days following the time that the amount ofsuch excess is finally determined.  TheExecutive and the Company shall each reasonably cooperate with the other inconnection with any administrative or judicial proceedings concerning theexistence or amount of liability for Excise Tax with respect to the TotalPayments.

 

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## 5.3                                 Thepayments provided in subsection (A) and (C) of Section 5.1 hereof andin Section 5.2 hereof shall be made not later than the fifth day followingthe Date of Termination; provided, however, that if the amounts of suchpayments cannot be finally determined on or before such day, the Company shallpay to the Executive on such day an estimate, as determined in good faith bythe Executive or, in the case of payments under Section 5.2 hereof, inaccordance with Section 5.2 hereof, of the minimum amount of such paymentsto which the Executive is clearly entitled and shall pay the remainder of suchpayments (together with interest on the unpaid remainder (or on all suchpayments to the extent the Company fails to make such payments when due) at120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon asthe amount thereof can be determined but in no event later than the thirtieth(30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds theamount subsequently determined to have been due, such excess shall constitute aloan by the Company to the Executive, payable on the fifth (5th) business dayafter demand by the Company (together with interest at 120% of the rateprovided in section 1274(b)(2)(B) of the Code), but only to the extentsuch amount has not been paid by the Executive pursuant to Section 5.2(C)above.  At the time that payments aremade under this Agreement, the Company shall provide the Executive with awritten statement setting forth the manner in which such payments werecalculated and the basis for such calculations including, without limitation,any opinions or other advice the Company has received from Tax Counsel, theAuditor or other advisors or consultants (and any such opinions or advice whichare in writing shall be attached to the statement).

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## 5.4                                 Ifthe Executive’s employment with the Company is terminated following a Change inControl and during the Term, the Company shall pay to the Executive all legalfees and expenses incurred by the Executive in disputing in good faith anyissue hereunder relating to the termination of the Executive’s employment, inseeking in good faith to obtain or enforce any benefit or right provided bythis Agreement or in connection with any tax audit or proceeding to the extentattributable to the application of section 4999 of the Code to any paymentor benefit provided hereunder.  Suchpayments shall be made within five (5) business days after delivery of theExecutive’s written requests for payment accompanied with such evidence of feesand expenses incurred as the Company reasonably may require.

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# 6.                                       TerminationProcedures and Compensation During Dispute.

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## 6.1                                 Noticeof Termination.  After a Change inControl and during the Term, any purported termination of the Executive’semployment (other than by reason of death) shall be communicated by writtenNotice of Termination from one party hereto to the other party hereto inaccordance with Section 9 hereof. For purposes of this Agreement, a “Notice of Termination” shall mean anotice which shall indicate the specific termination provision in thisAgreement relied upon and shall set forth in reasonable detail the facts andcircumstances claimed to provide a basis for termination of the Executive’semployment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copyof a resolution duly adopted by the affirmative vote of not less thanthree-quarters (3/4) of the Committee at a meeting of the Committee which wascalled and held for the purpose of considering such termination (afterreasonable notice to the Executive and an opportunity for the Executive,together with the Executive’s counsel, to be heard before the Committee)finding on

 

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## clear and convincing evidence and the good faithopinion of the Committee, the Executive’s employment was terminated for Causeand specifying the particulars thereof in detail.

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## 6.2                                 Dateof Termination.  “Date ofTermination,” with respect to any purported termination of the Executive’semployment after a Change in Control and during the Term, shall mean (i) if theExecutive’s employment is terminated for Disability, thirty (30) days afterNotice of Termination is given (provided that the Executive shall not havereturned to the full-time performance of the Executive’s duties during suchthirty (30) day period), and (ii) if the Executive’s employment is terminatedfor any other reason, the date specified in the Notice of Termination (which,in the case of a termination for Cause) and, in the case of a termination bythe Executive, shall not be less than fifteen (15) days nor more than sixty(60) days, respectively, from the date such Notice of Termination is given).

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## 6.3                                 DisputeConcerning Termination.  If withinfifteen (15) days after any Notice of Termination is given following a Changein Control, or, if later, prior to the Date of Termination (as determinedwithout regard to this Section 6.3), the party receiving such Notice ofTermination notifies the other party that a dispute exists concerning thetermination, 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 (which is not appealable or with respect to which the time forappeal therefrom has expired and no appeal has been perfected); provided,however, that the Date of Termination shall be extended by a notice of disputeonly if such notice is given in good faith and the party giving notice pursuesthe resolution of such dispute with reasonable diligence.

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## 6.4                                 CompensationDuring Dispute.  If a purportedtermination occurs following a Change in Control and during the Term and theDate of Termination is extended in accordance with Section 6.3 hereof, theCompany shall continue to pay the Executive the full compensation in effectwhen the notice giving rise to the dispute was given (including, but notlimited to, salary) and continue the Executive as a participant in allcompensation, benefit and insurance plans in which the Executive was participatingwhen the notice giving rise to the dispute was given or those plans in whichthe Executive was participating immediately prior to the first occurrence of anevent or circumstance giving rise to the Notice of Termination, if morefavorable to the Executive, until the Date of Termination, as determined inaccordance with Section 6.3 hereof. Amounts paid under this Section 6.4 are in addition to all otheramounts due under this Agreement (other than those due under Section 4.2hereof) and shall not be offset against or reduce any other amounts due underthis Agreement.

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# 7.                                       NoMitigation.  The Company agreesthat, if the Executive’s employment with the Company terminates during theTerm, the Executive is not required to seek other employment or to attempt inany way to reduce any amounts payable to the Executive by the Company pursuantto Sections 4, 5 or 6.4 hereof. Further, the amount of any payment or benefit provided for in thisAgreement (other than Section 5.1(B) hereof but including (but not limitedto) Section 6.4 hereof) shall not be reduced by any compensation earned bythe Executive as the result of employment by another employer, by retirementbenefits, by offset against any amount claimed to be owed by the Executive tothe Company, or otherwise.

 

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# 8.                                       Successors;Binding Agreement.

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## 8.1                                 Inaddition to any obligations imposed by law upon 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 businessand/or assets of the Company to expressly assume and agree to perform thisAgreement in the same manner and to the same extent that the Company would berequired to perform it if no such succession had taken place.  Failure of the Company to obtain suchassumption and agreement prior to the effectiveness of any such successionshall be a breach of this Agreement and shall entitle the Executive tocompensation from the Company in the same amount and on the same terms as theExecutive would be entitled to hereunder if the Executive were to terminate theExecutive’s employment for Good Reason after a Change in Control, except that,for purposes of implementing the foregoing, the date on which any suchsuccession becomes effective shall be deemed the Date of Termination.

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## 8.2                                 ThisAgreement shall inure to the benefit of and be enforceable by the Executive’spersonal or legal representatives, executors, administrators, successors,heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable tothe Executive hereunder (other than amounts which, by their terms, terminateupon the death of the Executive) if the Executive had continued to live, allsuch amounts, unless otherwise provided herein, shall be paid in accordancewith the terms of this Agreement to the executors, personal representatives oradministrators of the Executive’s estate.

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# 9.                                       Notices.  For the purpose of this Agreement, noticesand all other communications provided for in the Agreement shall be in writingand shall be deemed to have been duly given when delivered or mailed by UnitedStates registered mail, return receipt requested, postage prepaid, addressed,if to the Executive, to the address inserted below the Executive’s signature onthe final page hereof and, if to the Company, to the address set forth below,or to such other address as either party may have furnished to the other inwriting in accordance herewith, except that notice of change of address shallbe effective only upon actual receipt:

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| To the Company: |
|-----------------|
|            |
|            | Stewart & Stevenson  Services, Inc. |
|            | 2707 North Loop West |
|            | Houston, Texas  77008-1088 |
|            |   |
|            | Attention:  Secretary |

 

# 10.                                 Miscellaneous.  No provision of this Agreement may bemodified, waived or discharged unless such waiver, modification or discharge isagreed to in writing and signed by the Executive and such officer as may bespecifically designated by the Committee. No waiver by either party hereto at any time of any breach by the otherparty hereto of, or of any lack of compliance with, any condition or provisionof this Agreement to be performed by such other party shall be deemed a waiverof similar or dissimilar provisions or conditions at the same or at any prioror subsequent time.  This Agreementsupersedes any other agreements or representations, oral or otherwise, expressor implied, with respect to the subject matter hereof

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# which have been made by either party, provided,however, that this Agreement shall supersede any agreement setting forth theterms and conditions of the Executive’s employment with the Company only in theevent that the Executive’s employment with the Company is terminated on orfollowing a Change in Control, by the Company other than for Cause or by theExecutive other than for Good Reason; and provided further that all agreementsotherwise superseded by this Agreement shall be automatically reinstated withfull force and effect to the extent this Agreement is terminated.  The validity, interpretation, constructionand performance of this Agreement shall be governed by the laws of the State ofTexas.  All references to sections ofthe Exchange Act or the Code shall be deemed also to refer to any successorprovisions to such sections.  Anypayments provided for hereunder shall be paid net of any applicable withholdingrequired under federal, state or local law and any additional withholding towhich the Executive has agreed.  Theobligations of the Company and the Executive under this Agreement which bytheir 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 unenforceability of anyprovision of this Agreement shall not affect the validity or enforceability ofany other provision of this Agreement, which shall remain in full force andeffect.

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

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# 13.                                 Settlementof Disputes; Arbitration.

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## 13.1                           Allclaims by the Executive for benefits under this Agreement shall be directed toand determined by the Committee and shall be in writing.  Any denial by the Committee of a claim forbenefits under this Agreement shall be delivered to the Executive in writingwithin thirty (30) days after written notice of the claim is provided to theCompany in accordance with Section 10 and shall set forth the specificreasons for the denial and the specific provisions of this Agreement reliedupon.  The Committee shall afford areasonable opportunity to the Executive for a review of the decision denying aclaim and shall further allow the Executive to appeal to the Committee adecision of the Committee within sixty (60) days after notification by theCommittee that the Executive’s claim has been denied.

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## 13.2                           Anyfurther 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 theinterpretation or application of the provisions of this Agreement shall beresolved by arbitration before a panel of three arbitrators and administered bythe American Arbitration Association (the “AAA”) under its CommercialArbitration Rules then in effect.  No arbitrationproceeding relating to this Agreement may be initiated by either the Company orthe Executive unless the claims review and appeals procedures specified inSection 13.1 have been exhausted. Within ten (10) business days of the initiation of an arbitrationhereunder, the Company and the Executive will each separately designate anarbitrator, and within twenty (20) business days of selection, the appointedarbitrators will appoint a neutral arbitrator. All arbitrators shall be members of the National Panel of CommercialArbitrators maintained by the AAA.  Thearbitrators shall issue

 

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## their written decision (including a statement offinding of facts) within thirty (30) days from the date of the close of thearbitration hearing.  The decision ofthe arbitrators selected hereunder will be final and binding on bothparties.  This arbitration provision isexpressly made pursuant to and shall be governed by the Federal ArbitrationAct, 9 U.S.C. Sections 1-16 (or replacement or successor statute).  Pursuant to Section 9 of the FederalArbitration Act, the Company and the Executive agree that a judgment of theUnited States District Court for the Southern District of Texas may be enteredupon the award made pursuant to the arbitration.

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# 14.                                 Definitions.  For purposes of this Agreement, thefollowing terms shall have the meanings indicated below:

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### (A)                              “Affiliate”shall have the meaning set forth in Rule 12b-2 promulgated underSection 12 of the Exchange Act.

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

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### (C)                                “BaseAmount” shall have the meaning set forth in section 280G(b)(3) of theCode.

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### (D)                               “BeneficialOwner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

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

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### (F)                                 “Cause”for termination by the Company of the Executive’s employment shall mean (i) thewillful and continued failure by the Executive to substantially perform theExecutive’s duties with the Company (other than any such failure resulting fromthe Executive’s incapacity due to physical or mental illness or any such actualor anticipated failure after the issuance of a Notice of Termination for GoodReason by the Executive pursuant to Section 6.1 hereof) after a writtendemand for substantial performance is delivered to the Executive by the Board,which demand specifically identifies the manner in which the Board believesthat the Executive has not substantially performed the Executive’s duties, or(ii) the willful engaging by the Executive in conduct which is demonstrably andmaterially injurious to the Company or its subsidiaries, monetarily orotherwise.  For purposes of clauses (i)and (ii) of this definition, (x) no act, or failure to act, on the Executive’spart shall be deemed “willful” unless done, or omitted to be done, by theExecutive not in good faith and without reasonable belief that the Executive’sact, or failure to act, was in the best interest of the Company and (y) theExecutive has received written notice from the Company of the specific conductasserted as Cause for termination and has thirty (30) business days to remedyany such occurrence otherwise constituting Cause.

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

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#### (I)                                    anyPerson is or becomes the Beneficial Owner, directly or indirectly, ofsecurities of the Company (not including in the securities beneficially ownedby such Person any securities acquired directly from the

 

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#### Company or itsaffiliates) representing 35% or more of the combined voting power of theCompany’s then outstanding securities, excluding any Person who becomes such aBeneficial Owner in connection with a transaction described in clause (i) ofparagraph (III) below; or

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#### (II)                                thefollowing individuals cease for any reason to constitute a majority of thenumber of directors then serving: individuals who, on the date hereof,constitute the Board and any new director (other than a director whose initialassumption of office is in connection with an actual or threatened electioncontest relating to the election of directors of the Company) whose appointmentor election by the Board or nomination for election by the Company’sstockholders was approved or recommended by a vote of at least two-thirds (2/3)of the directors then still in office who either were directors on the datehereof or whose appointment, election or nomination for election was previouslyso approved or recommended; or

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#### (III)                            thereis consummated a merger or consolidation of the Company or any direct orindirect subsidiary of the Company with any other corporation, other than(i) a merger or consolidation that would result in the voting securitiesof the Company outstanding immediately prior to such merger or consolidationcontinuing to represent (either by remaining outstanding or by being convertedinto voting securities of the surviving entity or any parent thereof), incombination with the ownership of any trustee or other fiduciary holdingsecurities under an employee benefit plan of the Company or any subsidiary ofthe Company, at least 51% of the combined voting power of the securities of theCompany or its parent outstanding immediately after such merger orconsolidation, or (ii) a merger or consolidation effected to implement arecapitalization of the Company (or similar transaction) in which no Person isor becomes the Beneficial Owner, directly or indirectly, of securities of theCompany (not including in the securities Beneficially Owned by such Person anysecurities acquired directly from the Company or its Affiliates other than inconnection with the acquisition by the Company or its Affiliates of a business)representing at least 51% or more of the combined voting power of the Company’sthen outstanding securities; or

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#### (IV)                            thestockholders of the Company approve a plan of complete liquidation ordissolution of the Company or there is consummated an agreement for the sale ordisposition by the Company of all or substantially all of the Company’s assets,other than a sale or disposition by the Company of all or substantially all ofthe Company’s assets to an entity, at least 51% of the combined voting power ofthe voting securities of which are owned by stockholders of the Company insubstantially the same proportions as their ownership of the Companyimmediately prior to such sale.  Forpurposes of this Agreement, it is contemplated that a sale of substantially allof the assets of the Company shall not be deemed to occur unless at least 75%of the book value (as stated in the Company’s most recent audited financialstatements) of the Company’s total assets is disposed of in a single transaction.

####  

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Notwithstanding theforegoing, a “Change in Control” shall not be deemed to have occurred by virtueof the consummation of any transaction or series of integrated transactionsimmediately following which the record holders of the common stock of theCompany 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 Code of 1986, as amended from time to time.

###  

### (I)                                    “Committee”shall mean (i) the individuals (not fewer than three in number) who, onthe date six months before a Change in Control, constitute the CompensationCommittee of the Board, plus (ii) in the event that fewer than threeindividuals are available from the group specified in clause (i) above for anyreason, such individuals as may be appointed by the individual or individualsso available (including for this purpose any individual or individualspreviously so appointed under this clause (ii)); provided, however, that themaximum number of individuals constituting the Committee shall not exceed six(6).

###  

### (J)                                   “Company”shall mean Stewart & Stevenson Services, Inc. and, except in determiningunder Section 15(G) hereof whether or not any Change in Control of theCompany has occurred, shall include any successor to its business and/or assetswhich assumes and agrees to perform this Agreement by operation of law, orotherwise.

###  

### (K)                               “Dateof Termination” shall have the meaning set forth in Section 6.2 hereof.

###  

### (L)                                 “Disability”shall be deemed the reason for the termination by the Company of the Executive’semployment, if, as a result of the Executive’s incapacity due to physical ormental illness, the Executive shall have been absent from the full-timeperformance of the Executive’s duties with the Company for a period of six (6)consecutive months, the Company shall have given the Executive a Notice ofTermination for Disability, and, within thirty (30) days after such Notice ofTermination is given, the Executive shall not have returned to the full-timeperformance of the Executive’s duties.

###  

### (M)                            “ExchangeAct” shall mean the Securities Exchange Act of 1934, as amended from time totime.

###  

### (N)                               “ExciseTax” shall mean any excise tax imposed under section 4999 of the Code.

###  

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

###  

### (P)                                 “ExtensionDate” shall have the meaning set forth in Section 2 hereof.

 

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### (Q)                               “GoodReason” for termination by the Executive of the Executive’s employment shallmean the occurrence (without the Executive’s express written consent) after anyChange in Control, or prior to a Change in Control under the circumstancesdescribed in clause (ii) of the second sentence of Section 5.1 hereof ofany one of the following acts by the Company, or failures by the Company toact, unless, in the case of any act or failure to act described in paragraph(I), (V), (VI) or (VII) below, such act or failure to act is corrected prior tothe Date of Termination specified in the Notice of Termination given in respectthereof:

###  

#### (I)                                    theassignment to the Executive of any duties inconsistent with the Executive’sstatus as a senior executive officer of the Company or a substantial adversealteration in the nature or status of the Executive’s responsibilities fromthose in effect immediately prior to the Change in Control;

####  

#### (II)                                areduction by the Company in the Executive’s annual base salary as in effect onthe date hereof or as the same may be increased from time to time except foracross-the-board salary reductions similarly affecting all senior executives ofthe Company and all senior executives of any Person in control of the Company;

####  

#### (III)                            therelocation of the Executive’s principal place of employment to a location morethan 50 miles from the Executive’s principal place of employment immediatelyprior to the Change in Control or the Company’s requiring the Executive to bebased anywhere other than such principal place of employment (or permittedrelocation thereof) except for required travel on the Company’s business to anextent substantially consistent with the Executive’s present business travelobligations;

####  

#### (IV)                            thefailure by the Company to pay to the Executive any portion of the Executive’scurrent compensation except pursuant to an across-the-board compensationdeferral similarly affecting all senior executives of the Company and allsenior executives of any Person in control of the Company, or to pay to theExecutive any portion of an installment of deferred compensation under anydeferred compensation program of the Company, within seven (7) days of the datesuch compensation is due;

####  

#### (V)                                thefailure by the Company to continue in effect any compensation plan in which theExecutive participates immediately prior to the Change in Control which ismaterial to the Executive’s total compensation, including but not limited tothe Company’s stock option plans or any substitute plans adopted prior to theChange in Control, unless an equitable arrangement (embodied in an ongoingsubstitute or alternative plan) has been made with respect to such plan, or thefailure by the Company to continue the Executive’s participation therein (or insuch substitute or alternative plan) on a basis not materially less favorable,both in terms of the amount or timing of payment of benefits provided and thelevel of the Executive’s participation relative to other participants, asexisted immediately prior to the Change in Control;

 

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#### (VI)                            thefailure by the Company to continue to provide the Executive with benefitssubstantially similar to those enjoyed by the Executive under any of theCompany’s pension, savings, life insurance, medical, health and accident, ordisability plans in which the Executive was participating immediately prior tothe Change in Control (except for across the board changes similarly affectingall senior executives of the Company and all senior executives of any Person incontrol of the Company), the taking of any other action by the Company whichwould directly or indirectly materially reduce any of such benefits or deprivethe Executive of any material fringe benefit or perquisite enjoyed by theExecutive at the time of the Change in Control, or the failure by the Companyto provide the Executive with the number of paid vacation days to which theExecutive is entitled on the basis of years of service with the Company inaccordance with the Company’s normal vacation policy in effect at the time ofthe Change in Control; or

####  

#### (VII)                        anypurported termination of the Executive’s employment which is not effectedpursuant to a Notice of Termination satisfying the requirements ofSection 6.1 hereof; for purposes of this Agreement, no such purportedtermination shall be effective.

####  

The Executive’sright to terminate the Executive’s employment for Good Reason shall not beaffected by the Executive’s incapacity due to physical or mental illness.  The Executive’s continued employment shallnot constitute consent to, or a waiver of rights with respect to, any act orfailure to act constituting Good Reason hereunder.

 

For purposes ofany determination regarding the existence of Good Reason, any claim by theExecutive that Good Reason exists shall be presumed to be correct unless theCompany establishes to the Committee by clear and convincing evidence that GoodReason does not exist.

 

### (R)                                “Gross-UpPayment” shall have the meaning set forth in Section 5.2 hereof.

###  

### (S)                                 “Noticeof Termination” shall have the meaning set forth in Section 6.1 hereof.

###  

### (T)                                “Person”shall have the meaning given in Section 3(a)(9) of the Exchange Act, asmodified and used in Sections 13(d) and 14(d) thereof, except that such termshall not include (i) the Company or any of its subsidiaries, (ii) atrustee or other fiduciary holding securities under an employee benefit plan ofthe Company or any of its Affiliates, (iii) an underwriter temporarilyholding securities pursuant to an offering of such securities, or (iv)acorporation owned, directly or indirectly, by the stockholders of the Companyin substantially the same proportions as their ownership of stock of theCompany.

###  

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

 

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### (V)                                “SeverancePayments” shall have the meaning set forth in Section 5.1 hereof.

###  

### (W)                           “TaxCounsel” shall have the meaning set forth in Section 5.2 hereof.

###  

### (X)                               “Term”shall mean the period of time described in Section 2 hereof (including anyextension, continuation or termination described therein).

###  

### (Y)                                “TotalPayments” shall mean those payments so described in Section 5.2 hereof.

 

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IN WITNESS WHEREOF, theparties hereto have executed this Agreement as of the date above first written.

 
|   | **STEWART & STEVENSON SERVICES,  INC.** |
|--------|---------------------------------------------|
|   |                                        |
|   |                                        |
|   | By:                                         |   |
|   | Carl B. King                                |
|   | Senior Vice President, Secretary and        |
|   | General Counsel                             |
|   |                                        |
|   | EXECUTIVE:                                  |
|   |                                        |
|   |                                        |
|   | By:                                         |   |
|   |                                        |
|   | Address:                                    |   |
|        |                                             |  |  |  |

 

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