**Exhibit 10.1**

 

**EMPLOYMENTAGREEMENT**

 

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

 

WHEREAS, the Boardof Directors of the Company (the “Board”) desires initially to retain theExecutive as the President and Chief Executive Officer of the Company andthereafter as an advisor, and  toencourage the attention and dedication to the Company of the Executive as amember of the Company’s management, in the best interests of the Company andits shareholders;

 

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

 

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

 

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

 

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

 

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

 

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

 

During theAncillary Term the Executive shall serve the Company as an advisor to thesenior executives of the Company with respect to strategy, managementdevelopment and other matters consistent with the Executive’s experience andexpertise and consistent with the Executive’s having completed the Base Term asChief Executive Officer of the Company.

 

The Executiveagrees and acknowledges that, in connection with his employment relationshipwith the Company, the Executive owes fiduciary duties to the Company and willact accordingly.

 

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During the BaseTerm, the Executive agrees to devote substantially his full time, attention andenergies to the Company’s business and agrees to faithfully and diligentlyendeavor to the best of his ability to further the best interests of theCompany.  The Executive shall not engagein any other business activity, whether or not such business activity ispursued for gain, profit or other pecuniary advantage.  Subject to the covenants of Section 9herein, this shall not be construed as preventing the Executive from investinghis own assets in such form or manner as will not require his services in thedaily operations of the affairs of the companies in which such investments aremade.  Further, subject toSection 9 herein, the Executive may serve as a director of other companiesso long as such service is not detrimental to the Company and does notinterfere with his service to the Company and so long as such service does notpresent the Executive with a conflict of interest.

 

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

 

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

 

3.                                       Placeof Performance.  In connection withthe Executive’s employment by the Company, the Executive’s principal businessaddress shall be at the Company’s current principal executive offices inHouston, Texas (the “Principal Place of Employment”) or in such other place asthe Executive and the Company may agree.

 

4.                                       Compensationand Related Matters.

 

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

 

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

 

(b)                                 Bonuses.  At the end of the Base Term, the Executiveshall be eligible for a discretionary bonus taking into account the followingcriteria:

 

(i)                                     returnduring the Base Period on net capital employed in the Company’s businesses on aconsolidated basis;

 

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

 

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

 

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

 

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

 

(c)                                  AncillaryTerm Compensation.  During theAncillary Term, the Executive, shall not be eligible for any equitycompensation provided for or afforded to members of the Board of Directors assuch.  During the Ancillary Term, theCompany shall pay the Executive an annual salary of $35,000, payable inapproximately equal installments in accordance with the Company’s customarypayroll practices.    In the event theparties by mutual agreement increase the time the Executive shall provideservices from that provided in Section 2, the Company shall pay theExecutive an additional $6,250 per day for such services. The compensation tobe paid to the Executive for his services during the Ancillary Term is hereinreferred to as the “Ancillary Term Compensation”.

 

(d)                                 StockOption.  On January 3, 2005 theExecutive will be granted an option to purchase 100,000 shares of the Company’scommon stock under the Stewart & Stevenson Services, Inc. 1988 NonstatutoryStock Option Plan, as amended and restated effective as of June 10, 1997(the “1988 Option Plan”), which shall be subject to the terms and conditionsthereof and of the stock option agreement with respect thereto as contemplatedby the 1998 Option Plan.  The option agreementfor such option shall contain the same terms as are specified in theExecutive’s option agreement dated March 31, 2004; provided however thatthe per share exercise price applicable to such option shall be the fair marketvalue of a share of the Company’s common stock on January 3, 2005(determined in accordance with the terms of the 1988 Option Plan) and suchoption shall be fully exercisable on the first anniversary of the date of grantof such option.

 

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

 

(f)                                    OtherBenefits.  During the EmploymentPeriod, the Executive shall be entitled to participate in all of the employeebenefit plans and arrangements, other than equity compensation and bonus plans,made available by the Company to its other senior executive officers, subjectto and on a basis consistent with the terms, conditions and overalladministration of such plans and arrangements, and shall be entitled to allperquisites and special benefits suitable to the character of the ChiefExecutive Officer while acting as Chief Executive Officer.  Notwithstanding the foregoing, the Companyshall have the right to change, amend or discontinue any benefit plan, program,or perquisite, so long as such changes are similarly applicable to seniorexecutive officers of the Company generally.

 

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

 

(h)                                 ServicesFurnished.  During the EmploymentPeriod, the Executive shall at all times be provided with office space,clerical assistance and such other facilities and services as are suitable tohis then position.

 

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

 

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

 

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

 

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

 

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

 

During any periodthat the Executive fails to perform his duties hereunder as a result of incapacitydue to physical or mental illness (“Disability Period”), the Executive shallcontinue to receive his Base Salary or his Ancillary Term Compensation, as thecase may be, at the rate in effect at the beginning of such period as well asall other payments and benefits set forth in Section 4 hereof, reduced byany payments made to the Executive during the Disability Period under thedisability benefit plans of the Company then in effect or under the SocialSecurity disability insurance program.

 

(c)                                  Cause.  The Company may terminate the Executive’semployment hereunder for Cause.  Forpurposes of this Agreement, the Company shall have “Cause” to terminate theExecutive’s employment hereunder upon the occurrence of any of the followingevents:

 

(i)                                     thecommission by the Executive of an act of fraud, embezzlement, theft or othercriminal act constituting a felony;

 

(ii)                                  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 issuance of a Notice of Termination for GoodReason by the Executive) after a written demand for substantial performance isdelivered to the Executive by the Board, which demand specifically identifiesthe manner in which the Board believes that the Executive has not substantiallyperformed the Executive’s duties; or

 

(iii)                               thewillful engaging by the Executive in conduct which is demonstrably andmaterially injurious to the Company or its subsidiaries, monetarily orotherwise.

 

provided,that, the Executive shall have thirty (30) business days from the date on whichthe Executive receives the Company’s Notice of Termination for Cause underclause (ii) or (iii) above to remedy any such occurrence otherwise constitutingCause under such clause (ii) or (iii). For purposes of clauses (ii) and (iii) of this definition, no act, orfailure to act, on the Executive’s part shall be deemed to be “willful” unlessdone, or omitted to be done, by the Executive not in good faith and withoutreasonable belief that the Executive’s act, or failure to act, was in the bestinterest of the Company.

 

Cause shall notexist unless and until the Company has delivered to the Executive a copy of aresolution duly adopted by the affirmative vote of a majority of the entiremembership of the Board at a meeting of the Board called and held for suchpurpose (after reasonable notice to the Executive and an opportunity for theExecutive, together with his counsel, to be heard before the Board), finding inthe good faith opinion of the Board on clear and convincing evidence there isCause as set forth in this Section 6(c), specifying the materialparticulars thereof and, if applicable, determining that such Cause has notbeen remedied within the applicable 30-day time frame specified inSection 6(c).

 

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(d)                                 GoodReason.  The Executive may terminatehis employment hereunder for “Good Reason.” Good Reason for the Executive’s termination of employment shall mean theoccurrence, without the Executive’s prior written consent, of any one or moreof the following;

 

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

 

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

 

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

 

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

 

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

 

(e)                                  Withoutreliance upon Section 6(b), 6(c) or 6(d), either party hereto mayterminate this Agreement during the Base Term at any time by giving the otherno less than thirty (30) days’ and no more than sixty (60) days’ prior writtennotice, in accordance with Section 7 hereof, of such party’s intent to soterminate this Agreement.

 

7.                                       TerminationProcedure.

 

(a)                                  Noticeof Termination.  Any termination ofthe Executive’s employment by the Company or by the Executive (other thantermination pursuant to Section 6(a) hereof) shall be communicated bywritten Notice of Termination to the other party hereto in accordance withSection 12 hereof.  For purposes ofthis Agreement, a “Notice of Termination” shall mean a notice that shallindicate the specific termination provision in this Agreement relied upon andif Section 6(b), 6(c) or 6(d) is relied upon, shall set forth inreasonable detail the facts and circumstances claimed to provide a basis fortermination of the Executive’s employment under the provision so indicated.

 

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

 

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

 

(c)                                  CompensationDuring Dispute.  If a purportedtermination occurs during the Term, and such termination is disputed inaccordance with subsection (b) of this Section 7, the Company shallcontinue to pay the Executive the full compensation in effect when the noticegiving rise to the dispute was given (including, but not limited to, BaseSalary, if applicable) and continue the Executive as a participant in allcompensation, benefit and insurance plans in which the Executive wasparticipating when the notice giving rise to the dispute was given, until theDate of Termination, determined in accordance with subsection (b) of thisSection 7.  Amounts paid under thisSection 7(c) are in addition to all other amounts due under this Agreementand shall not be offset against or reduce any other amounts due under thisAgreement.

 

8.                                       Compensationupon Termination or During Disability.

 

(a)                                  AccruedObligation Defined.  For purposes ofthis Agreement, payment of the “Accrued Obligation” shall mean payment by theCompany to the Executive (or his designated beneficiary or legalrepresentative, as applicable), when due, of all vested benefits to which theExecutive is entitled under the terms of the employee benefit plans in whichthe Executive is a participant as of the Date of Termination and a lump sumamount in cash equal to the sum of (i) the Executive’s Base Salary orAncillary Term Compensation, as the case may be, through the Date ofTermination, (ii) any accrued vacation pay and (iii) any other amounts due theExecutive as of the Date of Termination, in each case to the extent nottheretofore paid.

 

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

 

(c)                                  Bythe Company for Cause.  If duringthe Term the Executive’s employment is terminated by the Company pursuant toSection 6(c) hereof, the Company shall pay to the Executive the AccruedObligation within thirty (30) days following the Date of Termination.  Following such payment, the Company shallhave no further obligations to the Executive other than as may be required bylaw or the terms of an employee benefit plan of the Company.

 

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(d)                                 Bythe Executive Without Good Reason. If during the Term the Executive terminates his employment for anyreason other than Good Reason, the Company shall pay to the Executive theAccrued Obligation within thirty (30) days following the Date ofTermination.  Following such payment,the Company shall have no further obligations to the Executive other than asmay be required by law or the terms of an employee benefit plan or stock optionplan of the Company.

 

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

 

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

 

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

 

(iii)                               allequity-based awards then held by Executive shall become fully vested andexercisable as of the Notice of Termination;

 

(iv)                              theCompany shall continue to provide to the Executive the benefits described inSection 4(f), to the extent contractually and legally permitted, providedthat such benefits shall be reduced to the extent benefits of the same type arereceived by, or made available at no greater cost to, the Executive under anygroup plan, whether by reason of new employment, participation in a spouse’splan or otherwise, during such period, and provided, further, that theExecutive shall have the obligation to notify the Company that he is entitledto receive such benefits;

 

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

 

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

 

(vii)                           if theExecutive’s employment is terminated before he has been granted the stockoption contemplated by Section 4(d), then in lieu of granting such stockoption the Company shall pay to the Executive a lump sum payment, in cash,equal to the Black-Scholes value, as reasonably determined by the Company as ofMarch 31, 2004, of an option to purchase 100,000 shares of the Company’scommon 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

 

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

 

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 this Section 8.  Further, exceptwith respect to the benefits provided pursuant to clause (iv) above, the amountof any payment or benefit provided for in this Agreement shall not be reducedby any compensation earned by the Executive as the result of employment byanother employer, by retirement benefits, by offset against any amount claimedto be owed by the Executive to the Company, or otherwise.  Satisfaction of the obligations to theExecutive under Sections 8(b) and 8(e) of this Agreement is contingent upon theExecutive’s (or, if applicable, his designated beneficiary or legalrepresentative’s) execution of a release substantially in the form ofExhibit A hereto.

 

9.                                       ConfidentialInformation; Non-Competition; Non-Solicitation.

 

(a)                                  ConfidentialInformation.  The Executive shallhold in a fiduciary capacity for the benefit of the Company all tradesecrets,  and information, knowledge ordata relating to the Company and its businesses treated as confidential by theCompany, which shall have been obtained by the Executive during the Executive’semployment by the Company and which shall not have been or hereafter becomepublic knowledge (other than by acts by the Executive or representatives of theExecutive in violation of this Agreement) (hereinafter being collectivelyreferred to as “Confidential Information”). The Executive shall not, without the prior written consent of theCompany or as may otherwise be required by law or legal process, communicate ordivulge any such trade secrets, information, knowledge or data to anyone otherthan the Company and those designated by the Company.  Any termination of the Executive’s employment or of thisAgreement shall have no effect on the continuing operation of thisSection 9(a).  The Executive agreesto return all Confidential Information, including all photocopies, extracts andsummaries thereof, and any such information stored electronically on tapes,computer disks or in any other manner to the Company at any time upon requestby the Company and upon the termination of his employment hereunder for anyreason.

 

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

 

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

 

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

 

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

 

(i)                                     solicitfrom any customer doing business with the Company as of the Date ofTermination, business of the same or of a similar nature to the business of theCompany with such customer;

 

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

 

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

 

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

 

The Executive andthe Company agree and acknowledge that the Company has a substantial andlegitimate interest in protecting the Company’s Confidential Information andgoodwill.  The Executive and the Companyfurther agree and acknowledge that the provisions of this Section 9 arereasonably necessary to protect the Company’s legitimate business interests andare designed to protect the Company’s Confidential Information and goodwill.

 

The Executiveagrees that the scope of the restrictions as to time, geographic area, andscope of activity in this Section 9 are reasonably necessary for theprotection of the Company’s legitimate business interests and are notoppressive or injurious to the public interest.  The Executive agrees that in the event of a breach or threatenedbreach of any of the provisions of this Section 9 the Company shall,notwithstanding Section 14 hereof, be entitled to injunctive reliefagainst the Executive’s activities to the extent allowed by law.  The Executive further agrees that any breachor threatened breach of any of the provisions of Section 9(a) would causeirreparable injury to the Company for which it would have no adequate remedy atlaw.

 

(d)                                 Publicity.  The Executive agrees that the Company mayuse, and hereby grants the Company the nonexclusive and worldwide right to use,the Executive’s name, picture, likeness, photograph, signature or any otherattribute of the Executive’s persona (all of such attributes are hereaftercollectively referred to as “Persona”) in any media for any advertising,publicity or other purpose at any time during the Restricted Period.  The Executive agrees that such use of hisPersona will not result in any invasion or violation of any privacy or propertyrights the Executive may have; and the Executive agrees that he will receive noadditional compensation for the use of his Persona.  The Executive further agrees that any negatives, prints or othermaterial for printing or reproduction purposes prepared in connection with theuse of his Persona by the Company shall be and are the sole property of theCompany.

 

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

 

11.                                 Successors;Binding Agreement.

 

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

 

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

 

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

 

If the Executive:

 

Max L. Lukens3415 AlbansHouston, Texas   77005

 

If to the Company:

 

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

 

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

 

13.                                 Amendmentor Modification; Waiver.  Noprovisions of this Agreement may be modified, waived or discharged unless suchwaiver, modification or discharge is agreed to in writing signed by theExecutive and such officer of the Company as may be specifically designated bythe Board or the Compensation Committee of the Board.  No waiver by either party hereto at any time of any breach by theother party hereto of, or compliance with, any condition or provision of thisAgreement to be performed by such other party shall be deemed a waiver ofsimilar or dissimilar provisions or conditions at the same or at any prior orsubsequent time.  No agreements orrepresentations, oral or otherwise, express or implied, with respect to thesubject matter hereof have been made by either party which are not set forthexpressly in Agreement.

 

14.                                 Arbitration.  Any dispute or controversy arising out of orrelating to this Agreement, including without limitation, any and all disputes,claims (whether in tort, contract, statutory or otherwise), breaches ordisagreements concerning the interpretation or application of the provisions ofthis 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.   Within ten (10) business days of theinitiation of an arbitration hereunder, the Company and the Executive will eachseparately designate an arbitrator, and within twenty (20) business days ofselection, the appointed arbitrators will appoint a neutral arbitrator.  All arbitrators shall be members of theNational Panel of Commercial Arbitrators maintained by the AAA.  The arbitrators shall issue their writtendecision (including a statement of finding of facts) within thirty (30) daysfrom 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.  The Company shall payto the Executive all reasonable legal fees and expenses, when incurred by theExecutive, in contesting or disputing any termination of employment or seekingto obtain or enforce any right, payment or benefit provided by this Agreement,regardless of outcome, unless a final decision is rendered that such claim wasnot brought by the Executive in good faith.

 

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

 

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

 

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

 

17.                                 Severability.  The invalidity or unenforceability of anyprovision or provisions of this Agreement shall not affect the validity orenforceability of any other provision of this Agreement, which shall remain infull force and effect throughout the Term. Should any one or more of the provisions of this Agreement be held to beexcessive or unreasonable as to duration, geographical scope or activity, thenthat provision shall be construed by limiting and reducing it so as to bereasonable and enforceable to the extent compatible with the applicable law.

 

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

 

19.                                 EntireAgreement.  This Agreement setsforth the entire agreement of the parties hereto in respect of the subjectmatter contained herein and, as of the Effective Date, supersedes all prioragreements, promises, covenants, arrangements, communications, representationsor warranties, whether oral or written, by any officer, employee orrepresentative of any party hereto; provided, however, that theSeverance Agreement shall not be superseded hereby but shall remain in full forceand effect.

 

IN WITNESSWHEREOF, the parties have executed this Agreement on the date first abovewritten.

 

 
|   | STEWART &  STEVENSON SERVICES, INC. |
|--------|----------------------------------------------|
|   |                                         |
|   |                                         |
|   | By                                           | /s/ Carl B. King |
|   |                                         | Carl B. King |
|   |                                         | Senior Vice President, Secretary,  and General Counsel |
|   |                                         |
|   |                                         |
|   | EXECUTIVE:                                   |
|   |                                         |
|   |                                         |
|   | /s/ Max L. Lukens                            |
|   | Max L. Lukens                                |
|   | 3415 Albans  Houston, Texas 77005            |

 

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EXHIBIT A

 

RELEASE

 

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

 

The Executiverepresents and acknowledges that in executing this Release he does not rely andhas not relied upon any representation or statement, oral or written, not setforth herein or in the Agreement made by any of the Releasees or by any of theReleasees’ agents, representatives or attorneys with regard to the subjectmatter, basis or effect of this Release, the Agreement or otherwise.

 

The Executiverepresents and agrees that he fully understands his right to discuss allaspects of this Release with his private attorney, that to the extent, if any,that he desires, he has availed himself of this right, that he has carefullyread and fully understands all of the provisions of this Release and that he isvoluntarily entering into this Release.

 

AGREED ANDACCEPTED, on this           day of                              ,20   .

 

 

 

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